Annual Report 2007

SKF 100 yearsOn 16 February 2007, exactly one hundred years afterAB SKF was founded, the company started its celebrationof the 100-year anniversary with a gala dinner in Göteborg.The King and Queen of Sweden were present and a largenumber of business partners as well as SKF managementfrom all over the world. SKF employees were chosen atrandom from 40 countries to visit Göteborg on that dayand to be at the dinner celebrations to represent all theemployees of the Group.On 16 February 2007, all SKF employees around the worldreceived an anniversary gift, a crystal bowl produced by theSwedish glassmaker Orrefors. Along with the bowl they alsoreceived three golden clay nuggets that symbolized the startof SKF. While working as a maintenance engineer at a textileplant, Sven Wingquist, the founder of SKF, had a problemwith bearing failure due to the misalignment of shafts asa consequence of machines moving slightly because thefactory was built on clay. This problem started his idea offinding a solution, and the result was the invention of the firstever self-aligning ball bearing.A clear focus on customers, distributors and employees wasa natural priority for all the celebration activities during theanniversary year and it was an excellent opportunity for theSKF Group to further strengthen its relationships with thesekey stakeholders.To commemorate the 100-year anniversary, each SKF sitewas also asked to plant a tree, as a symbol of the entireGroup’s commitment to sustainability. Close to 500 trees,whereof some can be seen in this annual report, wereplanted in 47 countries.In the same way that SKF started one hundred years ago, on aninnovation to solve a problem, SKF started its second centenarywith an innovation. This time the focus was on sustainabilityand helping SKF’s customers reduce energy consumption, andtherefore reducing carbon dioxide emissions. On 16 FebruarySKF introduced a new family of energy-efficient bearings whichreduce energy consumption. SKF 100 years

During the year, the Group’s President and CEO, Tom Johnstoneset out to meet as many customers and employees as possibleby visiting 35 different countries, meeting all in all around5,000 customers and 10,000 employees.Two books were also produced, one historical, SKF – A Global Story,reflecting the Group’s development over its first hundred years.The second, The Soul of SKF, contains interviews with 54 employeesfrom different parts of the organization from around the world,who share their views, feelings and expectations of SKF. The secondbook was given to all the employees.At the same time, three trucks with special exhibition trailers,toured Europe, from east to west, showing customers,employees, students and the general public, SKF’s expertiseand capabilities in its five technology platforms.All SKF sites around the world arranged special family daysto celebrate the first hundred years. Different countries didit in different ways, according to local customs and traditions,but always focusing on employees and their families.Through its partnership with the Gothia Cup, the world’slargest youth football tournament, SKF has also shown itscommitment towards the communities where the Group isactive. By arranging local tournaments SKF also made itpossible for boys and girls, from 20 different countries, tocome to Göteborg and take part in the tournament, whichinvolved about 30,000 young people.SKF 100 years

Administration ReportContent7 Shares and shareholders10 Report on the business 200715 Financial objectives and dividend policy17 Financial risks17 Sensitivity analysis18 Proposal for principles forremuneration of Group Management 200819 Nomination of Board members and changesto the Articles to the Association19 Administration Report for the Parent Company, AB SKF20 Sustainability21 SKF – the knowledge engineering company24 SKF’s markets

Shares and shareholdersSKF’s shares as of 28 December 2007SKF’s A and B shares have been quoted on the OMX Nordic Exchange Stockholm since 1914. The total number ofshares traded in 2007 was 1,338,731,309. SKF’s ADRs are traded on the OTC market in the USA.A shares, unrestricted 48,996,034B shares, unrestricted 406,355,034Total 455,351,068An A share gives the entitlement to one vote and a B share to one-tenth of a vote. It was decided at AB SKF’s AnnualGeneral Meeting on 18 April 2002 to insert a clause in the Articles of Association which would allow owners of A sharesto convert these to B shares. Of the total of 177,940,713 A shares converted to B shares up to December 2007,536,996 were converted in 2007.Changes in share capital 1982–2007Amount paidSEKmShare capitalSEKmNumber ofshares in millionsQuoted valueper share, SEK1982 Bonus issue 1:4 – 1,350 27.0 50.001989 Split 4:1 – 1,350 108.0 12.501990 Conversion of debentures 62 1,412 113.0 12.501997 Conversion of bonds 11 1,423 113.8 12.502005 Split 5:1 and redemption – 1,138 455.3 2.502007 Split 2:1 and redemption – 1,138 455.3 2.50Price trend of SKF’s sharesSEK160140B share A share OMX Stockholm_PI (normalized after B share)1201008060402003 2004 2005 2006 2007 Cash © OMX flow ABafterinvestments,Basic earningsShareholders’ equitybefore financingper share, SEKper share, SEKper share, SEKBasic earnings pershare, SEKShareholders’ equityper share, SEKCash flow after operatinginvestments, before financialitems per share, SEK1296307.7320059.48200610.09200750403020100392005422006392007864205.2520054.7420064.672007Administration report • Shares and shareholders

Share savings fund for employeesSKF Allemansfond, a national security savings fund for SKF employees in Sweden, was started in 1984. On 28 December 2007, the SKFAllemansfond had 667 members. 38% of the fund was invested in SKF shares. Assets amounted to SEK 88.6 million.Distribution of shareholdingShareholdingNumber ofshareholders %Numberof shares %1 – 1,000 42,967 77.3 15,554,202 3.41,001 – 10,000 11,083 19.9 31,254,087 6.910,001 – 100,000 1,177 2.1 35,463,802 7.8100,001 – 385 0.7 373,078,977 81.955,612 100.0 455,351,068 100.0Source: VPC AB (Securities Register Centre) as of 28 December 2007.The ten largest shareholders A shares B sharesNumberof sharesNumberof votesIn percentof votingrightsIn percentof sharecapitalFoundation Asset Management 23,500,000 22,250,000 45,750,000 25,725,000 28.70 10.05Skandia 3,721,864 2,865,051 6,586,915 4,008,369 4.47 1.45Alecta 2,244,604 11,900,000 14,144,604 3,434,604 3.83 3.11Swedbank Robur Funds 2,680,312 6,216,217 8,896,529 3,301,933 3.68 1.95AFA Sickness Insurance 1,384,900 12,359,006 13,743,906 2,620,800 2.92 3.02Gamla Livförsäkringsbolaget 2,138,700 496,700 2,635,400 2,188,370 2.44 0.58SEB Investment Management 642,000 6,164,896 6,806,896 1,258,489 1.40 1.49AMF Pension 0 10,600,000 10,600,000 1,060,000 1.18 2.33FPG FörsäkringsbolagetPensionsgaranti, ömsesidigt 930,400 497,600 1,428,000 980,160 1.09 0.31Handelsbanken Funds 0 9,798,445 9,798,445 979,844 1.09 2.15Total 37,242,780 83,147,915 120,390,695 45,557,569 50.80 26.44Source: VPC AB’s public share register as of 28 December 2007.Foundation Asset Management Sweden AB (FAM) is the only shareholder with a shareholding representing at least 10% of the voting rights in SKF.As of 28 December 2007, about 41% of the share capital was owned by foreign investors, about 51% by Swedish companies, institutions andmutual funds and about 8% by private Swedish investors. Most of the shares owned by investors abroad are registered through trustees, so thatthe actual shareholders are not officially registered.Geographic ownership2005 2006 2007•SwedenEurope excl. SwedenUSARest of the worldSource: SIS Ownership Data Corp. Administration report • Shares and shareholders

Per-share data (Definitions, see Note 1)Swedish kronor/share 2008 2007 2006 2005 2004 2003 2002 2001Earnings/loss per share 10.09 9.48 7.73 6.42 4.48 5.42 4.76Dividend per A and B share 5.00 1) 4.50 4.00 3.00 2.50 2.00 1.50Total dividends, SEKm 2,277 1) 2,049 1,821 1,366 1,138 911 683 598Redemption, SEKm 2,277 1) 4,554 2,846Purchase price of B shares at year-endon the OMX Nordic Exchange Stockholm 2) 109.50 118.31 104.28 63.57 59.70 48.53 44.24Shareholders’ equity per share 39 42 39 37 34 36 36Yield in per cent (B) 2) 4.6 1) 3.8 3.8 4.7 4.2 4.1 3.4Yield in per cent (B), including shareredemption 2) 9.1 1) 12.3 44.0P/E ratio, B 2) 10.9 12.5 13.5 9.9 13.3 9.0 9.3Cash flow after operating investments,before financial items per share 4.67 4.74 5.25 -2.05 5.43 5.81 9.38Years prior to 2003 are reported according to Swedish GAAP.1)According to the Board’s proposal for the year 2007.2)The years 2001 to 2006 have been recalculated to reflect the effects of the share split and redemption in 2007.Additional informationThere are no regulations under Swedish law or under the Articles ofAssociation limiting the transferability of SKF shares.To the best of SKF’s knowledge, there exist no agreements betweenshareholders limiting the right to transfer SKF shares (e.g. by preemptionor first refusal clauses).No limitations exist limiting the number of votes which each shareholdermay cast at a shareholders’ meeting.There are no existing agreements between SKF and any directoror employee, which allow them to receive compensation in case ofresignation, dismissal without cause, or termination of employmentas a consequence of a public takeover bid on SKF’s shares.AB SKF Stock Fund in the USSKF USA Inc. is offering a majority of its employees a possibility todefer pre-tax earnings into a Defined Contribution Pension Plan.The employees can direct the contributions and the matching contributionsby the Company to different mutual funds, including an ABSKF Stock Fund. The contribution to the AB SKF Stock Fund is limitedto a maximum of 20% of the total contributions, and assets can not betransferred into the fund. The employees have no rights to vote basedon the shares held in the fund. The fund held 888,506 AB SKF Bshares at the end of 2007.Analysts who follow SKFABG Sundal CollierCitigroup InvestmentGlitnirJP Morgan SecuritiesSG SecuritiesErik EjerhedResearchOla AsplundNick PatonRoddy BridgeMark FieldingABN AmroGoldman SachsKaupthing BankSwedbank MarketsLars GlemstedtDanske Markets EquitiesInternationalJoakim HöglundMats LissHenrik BreumJames MooreCA Cheuvreux Nordic ABMerrill LynchUBSPatrik SjöblomDeutsche BankHQ BankBen MaslenFredric StahlJohan WettergrenHans-Olov ÖbergMark TromanCredit SuisseÖhman FondkommissionPatrick MarshallDresdner KleinwortHandelsbanken CapitalNordea MarketsAnders RoslundWassersteinMarketsJohan TrocméCarnegieColin GrantPeder FrölénAnn-Sofie NordhAnders IdborgEvli BankHSBCSEB EnskildaMagnus AxénColin GibsonAnders ErikssonAdministration report • Shares and shareholders

Report on the business 2007The Group’s net sales increased by 10.3% in2007, from SEK 53,101 million to SEK58,559 million. This rise was attributable tovolume 7.7%, price/mix 2.4%, structure 3.1%and currency effects -2.9%. The operatingprofit was SEK 7,539 million (6,707). Theprofit before tax was SEK 7,138 million(6,387). Earnings per share stood at SEK10.09 (9.48).Compared with 2006, exchange rates forthe full year 2007, including the effects oftranslation and transaction flows, had anegative effect on SKF’s operating profit ofaround SEK 640 million.The Group’s net financial items wereSEK -401 million (-320). Excluding therevaluation of share swaps, the figure wasSEK -405 million (-355). SEK 798 million ofthe interest-bearing loans was amortized in2007. Interest-bearing loans at year-endtotalled SEK 7,735 million (8,053), whilepension provisions amounted to SEK 4,840million (4,731).The cash flow after operating investmentsand before financial items for the year was SEK2,126 million (2,158). The cash flow includesacquisitions of SEK 1,209 million (2,129).Return on capital employed for the 12-monthperiod ended 31 December was 25.4% (24.7).SKF’s capital expenditure on property,plant and equipment amounted to SEK 1,907million (1,933). Depreciation was SEK 1,518million (1,476). The increase in capitalexpenditure in 2007 reflects the upgradingof existing operations and the addition ofnew factories and capacity, primarily in Asia,to support the strong growth in the region.Of the Group’s total capital expenditure,SEK 166 million (105) was attributable tothe improvement of SKF’s environment bothinternally and externally.Expenditure on research and developmentwas SEK 900 million (875), correspondingto 1.5% (1.6) of annual sales. This does notinclude the customization of products andservices or development expenditure on ITsolutions. The number of first filings of patentapplications was 186 (175).Sales trendSales for the full year, calculated in localcurrencies, excluding structural effects andcompared to last year, were significantlyhigher for the Group. Looking at regions,sales were significantly higher in Europe,Asia and Latin America. In North Americasales were higher than last year. All thedivisions had significantly higher salescompared to last year.SKF’s sales to certain sectors saw a strongperformance over the year, in particular inthe energy, heavy industrial machinery, offhighwayvehicles, cars and light trucks, heavytrucks, vehicle service market, aerospace andrailway sectors.Most important factors influencing thefinancial resultsThe continued improvement in the SKFGroup’s financial results in 2007 can beattributed to a continued focus on deliveringvalue to its customers, higher sales, improvedpricing, increased productivity and costcontrol despite higher raw material costs.Another factor that also contributed positivelyto the results was the effect from therestructuring schemes undertaken in 2005as well as in 2006.The strong increase in raw material pricesseen in recent years continued throughout2007 and was addressed at an early stage bythe Group, enabling it to offset the negativeimpact, as in previous years, by cost reductions,increased productivity and improvedsourcing and pricing.Geographic distribution of net sales,average number of employees and property,plant and equipment (per cent)68Net salesAverage number of employeesProperty, plant and equipment•515318128564584310182016North AmericaLatin AmericaWestern EuropeEastern EuropeMiddle Eastand AfricaAsia/Pacific10 Administration report • Report on the business 2007

Net sales by customer segmentIndustrial distribution 23%Cars and light trucks 15%Vehicle service market 10%Aerospace 5%Railway 3%Off-highway 4%Special industrial equipment 11%Trucks 5%Heavy industry 7%Two-wheelers and Electrical 3%General industry 14%The strong demand seen in 2007 led to ashortage of raw materials and componentsthat worsened during the year and negativelyimpacted the second part of the year, particularlyaffecting the Industrial Division. Theresult also includes expenses for restructuringactivities of around SEK 300 million and anegative currency effect of an estimatedSEK 640 million.Supplies of raw materialsThe main raw materials for the Group aresteel and steel-based components. SKFworks with partners in order to securecapacity and the right cost on the marketswhere the company manufactures. To supportSKF’s global growth, the company isexpanding the number of suppliers worldwidecapable of supplying the Group.SKF’s divisionsThe SKF Group operates through threedivisions, each focusing on specific customersegments worldwide.The Industrial Division is responsible forsales to industrial Original EquipmentManufacturer (OEM) customers and for theproduct development and production of awide range of bearings (in particular sphericaland cylindrical roller bearings, angularcontact ball bearings, medium deep grooveball bearings and high precision bearings),lubrication systems, linear motion products,by-wire systems and couplings.Examples of new SKF solutions launchedinclude:• A new tillage disc solution, the SKF AgriHub for the agricultural industry. Typicalmachines for this solution are harrows,cultivators, rippers and mouldboards. Therelubrication-free unit is easy to install,eco-friendly and improves productivity.• A new assortment of sealed spherical rollerbearings combined with housings, for heavyconveyors. Simplified design for the manufacturerscoupled with an eco-friendlysolution are some benefits.Photo courtesy of Sidel Group and Krone Inc.One of the new product launches last year was the SKF Dry Lubrication systemfor beverage bottling conveyor lines. The system eliminates the need to spraythousands of litres of water and soluble lubricant. Instead, this flexible andautomated system applies a small amount of food-grade lubricant on theconveyor’s chains and guides. This system gives the benefit of improvedoperator safety by reducing slip hazards, cost savings by eliminating the highvolume of water and lubricants, and enhanced line efficiency by avoiding ahumid atmosphere that can cause corrosion.Administration report • Report on the business 2007 11

Important new business during the yearincluded:• A strategic partnership with Caterpillar anddesign engineering assignments from otheroff-highway vehicle manufactures.• More products and expanded engineeringsupport to wind turbine and gearbox manufacturers.Long-term supply agreementswere signed with several leading customers,one of these was Suzlon Energy Ltd.• Several important projects for passengerand freight vehicles in both Europe, Chinaand Russia. One example is a contract withBombardier Transportation for taperedroller bearing units for axle box applicationsto the Île de France suburban trains.• A new company with GE Aviation wasestablished, which will manufacture andrefurbish bearings for GE’s engines forlarge aircrafts.The Service Division is responsible for salesto the industrial aftermarket, mainly via anetwork of around 7,000 distributor locations.In addition to the sales of products,the division supports customers with knowledge-basedservice solutions that optimizeplant asset effi ciency through consulting andmechanical services, predictive and preventivemaintenance, condition monitoring,decision-support systems and performancebasedcontracts. SKF Logistics Services dealswith logistics and distribution for both theSKF Group and external customers. TheService Division is also responsible for allSKF sales in certain smaller markets.Examples of new SKF solutions launchedinclude:• A certifi cation scheme for the industrialaftermarket, aimed at maintenancepartners serving industrial plants andexpanded to include electric motor rebuildcompanies who want to improve theiroperations and market.• Expanded reliability systems services forindustrial manufacturers, to include energyand sustainability audits and solutions. Anew suite of condition monitoring integratedsoftware was introduced along withnew hardware.Important new business during the yearincluded:• New reliability and maintenance contractshave been signed or renewed with anumber of the largest steel producers, windturbine park operators, oil refi neries andwith the food and paper industries.• A new company with Baosteel was establishedfor large bearing remanufacturingfacility in China.• SKF Logistics Services was selected lastyear to run logistics operations for threemajor companies, Agfa Graphic, PIAB andMetso Minerals.• A joint project with Knorr-Bremse Systemefür Schienenfahrzeuge GmbH to developcondition monitoring capability for rollingstock integrated in Knorr-Bremse’s brakecontrol systems.• A partnership with Aker Kvaerner for conditionbased maintenance for the offshoreand onshore oil and gas industry.The Automotive Division is responsible forsales to the manufacturers of cars, lighttrucks, heavy goods vehicles, buses, twowheelers,household appliances, power toolsand electric motors and for the vehicle servicemarket. The division develops and manufacturesbearings, seals and related productsand service solutions. Products include wheelhub bearing units, tapered roller bearings,small deep groove ball bearings, seals, specialistautomotive products and completerepair kits for the vehicle service marketincluding a new product line with drive shaftsand control velocity joints.Examples of new SKF solutions launchedinclude:• A new high performance wheel bearingsolution for the automotive industry thatextends service life and reduces fuelconsumption.• A new product line for the European automotiveaftermarket, including constantvelocity joints, drive shafts and boot kits.Important new business during the yearincluded:• Wheel bearing solutions in China for twomajor car manufacturers. The fi rst waswith the Chinese company ShanghaiAutomotive Industry Cooperation for a newplatform, the second was additional businessfor two new Chery models.• Wheel bearing solutions in Europe andNorth America, with Renault, for the newRenault Master platform, Fiat for a new12 Administration report • Report on the business 2007

SKF acquired ABBA Linear Tech Co., Ltd. in Taiwanin 2007. ABBA is a leading manufacturer of profilerail guides and has facilities both in Taiwan andChina. In the pictures from the left are JennyChuang and Robin Yang.Alfa Romeo platform and Ford for the newFord Focus generation in North America.• SKF and Haldex jointly developed an integratedtruck hub unit for the truck industry,with a dual disc brake and fixed calliper. Thesolution is designed for one million mainten-ance-free kilometres and has a number ofadvantages like lower temperatures, lowerbrake forces, longer maintenance intervalsand less mounting space. The first customeris GIGANT, the German trailer axle company.• The recently launched SKF Wheel EndMonitor for a trailer axle manufacturer,Hendrickson in the US, which helps cut backon unplanned stops and reduce preventivemaintenance and unnecessary trailer bearingreplacements.EmployeesSKF’s vision “To equip the world with SKFknowledge” underlines the importance ofattracting, developing and retaining the bestpeople in the industry. It is the responsibilityof every manager to ensure that all employeesreceive adequate training and education. SKFhas training programmes on three levels forits employees – local, divisional and corporate.An extensive training portfolio is offered inareas such as Six Sigma, sustainability,leadership, sales and marketing, technology,manufacturing, finance, project management.An important element of retaining theemployees is to continuously monitor thelevel of employee satisfaction, as well asensuring that they each have the opportunityof developing themselves to the full potentialof their ability and ambition. SKF has usedan employee survey known as the WorkingClimate Analysis (WCA) since 1996, to measureemployee satisfaction and ensure thatthe SKF values and Code of Conduct are usedthroughout the organization. The survey isfollowed by feedback workshops whereimprovement opportunities are identified andaction plans developed. This survey has beencarried out at least once every 18 months, atdifferent times in the organization. In 2007,SKF ran the WCA survey at the same time inthe entire organization. The response ratewas 90% (with an overall score for all statementsof 5.11 on a 1-7 scale, a good score).Some important areas were identified thatneed improvement, such as cross-departmentalteamwork. The 2008 survey willagain be carried out simultaneously acrossthe organization and will allow SKF to measurethe improvement and to identify furtheropportunities for improvement.Details of salaries, wages and otherremuneration are given in the ConsolidatedFinancial Statements, Note 27.ManufacturingDuring the year, SKF strengthened and tookdecisions to further strengthen its manufacturingcapacity as well as to further increaseefficiency.SKF started additional production for thefast-growing automotive business in Asia:• a factory for bearings in Shanghai, China• a factory for bearings in Busan, Republicof Korea• a factory for seals in Taegu, Republicof KoreaIn addition, SKF decided to further expand itsproduction and announced the followingmain investments:• A new factory in Haridwar, Uttarakhand,India for manufacturing ball bearings mainlyfor the Indian two-wheeler industry. Theinvestment will be around SEK 250 million.• A new factory in India for manufacturinglarge size bearings. The investment willamount to around SEK 450 million. Thefactory is expected to start manufacturingat the end of 2008 and will, when fullyutilized, employ about 300 people.• A new factory in Russia for tapered bearingunits to supply to the rapidly expandingRussian railway market. The constructionof the new factory will start in September2008 and will be in operation by April 2010.The Group’s investment will amount toaround SEK 235 million and the headcountwill be about 150.• An investment of around SEK 600 million inits facilities in Göteborg, Sweden to increasecapacity. Investments include two newbearing channels, two roller channels, anew heat treatment plant, new machiningequipment for the production of cages, andup-grading several bearing channels. Theinvestments, some of which were initiated in2006, will be carried out over 2007 and 2008.SKF also decided on a number of restructuringactivities of which the most important were toclose its manufacturing facility at Glasgow inthe US, and reduce the number of employeesat the Fontenay-le-Comte facility in France.The total cost of these activities will be aroundSEK 360 million. About SEK 300 millionimpacted results in the fourth quarter 2007,of which around SEK 270 million was in theAutomotive Division and around SEK 30 millionin the Industrial Division. The remainingSEK 60 million will be seen during 2008 and2009. The annual benefit of the scheme, fullyimplemented from 2010, amounts to aroundSEK 120 million. The different activities in2008 and 2009 will affect operations in theUS, France and some other countries, andwill reduce the headcount by about 500.Six Sigma continues to grow at SKFThe target for 2007 regarding the numberof active Black Belts was met. The numberof Six Sigma trained staff is 16 Master BlackBelts, 378 Black Belts and 1,614 GreenBelts. More than 700 Six Sigma projectswere run globally in 2007, with net savingsof SEK 302 million. Of these projects 145were replicated ones, building on improvementsintroduced previously. Replicationof projects and re-using expertise was oneof the targets during the year, with a growingnumber of completed original projects identifiedas suitable for repeating in other partsof the organization. With the Six Sigma programmenow firmly in place, the focus ismoving away from deployment and towardsconsolidation and effectiveness.The Six Sigma training programme hasbeen updated and new modules have beenadded to the curriculum. Changes to thecurriculum include more lean modules implementedto make SKF Six Sigma even moreuseful for running in non-manufacturingprocesses. In addition the curriculum nowconsists of new e-learning modules that arereducing the time used for classroom training.Administration report • Report on the business 2007 13

Design for Six Sigma (DfSS) became a fullyintegrated part of the product developmentprocess with 58 training waves completedduring the year. DfSS is also increasinglybeing used with SKF’s customers.See also glossary page 129.AcquisitionsSKF acquired companies in 2007 for SEK1,209 million net of cash to improve theproduct and solutions portfolio for theplatforms and its market presence in keysegments/markets.Bearings and units• SKF (Shanghai) Bearing Company Ltd.The remaining 40% holding in SKF (Shanghai)Bearing Company Ltd. was acquired. Thecompany was originally set up in 2002 as apartnership with the Shanghai Electric GroupCorporation producing high quality smalldeep groove ball bearings primarily for theChinese domestic market. The factory is fullyoperational and currently employs more than200 people. This factory is part of theAutomotive Division.Mechatronics• ABBA Linear Tech Co., Ltd.ABBA is a leading Asian manufacturer of profilerail guides. It is headquartered in Taipei,Taiwan with facilities in Taiwan and in China.The ABBA Group employs about 480 people.SKF paid a total amount of SEK 390 millionnet of cash. With the addition of ABBA’sproduct range, SKF is reinforcing its positionin linear guides and strengthening its growthin Asia. This company was included in theincome statements as from the third quarter2007 and is part of the Industrial Division.• S2MS2M is a leading company in magnetic bearings.The company has about 200 employeesand is headquartered in Vernon, France,where it also has its manufacturing facilities.SKF paid around SEK 497 million net of cash.With this acquisition SKF has expanded itsrange of magnetic bearings and complementedits existing operation in Canada.S2M will be part of SKF’s Industrial Divisionand will be included as from 2008 in theGroup’s consolidated income statement,it is included in the balance sheet as fromthe fourth quarter 2007 by a preliminarypurchase price allocation.Services• Baker Instruments CompanyBaker Instruments is a leading manufacturerof testing and diagnostic instruments forelectric motor assessment. At acquisitionBaker had 62 employees. Baker’s sales aremainly focused on the industrial motor usersand geographically mainly on the Americanmarket. This move into electric motor diagnosticsis important to SKF’s new energyefficiencysolutions business, and is in linewith the SKF Group’s move towards supportingits customers in their sustainabilityefforts. This company was included in theincome statements as from the third quarter2007 and is part of the Service Division.• Preventive Maintenance Company Inc.(PMCI)PMCI is a market leader in PredictiveMaintenance (PdM) services for industrialcustomers in the pulp & paper, metals, food& beverage, automotive and other industries.PMCI is located in Elk Grove Village, Illinois,USA. The company had 70 employees atacquisition. This acquisition strengthensSKF’s market leadership in reliability services,condition monitoring products andmaintenance. This company was includedin the income statements as from the thirdquarter 2007 and is part of the ServiceDivision.Lubrication systems• Automatic Lubrication Systems (ALS)ALS is a service company for Canadianmobile transportation equipment and industrialmachinery customers for SKF centralizedlubrication systems. ALS is based inBurlington, Ontario, Canada, and had 13employees at acquisition. This acquisitionwill strengthen SKF’s distribution networkfor lubrication systems in Canada. ALS wasincluded in the income statements as fromthe second quarter 2007 and is part of theIndustrial Division.Sale of businessSKF is continuously reviewing its operationsand divesting what it regards as non-corebusiness.• The forging business at the Lüchow plantin Germany was sold to Hay SpeedUmformtechnik GmbH, a company establishedby the majority of the owners ofJohann Hay GmbH & Co KG, one of the largestprivately owned forging companies inGermany. The sale price was EUR 33 millionand SKF made a profit of around EUR4 million, which was reported in the secondquarter of 2007. SKF’s forging businessin Lüchow, belonged to the AutomotiveDivision and had a headcount of 222 in2006 and sales of EUR 74 million.SKF’s deregistration under the USSecurities Exchange Act of 1934came into forceSKF filed Form 15F with the US Securitiesand Exchange Commission (SEC) to deregisterits Class B shares under the US SecuritiesExchange Act of 1934 and to terminatereporting obligations with respect to its7 1/8% Notes due 1 July 2007. This deregistrationcame into force and as a result, SKFwill no longer reconcile the financial statementsto US GAAP, nor submit an annualreport on Form 20-F with the SEC.Risks and uncertainties in the businessThe company operates in many differentindustrial and automotive segments as wellas in many geographical segments that havedifferent economic cycles. A general economicdownturn at a global level, or in one of theworld’s leading economies, could reduce thedemand for the Group’s products, solutionsand services for a period of time. In addition,terrorism and other hostilities, as well asdisturbances in worldwide financial markets,could have a negative effect on the demandfor the Group’s products and services.However, the Group’s wide geographicalpresence and its exposure to different customersegments would normally mean thatthe business climate is good in some of theregions or segments.14 Administration report • Report on the business 2007

Financial objectives and dividend policyFinancial targetsSKF’s long-term financial targets were announced in January 2007.The targets are:• an operating margin level of 12%• sales growth in local currencies of 6-8% per annum• a return on capital employed of 24%StrategySKF is continuing to implement its business strategy to achieve long-termprofitable growth and to achieve its financial targets.The strategy includes:• a clear and dedicated customer focus• developing new products, solutions and services with higher added value andimproved price quality by applying the SKF platform and segment approach• strengthening the product portfolio within theplatforms through greater investment in R&D and through acquisitions• focusing and investing in faster growing segments and regions• reducing capital employed and fixed costs• attracting, retaining and developing the right people.Operating marginGrowth development/local currencyReturn oncapital employedOperating marginSales growth in localcurrencyReturn oncapital employed• Aquisitions/DivestmentsOrganic growth%1412108648.09.910.810.4*12.611.3*12.9% Y-o-Y1412108645.211.87.3*7.5*13.2%302520151013.919.021.824.725.4225003040506070030405060700304050607* Excluding income from the previouslyjointly controlled company Oy Ovako Ab* Excluding effect from sale of Oy Ovako Ab2005: 10.4%2006: 10.1%Administration report • Financial objectives and dividend policy 15

Overall financial objectiveSKF’s overall financial objective is to createvalue for its shareholders. Over time, thereturn on the shareholders’ investment inSKF should exceed the risk-free interest rateby around five percentage points. This is thebasis for SKF’s financial objectives and SKF’sfinancial performance management model.Financial performance managementmodelSKF’s financial performance managementmodel is a simplified, economic value addedmodel. This model, called Total Value Added(TVA) promotes increased operating profit,capital efficiency and profitable growth.TVA is the operating profit, less the pretaxcost of capital in the country in which thebusiness is conducted. The pre-tax cost ofcapital is based on a weighted cost of capitalwith a risk premium of 5% above the riskfreeinterest rate for the equity part and onactual borrowing cost. The TVA profit performancefor the Group correlates well withthe trend for the share price over a longerperiod of time. Variable salary schemes arebased on this model. The financial targetsare cascaded down to the divisions and businessunits through SKF’s financial performancemanagement model.Financial position and dividend policyThe capital structure target is a gearingof around 50%, which corresponds to anequity/assets ratio of around 35% or a netdebt/equity of around 80%. This will ensurethe financial flexibility and enable the Groupto continue to invest in the business, whilemaintaining a strong credit rating. On 31December 2007 the gearing was 40.1%(39.1), the equity/assets ratio was 39.6%(42.4) and the net debt/equity was 47.5%(19.7). A definition of the key figures aboveis available in Note 1 of the financialstatements.SKF’s dividend and distribution policy isbased on the principle that the total dividendshould be adapted to the trend for earningsand cash flow, while taking account of theGroup’s development potential and financialposition. The Board of Directors’ view is thatthe ordinary dividend should amount toaround one half of SKF’s average net profitcalculated over a business cycle.When the financial position of the SKFGroup is stronger than the targets describedabove, an extra distribution to the ordinarydividend could be made in the form of ahigher dividend, a redemption scheme or asa repurchase of the company’s own shares.Dividend and redemptionDue to the company’s strong performance,cash generation capacity and outlook, theBoard of Directors of SKF proposes anincrease in the dividend of 11.1%, giving adividend of SEK 5.00 per share.Furthermore, the Board of Directors alsoproposes a 2:1 share split combined with anautomatic redemption procedure. Throughthis procedure, the shareholders will receiveone new ordinary share and one redemptionshare, which will be automatically redeemedfor SEK 5.00. The proposal means that SEK2,277 million will be distributed to the shareholders,in addition to the proposed dividenddistribution. The total distribution to shareholderswill be SEK 4,554 million.These proposals are subject to resolutionsby the Annual General Meeting in April 2008.Repurchase of the company’s own sharesThe Board proposes that the Annual GeneralMeeting should resolve to authorize the Board,until the next Annual General Meeting, todecide upon the repurchase of the company’sown shares. The intention of this proposal isto be able to adapt the capital structure of thecompany to its capital needs in order therebyto contribute to increased shareholder value.According to the proposal, the authorizationwill involve Class A shares as well as Class B.The maximum number of shares to be repurchasedwill be such that the company thenholds a maximum of 5% of all shares issuedby the company. The shares may be repurchasedby operations on the OMX NordicExchange Stockholm. The proposal is subjectto resolutions by the Annual GeneralMeeting in April 2008.The Annual General Meeting in April 2007resolved to authorize the Board, until thenext Annual General Meeting, to decide onthe repurchase of the company’s own shares.In 2007, no repurchases were made and thecompany owns no SKF shares.Credit ratingThe Group has an A minus (A-) rating forlong-term credit from Standard and Poor’sand an A3 rating from Moody’s InvestorsService, both with a stable outlook. SKFintends to keep a strong credit rating and itsgearing target reflects this.FinancingIt is SKF’s policy that the financing of theGroup’s operations should be long term. As of31 December 2007, the average maturity ofSKF’s loans was 4.5 years.SKF has issued two separate notes on theEuropean bond market, one amounting toEUR 250 million with a due date of 2010 andone amounting to EUR 500 million with a duedate of 2013. According to the conditions ofthe notes, the notes’ interest rate may increaseby five per cent in case of a change ofcontrol (meaning any party/concerted partiesacquiring more than 50% of SKF’s share capitalor SKF shares carrying more than 50% ofthe voting rights).Net currency flows 2007CurrencyFlows, SEKmUSD 4,200EUR -400CAD 360Other 1) 1,540SEK -5,7001)Other is a sum comprising 14 different currencies.USDEURCADOtherSEK-6000 -5000 -4000 -3000 -2000 -1000 0 1000 2000 3000 4000 500016 Administration report • Financial objectives

SKF is investing around SEK 600 million in its facilities at Göteborg to increasecapacity. The investments include a new heat treatment plant, two new bearingchannels, two roller channels, new machining equipment for the production ofcages, and upgrading several bearing channels. In the picture is JamalAli Hossen, taken from one of the new bearing channels.Financial risksThe SKF Group’s operations are exposed tovarious types of financial risk. The Group’sfinancial policy defines the main risks as beingcurrency, interest rates, credit and liquidityand establishes responsibility and authorityto manage these risks. The policy states thatthe objective is to eliminate or minimize riskand to contribute to a better return throughthe active management of risks. The managementof the risks and the responsibilityfor all treasury operations are largely centralizedat the SKF Treasury Centre, theGroup’s internal bank.Currency riskThe SKF Group is subject to both transactionand translation exposure. The Group’s principalcommercial flows of foreign currenciespertain to exports from Europe to both NorthAmerica, Asia and to intra-European business.SKF hedges 100% of the estimated net USDexposure for three to twelve months. Thishedging corresponds to around 50% of the totalnet transaction flows. As of year-end, thelengths of the actual forward contracts conformedto the basic policy. Translation exposureon Group accounts is not hedged.Interest rate riskLiquidity and borrowing are managed atGroup level. By matching the maturity datesof investments made by subsidiaries with theborrowings of other subsidiaries, the interestrate exposure of the Group can be reduced.Credit riskThe Group’s policy states that only wellestablished financial institutions are to beapproved as counterparties. Exposure percounterpart is continuously monitored.Liquidity riskIn addition to its own liquidity, AB SKF hadcommitted credit facilities of EUR 500 millionat year-end.More details about risk management andhedging activities can be found in theConsolidated Financial Statements, Note 30.Sensitivity analysisThe following shows the magnitude of changes in respect ofa number of factors influencing the Group’s profit before tax.The assessment is based on the year-end figures. All the calculationshave been made on the assumption that everything elseis equal.• The annual cost of purchasing raw material and componentsis around SEK 17,000 million. Of this amount, steel bars, tubes,components or oil-based products account for the majority.A change of 1% in the cost of raw material and componentsreduces/increases profit before tax by SEK 170 million.• An increase of 1% in the cost of wages and salaries (includingsocial security charges) reduces the profit before tax by SEK152 million.• A change of 1% in interest rates has no significant influenceon the profit before tax, based on current position. The Grouphad a net short-term financial debt (short-term financialassets less total loans) of SEK 3,878 million on 31 December2007.• A weakening/strengthening of 10% in SEK against the USD hasa positive/negative effect from net currency flows on the profitbefore tax of around SEK 400-500 million, excluding anyeffects by hedging transactions. For the commercial flows theSKF Group is primarily exposed to the USD and to US dollarrelatedcurrencies.• A weakening/strengthening of 5% in the SEK versus all the majorcurrencies has a positive/negative effect of the translation ofprofits in SEK of around SEK 300 million. The majority of theprofit is made outside Sweden, the Group is therefore exposedto translational risks from all the main currencies.Administration report • Sensitivity analysis 17

Proposal for principles for remuneration of Group Management 2008IntroductionThe Board of Directors of AB SKF has decidedto submit to the Annual General Meeting thefollowing principles for remuneration of SKFGroup Management. Group Management isdefined as the Chief Executive Officer and theother members of the management team. Theprinciples apply in relation to members ofGroup Management appointed after the adoptionof the principles, and, in other cases, tothe extent permitted under existingagreements.The objective of the principles is to ensurethat SKF can attract and retain the best peoplein order to support the SKF mission and businessstrategy. The remuneration of GroupManagement members shall be based onconditions that are market competitive and atthe same time support the shareholders’ bestinterest.The total remuneration package for aGroup Management member consists primarilyof the following components: fixed salary,variable salary, performance shares, pensionbenefits, conditions for notice of terminationand severance pay, and other benefits suchas for example a company car. The componentsshall create a well balanced remunerationreflecting individual performance andresponsibility as well as SKF’s overallperformance.Fixed salaryThe fixed salary of a Group Managementmember shall be at a market competitivelevel. It is based on competence, responsibilityand performance. SKF uses an internationallywell-recognized evaluation system,International Position Evaluation (IPE), inorder to evaluate the scope and responsibilityof the position. Market benchmarks are conductedon a regular basis. The performanceof the Group Management members is continuouslymonitored and used as a base forthe annual review of the fixed salary.Variable salaryThe variable salary for a Group Managementmember is according to a performancebasedprogramme. The purpose of the programmeis to motivate and compensate valuecreating achievements in order to supportoperational and financial targets.The performance-based programme isprimarily based on the short-term financialperformance of the SKF Group establishedaccording to the SKF management modelTotal Value Added (TVA). TVA is a simplifiedeconomic value-added model. This modelpromotes improved margins, capital reductionand profitable growth. TVA is the operatingprofit, less the pre-tax cost of capital inthe country in which the business is conducted.The TVA result development for theGroup correlates well with the trend of theshare price over a longer period of time.The maximum variable salary according tothe programme is capped at a certain percentageof the fixed annual salary. The percentageis linked to the position of theindividual and varies for Group Managementmembers between 40 and 70%.If the financial performance of the SKFGroup is not in line with the requirements ofthe variable salary programme, no variablesalary will be paid. The maximum variablesalary will not exceed 70% of the accumulatedannual fixed salary of the members of GroupManagement.Performance sharesThe Board of Directors proposes that a decisionbe taken at the Annual General Meetingon the introduction of SKF’s PerformanceShare Programme 2008. The programme isproposed to cover a maximum of 310 seniormanagers and key employees in the SKFGroup including Group Management with anopportunity to be allotted, free of charge,SKF Class B shares.The number of shares that may be allottedmust be related to the degree of achievementof financial targets defined by the Board ofDirectors in accordance with the Group’s TVAmanagement model and must pertain to theperiod commencing 2008 up to and including2010. Under the programme, not more than1,000,000 Class B shares may be allotted.The participants in the programme mayreceive not more than the following numberof shares within the various key groups:• CEO and President – 20,000 shares• Division Presidents and Executive VicePresident – 10,000 shares• Other members of Group Management –7,000 shares• Managers of large business units and othersenior managers – 2,500-3,600 sharesThe participants shall not provide any considerationfor their rights under the programme.SKF’s Performance Share Programme2008 is proposed to replace the long-termpart of the variable salary programmeincluded in the principles for remuneration ofGroup Management decided upon at theAnnual General Meeting 2007.Other benefitsSKF provides other benefits to GroupManagement members in accordance withlocal practice. The accumulated value ofother benefits shall in relation to the value ofthe total remuneration be limited and shall asa principle correspond to what is customaryon the relevant market.Other benefits can for instance be a companycar, medical insurance and home service.PensionSKF strives for establishing pension plansbased on defined contribution models, whichmeans that SKF pays a premium amountingto a certain percentage of the employee’sannual salary. SKF’s commitment is in thesecases limited to the payment of an agreedpremium to an insurance company offeringpension insurance.A Group Management member is normallycovered by, in addition to the base pension(for Swedish members usually the ITP pensionplan), a supplementary defined contributionpension plan. SKF ensures by offeringthis supplementary defined contribution planthat Group Management members are entitledto earn pension benefits based on thefixed annual salary above the level of the basepension. The normal retirement age forGroup Management members is 62 years.Notice of termination and severance payA Group Management member may terminatehis/her employment by giving six months’notice. In the event of termination of employmentat the request of SKF, the employmentshall cease immediately. The Group Managementmember shall however receive a severancepayment related to the years of service,provided that it shall always be maximized totwo years’ salary.18 Administration report • Proposal for principles for remuneration of Group Management 2008

The Board of Directors’ right to deviatefrom the principles of remunerationThe Board of Directors may in case of particulargrounds deviate from the principles ofremuneration decided by the Annual GeneralMeeting.Preparation of matters relating to remunerationof Group ManagementThe Board of Directors of AB SKF has establisheda Remuneration Committee. TheCommittee consists of maximum four Boardmembers. The Remuneration Committeeprepares all matters relating to the principlesfor remuneration of Group Management aswell as the employment conditions for theChief Executive Officer.The principles for remuneration of GroupManagement are presented to the Board ofDirectors that submits a proposal for suchprinciples to the Annual General Meeting forapproval. The Board of Directors shallapprove the employment conditions for theChief Executive Officer.Information about remuneration decidedupon but not due for paymentThe structure of Group Management remunerationdecided upon prior to the approvalof these principles for remuneration but notdue for payment is substantially in line withthese principles with the following exceptions:In 2003 Group Management memberswere allocated stock options in accordancewith the SKF Stock Option Programme furtherdescribed on page 74 in the AnnualReport. The exercise period for the stockoptions allocated in 2003 expires in 2009.The total holding of stock options by GroupManagement is set out on page 74 in theAnnual Report.As stated above it is proposed that SKF’sPerformance Share Programme 2008 shallreplace the long term part of the variable salaryprogramme included in the principles forremuneration of Group Management decidedupon at the Annual General Meeting 2007.Any pay out under the long term part of theearlier variable salary programmes of 2005,2006 and 2007, respectively, will be made in2008, 2009 and 2010, respectively. Themaximum variable salary including both theshort-term and the long-term part is cappedat a certain percentage of the fixed annualsalary. The percentage is linked to the positionof the individual and varies for GroupManagement members between 60 and 90%.The pension conditions of the ChiefExecutive Officer are described on page 72 inthe Annual Report.Certain members of Group Managementare covered by the SKF Group’s Swedishdefined benefit pension plan which is furtherdescribed on page 73 in the Annual Report.Certain members of Group Managementare in the event of termination of employmentat the request of AB SKF, entitled toreceive a severance payment which is notrelated to the years of service amounting to amaximum of two years’ salary.• Principles for remuneration of GroupManagement 2007, see CorporateGovernance Report on page 30• Remuneration of Group Management 2007,see Note 27.Nomination of Board members and changes to the Articles of AssociationIn addition to specially-appointed membersand deputies, the company’s Board ofDirectors shall comprise a minimum of fiveand a maximum of ten members, with amaximum of five deputies.Notice to attend an Annual GeneralMeeting and notice to attend an ExtraordinaryGeneral Meeting where an issuerelating to a change in the Articles ofAssociation will be dealt with, shall be issuedno earlier than six weeks and no later thanfour weeks prior to the General Meeting.The Annual General Meeting shall, interalia, determine the number of Board membersand deputy Board members, and presideover the elections of Board membersand deputy Board members.Administration Report for the Parent Company, AB SKFAB SKF, corporate identity number 556007-3495, which is the Parent company of theSKF Group, is a registered Swedish limitedliability company domiciled in Göteborg. Theheadquarters’ address is AB SKF, SE-415 50Göteborg, Sweden.The company performs Group-wide services.Reported net sales refer to servicesinvoiced to subsidiaries. Costs invoiced fromsubsidiaries are included in the reported costof services provided and amounted to SEK1,191 million (1,023).Dividend income from consolidated subsidiarieswas SEK 2,073 million (2,810).Additions to investments in subsidiarieswere SEK 1,053 million (363) of which SEK273 million (203) relates to acquisitions fromcompanies in the SKF Group and SEK 780million (160) to capital contributions toexisting units.Risks and uncertainties in the businessfor the Group are described in theAdministration Report for the Group. Thefinancial position of the Parent company isdependent on the financial position anddevelopment of the subsidiaries. A generaldecline in the demand for the products andservices provided by the Group could meanlower dividend income for the Parent company,as well as a need for writing down thevalues of the shares in the subsidiaries. Therisk of the financial position of the Parentcompany being negatively affected is consideredsmall due to the vast diversity of markets,geographically and operationally inwhich the subsidiaries operate.Information on remuneration principlesfor the Group management is found in theAdministration Report for the Group.Proposed distribution of surplusUnrestricted equity in the parent companyamounts to SEK 6,859 million. The Board ofDirectors and the President recommend thata dividend of SEK 5.00 per share be paid forthe fiscal year 2007 in accordance with thecompilation presented on page 91.Furthermore, the Board of Directors alsoproposes 2:1 share split combined with anautomatic redemption procedure, seepage 16.Administration report • Administration report for the Parent Company, AB SKF 19

SustainabilityReportingSKF defi nes sustainability as SKF Care whichis made up of four elements, Business Care,Environmental Care, Employee Care andCommunity Care.Business CareBusiness care is to deliver shareholder value,through achieving the Group’s fi nancial targetsand realizing the vision.SKF adheres to the UN Global CompactTen Principles and correspondingly endorsesthe principles globally in its operation management.Furthermore, SKF extends good corporatecitizenship in its demand chain by itsmajor suppliers worldwide to uphold a similarapproach to SKF in business ethics and environmentalperformance.In its drive to reach BeyondZero, SKFlaunched several energy-effi cient products andsolutions including a new energy-effi cientbearing family that outperforms standard ISOproducts with a minimum 30% energy consumptionsaving for customers (in the bearing).SKF is also a partner in the RELIAWINDproject, a European Union-sponsored projectaimed at developing new technology forhighly-effi cient wind turbines. This projectconsists of ten partners representing the fullvalue chain and is expected to be completedby December 2010.Environmental Care• Environmental permitsSKF’s operations have an impact on the environmentin the form of energy consumption,waste, air and water emissions, as well as noise.Operations requiring permits are carried outin all the countries where manufacturingtakes place. In Sweden, on 31 December2007, operating permits covering 9% of theGroup’s overall production volume were heldby SKF in its operations in Göteborg,Katrineholm and Hofors. These permitsrelate to the production of bearings, bearinghousings and couplings. SKF received nosignifi cant directives from the environmentalauthorities in 2007. No permits were subjectto review or revision in 2007. The EU’s chemicallegislation REACH applies to SKF and thecompany has set out a strategy to complywith this legislation.• Environmental approvalThe SKF Group has Group-wide ISO 14001certifi cation, which is the international standardfor environmental management. All unitsare included in a single Group-wide certifi cate,which, at the end of 2007, encompassed 91sites in 28 countries. Recently acquired companieswork towards a plan for certifi cation.• Environmental targetThe Group has set an annual target of a 5%reduction in carbon dioxide emissions fromenergy consumption at all its factories, irrespectiveof production volume increases. Theemission reduction was 2.2% in 2007 comparedwith 2006. During the year, to refl ectinternationally and locally available methodsand data SKF has updated the way CO 2emissionsare calculated. This is further describedin the sustainability report.• Landfi llsMany SKF factories have disposed of varioustypes of waste at approved landfi ll sites.Because of stricter laws and regulations –some with a retroactive effect – relating tolandfi ll disposal, a few SKF companies arecurrently involved in cleaning up old landfi lls,most of which have not been used for manyyears. Relevant provisions have been made tocover these costs.Employee Care• Health and safety certifi cationBy the end of 2005, the SKF Group wascertifi ed according to the OHSAS 18001health and safety management standard.This approval covers 91 sites in 28 countries.OHSAS 18001 is the health and safetyequivalent of ISO 14001.• Towards zero accidentsSKF’s drive for achieving zero work-relatedinjuries and illnesses is progressing and isgiven top priority. Of 204 units, 104 unitsreported zero accidents for at least one yearand accidents rate was reduced by 11% comparedwith 2006.• Working Climate AnalysisSKF rolled out for the fi rst year at the sametime a Group-wide Working Climate AnalysisAround SEK 1 million was donated in 2007to support children at the SOS Children’sVillages and the World Childhood Foundation.targeted at all employees. The objectivewas to obtain employees’ feedback on SKF’sperformance in relation to company valuesand key focus areas.Community CareIn its 100-year anniversary celebrations,SKF launched a campaign to raise moneyfor helping children and combating climatechange, as an alternative to gifts at meetingsand conferences.Around SEK 1 million was donated insupport of the various projects at the SOSChildren’s Villages and the World ChildhoodFoundation. SKF purchased more than 2,000tonnes of Certifi ed Emission Reductions (CER)credits to support a hydro power project inIndia through the Carbon Neutral Company.SKF was also the main partner in sponsoringthe 2007 Gothia Cup in Göteborg, a footballtournament in Sweden where more than30,000 young people from around the worldtook part. Local tournaments – “Meet theWorld” – were hosted by SKF in 20 differentcountries where the local winning teamswere sponsored by SKF to compete at theoffi cial Gothia Cup tournament in Göteborg.Sustainability indicesSKF was included in the Dow JonesSustainability Indexes for the eighth successiveyear, and for the seventh successive yearin the FTSE4Good Index Series. Furthermore,SKF received the highest ranking bythe Folksam Corporate Responsibility Indexon environmental performance for the secondsuccessive year.In addition, SKF was awarded the GlobeAward for Best CSR Company by GlobeForum and the Social Capitalist Award byVeckans Affärer, a Swedish business journal.For further information see the SustainabilityReport page 107.20 Administration report • Sustainability

skf – the knowledge engineering companyCustomersProducts manufactured by SKF’s industrialOriginal Equipment Manufacturer (OEM) customersinclude for example pumps, fans,compressors, motors, gearboxes, machinetools, paper machines, steel mills, printingpresses and windmills. SKF also supplies theaerospace industry, including manufacturersof engines and gearboxes for fixed wing aircraftand helicopters, as well as maintenance,repair and overhaul organizations. OEM customersin these segments number over tenthousand. Moreover SKF, along with the largestThe Group’s five technology platforms are Bearings and units, Seals, Mechatronics, Services, andLubrication Systems. SKF utilizes the capabilities of all the platforms to help customers improvetheir production efficiency and produce competitive offers, see also page 128.network of authorized distributors in thebearing industry, has developed a truly uniqueservice organization for the industrial industry.With around 7,000 distributor locations, SKF isclose to its customers wherever they are in theworld. Working with its global distributors, SKFLogistics Services and e-business portalsensure that SKF’s customers have the rightproducts at the right time while minimizingcapital tied up in stock. SKF also helps customersto improve the efficiency of their productionprocesses. SKF’s vast knowledge of bearingvibration analysis and diagnostics can also beused in real-time analysis of machine operation.After a thorough analysis, SKF recommendsa maintenance strategy, work processesand an optimum level of spare parts.SKF also supplies customers that manufactureproducts in large volumes. Thesecustomers include car and truck makers, theautomotive component industry as well asmanufacturers of household appliances,small electric motors and two-wheelers.Since the lead-time for developing a newgeneration of cars or trucks is long, SKF’sdialogue and involvement in product developmentbegins several years before the startof production. Almost all automotive productsand solutions are specifically designedfor each individual customer. SKF also servesthe aftermarket for vehicles, which is calledthe Vehicle Service Market (VSM) business.This business is primarily based on SKF’s kitconcept. The idea is to offer mechanics a convenientsolution to help speed up and facilitaterepair work by providing repair kits thatcontain all the necessary components tochange wheel bearings, water pumps, timingbelts and so on. VSM currently has around6,000 different kits on the market.Value creationKnowledge acquired through supplyingdemanding customers within one customersegment is utilized for solutions for othercustomer segments, thereby creating positivesynergies.Throughout its 100-year history SKF hasbeen a technological leader. SKF’s fundamentalstrength is its ability to develop technologies,products and services that createcompetitive advantages. The company doesthis by combining its knowledge across theSKF technology platforms, and through innovationand development, creating new valuepropositions for SKF customers. A key thrustof the company’s work is directed towardssustainability: reducing energy losses for acleaner, brighter environment.SKF’s range has evolved over hundredyears from different types of bearings tomore unitized modules, integrating knowledgeand the capabilities of bearings, sealingsolutions, mechatronics, lubrication systemsand service solutions.SKF also focuses on eco-adapted solutionsthat reduce energy consumption and lessenthe impact on the environment.To further strengthen the platforms SKFEvery year SKF acknowledges people in the organization for their outstanding achievements. In 2007 Danielwill increase its spending on research andFigueroa from Chile received the SKF Excellence Award in the Knowledge category for developing the firstdevelopment steadily over the next years.online condition monitoring solution for mining shovels for the Chilean mining company Codelco. CodelcoChuquicamata’s shovels work in a harsh environment in the world’s largest open-pit mine. Through technologyand engineering know-how Daniel’s team developed a new condition monitoring solution based on knowledgefrom predictive vibration analysis that can be reused for other mining customers. In the picture from leftare Tom Johnstone, President and CEO, Daniel Figueroa, Product Manager, and Eva Hansdotter, SeniorVice President, Group Human Resources and Sustainability.SKF’s global network of research and developmentcentres and laboratories are complementedby collaboration with majoruniversity and research institutes.Administration report • SKF – the knowledge engineering company 21

SKF manages the complex portfolio ofresearch projects for the platforms throughits technology clusters. These are groups ofexperts from across SKF in each disciplinewho translate the technology strategy intheir fi elds of expertise into clear technologyroadmaps. They are responsible for planningrapid delivery of agreed programmes. Theyalso provide the consensus needed to driveideas through to implementation.Inspiring an innovative culture is vitallyimportant. SKF’s prestigious ExcellenceAwards are an important way of encouragingthis. Judged by senior executives at the company,they are awarded annually to projectsthat provide the highest contribution to business,innovation and sustainability.TechnologiesSKF’s core areas of technical expertise include:• Materials –development of materialsproperties optimized to suit the application(steel, ceramics, plastics, polymers etc.)• Tribology and lubrication – reduction offriction and wear through surface engineeringand selection and developmentof lubrication.• Mechatronics – synergistic integration ofmechanical and electronic engineering withintelligent computer control in the designof industrial products and processes.• Modelling, calculation and simulation –knowledge implemented in SKF’s uniquesoftware products to predict and enhanceproduct performance for the customer.SKF is at the forefront in understanding theperformance of materials under extremeloads. The company’s ability to develop theproperties of its steels through heat treatmentand control of residual stresses, signifi -cantly enhances the performance of itsbearings in service.One important focus of SKF’s surface engineeringis to reduce friction. This is fundamentalto enhancing the contribution, for example,that a bearing can make to reduce the energyconsumption of a motor or a pump. Another iswear enhancement, ensuring higher productreliability and life expectancy.SKF is leading the fi eld in the use of ceramicsin rolling element bearings. These provideoptimal solutions in applications where lubricationis limited, where contamination cancause problems, or where speed levels areextreme. The successful use of ceramic componentsdemands both extensive understandingof materials and knowledge in safedesign, using such hard materials, exploitingtheir strengths while overcoming theirlimitations.A novel polymer-thickened grease and theways to process this has been patented bySKF. This can extend service life and serviceintervals, and may lead to the developmentof tailored lubricants for specifi c applicationsThe integration of electronics andadvanced computer control, with the precisionmechanical engineering traditionallyassociated with SKF, is leading to excitingnew business opportunities for the Group.Among the parameters measured are speed,position, temperature, vibration and load.This provides SKF with some unparalleledproducts both to sell to customers and toapply within SKF’s Service Division.SKF has been the forerunner in bearingdesign analysis for a long time. Much of thiswork forms the basis of current internationalindustry standards. At the SKF Engineering &Research Centre in the Netherlands, thecompany pioneers new advanced computationalanalysis techniques. Initially developedfor its bearing applications, the company nowapplies modelling and simulation across theentire range of SKF’s products. The company’smodels extend beyond its own componentsto encompass the environment in which theyoperate giving customer confi dence throughSKF knowledge.Using its suite of advanced technology thecompany can model anything from an atomicscale to massive engineering systems andstructures. Whether the application requiresstress analysis, thermal predictions, or theunderstanding of many other service parameters,SKF modelling can reduce developmenttimes and boost performance.ProductsSome examples of new products launched:Tooth decay detection deviceWorking with the UK dental health company,IDMoS, SKF has created a scanner for earlydetection and monitoring of tooth decay. SKFSKF has developed the customized hardware and softwareelements of a new product for detecting and monitoring toothdecay. It comprises a handheld sensor and monitoring device(CariesScan) which is linked wirelessly to a central monitor thatprovides graphic real-time displays of tooth measurements,which can be seen by both dentist and patient (CarieScan Plus).The system has a higher level of accuracy and certainty thanexisting techniques and without the safety risks associated withthe repeated use of x-rays.22 Administration report • SKF – the knowledge engineering company

The Anti Creeping System Modules (ACSM) for precision rail guides preventsthe cage from wondering out of its correct position through an involute gearwheel, made of high-grade brass. Stress on the material is lower and lifeexpectancy is increased. The rails and rolling elements are manufacturedfrom corrosion-resistant steel. New manufacturing methods have enabledimprovements in the rail geometry. This results in higher system stiffness andabsolute accuracy of the ACSM precision rail guides.developed the complex hardware and softwaresystem that allows greater accuracythan traditional X-ray methods without theassociated dose of radiation. In partnershipSKF has developed the system rapidly fromprototype to full manufacture, meeting allthe stringent regulatory requirementsdemanded in the medical field.Energy-efficient bearingsOn the day of its 100th anniversary, SKFlaunched a new range of energy-efficient bearings.These provide at least 30% less frictionin the bearing without compromising theservice life. They reduce the cost of ownershipthrough energy savings and benefit to the environment.An energy-efficient electric motor,due to be launched by a customer in 2008shows a saving of 50% in reduced frictionalloss in the bearing.Load sensorsIn many applications, the bearing is close towhere the load is applied to the system. Ittherefore provides a good location to measurethe system loads for maximum sensitivityof response. SKF is developing sensorizedhub bearing units for the automotive industry.These can track wheel forces in alldegrees of movement and may improvebraking and stability control, contributing tosafety in a wide range of vehicles.Wireless monitoringSKF is working with ABB and SINTEF on ajoint project to develop “fit and forget” devicesthat can report back on the state of a machineanywhere in the world.Advanced low power, low cost components,using the technology of microelectromechanicalsystems combined with SKF’sadvanced ability to automatically acquirecondition monitoring data. The system trans-mits the information to the SKF @ptitudeMonitoring Suite using emerging and highlyrobust industrial wireless protocols. Thework is sponsored by a consortium of themajor oil companies including Statoil, BP andConocoPhillips and is supported by theNorwegian Government’s Petromaks fund.Technology in motor racingSKF racing involvement has included a successfultechnical partnership with Formula One’sScuderia Ferrari since 1947. This partnershipmeans that SKF provides parts for some of themost demanding engineering applications.Formula One’s enthusiasm for rapidlyexploiting the very latest technology providesSKF with a unique test bed to shorten time tomarket for new products. Examples of successespiloted in Formula One and now inindustrial use include:• Ultra low friction sealing materials andsolutions• Enhanced metal ceramic hybrid bearings• Nitrogen rich stainless steels.In 2007, the Ferrari team won both the constructors’championship and the drivers’championship.SKF is also involved in NASCAR in the USA.Since the beginning of the technical partnershipwith Richard Childress Racing (RCR) in2005, SKF motor sports engineering teamhas been successful in assisting RCR in thedevelopment of technology to enhance ontrackperformance. The information developedthrough the technical partnership withRCR has enabled SKF to enhance its aftermarketproducts. The 2007 NASCAR NEXTEL Cupseason was the best on record for RCR overthe past five years, with all three NEXTEL Cupdrivers competing for the 2007 Championship.SKF is also a technical partner for Ducatisince 2001. In 2007 the Ducati driver CaseyStoner won the World Superbike Championship.This also ensured Ducati winning theConstructors’ championship.ManufacturingAdvances in SKF’s manufacturing efficiencyare driven both through continuous improvementactivities and through research intostep change innovations. Many of theseprojects are commercially sensitive and representpart of the company’s competitiveadvantage. Today, near net shape formingprocesses are gaining in importance as steelhas become more expensive and more difficultto obtain. Near net shape processesimprove efficiency and material utilization,enabling SKF to reduce variations in manufacturingand waste and thereby becomingmore environmental friendly. Other programmesinclude ways of adding artificialintelligence to SKF’s manufacturing processes.Inspection and assurance of the company’sproduct quality using vision systems isroutine in many plants with increasinglyadvanced developments being added on aregular basis. Intelligent machining allowsautomatic optimization of the manufacturingprocess.Example of a new manufacturing process:Precision rail guides are manufactured withextreme accuracy and provide a uniform rollingaction during operation as a result of theirinner geometry. SKF has patented a newmethod of synchronization, called AntiCreeping System Modules (ACSM), whichimproves the reliability of the guides. By introducingan advanced manufacturing process,the quality and performance levels of the SKFrail guides have been further enhanced.Administration report • SKF – the knowledge engineering company 23

SKF’s marketsThe world bearing marketThe world bearing markets are usuallydefined as the global sales of rolling bearings,which comprise ball and roller bearings ofvarious designs. SKF estimates that thismarket is worth about SEK 250 billion a year,excluding various types of bearing housingsbut including spherical plain bearings. Asianow accounts for about 40% of the worldmarket, rising from less than 30% over thelast ten years. China and Japan each accountfor about 15%. India, Thailand and theRepublic of Korea are also recording highgrowth rates and have sizeable local bearingproduction. European markets make up morethan 30% of the world total, while NorthAmerica, including Canada and Mexico, representless than 25%, calculated in SEK. InSouth America, Brazil is showing high growthrates and makes up more than 60% of theregional market.SKF is the world leader for bearings. InWestern Europe, SKF is closely followed bythe German Schaeffler Group, with its INAand FAG brands. SKF is the second largestbearing supplier in North America, with theUS-based company Timken being the marketleader. SKF is also the leading supplier in theAsian markets outside Japan. The Japanesebearing market is mainly supplied by thedomestic manufacturers NSK Ltd, NTN Corp.and JTEKT Corp.The largest, and also the most rapidlyexpanding of the emerging markets, is China.It is a very fragmented market with many localmanufacturers. SKF is one of the leading bearingcompanies in China – both as an importerand as a local manufacturer. In recent years,all the major international bearing companieshave set up production in the country. China,as well as India, in particular, is expected to seesignificant growth over the next few years bothas a market and global supply base.The rolling bearing world can also be dividedaccording to different types of bearings. Ballbearings, of various designs, account for morethan half the market, while different designs ofroller bearings make up the balance. In 2007,however, the markets for roller-type bearingsgrew significantly as a result of investments inenergy production, notably wind power generators,infrastructure, and the mining and basicmetals industries.The most popular ball bearing is the radialdeep groove ball bearing, which accounts forabout one third of the total world bearingdemand. Other ball bearings are angular contactball bearings, self-aligning ball bearings,thrust ball bearings and wheel hub bearingunits for automotive wheels. The roller bearingsare named according to the shape of therollers, such as cylindrical roller bearings,needle roller bearings, tapered roller bearingsor spherical roller bearings.The largest of the roller bearing families isthe tapered roller bearing, with a share ofless than 20% of the total world bearing market.Sales of this type of bearing havedeclined over the past two decades, as wheelhub units that mainly incorporate balls havereplaced tapered roller bearings to a largeextent in automotive wheel applications. Onthe back of current infrastructure investmentsleading to an increase in the productionof heavy-duty and off-highway vehicles,demand for tapered roller bearings has againbeen growing in recent years.The polymer seals marketSKF is a leading company within the global polymerseals market, which is estimated to beworth around SEK 65 billion. Geographically,the market is almost equally split between theAmericas, Europe and Asia. In terms of segments,the market for seals in the industrialand automotive segments account for about45% each, with aerospace and other segmentsaccounting for 10%.The German Freudenberg Group (includingits partnerships with the Japanese companyNOK) is the largest supplier on the world polymerseals market, followed by the US companyParker Hannifin and the Swedish companyTrelleborg.The lubrication systems marketThis market is mainly divided into two segments,oil- and grease-based systems. Thetotal world market for both segments includingproducts, services, preventive maintenanceand software systems was for 2007 aroundSEK 20 billion. SKF is the leader in the globaloil-lubrication systems market and a strongplayer in grease lubrication. The largest competitorin lubrication systems is the USCompany Lincoln Industrial Corp. Lincolnfocuses on grease-lubrication systems and isthe largest company in this segment, as well asbeing leader of the total US market.The actuation and motion control marketThis market includes a wide variety of differentproducts unified by the fact that they all providelinear movements. The industry consists ofmany companies, some of which have evolvedfrom firms producing mechanical components,while others have specialized in motors or controls.All the companies which provide linearmotioncontrols combine mechanics, electricmotors and controls. The value of the worldmotion-control market, including systems andcomponents, is around SEK 100 billion. SKFfocuses primarily on the medical, health care,machine tool and factory automation segmentsby providing products such as actuators, linearguides, ball and roller screws or complete subsystems.SKF’s annual growth rate in this businessis in the double-digit per cent area. SKFalso works with by-wire systems for the aerospace,off-highway and automotiveapplications.The asset efficiency marketThe market for asset efficiency products andservice solutions is a wide-ranging, rapidlyexpanding business sector, driven by the needfor capital-intensive industries to compete ina global market place. Through the effectiveimplementation of asset efficiency programmes,manufacturers can improve the performanceof existing assets, decrease energy consumptionand improve on critical health, safety andenvironmental consequences.This market is being driven by the impactof global competition from emerging markets,higher costs of raw materials and the steadilyincreasing age of the workforce in most markets.The European, Middle East and NorthAmerican markets account for nearly 80% ofthis with the remainder going to Latin Americaand Asia. However, these two markets havenearly twice the growth rates compared to theother markets.SKF is a market leader, with services, instrumentationand software designed to addressthese growing needs. SKF has combined itsdeep knowledge of industrial customers’ applicationsalong with a local SKF service presenceto deliver solutions that lead to successful customerimplementations. SKF’s largest competitorin the market is the Bently-Nevada unit, apart of GE Energy.24 Administration report • SKF’s markets

Corporate Governance Report

Corporate Governance ReportIntroductionSKF applies the principles of sound corporategovernance as an instrument for increasedcompetitiveness and to promote capital marketconfidence in SKF. Among other things,this means that the company maintains anefficient organizational structure with clearareas of responsibility, that the financialreporting is transparent and that the companyin all respects maintains good corporatecitizenship.The corporate governance principlesapplied by SKF are based on Swedish law, inparticular the Swedish Companies Act, andthe regulatory system of the OMX NordicExchange Stockholm (“Stockholm StockExchange”).Swedish Code of Corporate GovernanceIn December 2004, the Swedish Code ofCorporate Governance was introduced (the”Code”). The listing requirements of theStockholm Stock Exchange prescribe that allSwedish companies registered at the StockholmStock Exchange, with a market capitalizationexceeding SEK 3 billion, should applythe Code.SKF applies the Code. This Corporate GovernanceReport has been prepared in accordancewith the Code. Furthermore, SKF hasprovided information on the company’s websitein line with the Code requirements. TheAnnual General Meeting in 2007 was alsoheld in accordance with the Code rules. Theauditor of the company has reviewed thisCorporate Governance Report including thesection containing the Board’s report oninternal control over the financial reporting.The Board shall according to the Codeannually submit a report on how the part ofthe internal control dealing with financialreporting is organized and how well it hasfunctioned during the most recent financialyear. The report shall according to the Codebe reviewed by the company’s auditor. However,in September 2006, the Swedish CorporateGovernance Board (the board’s role isto keep the Code up to date and to providenorms and standards for what is regarded asgood corporate governance practice withinSwedish listed companies) issued newinstructions for the application of the Coderules regarding internal control which arevalid as of the reports on internal control for2006 and onwards. These instructions stipulatethat it is sufficient to limit the internalcontrol report to a description of the organizationof the internal control for financialreporting made on the basis of the Guidanceon the Board of Directors’ Report on InternalControl over Financial Reporting, issued byFAR SRS (the professional institute forauthorized public accountants (auktoriseraderevisorer), approved public accountants(godkända revisorer) and other highly qualifiedprofessionals in the accountancy sectorin Sweden) and the Confederation of SwedishEnterprise (Svenskt Näringsliv). The instructionsfurther stipulate that there is norequirement for the company’s auditor toreview the report and that the report is to besubmitted in a separate section of the CorporateGovernance Report. On the basis of thestatement from the Swedish Corporate GovernanceBoard, SKF has limited the internalcontrol report for 2007 to a description of theorganization of the internal control for thefinancial reporting and submitted it as a separatesection of the Corporate GovernanceReport, see page 32.Nomination CommitteeAt the Annual General Meeting of AB SKFheld in the spring 2007, it was resolved thatthe company shall have a Nomination Committeeformed by one representative of eachof the four major shareholders with regard tothe number of votes held as well as theChairman of the Board. When constitutingthe Nomination Committee, the shareholdingsper the last banking day in September2007 would determine which shareholdersare the largest with regard to the number ofvotes held. The names of the four shareholderrepresentatives were to be published as soonas they had been elected, however not laterthan six months before the Annual GeneralMeeting 2008.In a press release dated 11 October 2007,it was announced that a Nomination Committeeconsisting of the following representativesof the shareholders, besides theChairman of the Board, had been appointed:• Claes Dahlbäck, Knut and Alice WallenbergFoundation (as from November 2007 theshareholding in SKF has been transferredto Foundation Asset Management SwedenAB, a company owned by the WallenbergFoundations)• Bengt-Åke Fagerman, Skandia Liv• Marianne Nilsson, Robur• Tomas Nicolin, AlectaThe Nomination Committee is to furnishproposals in the following matters to bepresented to, and resolved by, the AnnualGeneral Meeting in 2008:• proposal for Chairman of the AnnualGeneral Meeting• proposal for Board of Directors• proposal for Chairman of the Board ofDirectors• proposal for fee for the Board of Directors• proposal for fee for the auditor• proposal for a Nomination Committeefacing the Annual General Meeting of 2009The proposals of the Nomination Committeeare at the latest to be published in connectionwith the notice to the Annual General Meeting2008.General information about howthe company is managedThe Board of Directors has a responsibilityfor the company’s organization and for theoversight of the management of the company’saffairs. The Chairman of the Board ofDirectors shall direct the work of the Boardand monitor that the Board of Directors fulfilsits obligations. The Board adopts annuallywritten rules of procedure for its internalwork and written instructions. For moredetails on the rules of procedures and thewritten instructions, see below under theheading ”Activities of the Board of Directors”.The President of the company, who is alsothe Chief Executive Officer, handles the dayto-daymanagement of the company’s businessin accordance with the guidelines andinstructions from the Board of Directors.The approval of the Board is, for example,required in relation to investments andacquisitions above certain amounts, as wellas for the appointment of certain seniormanagers.26 Corporate Governance Report

The Board of DirectorsThe composition of the BoardThe Board shall, in addition to speciallyappointed members and deputies, accordingto the Articles of Association of SKF, comprisea minimum of five and a maximum of tenBoard members, with a maximum of fivedeputies. The Board members are electedeach year at the Annual General Meeting forthe period up to the end of the next AnnualGeneral Meeting.Information on the remuneration of theBoard members decided upon by the AnnualGeneral Meeting can be found in the ConsolidatedFinancial Statements, Note 27.Ten Board members, including the Chairman,were elected at SKF’s Annual GeneralMeeting held in the spring of 2007. In addition,the employees have appointed twoBoard members and two deputy Boardmembers. No Board member, except for thePresident, is included in the management ofthe company.Vito H BaumgartnerBoard member since 1998Born 1940Education and job experience: Swiss School ofCommerce, MIT Program for Senior Executives,retired Group President of Caterpillar IncOther assignments: Board member PartnerReLtd, Northern Trust Global ServicesLtd. and Scania ABShareholding (own and/or held by relatedparties): 2,400 SKF BClas Åke HedströmBoard member since 2000Born 1939Education and job experience: Master ofEngineering (the Royal Institute of Technology,Stockholm), retired President and CEOSandvik ABOther assignments: Chairman of Sandvik ABShareholding (own and/or held by relatedparties): 10,100 SKF BMembers of the Board of DirectorsAnders ScharpChairman, Board member since 1992Born 1934Education and job experience: Master ofEngineering (the Royal Institute ofTechnology, Stockholm), President AB Electrolux1981, President and CEO ABElectrolux 1986Other assignments: Chairman of superiorboard of Alecta, Chairman of AB Ph. Nederman& Co, Deputy Chairman of Investor ABShareholding (own and/or held by relatedparties): 100,000 SKF BUlla LitzénBoard member since 1998Born 1956Education and job experience: Master ofScience in Economics (Stockholm School ofEconomics), MBA (Massachusetts Institute ofTechnology), Managing Director and memberof the Management Group, Investor AB1996-2001, President W Capital ManagementAB 2001-2005Other assignments: Board member AtlasCopco AB, Boliden AB, Karo Bio AB, AlfaLaval AB and Rezidor Hotel GroupShareholding (own and/or held by relatedparties): 34,000 SKF BTom JohnstoneBoard member since 2003Born 1955President and Chief Executive Officer of ABSKF. For more details, see page 30, Presidentand Chief Executive Officer.Corporate Governance Report 27

Winnie Kin Wah FokBoard member since 2004Born 1956Education and job experience: Bachelor ofCommerce (University of New South Wales,Australia), Chief Executive EQT Partners AsiaLimited, Hong KongOther assignments: Board member GlobalBeauty International LimitedShareholding (own and/or held by relatedparties): 4,600 SKF ALeif ÖstlingBoard member since 2005Born 1945Education and job experience: Master ofEngineering (Chalmers University of Technology,Göteborg), Bachelor of Economics(School of Business, Economics and Law,Göteborg University), President and CEOScania AB since 1994Other assignments: Vice Chairman of ISS A/S,Board member Scania AB, the Confederationof Swedish Enterprise and the Association ofSwedish Engineering IndustriesShareholding (own and/or held by relatedparties): 20,000 SKF BEckhard CordesBoard member since 2006Born 1950Education and job experience: Studies ofBusiness Administration (HamburgUniversity), several management postswithin the Daimler-Benz Group and theDaimlerChrysler Group between 1981 and2005, CEO Franz Haniel & Cie, GmbH, Duisburgsince January 2006, CEO Metro AG,Duesseldorf, since November 2007Other assignments: Chairman of the ManagementBoard of Metro AG, chairman of theSupervisory Board of Celesio AG, chairman ofthe Supervisory Board of Kaufhof WarenhausAG and chairman of the Advisory Boardof Fiege Holding Stiftung & Co. KG, memberof the Supervisory Boards of Rheinmetall AGand Takkt AG, member of the Board of Directorsof Air Berlin PLC, member of the EuropeanAdvisory Council of Rothschild andmember of the Stuttgart Essen AdvisoryBoard of Deutsche Bank AG and member ofthe Investment Committee of EQT.Shareholding (own and/or held by relatedparties): 0Hans-Olov OlssonBoard member since 2007Born 1941Education and job experience: M.Sc. (GöteborgUniversity) and appointed HonoraryDoctor in Economics (School of Business,Economics and Law, Göteborg University).President and Chairman of Volvo Cars 2000-2006 and member of the Ford ManagementBoard 2006.Other assignments: Chairman of the Associationof Swedish Engineering Industries, vicechairman of the Confederation of SwedishEnterprise, board member of Vattenfall AB,Lindab International AB, Elanders AB andHöganäs AB and member of the RothschildEuropean Advisory Board.Shareholding (own and/or held by relatedparties): 2,000 SKF BLena Treschow TorellBoard member since 2007Born 1946Education and job experience: Ph.D. (GöteborgUniversity) and Docent in Physics(Chalmers University of Technology, Göteborg).Professor at University of Uppsala andthen at Chalmers University of Technology,Göteborg. Vice President at ChalmersUniversity, Göteborg during 1995-2001.Research Director of the Joint ResearchCentre, European Commission in Brussels1998-2001. President of the Royal SwedishAcademy of Engineering Sciences (IVA) since2001.Other assignments: Board member MicronicLaser Systems AB, Saab AB, AB ÅF, InvestorAB and Chalmers University of TechnologyFoundation. Chairman of European Council ofApplied Sciences and Engineering, Chairmanof MISTRA, the Foundation for StrategicEnvironmental Research. Member of theGlobalisation Committee of the SwedishGovernment.Shareholding (own and/or held by relatedparties): 028 Corporate Governance Report

Employee representativesIndependence requirementsThe Board of Directors has been considered tocomply with the requirements regarding independenceof the Stockholm Stock Exchangeand of the Code. The table below shows theBoard member’s independence according tothe requirements of the Code in relation to (i)the company and (ii) major shareholders.Göran JohanssonBoard member since 1975Born 1945Education and job experience: Chairman ofMunicipal Executive Board of GöteborgOther assignments: Chairman Liseberg ABShareholding (own and/or held by relatedparties): 400 SKF BKennet CarlssonDeputy Board member since 2001Born 1962Education and job experience: Employed byAB SKF since 1979Other assignments: Chairman Metalworkers’Union, SKF, Göteborg, and SKF WorkersWorld Council, GöteborgShareholding (own and/or held by relatedparties): 100 SKF BLennart JohanssonHonorary Chairman of the Boardof Directors of AB SKF. Passed awayin February 2008. Lennart Johansson- In memoriam, see page 125.Lennart LarssonBoard member since 2004Born 1948Education and job experience: Employed byAB SKF since 1965Other assignments: Chairman SIF (the SwedishUnion of Clerical and Technical Employeesin Industry), SKF, GöteborgShareholding (own and/or held by relatedparties): 8 SKF BJeanette StenborgDeputy Board member since 2005Born 1967Education and job experience: Employed byAB SKF since 1987Other assignments: Board member SIF (theSwedish Union of Clerical and TechnicalEmployees in Industry), SKF, GöteborgShareholding (own and/or held by relatedparties): 0AuditorThomas ThielAuthorized Public AccountantKPMG Bohlins ABName of theBoard memberselected bythe AnnualGeneral MeetingIndependencein relation tothe company/seniormanagementIndependencein relationto the majorshareholdersof the companyAnders ScharpVito H Baumgartner • •Ulla Litzén • •Clas Åke Hedström • •Tom Johnstone•Winnie Kin Wah Fok • •Leif Östling • •Eckhard Cordes • •Hans-Olov Olsson • •Lena Treschow Torell • •Activities of the Board of DirectorsThe Board held six meetings in 2007. TheBoard members were present at the Boardmeetings as follows:Name ofBoard memberPresence/totalnumber of meetingsAnders Scharp 6/6Vito H Baumgartner 6/6Ulla Litzén 6/6Clas Åke Hedström 6/6Tom Johnstone 6/6Winnie Kin Wah Fok 6/6Leif Östling 6/6Eckhard Cordes 3/6Hans-Olov Olsson (elected 24 April 2007) 5/6Lena Treschow Torell (elected 24 April 2007) 5/6Göran Johansson 4/6Lennart Larsson 6/6Kennet Carlsson 6/6Jeanette Stenborg 6/6The Board adopts written rules of procedureannually for its internal work. These rulesprescribe i.a.• the number of Board meetings and whenthey are to be held;• the items normally included in the Boardagenda;• the presentation to the Board of reportsfrom the external auditors.Corporate Governance Report 29

The Board has also issued writteninstructions on:• when and how information required for theBoard’s assessment of the company’s andthe Group’s financial position shall becollected and reported to the Board;• the allocation of the tasks between theBoard and the President.Issues dealt with by the Board in 2007include i.a. market outlook, financial reporting,capital structure, acquisitions anddivestments of companies, the strategicdirection and business plan of the Group andmanagement issues.Work in committeesRemuneration CommitteeThe Board of SKF has established a RemunerationCommittee consisting of the Chairmanof the Board, Anders Scharp, and theBoard members, Vito H Baumgartner andLeif Östling. The Remuneration Committeeprepares matters related to the principles forremuneration of Group Management membersand employment conditions for thePresident.The principles for the remuneration ofGroup Management members shall be submittedto the Board, which shall submit aproposal for such remuneration principles tothe Annual General Meeting for approval.The employment conditions for the Presidentshall be approved by the Board.The Remuneration Committee held fourmeetings in 2007. The members of thecommittee were present at the meetingsas follows:Nameof memberPresence/totalnumber of meetingsAnders Scharp 4/4Vito H Baumgartner 4/4Leif Östling 4/4Audit CommitteeThe Board of SKF has appointed an AuditCommittee. The Audit Committee consists ofClas Åke Hedström as Chairman, and theBoard members Anders Scharp, Ulla Litzénand Winnie Fok. The tasks of the Audit Committeeinclude i.a. preparations in relation tothe nomination of external auditors, reviewof the scope of the external audit, evaluationof the performance of the external auditors,review of the financial information and reviewof the internal financial controls.The Audit Committee held four meetings in2007. The members of the committee werepresent at the meetings as follows:Nameof memberPresence/totalnumber of meetingsAnders Scharp 4/4Ulla Litzén 3/4Clas Åke Hedström 4/4Winnie Kin Wah Fok 4/4AssessmentThe Board members assess the quality of thework of the Board through the completion ofa questionnaire. The result is then discussedat a Board meeting. The Nomination Committeehas been provided with the result ofthe assessment.President and Chief Executive OfficerTom JohnstoneBoard member of AB SKF’s Board since 2003Born 1955Education and job experience: Master of Artsdegree, the University of Glasgow, HonoraryDoctor’s degree in Business Administration,the University of South Carolina, USA,several management posts within the SKFGroup, the latest as Executive Vice PresidentAB SKF and President, Automotive DivisionOther assignments: Board member HusqvarnaAB and the Association of SwedishEngineering IndustriesShareholdings (own and/or held by relatedparties) in the company: 41,196 SKF B andstock options allowing him to acquire 90,731SKF B.Material shareholdings or other holdings incompanies with which the company hasimportant business relationships: 1,450 ABBB, 3,500 Volvo B, 1,200 Electrolux B, 3,200Husqvarna B and 660 Husqvarna A.The auditor of the companyThe task of the auditor is to review, on behalfof the shareholders, the Annual Report andthe accounting and also to review the Board’sand the President’s management of thecompany.The Annual General Meeting elects theauditor for a period of four years. At theAnnual General Meeting in the spring of2005, KPMG was elected as auditor for ABSKF until the Annual General Meeting in2009. KPMG was present at the AnnualGeneral Meeting in 2005, 2006 and 2007.Thomas Thiel is the auditor in charge.Thomas Thiel is also the auditor in charge ata number of other listed companies, such asAtlas Copco, Holmen and Swedish Match.SKF has a procedure in place whereby allmatters that are intended to be handled bythe elected auditors are evaluated in relationto the independence requirements and areapproved or, as the case may be, rejected,according to rules adopted by the Audit Committee.KPMG applies a similar procedure andissues annually, in addition thereto, a writtenstatement to the Board stating that the auditfirm is independent in relation to SKF.KPMG has during the last two years only toa limited extent been involved in mattersbesides the auditing for 2006–2007. Thesematters have primarily concerned tax adviceand attestation services. The total fees forKPMG’s services besides auditing in 2007amount to SEK 2 million, and they amountedto SEK 4 million in 2006.Principles for remunerationof Group ManagementIn April 2007, the Annual General Meetingadopted principles for remuneration of GroupManagement. Group Management is definedas the Chief Executive Officer and the othermembers of the management team. The principlesapply in relation to members of GroupManagement appointed after the adoption ofthe principles, and, in other cases, to theextent permitted under existing agreements.The objective of the principles is to ensurethat SKF can attract and retain the bestpeople in order to support the SKF missionand business strategy. The remuneration ofGroup Management members shall be basedon conditions that are market competitiveand at the same time support the shareholders’best interest.The total remuneration package for aGroup Management member consists primarilyof the following components: fixed salary,variable salary, pension benefits, conditionsfor notice of termination and severance pay,and other benefits such as for example acompany car. The components shall create awell-balanced remuneration reflecting individualperformance and responsibility as wellas SKF’s overall performance.Fixed salaryThe fixed salary of a Group Managementmember shall be at a market competitivelevel. It is based on competence, respons-30 Corporate Governance Report

ibility and performance. SKF uses an internationallywell-recognized evaluationsystem, International Position Evaluation(IPE), in order to evaluate the scope andresponsibility of the position. Market benchmarksare conducted on a regular basis.The performance of the Group Managementmembers is continuously monitored andused as a base for the annual review of thefixed salary.Variable salaryThe variable salary for a Group Managementmember is according to a performancebasedprogramme. The purpose of the programmeis to motivate and compensate valuecreating achievements in order to supportoperational and financial targets.The performance-based programme isdivided into two parts, a short-term and along-term part, both primarily based on thefinancial performance of the SKF Groupestablished according to the SKF managementmodel Total Value Added (TVA). TVA is asimplified economic value-added model. Thismodel promotes improved margins, capitalreduction and profitable growth. TVA is theoperating result, less the pre-tax cost ofcapital in the country in which the business isconducted. The TVA result development forthe Group correlates well with the trend ofthe share price over a longer period of time.The maximum variable salary, includingboth the short-term and the long-term partaccording to the programme, is capped at acertain percentage of the fixed annual salary.The percentage is linked to the position of theindividual and varies for Group Managementmembers between 60 and 90%.If the financial performance of the SKFGroup is not in line with the requirements ofthe variable salary programme, no variablesalary will be paid. The maximum variablesalary will not exceed 90% of the accumulatedannual fixed salary of the members of GroupManagement.Other benefitsSKF provides other benefits to Group Managementmembers in accordance with localpractice. The accumulated value of otherbenefits shall in relation to the value of thetotal remuneration be limited and shall as aprinciple correspond to what is customary onthe relevant market.Other benefits can for instance be a companycar, medical insurance and home service.PensionSKF strives for establishing pension plansbased on defined contribution models, whichmeans that SKF pays a premium amountingto a certain percentage of the employee’sannual salary. SKF’s commitment is in thesecases limited to the payment of an agreedpremium to an insurance company offeringpension insurance.A Group Management member is normallycovered by, in addition to the base pension(for Swedish members usually the ITP pensionplan), a supplementary defined contributionpension plan. SKF ensures by offeringthis supplementary defined contribution planthat Group Management members are entitledto earn pension benefits based on thefixed annual salary above the level of the basepension. The normal retirement age forGroup Management members is 62 years.Notice of termination and severance payA Group Management member may terminatehis/her employment by giving six months’notice. In the event of termination of employmentat the request of SKF, the employmentshall cease immediately. The Group Managementmember shall, however, receive a severancepayment related to the years ofservice, provided that it shall always be maximizedto two years’ salary.The Board of Directors’ right to deviatefrom the principles of remunerationThe Board of Directors may in case of particulargrounds deviate from the principles ofremuneration decided by the Annual GeneralMeeting.Preparation of matters relating toremuneration of Group ManagementThe Board of Directors of AB SKF has establisheda Remuneration Committee. TheCommittee consists of maximum four Boardmembers. The Remuneration Committeeprepares all matters relating to the principlesfor remuneration of Group Management aswell as the employment conditions for theChief Executive Officer.The principles for remuneration of GroupManagement are presented to the Boardof Directors that submits a proposal forsuch principles to the Annual General Meetingfor approval. The Board of Directors shallapprove the employment conditions for theChief Executive Officer.Information about remunerationdecided upon but not due for paymentThe structure of Group Management remunerationdecided upon prior to the approvalof these principles for remuneration, but notdue for payment, is substantially in line withthese principles with the following exceptions:In 2002 and 2003 Group Managementmembers were allocated stock options inaccordance with the SKF Stock Option Programmefurther described on page 74 in theAnnual Report. The exercise periods for thestock options allocated in 2002 and 2003,respectively, expire in 2008 and 2009,respectively. The total holding of stockoptions by Group Management is set out onpage 74 in the Annual Report.The pension conditions of the Chief ExecutiveOfficer are described on page 72 in theAnnual Report.Certain members of Group Managementare covered by the SKF Group’s Swedishdefined pension plan which is furtherdescribed on page 73 in the Annual Report.Certain members of Group Managementare in the event of termination of employmentat the request of AB SKF, entitled toreceive a severance payment which is notrelated to the years of service amounting toa maximum of two years’ salary.Stock related incentive programmesBetween 2001 and 2003, SKF made allocationsof stock options within the frameworkof a Stock Option Programme that was initiatedby SKF in 2000. No allocation of stockoptions has been made since 2003. For moreinformation on the outstanding stock options,see Note 27.One part of the allotment to the Board, forthe time until the next Annual General Meetinghas been held, is variable and correspondsto the value of the SKF B share at acertain time. For more information regardingthis, see Note 27.Financial reportingThe Board of Directors is responsible fordocumenting how the quality of the financialreporting is secured and how the companycommunicates with its auditor.The Audit Committee assists the Board ofDirectors by preparatory work to secure thequality of the company’s financial reporting.This is, for example, achieved through theAudit Committee’s review of the financialinformation and the company’s internalfinancial controls.Corporate Governance Report 31

In September 2007 SKF was deregisteredfrom the U.S. Securities & Exchange Commission(SEC). One of the consequences ofthe deregistration is that SKF is no longerobligated to file certain reports and formswith the SEC, including Forms 20-F and 6-K.In addition, SKF no longer has to comply withthe Sarbanes-Oxley Act.The Board of Directors had one meetingwith the auditor in 2007 and has been providedwith the audit and its result. Within thescope of its work, which includes reviewingthe extent of the external audit and evaluatingthe performance of the external auditors,the Audit Committee met with the auditors inconnection with three Audit Committeemeetings. In addition to that, the auditorsgave both the Audit Committee and theBoard of Directors information in writingregarding matters including the planning andimplementation of the audit and an assessmentof the risk position of the company.The Board’s report on internalcontrol concerning financial reportingfor the 2007 financial yearAccording to the Swedish Companies Act andthe Swedish Code of Corporate Governance(the “Code”), the Board of Directors isresponsible for the internal control. Thisreport on the internal control concerningfinancial reporting has been prepared inaccordance with part 3.7.2 of the Code andthe instructions for the application of theCode rules regarding internal control issuedby the Swedish Corporate Governance Boardin September 2006.Organization of the internal control concerningfinancial reportingDue to the SEC deregistration, SKF did not fileany report of management and accompanyingauditor’s report on the internal controlconcerning financial reporting as per 31December 2006 according to Section 404 ofSOX. SKF applies the Internal Control - IntegratedFramework launched in 1992 by theCommittee of Sponsoring Organizations ofthe Treadway Commission (COSO). SKFapplies a subset of the CobiT standard for ITsecurity. The COSO consists of five interrelatedcomponents, where a number ofobjectives have to be met in each component:MonitoringInformation and CommunicationControl ActivitiesRisk AssessmentControl EnvironmentThe control environment component isthe foundation for the other components.Through its policies, instructions and organizationalstructure SKF has documented thedivision of responsibility throughout the SKForganization. This is reflected in the fact thatpolicies and instructions, where applicable,are developed on the basis of internationallyaccepted standards and/or best practice.Policies and instructions are reassessedannually.SKF is a process-oriented company andincludes integrated risk assessment with thebusiness processes such as business planning.Separate functions or cross functionalboards monitor all major risk areas.In the area of control activities, SKF hasdocumented in detail, all the critical financeprocesses and controls for the Parent companyand all main subsidiary companies, coveringmore than 70% of the Group’s net salesand total assets. For smaller subsidiary companies,corresponding to an additional 20% ofnet sales and total assets, SKF has mappedout and evaluated the adherence to the COSOcomponents. The documentation standardsrequire an extensive risk assessment atGroup and subsidiary company level of risksin the area of financial reporting. For allmaterial risks that are identified, action istaken to eliminate the risk or reduce it to anacceptable level. The financial process andcontrol documentation is reviewed annually.SKF has information and communicationsystems and procedures in place in order toensure the completeness and correctnessof the financial reporting. Accounting andreporting instructions are updated whennecessary and reassessed at least once ayear. These instructions have been madeavailable to all relevant employees togetherwith training programmes and the frequentcommunication of any changes in accountingand/or reporting requirements. Financialprocess and control documentation, documentationof the COSO components of monitoring,information and communication,financial risk assessment, control environment,as well as test and review protocols,are stored in a special IT system. This enablesthe on-line real-time follow-up and monitoringof SKF’s financial internal control system.The COSO internal control framework wasimplemented in 2005. This work consistedprimarily of adapting the process and controldescriptions to a common framework, asrequired by COSO and SOX, and putting inplace a comprehensive system for managementtesting of the controls. All controlsassessed as being critical to ensure theeffective control over financial reportingwere tested in 2006. Following the SECderegistration it was decided that SKF shouldfurther develop the financial internal controlsystem. Based on the SOX 404 experiencethe internal control system was updated andSKF is currently in the process of establishingthe modified system as a Group standard,also covering those companies that wereexcluded from the SOX 404 project.SKF has an internal audit function whosemain responsibility is to ensure adherence tothe internal control framework by carryingout annual tests. The internal audit functionreports to the Group’s Chief Financial Officerand regularly submits reports to the AuditCommittee of the Board of Directors. TheBoard of Directors receives regular financialreports and the Group’s financial position anddevelopment are discussed at every meeting.The Audit Committee of the Board of Directorsreviews all interim and annual financialreports before they are released to the public.32 Corporate Governance Report

33 Consolidated financial statements34 Consolidated income statements35 Comments on the consolidated income statements36 Consolidated balance sheets37 Comments on the consolidated balance sheets38 Consolidated statements of cash flow39 Comments on the consolidated statements of cash flow40 Consolidated statements of changes in shareholders’ equity and comments41 Notes to the consolidated financial statements41 Note 1. Accounting policies (see page 48 for definitions of key figures)49 Note 2. Segment information51 Note 3. Acquisitions54 Note 4. Divestments of businesses and of assets held for sale55 Note 5. Research and development55 Note 6. Expenses by nature55 Note 7. Other operating income and expenses56 Note 8. Financial income and financial expenses56 Note 9. Taxes58 Note 10. Intangible assets59 Note 11. Property, plant and equipment61 Note 12. Jointly controlled and associated companies62 Note 13. Inventories62 Note 14. Trade receivables63 Note 15. Other financial assets63 Note 16. Other short-term assets64 Note 17. Assets classified as held for sale64 Note 18. Share capital65 Note 19. Earnings per share65 Note 20. Provisions for post-employment benefits69 Note 21. Other provisions69 Note 22. Other financial liabilities70 Note 23. Leases70 Note 24. Other short-term liabilities71 Note 25. Assets pledged and contingent liabilities71 Note 26. Related parties72 Note 27. Remuneration to Key Management75 Note 28. Fees to the auditors75 Note 29. Average number of employees76 Note 30. Risk management and financial derivatives79 Note 31. Men and women in Management and Board79 Note 32. Events after the balance sheet date80 Financial statements of the Parent Company80 Parent Company income statements81 Parent Company balance sheets82 Parent Company statements of cash flow83 Parent Company statements of changes in shareholders’ equity84 Notes to the financial statements of the Parent Company84 Note 1. Accounting policies84 Note 2. Financial income, impairment of financial assets and financial expenses84 Note 3. Untaxed reserves85 Note 4. Taxes85 Note 5. Property, plant and equipment86 Note 6. Investments in subsidiaries, jointly controlled and associated companies88 Note 7. Investments in equity securities88 Note 8. Other short-term assets88 Note 9. Provisions for pensions and similar commitments89 Note 10. Long-term loans89 Note 11. Short-term loans89 Note 12. Other short-term liabilities89 Note 13. Assets pledged89 Note 14. Contingent liabilities90 Note 15. Salaries, wages, other remunerations,average number of employees and men and women in Management and Board90 Note 16. Absence due to illness90 Note 17. Events after the balance sheet date90 Note 18. Related partiesFinancial statements91 Proposed distribution of surplus92 Auditors’ report

Consolidated income statementsYears ended 31 DecemberSEKm Note 2007 2006Net sales 2 58,559 53,101Cost of goods sold 5, 6 -43,172 -39,493Gross profit 15,387 13,608Selling expenses 6 -7,386 -7,104Administrative expenses 6 -478 -513Other operating income 7 320 316Other operating expenses 7 -301 -338Profit (+)/loss (-) from jointly controlled and associated companies 12 -3 738Operating profit 7,539 6,707Financial income 8 968 69Financial expenses 8 -1,369 -389Profit before taxes 7,138 6,387Taxes 9 -2,371 -1,955Net profit 4,767 4,432Net profit attributable to:Shareholders of AB SKF 4,595 4,317Minority interests 172 115Basic earnings per share (SEK) 19 10.09 9.48Diluted earnings per share (SEK) 19 10.07 9.45Values by quarterSEKm Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full year 2007Net sales 14,371 14,963 14,155 15,070 58,559Operating profit 1,886 2,019 1,803 1,831 7,539Profit before taxes 1,825 1,957 1,646 1,710 7,138Basic earnings per share (SEK) 2.57 2.71 2.48 2.33 10.09Diluted earnings per share (SEK) 2.56 2.70 2.48 2.33 10.0734 Consolidated income statements

5,2535,25349,28549,2856,3876,38753,10153,1017,1387,13858,55958,559Amounts in parentheses refer to comparable figures for 2006.Net salesNet sales amounted to SEK 58,559 m (53,101). The 10.3% increasein net sales compared to 2006 was attributable to structure by 3.1%,to exchange rate effects by -2.9%, to price and mix 1) by 2.4%, and tovolume by 7.7%. Net sales, recorded in local currencies, were 13.2%higher in 2007 compared to 2006. Qualifying hedging instrumentsaffected net sales by SEK 72 m.Operating profitThe operating profit in 2007 amounted to SEK 7,539 m (6,707)resulting in an operating margin of 12.9% (12.6). The restructuringplans to close the factory in Glasgow, USA and to reduce the numberof employees at the Fontenay-le-Comte facility in France wereannounced in December. Around SEK 300 m was charged to theincome statement for these activities, whereof SEK 60 m related toimpairments. Of this amount around SEK 270 m was taken in theAutomotive Division and around SEK 30 m in the Industrial Division.Exchange rates for the full year 2007, including translation effectsand flows from transactions, had a negative effect on operating profitof around SEK 640 m.2006 included income from the jointly controlled entity, Oy Ovako Ab,of SEK 725 m, representing both results from operations as well asthe gain on the sale of Oy Ovako Ab’s operating subsidiaries. In 2006,a cost of around SEK 400 m was charged to the income statement asa consequence of a number of restructuring and cost improvementactivities. This included impairments, write-offs and restructuringcharges.Cost of goods sold, selling and administrative expenses 2007amounted to SEK 51,036 m. The costs were divided into 34% salaries,wages and social charges, 3% depreciation, amortization and impairment,35% raw material and components consumed, and 28% otherpurchased services, utilities and goods.Other operating income and other operating expenses includeitems such as foreign exchange gains and losses arising on operatingassets and liabilities, gains and losses on sales of property, plant andequipment and businesses as well as rental revenues. For 2007 thisincluded income of SEK 40 m mainly from the sale of the forging businessat the Lüchow factory in Germany. For further details, see Note 7.Profit before taxesProfit before taxes 2007 amounted to SEK 7,138 m (6,387). In 2007the financial income and expense, net, amounted to SEK -401 m(-320) and was negatively affected by increasing interest rates andpositively affected by currency effects. Interest costs on postemploymentbenefits have affected the financial net negatively bySEK 228 m. The financial exchange gains and losses,net, amounted to SEK 38 m (-70).Net profitNet profit in 2007 amounted to SEK 4,767 m (4,432). The actual taxrate in 2007 was 33% (31).Diluted earnings per shareDiluted earnings per share are calculated in Note 19.1)Mix refers to volume shifts between various customer segmentsand products with different price levels.Net salesNet salesProfit before taxes Profit before taxes60,00060,0008,0008,00050,00040,00050,00040,0006,0006,00030,00030,0004,0004,00020,00010,00020,00010,0002,0002,00000500605 07060700500605 070607Inventories, % Inventories, %of annual net of sales annual net salesComments Equity/Assets, on the Equity/Assets, consolidated %% income statements 35

Consolidated balance sheetsAs of 31 DecemberSEKm Note 2007 2006ASSETSNon-current assetsIntangible assets 10 3,516 2,586Property, plant and equipment 11 11,960 11,388Investments in jointly controlled and associated companies 12 70 54Long-term financial assets 15 1,360 1,128Deferred tax assets 9 989 948Other long-term assets 20 339 24718,234 16,351Current assetsInventories 13 11,563 9,939Trade receivables 14 9,894 8,845Tax receivables 112 108Other short-term assets 16 2,164 1,609Investment in jointly controlled company 12 3 48Assets classified as held for sale 17 86 335Other short-term financial assets 15 1,329 1,761Cash and cash equivalents 15 2,946 7,24228,097 29,887Total assets 46,331 46,238EQUITY AND LIABILITIESEquity attributable to shareholders of AB SKFShare capital 18 1,138 1,138Share premium 564 564Available-for-sale reserve 367 35Hedging reserve 27 39Translation reserve -633 -955Retained earnings 16,124 18,152Equity attributable to minority interests 768 63418,355 19,607Non-current liabilitiesLong-term financial liabilities 22 7,301 7,007Provisions for post-employment benefits 20 4,840 4,731Deferred tax provisions 9 1,333 1,243Other long-term provisions 21 1,484 1,464Other long-term liabilities 186 14115,144 14,586Current liabilitiesTrade payables 4,904 4,529Tax payables 737 620Short-term provisions 21 545 455Other short-term financial liabilities 22 810 1,218Other short-term liabilities 24 5,836 5,164Liabilities related to assets classified as held for sale 17 – 5912,832 12,045Total equity and liabilities 46,331 46,23836 Consolidated balance sheets

49,2852,39020.1Inventories, %of annual net of sales annual net sales2,39020.133.218.753,1012,15818.739.12,15849,2852,39020.12,39020.133.219.858,5592,12619.840.12,12618.753,1012,15818.739.12,15819.858,5592,12619.840.12,1265,2531,62345.21,62345.222.76,3871,93342.41,93342.419.75,2531,62345.21,62345.222.7Equity/Assets, %7,1381,90739.61,90739.647.56,3871,93342.41,93342.419.77,1381,90739.61,90739.647.525255050202040401515Amounts in parentheses refer to comparable figures for 2006.1010Assets and liabilities 55Inventories at 31 December amounted to SEK 11,563 m (9,939).00The production volume 05 for 062007 05 was 07 06 12% above 07 the volume for2006. Inventories as a percentage of annual sales totalled 19.8% (18.7).The target for the Group is 18%.Net salesTrade receivables at 31 DecemberNetamountedsalesto SEK 9,894 m(8,845). The average days of outstanding trade receivables in 2007were 62 days. The Group aims to reach 57 days. Trade receivablesCash flow after Cash operating flow after operatingas a percentage of annual net sales totalled 16.9% (16.7).60,000 investments, 60,000 investments, before financial before items financial itemsDuring 2007, the net book value of property, plant and equipment50,000 50,000in Swedish kronor increased by SEK 222 m due to translation effectscaused by 40,000 a weaker Swedish 40,000 krona, principally compared to the Euro.The value 30,0004,000of total assets 30,0004,000 increased in 2007 by around 2% comparedwith 200620,000due to a weaker Swedish krona.3,00020,0003,000The Group’s equity/assets 2007 were 39.6% (42.4), which is above10,000 10,000the average 2,000 target of 35%. Gearing in 2007 was 40.1% (39.1). The0 2,000005 06 05 07 06 071,000 1,0003030target for gearing is to operate around 50%. The net debt/equity 20072020was 47.5% (19.7).Shareholders’ 10 equity increased 10 by SEK 322 m (-1,203) due totranslation effects caused by a weaker Swedish krona.00In 2007, SEK 2,049 05 m (1,821) 06 05 was 07 distributed 06 07 to the shareholdersof AB SKF. Shareholders’ equity was also reduced by SEK 4,554 m asa result of the share redemption. For further details, see Note 18.Profit before Profit taxesbefore taxesFinancingAt year end, total interest-bearing loans amounted to SEK 7,735 mAdditions to Additions property, to property,(8,053). In 2006, the Group issued a EUR 500 m seven-year note in8,000 plant 8,000 and equipment plant and equipmentthe European bond market.Post-employment 6,000 benefits, 6,000 net amounted to SEK 4,538 m (4,540).Financial assets totalled SEK 5,635 m (10,131) of which SEK 4,275 m(9,003) consisted 4,0002,000of current 4,0002,000financial assets. Changes in net interestbearingliabilities 2007 are disclosed in the Group’s consolidated2,0001,500statement of cash flow. 2,0001,5001,0000 1,000005 06 05 07 06 07500 5000050060507060700500605070607Inventories, Inventories, % %of annual net of sales annual net salesEquity/Assets, Equity/Assets, % %252015102520151050Paid dividend 50Paid per dividend perA and B share, A and SEKB share, SEK40403052044.005.004.50 4.504.003052045.00551031030050060507060702105020610507060700600706080708Cash flow Gearing, after Cash operating flow % Gearing, after operating %investments, investments, before financial before items financial itemsAdditionsNet debtto/equity, Additions property,Net debt % to/equity,property,%plant and equipment plant and equipment505050504,000 404,000 402,000 402,000 40303,000303,000301,500301,500202,00010202,00010201,00010201,000101,000001,000005 06 05005 06 0507 0607 060707500000505500006 05006 0507 0607 060707Comments on the consolidated balance sheets 37

Consolidated statements of cash flowYears ended 31 DecemberSEKm Note 2007 2006Operating activitiesProfit before taxes 7,138 6,387Adjustments forDepreciation, amortization and impairment 6 1,776 1,834Net gain (-) on sales of property, plant and equipment -13 -13Net gain (-) on sales of equity securities – -2Net gain (-) on sales of businesses and assets held for sale -66 –Other non cash items 706 -434Income taxes paid -2,361 -1,947Contributions to and payments under post-employment definedbenefit plans -418 -413Jointly controlled and associated companies -10 186Changes in working capitalInventories -1,390 -250Trade receivables -744 -831Trade payables 197 442Other operating assets and liabilities, net 111 68Net cash flow from operating activities 4,926 5,027Investing activitiesOperating investmentsAdditions to intangible assets 10 -50 -78Additions to property, plant and equipment 11 -1,907 -1,933Sales of property, plant and equipment 119 52Acquisitions of businesses, net of cash and cash equivalents 3 -1,209 -2,129Sales of businesses and assets held for sale, net of cashand cash equivalents 4 200 –Pre-liquidation proceeds from Oy Ovako Ab 12 46 1,217Investments in equity securities -1 –Sales of equity securities 2 2Subtotal operating investments -2,800 -2,869Investments in financial and other assets -636 -2,173Sales of financial and other assets 1,525 3,018Net cash flow used in investing activities -1,911 -2,024Net cash flow after investments before financing 3,015 3,003Financing activitiesProceeds from medium- and long-term loans 127 4,676Repayment of medium- and long-term loans -798 -740Change in short-term loans 7 -55Payment of finance lease liabilities -5 -5Cash dividends to AB SKF’s shareholders -2,049 -1,821Cash dividends to minority shareholders -54 -47Redemption of shares -4,554 –Net cash flow used in financing activities -7,326 2,008Increase(+)/decrease(-) in cash and cash equivalents -4,311 5,011Cash and cash equivalents at 1 January 7,242 2,379Cash effect excluding acquired companies -4,355 4,514Cash effect of businesses acquired 3 44 497Translation effect 15 -148Cash and cash equivalents at 31 December 2,946 7,24238 Consolidated statements of cash flow

2,3902,1582,126 2,3902,1582,1261,6231,9331,623 1,9071,9331,90720.118.720.1 19.818.719.839.6 45.242.439.645.242.45,2535,25349,28549,285 58,5596,3876,38753,10153,1017,1387,13858,559Amounts in parentheses refer to comparable figures for 2006.The consolidated statement of cash flow have been adjusted forexchange rates arising upon the translation of foreign currency toSEK, as these do not represent cash flow.Cash flow after operating investments before financial itemsCash flow after operating investments before financial items, shownin table below, which is the primary cash flow measurement used inthe Group, amounted to Net SEK sales 2,126 m (2,158). Net sales Excluding acquisitions,it amounted to SEK 3,335 m (4,287).Net cash flow from operating activities60,00060,000Gross cash flow, defined as operating profit plus depreciation,50,000amortization and impairment, 50,000amounted to SEK 9,315 m (8,541).The gross 40,000 cash flow was 15.9% 40,000(16.1) of annual net sales.A continued 30,000good operating 30,000profit, which in 2007 amounted toSEK 7,539 20,000 m (6,707), contributed to the strong cash flow.20,000Other non cash items adjust primarily for certain expenses for10,00010,000which cash flow has not yet occurred, the most significant being0005 06 05 07 06 07expenses for post employment benefits and unrealised gains andlosses related to financial instruments.Subtotal operating investmentsThe Group’s capital expenditures for property, plant and equipmentamounted to SEK 1,907 m (1,933). Of this amount, approximatelySEK 166 m (105) was invested in measures to improve theenvironment, both internally and externally.In 2007, the Group’s cash outflow from acquisitions was SEK 1,209 m(2,129 ), see NoteProfit3.before taxes Profit before taxesCash flow from financing activitiesInterest-bearing loans totalled SEK 7,735 m at year end (8,053).8,0008,000Post-employment benefits, net, amounted to SEK 4,538 m (4,540).Interest payments amounted to SEK 726 m (328) and interest6,0006,000received to SEK 528 m (363).The change 4,000in cash and 4,000 cash equivalents was SEK -4,296 m(4,863). In 2007, changes in exchange rates affected cash and cashequivalents 2,000 by SEK 15 m (-148) 2,000 mainly attributable to USD and EUR.Other financial assets, other 2) , totalled SEK 1,631 m at year00end (2,425). 05 06 05 07 06 07Additional cash flow information (SEKm) 2007 2006Cash flow after operating investments before financial itemsNet cash flow from operating activities 4,926 5,027Inventories, % Inventories, %Equity/Assets, % Equity/Assets, %Subtotal operating investments -2,800 -2,869of annual net sales of annual net sales2,126 2,15825Change in net 20 interest-bearing 20 liabilities (SEKm)252007ClosingbalanceCashchange50Businessesacquired/sold 4050Othernon cashchanges 40Translationeffect2007OpeningbalanceLoans 1) 15157,735 -664 30 114 -10330335 8,053Post-employment benefits, net 4,538 -418 18 357 41 4,54010Other financial assets, other 2) 10-1,631 88920–20-97 2 -2,425Cash and cash 5equivalents 5-2,946 4,355 10 -44 10 – -15 -7,242Net interest-bearing liabilities 7,696 4,162 88 157 363 2,926000005 06 05 07 06 0705 06 05 07 06 071)Excludes derivatives, see Note 22.2)Other financial assets exclude equity securities, cash and cash equivalent, derivatives and include other long-term assets less defined benefit assets.Cash flow after Cash operating flow after operatinginvestments, before investments, financial before items financial itemsAdditions to property, Additions to property,plant and equipment plant and equipment4,0004,0002,0002,0003,0003,0001,5001,5002,0002,0001,0001,0001,0001,00050050000500605 07060700500605 070607Comments on the consolidated statements of cash flow 39Paid dividend per Paid dividend per

33.239.140.147.52,3902,1582,1261,6231,9331,90720.118.719.845.242.439.65,25650,00040,0006,00030,00020,00010,000Consolidated statements of changes 2,000in shareholders’ equity005SEKm0607Sharecapital4,0000Sharepremium05 Available- 06for-salereserve07HedgingreserveTranslationreserveRetainedearningsMinorityinterestOpening balance 1/1/2006 1,138 564 12 -4 248 15,671 604 18,233Exchange differences arising on thetranslation of foreign operations – – – – -1,203 9 -68 -1,262Change Inventories, in fair value % of available-for-saleEquity/Assets, %assets of annual and cash net sales flow hedges – – 23 112 – – – 135Release of cash flow hedges – – – -69 – – – -69Income and expense recognized directly in equity – – 23 43 -1,203 9 -68 -1,196Profit for the year – – – – – 4,317 115 4,43225Total recognized income and expense –50– 23 43 -1,203 4,326 47 3,23620 Exercise of share options – 40– – – – -24 – -24Transactions with minority owners15– –30– – – – 30 30Dividends – – – – – -1,821 -47 -1,86810Closing balance 31/12/2006 1,13820564 35 39 -955 18,152 634 19,6075 Exchange differences arising on the10translation of foreign operations – – – – 322 -2 13 33300Change 05 in fair 06 value 07 of available-for-sale05 06 07assets and cash flow hedges – – 332 40 – – – 372Release of cash flow hedges – – – -52 – – – -52Income and expense recognized directly in equity – – 332 -12 322 -2 13 653Profit for the year – – – – – 4,595 172 4,767Total recognized income and expense – – 332 -12 322 4,593 185 5,420Cash flow after operatingAdditions to property,Exercise of share options – – – – – -40 – -40investments, before financial itemsplant and equipmentOther, including transactions with minority owners – – – – – 22 3 25Redemption of shares -569 – – – – -3,985 – -4,554Bonus issue 569 – – – – -569 – –4,000 Dividends – 2,000– – – – -2,049 -54 -2,103Closing balance 31/12/2007 1,138 564 367 27 -633 16,124 768 18,3553,0001,500Total2,0001,0001,000Available-for-sale reserve0This reserve arises on the valuation of available-for-sale financial05 06 07assets. When an available-for-sale asset is sold, the portion of thereserve that relates to that financial asset, and is effectively realized,is recognized in profit or loss. When an available-for-sale asset isimpaired, the portion of the reserve that relates to that financial assetis recognized in profit or loss.500Translation reserve0Exchange differences relating to the translation from the functional05 06 07currencies of the SKF Group’s foreign subsidiaries into SEK areaccumulated to the translation reserve. Upon the sale of a foreignoperation, the accumulated translation amounts are recycled to theincome statement and included in the gain or loss on the disposal.Hedging reserveThe hedging reserve represents hedging gains and losses recognizedon the effective portion of cash flow hedges. The cumulative deferredgain or loss on the hedge is recognized in profit or loss when the hedgedtransaction impacts the profit or loss.Paid dividend perA and B share, SEK5432104.00064.50075.0008A share redemption of SEK 10.00 per sharewas paid in 2007 in addition to the ordinarydividend of SEK 4.50 per share. The Board ofDirectors’ proposed distribution of surplus forthe year 2007, which is subject to approvalat the Annual General Meeting in April 2008,includes an ordinary dividend of SEK 5.00per share and additionally a redemption ofSEK 5.00 per share, see Note 18.Gearing, %Net debt /equity, %5040 Consolidated statements of changes in shareholders’ equity and comments404050

Notes to the consolidated financial statementsAmounts in SEK m unless otherwise stated. Amounts in parentheses refer to comparable figures for 2006.1 Accounting policiesCritical accounting policiesBasis of presentationThe consolidated financial statements of the SKF Group are preparedin accordance with International Financial Reporting Standards (IFRS)as adopted by the European Union (EU), which includes interpretationsfrom the International Financial Reporting InterpretationsCommittee (IFRIC). Furthermore, the Group is in compliance withrequirements from the Swedish Financial Accounting StandardsCouncil RR 30:06, “Additional Accounting Rules for Group Accounts”as well as relevant interpretations (URA) issued by the Council’sEmerging Issues Task Force.The annual report of AB SKF has been signed by the Board ofDirectors on 31 January 2008. The income statement and balancesheet, and the consolidated income statement and consolidatedbalance sheet are subject to adoption at the Annual General Meetingon 16 April 2008.The consolidated financial statements are prepared on the historicalcost basis except as disclosed in the accounting policies below.Certain prior period amounts have been reclassified to conform tothe current period presentation primarily related to the implementationof IFRS 7 “Financial Instruments: Disclosures”.Only one comparative year has been presented in the consolidatedfinancial statements and accompanying notes, resulting from theGroup’s de-registration from the Securities Exchange Commissionin the USA, where two comparative years were required.Basis of consolidationThe consolidated financial statements include the Parent company,AB SKF, and each of those companies in which it directly or indirectly,exercises control. Control is defined as the power to govern the financialand operating policies of a company in order to obtain benefitfrom its activities. Such control is usually achieved with an ownershiprepresenting more than 50% of the voting rights. AB SKF and itssubsidiaries are referred to as “the SKF Group” or “the Group”.Consolidated shareholders’ equity includes the Parent company’sequity and the part of the equity in subsidiaries arising after thesubsidiary’s acquisition.Minority interests are shown as a separate category within equity,with the minority share of net profit being specified after the net profit.Intercompany accounts, transactions and unrealized profits havebeen eliminated in the consolidated financial statements.Business combinations and goodwillAll business combinations are accounted for in accordance with thepurchase method. At the date of acquisition, the acquired assets,assumed liabilities and contingent liabilities (net identifiable assets)are measured at fair value, which requires the use of estimates.Acquired land, buildings and equipment are either appraised byindependent valuers, or internally appraised with reference toobservable market data. Financial assets and liabilities (includingpost-employment benefits), as well as inventories, are valued usingreferences to available market information. The fair values of significantintangible assets are derived either with the assistance of independentvaluation experts, or developed internally using appropriatevaluation techniques generally based on forecasted future cash flows.Any excess of the cost of acquisition over fair values of net identifiableassets of the acquired business is recognized as goodwill. If suchfair values exceed the cost of acquisition, this excess is credited toprofit and loss in the period of acquisition.This purchase price allocation, PPA, (the process of allocating theacquisition cost to the net identifiable assets acquired and goodwill),is required by IFRS to be completed within twelve months of theacquisition date. Once the PPA has been reviewed and approved bymanagement, goodwill is allocated to cash generating units (“CGUs”)and subsequently it is tested annually for impairment. Goodwill is notamortized.Investments in jointly controlled and associated companiesCompanies, in which the Group has a significant influence, are referredto as associated companies. Significant influence is the power to participatein the financial and operating policy decisions of the investeeand is usually achieved when the Group owns 20-50% of the votingrights. Investments in associated companies are reported in accordancewith the equity method.Investments, where the Group as a venturer and together withother venturers, jointly control the investment through a contractualarrangement between the venturers, are defined as jointly controlledentities. Such investments are accounted for using the equity method.Under the equity method, the carrying value of the investment isequal to the Group’s share of shareholders’ equity in the company,determined in accordance with the accounting policies of the Group,as well as any goodwill or other fair value adjustments arising uponacquisition less any impairment. The Group’s share in the result ofthese companies is based on their pre-tax profit/loss and taxes,respectively.ClassificationThe assets and liabilities classified as current are expected to berecovered or settled within twelve months from the balance sheetdate. All other assets and liabilities are recovered or settled later.No other liabilities than loans, financial leases and certain derivativeinstruments are expected to be settled later than five years from thebalance sheet date.Segment informationThe Group’s primary segments are based on customer segments representinggroups of related industrial and automotive products, andwhich agree to the Group’s operational structure. The secondary segmentinformation is based on geographical location of the customer towhom the sale is made, as well as the geographical location of subsidiaries’assets and capital expenditures. Sales between operating unitsNotes Group 41

1 Accounting policies (cont.)are based on market conditions. Segment results represent the contributionof the segments to the profit of the Group, and include someallocated corporate expenses. Unallocated items consist mainly ofremaining corporate expenses, including some research and developmentactivities, net costs relating to prior organization or disposedoperations and profit from certain associated companies.Segment assets include all operating assets used by a segment andconsist principally of property, plant and equipment, external tradereceivables, inventories, other receivables, prepayments and accruedincome. Segment liabilities include all operating liabilities used by asegment and consist principally of external trade payables, otherprovisions, accrued expenses and deferred income.Unallocated assets and liabilities include all tax items and itemsof a financial, interest-bearing nature, including post-employmentbenefit assets and provisions. Additionally, unallocated items includeitems related to central corporate activities, including research anddevelopment, as well as items related to previously mentionedunallocated result items included in results of operations.Inter-segment receivables and payables arising from the salesbetween Group companies, are not considered segment assets andliabilities as such items are sold to and settled directly with SKFTreasury Centre, the Group’s internal bank, thereby becomingfinancial in nature.Translation of foreign financial statementsAB SKF’s functional currency is the Swedish kronor (SEK), which isalso the Group’s reporting currency.All foreign subsidiaries report in their functional currency beingthe currency of the primary economic environment in which thesubsidiary operates. Upon consolidation, all balance sheet itemshave been translated to SEK based on the year-end exchange rates.Income statement items are translated at average exchange rates.The resulting translation adjustments that have arisen since1 January 2003, the date of transition to IFRS, are presented asa separate component of shareholders’ equity. Such translationdifferences are recognized in profit and loss upon the disposal ofthe foreign operation.rates prevailing at the balance sheet date. Exchange gains and lossesrelated to trade receivables and payables and other operating receivablesand payables are included in other operating income and otheroperating expenses. The exchange gains and losses relating to otherfinancial assets and liabilities are included in financial income andfinancial expenses.RevenueRevenue consists of sales of products or services in the normal courseof business. Service revenues are defined as business activities, billedto a customer, that do not include physical products or where thesupply of any products is subsidiary to the fulfillment of the contract.Sales are recorded net of allowances for volume rebates and salesreturns. Accruals for such allowances are recorded at the time ofrevenue recognition.Revenue is recognized when the significant risks and rewards ofownership have been transferred to the buyer. Revenue from the saleof goods and services is generally recognized when (1) an arrangementwith a customer exists, (2) delivery has occurred or services havebeen rendered, (3) the price is fixed or determinable, and (4) collectionof the amount due is reasonably assured.Contracts and customer purchase orders are generally used todetermine the existence of such an arrangement. Shipping documentsand customer acceptance are used, when applicable, to verify delivery.Whether the price is fixed or determinable is assessed based onthe payment terms associated with the transaction. Collectibility isassessed based primarily on the creditworthiness of the customer asdetermined by credit limit control and approval procedures, as wellas the customer’s payment history. Approval procedures includeapproval of new customers by management.Revenues from service and/or maintenance contracts where theservice is delivered to the customer at a fixed price is accounted foron a straight-line basis over the duration of the contract or under thepercentage-of completion method based on the ratio of actual costsincurred to total estimated costs expected to be incurred. Any anticipatedlosses on contracts are recognized in full in the period in whichlosses become probable and estimable.Translation of items denominated in foreign currencyTransactions in foreign currencies during the year have been translatedat the exchange rate prevailing at the respective transaction date.Assets and liabilities denominated in a foreign currency, primarilyreceivables and payables, have been translated at the exchangeAllowance for doubtful accountsManagement maintains an allowance for doubtful receivables forexpected losses resulting from the inability of customers to makerequired payments. When evaluating the need for an allowance,management considers the aging of accounts receivable balances,Exchange ratesThe following exchange rates have been used when translating the financial statements of foreign subsidiaries operating in the countries shownbelow into SEK:Average ratesYear-end ratesCountry Unit Currency 2007 2006 2007 2006China 1 CNY 0.89 0.93 0.88 0.88EMU-countries 1 EUR 9.24 9.27 9.46 9.05India 100 INR 16.33 16.22 16.38 15.53Japan 100 JPY 5.73 6.36 5.71 5.78United Kingdom 1 GBP 13.50 13.58 12.90 13.48USA 1 USD 6.74 7.37 6.46 6.8842 Notes Group

historical write-off experience, customer creditworthiness andchanges in customer payment terms.Amortization is included in cost of goods sold, selling or administrativeexpenses depending on where the assets have been used.Property, plant and equipment (PPE)Machinery and supply systems, land, buildings, tools, office equipmentand vehicles for continuing use or sales of goods or services or foradministrative purposes are stated in the balance sheet at cost ordeemed cost, less any accumulated depreciation and impairmentlosses. Deemed cost is the carrying amount of property, plant andequipment at the transition to IFRS, which included revaluationsmade under previous Swedish GAAP. The Group does not capitalizeborrowing costs as part of the cost of constructing property, plantand equipment, rather these are expensed as incurred.SKF applies a component approach to depreciation. This meansthat where items of PPE are comprised of different componentshaving a cost significant in relation to the total cost of the items, suchcomponents are depreciated separately. Depreciation is provided ona straight-line basis and is calculated based on cost or deemed cost.The rates of depreciation are based on the estimated useful lives of theassets, which are subject to annual review. These useful lives are basedupon estimates of the periods during which the assets will generaterevenue and are based to a large extent on historical experience ofusage and technological development. The useful lives are:• 33 years for buildings and installations;• 10-20 years for machinery and supply systems;• 10 years for control systems within machinery and supply systems;• 4-5 years for tools, office equipment and vehicles.Depreciation is included in cost of goods sold, selling or administrativeexpenses depending on where the assets have been used.Assets classified as held for saleAssets and disposal groups are classified as held for sale when theyare available for immediate sale in their present condition and managementis committed to the sale. The sale must be highly probablesuch that it is expected to be completed within one year.Assets and disposal groups classified as held for sale are valued atthe lower of carrying amount and fair value less cost to sell. Property,plant and equipment classified as held for sale are not depreciated asthey will be recovered principally through a sales transaction ratherthan through continuing use.Intangible assets other than goodwillIntangible assets other than goodwill are stated at initial cost less anyaccumulated amortization and impairment losses. Amortization ismade on a straight-line basis over their estimated useful lives, whichare subject to annual review. The useful lives are based to a largeextent on historical experience, the expected application, as well asother individual characteristics of the asset. The useful lives are:• Patents and similar rights up to 11 years;• Capitalized software normally 4 years;• Capitalized customer relationships up to 25 years;• Capitalized development expenditures up to 25 years;• Other intangible assets normally from 3-5 years;• Those intangible assets where there is no foreseeable limit to the periodover which the asset is expected to generate net cash flows, are consideredto have indefinite useful lives, and no amortization is made.Capitalization of softwareThe Group capitalizes software for internal use if it is probable thatthe future economic benefits that are attributable to it will flow tothe company and the cost can be reliably measured. In evaluating capitalization,management considers new functionality and/or increasedstandard of performance to be significant evidence that future economicbenefits will be achieved.Research and developmentResearch expenditures as well as development expenditures notmeeting the capitalization criteria described below, are charged to costof goods sold in the income statement when incurred.Expenditures during the development phase are capitalized as intangibleassets when, according to management’s judgment, it is probablethat they will result in future economic benefits for the Group. Stringentcriteria must be met before a development project results in the recordingof an intangible asset. Such criteria include the ability to complete theproject, proof of technical feasibility and market existence and intentionand ability to use or sell the asset as well as the ability to reliably measurethe expenditures during the development phase. Management considersthe existence of a customer order as significant evidence of technologicaland economic feasibility.LeasesA lease agreement that, according to the management’s judgment,transfers substantially all the benefits and risks of ownership to theGroup, is accounted for as a finance lease. Finance leases are initiallyrecorded as property, plant and equipment at an amount equal to thepresent value of the minimum lease payments during the lease term.Finance leases are depreciated in a manner consistent with the Group’suseful lives for owned property, plant and equipment. Lease paymentsare apportioned between the finance charge and the reduction in theoutstanding finance lease obligation. The finance charge is allocated toperiods during the lease term as to produce a constant periodic rate ofinterest on the remaining balance of the liability for each period.Other leases are accounted for as operating leases, where rentalexpenses are recognized in the income statement, on a straight-linebasis, over the lease term.InventoriesInventories are stated at the lower of cost (first-in, first-out basis) ormarket value (net realizable value). Raw materials and purchasedfinished goods are valued at purchase cost. Work in process and manufacturedfinished goods are valued at production cost. Production costincludes direct production cost such as material and labour, as well asmanufacturing overhead as appropriate.Net realizable value is defined as selling price less costs to completeand costs to sell. As future selling prices and selling costs are notknown, management’s best estimate, based on current price and costlevels are used. Net realizable value includes both technical and commercialobsolescence made on an individual subsidiary basis. Suchobsolescence is assessed by reference to the rate of turnover for eachinventory item.Notes Group 43

1 Accounting policies (cont.)Long-term employee benefitsEmployee benefits, which are both earned and paid out during employment,and are expected to be settled more than twelve months afterthey are earned yet before employment ends, are long-term employeebenefits. These include part-time retirements programs, anniversarybonuses, long-stay and jubilee payments. All such programs are calculatedusing the projected credit unit method and appropriate assumptions,as described under post-employment benefits, except that allactuarial gains and losses are recognized immediately in the incomestatement.Financial assets and financial liabilitiesGeneralA financial instrument is any contract that gives rise to a financial assetof one entity and a financial liability or equity instrument of anotherentity. Financial assets include, in particular, cash and cash equivalents,trade receivables and other originated loans and receivables,equity securities and derivative assets. Financial liabilities generallysubstantiate claims for repayment in cash or another financial asset.In particular, this includes bonds, trade payables, liabilities to banks,finance lease payables and derivative liabilities.RecognitionFinancial assets and financial liabilities are recognized on the Group’sbalance sheets when the Group becomes a party to the contractualprovisions of the instrument. Settlement day recognition is appliedfor financial assets and liabilities other than derivatives, which arerecognized at trade date. Financial instruments are initially recordedat fair value, which is normally equal to cost. Transaction costs areincluded in the initial measurement of financial assets and liabilitiesthat are not subsequently measured at fair value through profit andloss. In general, financial assets and financial liabilities are offset andthe net amount presented in the balance sheet when, and only when,the entity currently has a right to set off the recognized amountsand intends to settle on a net basis.• Loans and receivablesFinancial assets categorized as loans and receivables are non-derivativefinancial assets with fixed or determinable payments that are notquoted in an active market. Loans and receivables include trade receivables,loans granted, funds held with banks and deposits comprisingprincipally of funds held with landlords and other service providers, forwhich substantially all initial investment is expected to be recovered.Loans and receivables are measured at amortized cost using theeffective interest method. Impairment losses are recognized wherethere is objective evidence of impairment. On occurrence of default,loans and receivables are derecognised. For disclosure purposes,fair values have been calculated using valuation techniques, mainlydiscounted cash flow analyses based on observable market data.• Financial assets at fair value through profit and lossFinancial assets, other than those designated as available for saleor loans and receivables, are included in the category financial assetsat fair value through profit and loss. The fair value of assets in thiscategory is based on quoted market prices or measured using valuationtechniques, mainly discounted cash flow analyses based onobservable market data.This category has two sub-categories: financial assets held fortrading and those designated at fair value through profit or loss atinception. Financial instruments are designated at fair value throughprofit and loss when the Group manages such investments and makespurchase and sale decisions based on their fair value. Derivatives arecategorized as held for trading unless subject to hedge accounting.• Financial liabilities at fair value through profit and lossDerivatives with a negative fair value that are not subject to hedgeaccounting are classified as held for trading and reported at fair valuethrough profit and loss. Derivatives with a negative fair value arerecognized as financial liabilities. The Group has not yet made use ofthe option to designate financial liabilities upon initial recognition asfinancial liabilities at fair value through profit and loss.MeasurementSubsequent measurement depends on the designation of the instrument,as determined by management, in the following categories:• Available-for-saleInvestments in equity securities (other than interests in jointly controlledand associated companies) and debt securities, except debtsecurities held by SKF Treasury Centre, are categorized as availablefor sale. Changes in the fair value of these financial instruments arerecognized directly in equity, except for impairment losses which arerecognized in the income statement. When the investments are derecognized,the cumulative gain or loss recognized in equity is releasedfrom equity and recognised in the income statement. The fair valuesof quoted equity securities held are based on the current bid price forthe securities.• Other financial liabilitiesFinancial liabilities, excluding derivatives, are measured at amortizedcost using the effective interest method. Liabilities that are hedgeditems, where fair value hedge accounting is applied are measuredbased on changes in the fair value of the hedge instruments, attributedto the risk hedged. For disclosure purposes, fair values of financialliabilities have been calculated using valuation techniques, mainlydiscounted cash flow analyses based on observable market data.DerecognitionFinancial assets are derecognized when the contractual rights to thecash flow have expired or been transferred together with substantiallyall risks and rewards. Financial liabilities are derecognized when theyare extinguished.Cash and cash equivalentsCash and cash equivalents comprise cash in hand, bank deposits, debtsecurities and other liquid investments that have a maturity of threemonths or less at the time of acquisition.44 Notes Group

Hedge accountingGeneralThe Group applies hedge accounting aimed at reducing risks relatedto the volatility of balance sheet items and future cash flows, whichotherwise would affect the income statement. A distinction is madebetween fair value hedge and cash flow hedges, depending on thenature of the hedged item. Derivative instruments which provideeffective economic hedges, but for which hedge accounting as definedby IAS 39 is not permitted, are accounted for as trading instruments.Changes in the fair value of these economic hedges are immediatelyrecognized in the income statement as financial items.Cash flow hedgesHedge accounting has been applied to derivative financial instruments,which are effective in offsetting the variability in the cash flows fromforecasted net sales. Forward exchange and currency option contractswere used as hedge instruments. Changes in the fair value of thesederivative financial instruments designated as hedge instruments thatmeet the criteria for hedging future cash flows, were recognizeddirectly in equity.In the same period during which the forecasted net sales affects theincome statement, the cumulative gain or loss recognized in equity isrecycled to the income statement and included in Net sales. When ahedge relationship is terminated, but the hedged transaction is stillexpected to occur, the cumulative gain or loss at that point, remainsin equity and is removed from equity and recognized in the incomestatement as financial items when the committed or forecastedtransaction is recognized in the income statement. However, if thehedged transaction is no longer expected to occur, the cumulativegain or loss reported in equity is immediately transferred to theincome statement under financial items.Fair value hedgesHedge accounting has been applied to derivative financial instrumentswhich are effective in hedging the exposure to changes infair value in foreign borrowing. The interest risk exposure has beenhedged by interest rate swaps. Changes in the fair value of thesederivative financial instruments designated as hedging instrumentsand meeting the criteria for fair value hedges are recognized in theincome statement under financial items. The carrying amount of thehedged item is adjusted for the gain or loss attributable to the hedgedrisk. The gain or loss is recognized in the income statement underfinancial items.Share-based paymentsThe fair value at grant date of option programme 2003, which vestedin February 2005, was initially recognized directly in equity andamortized as an operating expense over the vesting period. The fairvalue was determined using the Black & Scholes options valuationmodel. The terms and conditions upon which the options were grantedwere taken into account when applying the valuation method. Theamount recognized as an expense was adjusted to reflect the actualnumber of share options that vested. The exercise of options underthis programme is recognized directly in equity and no additionalexpense is recognized in earnings.The option programmes granted in 2001 and 2002, which vested inFebruary 2003 and 2004, respectively, were not required to be valuedand recorded in accordance with IFRS 2 on transition to IFRS andtherefore the cost at exercise of these two programmes was recordedin earnings in accordance with previously applied Swedish GAAP.A provision calculated on the estimated fair value of the options onthe reporting date is recorded for social charges to be paid by theemployer when the options are exercised. The fair value of the optionsis calculated as the difference in the exercise price of the options andthe market price of the SKF B share.A minor part of the remuneration granted to the Board of Directorsof the Parent company is a cash-settled share-based compensation.The liability incurred is recognized over the period when the servicesare rendered. At each balance sheet date, and ultimately at settlementdate, the fair value of the liability is remeasured with any changes infair value recognized in profit and loss for the period.Earnings per shareBasic earnings per share is calculated by dividing the net profit or lossattributable to shareholders of the Parent company by the weightedaverage number of ordinary shares outstanding during the period.Diluted earnings per share is calculated using the weighted averagenumber of shares outstanding during the period adjusted for all dilutivepotential ordinary shares, which comprise share options grantedto employees. The dilutive effect of options is based on the averagemarket price of the SKF B share and the exercise prices of the options.Critical accounting policies involving significant management judgementThe following critical accounting policies involve management judgementsthat are considered to have the most significant effect on theconsolidated financial statements.Income taxesGeneralTaxes include current taxes on profits, deferred taxes and other taxessuch as taxes on capital, actual or potential withholding on currentand expected transfers of income from Group companies and taxadjustments relating to prior years. Income taxes are recognized inthe income statement, except to the extent that they relate to itemsdirectly taken to equity, in which case they are recognized in equity.Significant management judgment is required in determiningcurrent tax liabilities and assets as well as deferred tax provisions andassets. The process involves estimating the current tax exposuretogether with assessing temporary differences arising from differingtreatment of items for tax and accounting purposes. In particular,management assesses the likelihood that deferred tax assets will berecoverable from future taxable income.Current taxesAll the companies within the Group compute current income taxes inaccordance with the tax rules and regulations of the countries wherethe income is taxable. Provisions have been made in the financialstatements for estimated taxes on earnings of subsidiaries expectedto be remitted in the following year, but not for taxes, which may ariseon distribution of the remaining unrestricted earnings of foreign subsidiariesas they can be distributed free of tax or as the Group doesnot intend to internally distribute them in the foreseeable future.Deferred taxesThe Group applies the required balance sheet approach for measuringdeferred taxes, where deferred tax assets and provisions are recordedNotes Group 45

1 Accounting policies (cont.)based on enacted tax rates for the expected future tax consequencesof existing differences between accounting and tax reporting bases ofassets and liabilities, as well as for tax loss and tax credit carry-forwards.Such tax loss and tax credit carry-forwards can be used to offset futureincome. Deferred tax assets are recorded to the extent that it is probablethat sufficient future taxable income will be available to allow therecognition of such benefits.Other taxesOther taxes refer to taxes other than income taxes, which should notbe included elsewhere in the income statement.Critical accounting policies involving key sourcesof estimation uncertaintyThe following critical accounting policies involve key assumptionsand/or estimates that have a significant risk of causing a materialadjustment to the carrying amounts of assets and liabilities within thenext financial year.Impairment of intangible assets and property, plant and equipmentAssets with definite useful livesIntangible assets with definite useful lives and property, plant andequipment are tested for impairment whenever events or changes incircumstances indicate that the carrying value may not be recoverable.The determination is performed at the cash generating unit (CGU)level. Factors that are considered important are:• Underperformance relative to historical and forecasted operatingresults;• Significant negative industry or economic trends;• Significant changes relative to the asset including plans to discontinueor restructure the operation to which the asset belongs.When there is an indication that the carrying value may not be recoverablebased on the above indicators, the profitability of the CGU towhich the asset belongs is analyzed to further confirm the nature andextent of the indication. When an indication is confirmed, an impairmentloss is recognized to the extent that the carrying amount of theaffected CGU exceeds its recoverable amount.Intangible assets with indefinite useful livesGoodwill and other intangible assets with indefinite useful lives, onceallocated to a CGU, are tested annually for impairment and wheneverthere is an indication that the asset may be impaired. The impairmenttest is carried out at the CGU level where an impairment loss is recognizedif the carrying amount exceeds the recoverable amount. Theimpairment loss first reduces the carrying value of goodwill, and thenother intangible assets and property, plant and equipment based ontheir relative carrying values.Calculation of recoverable amountThe recoverable amount is the greater of the estimated fair value lesscosts to sell and value in use.In assessing value in use, a discounted cash flow model (DCF) isused. The DCF model involves the forecasting of future operating cashflows and includes estimates of revenues, production costs and workingcapital requirements, as well as a number of assumptions, the mostsignificant being the growth rates and the discount rate.These forecasts of future operating cash flows are based on:• business and strategic plans for a three-year period representingmanagement’s best estimates of future revenues and operatingexpenses using historical trends, general market conditions, industrytrends and forecasts and other currently available information;• extrapolated for another seven years using growth rates determinedon an individual CGU basis, reflecting a combination of product,industry and country growth factors;• after which a terminal value is calculated based on the GordonGrowth model, which includes a growth factor representing thereal growth rate and infl ation expected in the country in whichthe assets operate.Forecasts of future operating cash flows are adjusted to present valueby an appropriate discount rate derived from our cost of capital, takinginto account the country risk premium where applicable, and thesystematic risk of the CGU at the date of evaluation. Managementdetermines the discount rate to be used based on the risk inherent inthe related activity’s current business model and industry comparisons.Estimates and assumptions used in the DCF model encompassuncertainty about future events and market conditions and thereforeactual outcomes may be significantly different. However, the estimatesand assumptions have been reviewed by management, and are consistentwith internal forecasts and business outlook.ProvisionsIn general, a provision is recognized when there is a present obligationas a result of a past event, it is probable that an outflow of resourceswill be required to settle the obligation and a reliable estimate can bemade of the amount of the obligation. The amount recognized as provisionsis the best estimate of the expenditure required to settle thepresent obligation at the balance sheet date. As the estimates mayinvolve uncertainty about future events outside the control of theGroup, the actual outcomes may be significantly different.When an obligation does not meet the criteria for recognition it maybe considered a contingent liability and disclosed. Contingent liabilitiesrepresent possible obligations whose existence will be confirmed onlyby the occurrence or non-occurrence of one or more uncertain futureevents not wholly within the control of the Group. They include alsoexisting obligations where it is not probable that an outflow ofresources is required, or the outflow cannot be reliably quantified.Restructuring provisions including termination benefitsRestructuring provisions for programmes that materially change themanner in which the business unit operates are recognized when adetailed formal plan has been established and a public announcementof the plan has occurred, creating a valid expectation that the planwill be carried out. Restructuring provisions often include terminationbenefits, which can be either voluntary or involuntary. Terminationbenefits are recognized in accordance with the above, except wherethere is a service requirement in connection with the benefits, in whichcase the cost is allocated over the service period.Restructuring provisions involve estimates of the timing and costof the planned future activities. The most significant estimates involvethe costs necessary to settle employee severance or other employeeseparation obligations, as well as the costs involved in contract cancellationsand other exit costs. Such estimates are based on historical46 Notes Group

experience and the expected future cash outflows, based on thecurrent status of negotiations with the affected parties and/or theirrepresentatives.Provisions for litigationProvisions for litigation are estimates of the future cash flows necessaryto settle the obligations. Such estimates are based on the natureof the litigation, the legal processes and potential level of damages inthe jurisdiction in which the litigation has been brought, the progressof the cases, the opinions and view of internal and external legalcounsel and other advisers regarding the outcome of the case andexperience with similar cases.Warranty provisionsWarranty provisions involve estimates of the outcome of warrantyclaims resulting from defective products, which include estimates forpotential liability for damages caused by such defects to the Group’scustomers or to the customers of these customers and potentialliability for consequential damage. Assumptions are required fordetermining both the likelihood of favourable outcomes of warrantydisputes and the cost incurred when replacing the defective productsand compensating customers for damage caused by the Group’s products.Warranty provisions are estimated with consideration of historicalclaims statistics, expected costs to remedy and the average time lagbetween faults occurring and claims against the company.Post-employment benefitsThe post-employment provisions and assets arise from defined benefitobligations in plans which are either unfunded or funded. For theunfunded plans, benefits paid out under these plans come from theall-purpose assets of the company sponsoring the plan. The relatedprovisions carried in the balance sheet represent the present valueof the defined benefit obligation adjusted for unrecognized actuarialgains and losses and past service costs.Under funded defined benefit plans, the assets of the plans are heldin trusts legally separate from the Group. The related balance sheetprovision or asset represents the deficit or excess of the fair value ofplan assets over the present value of the defined benefit obligation,taking into account any unrecognized actuarial gains or losses andpast service cost. However, an asset is recognized only to the extentthat it represents a future economic benefit which is actually availableto the Group, for example in the form of reductions in future contributionsor refunds from the plan. When such excess is not available it isnot recognized, but is disclosed in the notes.The projected unit credit method is used to determine the presentvalue of all defined benefit obligations and the related current servicecost and where applicable, past service cost. Valuations are carriedout annually for the most significant plans and on a regular basis forother plans. External actuarial experts are used for these valuations.Estimating the obligations and costs involves the use of assumptions.Such assumptions vary according to the economic conditionsof the country in which the plan is located and are adjusted to reflectmarket conditions at every year end. However, the actual costs andobligations that in fact arise under the plans may be materially differentfrom the estimates based on the assumptions due to changingmarket and economic conditions.The most sensitive assumptions are related to the discount rate,expected return on assets, future compensation increases and healthcare cost rates. The selection of the discount rate is based on rates ofreturn on high-quality, fixed-income investments (high quality corporatebonds and, in countries where there is no deep market for suchbonds, government bonds) that, if invested at the valuation date,would provide the necessary future cash flows to pay the benefitswhen due. The expected return on assets is based on the marketexpectations (at the beginning of each period) for returns over theentire life of the related obligation. In developing the long term rate ofreturn, management considers the historical returns and the futureexpected return based on current market developments for eachasset class as well as the target allocations of the portfolio. The salarygrowth assumptions reflect the non-current actual experience, thenear term outlook and assumed inflation. Health care cost trend ratesare developed based on historical cost data, the near term outlook,and an assessment of likely non-current trends.Actuarial gains and losses arise mainly from changes in actuarialassumptions and experience adjustments, being differences betweenactuarial assumptions and what has actually occurred. They are recognizedin the income statement, over the remaining service lives ofthe employees, only to the extent that their net cumulative amountexceeds 10% of the greater of the present value of the obligation or ofthe fair value of the plan assets at the end of the previous year.For all defined benefit plans the cost charged to the income statementconsists of current service cost, interest cost, expected returnon plan assets (only funded plans), past service cost, curtailments andsettlements as well as any amortized actuarial gains and losses. Thepast service cost for changes in pension benefits is recognized whensuch benefits vest, or amortized over the periods until vesting occurs.Interest cost and the expected return on assets to the extent thatit covers that plan’s interest cost, is classified as financial expense.Other expense items as well as any remaining expected return on assetsand all defined contribution expenses are allocated to the operationsbased on the employee’s function as manufacturing, selling oradministrative.The defined benefit accounting described above is applied only inthe consolidated accounts. Subsidiaries, as well as the Parent company,continue to use the local statutory pension calculations to determinepension costs, provisions and assets in the stand-alone statutoryreporting.Some post-employment benefits are also provided by defined contributionschemes, where the Group has no obligation to pay benefitsafter payment of an agreed-upon contribution to the third partyresponsible for the plan. Such contributions are recognized asexpense when incurred.A portion of the ITP pensions arrangements in Sweden is financedthrough insurance premiums to Alecta. This arrangement is considered tobe a multi-employer plan where defined benefit accounting is required.Alecta is currently unable to provide the information needed to do suchaccounting. As a result, such insurance premiums paid are currentlyaccounted for as a defined contribution expense.Change in accounting principles 1 January 2007The following accounting principles became effective as from 1 January2007 and, except for additional disclosures as mentioned below, theyhad no material effect upon the Groups financial statements:• IFRS 7, “Financial Instruments: Disclosures” requires additionaldisclosures about financial instruments including risks, which havebeen incorporated into these financial statements.Notes Group 47

1 Accounting policies (cont.)• IAS 1 “Presentation of Financial Statements: Capital Disclosures”requires disclosures about an entity’s capital, which have beenincorporated into these financial statements.• IFRIC 7, “Applying the Restatement Approach under IAS 29 FinancialReporting in Hyperinflationary Economies” provides guidance onhow the restatement approach is applied.• IFRIC 8 “Scope of IFRS 2” provides guidance when making sharebasedpayments.• IFRIC 9 “Reassessment of Embedded Derivatives” addressesaccounting requirements for embedded derivatives.• IFRIC 10 “Interim Financial Reporting and Impairment” prohibitsthe reversal of impairment losses on goodwill and financial assetscarried at cost made in a previous interim period.IFRS issued but not effectiveThe following new accounting interpretations have been issued by theIFRIC and are effective as from 1 January 2008 and are not expectedto have a material effect on the Group’s financial statements.• IFRIC 11: “IFRS 2: Group and Treasury Share Transactions” providesguidance on share-based payments involving an entity’s ownequity instruments.• 1) IFRIC 12 “Service Concession Arrangements” provides guidance forthe accounting of service concession contracts, which are arrangementsfor the supply of public services.• 1) IFRIC 14 “IAS 19 – The Limit on a Defined Benefit Asset, MinimumFunding Requirements (MFR) and their Interaction”, clarifies the assetlimitation rules as well as how a minimum funding requirement undera post-employment defined benefit plan affects the accounting.Numerous new or amended accounting standards and interpretationshave been issued by the IASB which will be effective as from1 January 2009 or later. The impact of these upon the Group has notyet been determined.• 1) IFRS 2, “Share Based Payments: Vesting Conditions and Cancellations”(2009), clarifies the terms vesting conditions and cancellations.• 1) IFRS 3 “Business Combinations; Comprehensive Revision onApplying the Acquisition Method” and consequential amendmentsto IAS 27, “Consolidated and Separate Financial Statements” IAS28 “Associates” and IAS 31, “Joint Ventures” (2010). The more significantchanges include the definition of acquisition costs, contingentconsideration, the measurement of goodwill and step acquisitions.• 1) IAS 1 “Presentation of Financial Statements: A Revised Presentation”(2009), requires, among other things, a statement of comprehensiveincome to be disclosed.• 1) Amendments to IAS 1, “Presentation of Financial Statements” andIAS 32 “Financial Instruments Disclosures” (2009) relates to the disclosureof puttable instruments and obligations arising on liquidation.• 1) IAS 23 “Borrowing costs” (2009) requires that borrowing costs becapitalized for assets requiring a significant time for construction.• IFRS 8 “Operating Segments” (2009) defines the disclosuresrequired about a company’s operating segments, geographicalinformation and major customers.• 1) IFRIC 13 “Customer Loyalty Programmes” (2009) provides guidanceon a company’s loyalty award credits (such as ’points’ or travelmiles) to customers who buy other goods or services.1)These have not been endorsed by the EU.Definitions of key figuresThe majority of the subsidiaries within the Group report the results oftheir operations and financial position twelve times a year. Most of thekey figures presented in the Annual Report have been calculated usingaverage values based on these reports. Consequently, the calculationof these key figures using the year-end values presented may giveslightly different results.1. Portion of risk-bearing capitalShareholders’ equity and provisions for deferred taxes, as apercentage of total assets at year end.2. Equity/assets ratioShareholders’ equity as a percentage of total assets at year end.3. GearingLoans plus net provisions for post-employment benefits, as apercentage of the sum of loans, net provisions for post-employmentbenefits and shareholders’ equity, all at year end.4. Net debt/equityTotal short-term financial assets excluding derivatives minus loansand provisions for post-employment benefits, as a percentage ofshareholder’s equity, all at year end.5. Return on total assetsOperating profit/loss plus interest income, as a percentage oftwelve months average of total assets.6. Return on capital employedOperating profit/loss plus interest income, as a percentage oftwelve months average of total assets less the average of noninterestbearing liabilities.7. Return on shareholders’ equityProfit/loss after taxes as a percentage of twelve months averageof shareholders’ equity.8. Operating marginOperating profit/loss, as a percentage of net sales.9. Turnover of total assetsNet sales in relation to twelve months average of total assets.10. Basic earnings/loss per share in SEKProfit/loss after taxes less minority interests divided bythe number of shares.11. YieldDividend as a percentage of share price at year end.12. P/E ratioShare price at year end divided by basic earnings per share.13. Average number of employeesTotal number of working hours of all employees, divided bythe normal total working time over the year.48 Notes Group

2 Segment informationPrimary segmentThe SKF Group is divided into three divisions, each focusing on specificcustomer groups worldwide. Previously published amounts have beenreclassified to conform to the current Group structure in 2007.The Industrial Division is responsible for sales to industrial OriginalEquipment Manufacturer (OEM) customers and for the product developmentand production of a wide range of bearings (in particularspherical and cylindrical roller bearings, angular contact ball bearings,medium deep groove ball bearings and high precision bearings), lubricationsystems, linear motion products, by-wire systems and couplings.The division has four specialized business areas: Aerospace & HighPrecision Bearings, Railways, Lubrication Systems, and Actuation &Motion Control.The Service Division is responsible for sales to the industrial aftermarket,mainly via a network of around 7,000 distributor locations. Inaddition to the sales of products, the division supports customers withknowledge-based service solutions to optimize plant asset efficiencythrough consulting and mechanical services, predictive and preventivemaintenance, condition monitoring, decision-support systems andperformance-based contracts. SKF Logistics Services deals with logisticsand distribution for both the SKF Group and external customers.The Service Division is also responsible for all Group sales in certainsmaller markets.The Automotive Division is responsible for sales to the manufacturersof cars, light trucks, heavy goods vehicles, buses, two-wheelers,household appliances, power tools and electric motors and for thevehicle service market. The division develops and manufacturesbearings, seals and related products and service solutions. Productsinclude wheel hub bearing units, tapered roller bearings, small deepgroove ball bearings, seals, specialist automotive products andcomplete repair kits for the vehicle service market including a newproduct line of control velocity joints.Other operations generally include business that have been disposedof in the comparative year as well as other minor operations.Net sales Sales including intra Group salesSEKm 2007 2006 2007 2006Industrial Division 19,266 17,176 29,318 26,698Service Division 19,597 17,984 21,393 19,761Automotive Division 19,617 17,869 23,795 21,807Other operations 79 72 79 72Eliminations – – -16,026 -15,23758,559 53,101 58,559 53,101Operating profitDepreciation, amortizationand impairmentsSEKm 2007 2006 2007 2006Industrial Division 3,430 3,027 788 831Service Division 2,846 2,362 121 101Automotive Division 1,154 946 855 897Other operations 0 738 16 10Eliminations and unallocated items 109 -366 -4 -57,539 6,707 1,776 1,834Operating profit for Other operations in 2006 includes primarily theSKF Group’s income from the jointly controlled company Oy Ovako Ab.Of the SKF Group’s total income from jointly controlled and associatedcompanies, SEK 0 m (738) was included in Other Operations,SEK -8 m (-2) in Automotive Division, SEK -2 m (1) in Service Divisionand SEK 0 m (-1) in Industrial Division. The remainder was reportedas unallocated.See Note 10 and 11 for further information about impairments,and Note 21 for restructuring expenses.Notes Group 49

2 Segment information (cont.)Additions to property, plant,equipment and intangible assets Assets LiabilitiesSEKm 2007 2006 2007 2006 2007 2006Industrial Division 1,127 965 18,118 15,418 4,342 3,875Service Division 100 84 6,129 5,074 1,787 1,637Automotive Division 774 1,185 13,640 13,307 4,088 3,521Other operations – – – 52 – –Eliminations and unallocated items -44 -223 8,444 12,387 17,759 17,5981,957 2,011 46,331 46,238 27,976 26,631Assets in 2006 for Other operations includes primarily the SKF Group’s investment in the jointly controlled company Oy Ovako Ab.Geographical segmentsThe SKF Group has more than 100 factories in around 25 countries.Roller bearings, bearing units and seals for the automotive and industrialOEM producers and for the aftermarket are produced in Europe,North America and Asia. Linear motion products and machine toolsare made in Europe and Asia.The SKF Group has some two million customers worldwide.Products for the industrial and automotive aftermarket are soldthrough a network of distributors and dealers in some 15,000locations in more than 130 countries. Mechanical services, predictiveand preventive maintenance, condition monitoring, decision-supportsystems and performance-based contracts comprise a relatively smallbut growing business with customers worldwide.Net sales bycustomer locationAssetsAdditions to property, plant,equipment and intangible assetsSEKm 2007 2006 2007 2006 2007 2006North America 10,501 10,611 5,648 5,579 104 161Europe 32,721 28,656 30,415 33,098 1,255 1,125Asia-Pacific 10,720 9,622 8,521 6,436 529 808Other 4,617 4,212 2,987 2,372 113 157Eliminations – – -1,240 -1,247 -44 -24058,559 53,101 46,331 46,238 1,957 2,01150 Notes Group

3 AcquisitionsSEKm 2007 2006Fair value of net assets acquiredIntangible assets 392 586Property, plant and equipment 147 804Financial assets 10 6Purchase of remaining minority holdings – 8Minority interests -2 -42Financial liabilities -114 -262Employee benefits, deferred taxes and provisions -149 -353Net working capital and current taxes 248 664Cash and cash equivalents 44 497576 1,908Change in fair value since previous acquisition -32 –Goodwill (subject to changes in PPA for S2M Group and ABBA Group) 674 755Total consideration 1,218 2,663Less:Cash and cash equivalents acquired -44 -497Consideration payable -2 -37Payment of consideration on prior year acquisitions 37 –Cash outflow on acquisitions 1,209 2,129In 2007, the SKF Group acquired businessesamounting to SEK 1,218 m:Industrial Division• ABBA Linear Tech Co. Ltd, a leading Asian manufacturer of linearguidings, based in Taiwan (April 2007);• Société de Mécanique Magnétique SA (S2M), France, a leadingmanufacturer of magnetic bearings (December 2007).Service Division• Automatic Lubrication Systems Ltd, Canada, a service companyto Canadian mobile transportation equipment and industrialmachinery customers for the Group’s centralized lubricationsystems (March 2007);• Baker Instrument Company, USA, a leading manufacturer of testand diagnostic instruments for electric motor assessment (June2007);• Preventive Maintenance Company Inc. (PMCI), USA, a market leaderin predictive maintenance services for industrial customers inthe pulp & paper, metals, food, automotive and other industries(January 2007).Automotive Division• Seal Jet Economos S.A.’s industrial seals business, Argentina(November 2007).Pro forma income statement informationThe pro forma financial information presents net sales and net incomeas if all of the above acquisitions had been completed on 1 January 2007.These pro forma results include the historical result of the companies,adjusted for the estimated effects relating to fair value adjustments forthe period in 2007 prior to acquisition. These pro forma results havebeen prepared for comparative purposes only and are not necessarilyindicative of the result of operations which actually would have resultedhad the acquisitions been in effect at the beginning of the year or offuture results. The total SKF Group net sales for the year would havebeen SEK 59,112 m and net profit for the year would have beenSEK 4,769 m.Notes Group 51

3 Acquisitions (cont.)S2M GroupThe most significant acquisition in 2007 occurred in the IndustrialDivision, when the SKF Group acquired, in a business combinationachieved in stages, an additional 87.48% of the issued share capitalin the French company, Société de Mécanique Magnétique SA. Thecompany is headquartered and has manufacturing facilities in Vernon,France. The acquisition was completed 21 December 2007, for a totalconsideration of SEK 513 m. The purchase price allocation is provisionaland will be finalized during 2008 once the review and approval bymanagement is complete.Goodwill is derived from S2M’s strong position in high speed rotatingequipment for Oil & Gas, Vacuum and Compressor applications. Theacquired operations are largely complementary to SKF’s prior magneticbearings operations in respect of geography, customer base and technologyplatform. The combination of S2M and SKF creates a strongglobal partner for OEM’s and end users. Additionally, intangible assetsother than goodwill were identified. The most significant of theseintangibles was assigned to customer relationships and technology.The S2M Group has not contributed to net sales and net profit for theperiod between the date of acquisition and 31 December, due to beingacquired so close to financial year end.S2M Group (SEKm)Book valueFair valueadjustmentsFair valueNet assets acquiredIntangible assets 1 268 269Property, plant and equipment 73 – 73Financial assets 1 – 1Minority interest -19 17 -2Financial liabilities -22 -19 -41Employee benefits, deferred taxes and provisions -6 -104 -110Net working capital and current taxes 86 14 100Cash and cash equivalents 16 – 16130 176 306Change in fair value since previous acquisition -32Goodwill (provisional and subject to changes in PPA) 239Total consideration 513Less:Cash and cash equivalents acquired -16Cash outflow on acquisition 497Total consideration satisfied by:Cash 507Directly attributable costs 6Total consideration 51352 Notes Group

ABBA GroupIn 2007, the SKF Group acquired 100% of the issued share capital inthe Taiwanese company ABBA Linear Tech Co. Ltd. The legal transferhad not been completed for 0,7% of the common shares, however nominority interest was presented as it was immaterial. The companyis headquartered and has manufacturing facilities in Taipei, Taiwan.The acquisition was completed 20 April 2007, for a total considerationof SEK 417 m. The purchase price allocation is provisional and will befinalized during 2008 once the review and approval by managementis complete.Goodwill is derived from SKF acquiring the technology for the largestproduct area, being profile rail guides, in the Linear Motion businessand a strong position in the fast growing Asian market. The mostcommon applications are Medical, Factory Automation and MachineTool. The acquisition is complementary to the SKF Linear Motionbusiness in respect of geography, product assortment, customer baseand manufacturing footprint. The combination of the ABBA Group andSKF create a strong Linear Motion partner for OEM’s and after marketfor the future.Additionally, intangible assets other than goodwill were identified.The most significant of these intangibles was assigned to customerrelationships and trademarks.The ABBA Group contributed SEK 172 m to net sales andSEK 20 m of net profit for the period between the date of acquisitionand 31 December. This net profit includes a negative effect relatingto fair value adjustments of SEK 12 m.ABBA Group (SEKm)Book valueFair valueadjustmentsFair valueNet assets acquiredIntangible assets 1 49 50Property, plant and equipment 63 -1 62Financial assets 9 – 9Financial liabilities -63 -12 -75Employee benefits, deferred taxes and provisions 2 -11 -9Net working capital and current taxes 82 7 89Cash and cash equivalents 27 – 27121 32 153Goodwill (provisional and subject to changes in PPA) 264Total consideration 417Less:Cash and cash equivalents acquired -27Cash outflow on acquisition 390Total consideration satisfied by:Cash 402Directly attributable costs 15Total consideration 417In 2006, the SKF Group acquired businessesamounting to SEK 2,663 m:Industrial Division• SNFA S.A.S, France, a leading manufacturer of bearings foraerospace and machine tool applications;• John Crane’s lubrication systems business, Finland;Automotive Division• Economos Austria GmbH, an Austrian industrial seals companymanufacturing hydraulic and pneumatic seals for the oil and gas,food and beverage, pulp and paper, mining and steel industries;• 51% of Macrotech Polyseal Inc., USA, a leader in fluid power sealsfor the industrial customers in the USA market;• The remaining 40% minority of Shanghai Bearing Co., Ltd.,manufacturing deep groove ball bearings for the Chinese domesticmarket. The SKF Group’s 60 % investment was made in 2001;Service Division• Precision Balancing & Analyzing Co., USA, specialising in the repairand upgrading of machine tool spindle mechanisms;• Monitek, an Australian predictive maintenance service business.The Monitek business is a supplier of high quality vibration monitoringand wear debris analysis in the mining industry;• The remaining 50% minority of RC DEI Norge AS, Norway. TheRC DEI business mainly consists of services for condition-basedmaintenance principally servicing the oil and gas industry on thecontinental shelf of the North Sea. 50% of the company was acquiredin 1999.Notes Group 53

3 Acquisitions (cont.)SNFA GroupThe most significant acquisition in 2006 occurred in the IndustrialDivision, when the SKF Group acquired 100% of the issued sharecapital in the French company SNFA S.A.S. The company is headquarteredin Paris, France, and has manufacturing facilities in France,Italy and the UK. The acquisition was completed 4 July 2006, for atotal consideration of SEK 1,761 m.The SNFA goodwill, amounting to SEK 368 m, is due to SNFA’s wellknown innovative products and strong application engineering. Withinaerospace, SNFA has a complementary range of products to the existingSKF Aerospace offerings in engine, gearbox, helicopter and airframebearings. Within the machine tool business, the combination of SKFand SNFA will create a full assortment supplier of high precisionangular contact ball bearings and high precision cylindrical rollerbearings.As a result of the acquisition, SEK 290 m of intangible assets otherthan goodwill was recorded. The most significant of these intangibleswas SEK 120 m assigned to customer relationships and SEK 111 massigned to developed technology. These intangibles are being amortizedover estimated useful lives of 10-25 years.The SNFA Group contributed SEK 451 m of net sales and SEK 5 m ofnet loss for the period between the date of acquisition and 31 December2006. This net loss includes a negative effect relating to fair valueadjustments of SEK 57 m.SNFA Group (SEKm)BookvalueFair valueadjustmentsNet assets acquiredIntangible assets 20 270 290Property, plant and equipment 242 176 418Financial liabilities -43 – -43Deferred taxes and provisions -89 -185 -274Net working capital and current taxes 444 78 522Cash and cash equivalents 480 – 4801,054 339 1,393Goodwill 368Total consideration 1,761Less:Cash and cash equivalents acquired -480Cash outflow on acquisition 1,281Total consideration satisfied by:Cash 1,746Directly attributable costs 15Total consideration 1,761Fairvalue4 Divestments of businesses and of assets held for saleSEKm 2007 2006Net assets disposed ofProperty, plant and equipment 152 –Deferred taxes and provisions -56 –Net working capital and current taxes 130 –226 –Profit 66 –Total consideration 292 –Consideration receivable -92 –Total cash inflow 200 –Divestments in 2007The majority of divestments relates to Automotive Division’s forgingbusiness at the Lüchow plant in Germany. Also included is thedisposal group representing the spindle manufacturing business inItaly, as well as the sale of land and buildings related to the closure ofthe manufacturing plant in South Africa, which both formed part ofthe Industrial Division. These divestments are in line with theGroup’s manufacturing strategy to divest non-core componentmanufacturing.Divestments in 2006No divestments were made in 2006.54 Notes Group

5 Research and developmentResearch and development expenditures totalled SEK 900 m (875).Additionally, the Group entered into external research contractswhere the Group produces prototypes of various products on behalfof a third party. Expenses under such contracts were SEK 16 m (8).6 Expenses by natureSEKm 2007 2006Employee benefit expense including social charges 17,119 15,766Raw material and components consumed, including shop supplies 18,729 16,466Change in work in progress and finished goods -1,112 -117Depreciation, amortization, and impairments 1,776 1,834Other expenses, primarily purchased services, utilities and goods 14,524 13,161Total operating expenses 51,036 47,110Depreciation, amortization andimpairments were accounted for as (SEKm)2007Depreciation Amortization Impairments TotalCost of goods sold 1,409 90 66 1,565Selling expenses 106 66 12 184Administrative expenses 3 24 – 271,518 180 78 1,776Depreciation, amortization andimpairments were accounted for as (SEKm)2006Depreciation Amortization Impairments TotalCost of goods sold 1,362 87 113 1,562Selling expenses 109 35 106 250Administrative expenses 5 17 – 221,476 139 219 1,8347 Other operating income and expensesSEKm 2007 2006Other operating incomeProfit from sale of property, plant and equipment 30 29Profit from sale of businesses 40 –Rental income 9 5Royalty and commission income 5 6Exchange gain on trade receivables/payables 217 246Other 19 30320 316Other operating expensesLoss from sale of property, plant and equipment -8 -2Exchange loss on trade receivables/payables -243 -305Other -50 -31-301 -338Notes Group 55

8 Financial income and financial expensesSEKm 2007 2006Financial incomeDividends 5 5Share swaps 4 35Interest income and similar items 1) 538 311Financial exchange gains and losses, net, on financial assets 2) 421 -282968 69Financial expensesInterest on post-employment benefits -228 -210Interest expense and similar items 1) -758 -391Financial exchange gains and losses, net, on financial liabilities 2) -383 212-1,369 -389Financial income and financial expenses, net (SEKm) 2007 2006Loans and receivables 195 -51Available-for-sale assets 6 6Financial assets at fair value through profit and lossDesignated upon initial recognition 122 69Derivatives used for trading 398 -52Derivatives used for hedge accounting 264 99Financial liabilities at fair value through profit and lossDerivatives used for trading -67 -49Derivatives used for hedge accounting -300 -92Financial liabilities measured at amortized cost -791 -40Post-employment benefits -228 -2101)Interest income and interest expense relating to assets and liabilities not in the category fair value through profit and loss amountedto SEK 124 m and SEK -454 m (119 and -292).2)Net foreign exchange gains/losses on financial instruments measured at fair value through profit or loss amounted to SEK 321 m (-128).-401 -3209 TaxesTaxes on profit before taxes (SEKm) 2007 2006Current taxes -2,417 -2,093Deferred taxes 98 231Other taxes -52 -93-2,371 -1,955Deferred taxes for 2007 included a tax benefit of SEK 51 m (65)related to the net change in previously unrecognized deferred taxassets. Of this income, SEK 35 m (31) represented an adjustment ofthe opening balance of the unrecognized deferred tax assets. Theadjustment related to a change in circumstances where profitabilityimproved, which affected the judgment on the realizability of therelated deferred tax asset in future years. Changes in tax rates usedto calculate deferred tax had an impact of SEK 128 m (-2), which in2007 primarily related to changed tax rates in Germany and Italy.In 2007, SEK 1 m (1) of current taxes were related to items chargeddirectly to equity.56 Notes Group

Net deferred taxes per type (SEKm)2007ClosingbalanceAcquisitionsChargedto incomestatementCharged toequityTranslationeffects2007OpeningbalanceProperty, plant and equipment 1,141 1 -124 – 28 1,236Inventories 166 -1 50 -6 123Provisions for post-employment benefits -627 85 80 – 22 -814Other -97 35 -30 – -3 -99Tax loss carry-forwards -237 – -67 – -7 -163Fair value of investments in equity securities andderivative hedging instruments -2 – -7 -7 – 12344 120 -98 -7 34 295Shown on the balance sheet as (SEKm)Deferred tax assets -989 -1 -38 -7 5 -948Deferred tax provisions 1,333 121 -60 – 29 1,243344 120 -98 -7 34 295Net deferred taxes per type (SEKm)2006ClosingbalanceAcquisitionsChargedto incomestatementCharged toequityTranslationeffects2006OpeningbalanceProperty, plant and equipment 1,236 107 -198 – -79 1,406Inventories 123 18 -61 – -50 216Provisions for post-employment benefits -814 -2 57 – 95 -964Other -99 149 70 – 40 -358Tax loss carry-forwards -163 -15 -78 – 10 -80Fair value of investments in equity securities andderivative hedging instruments 12 – -21 23 – 10295 257 -231 23 16 230Shown on the balance sheet as (SEKm)Deferred tax assets -948 -18 -118 – 50 -862Deferred tax provisions 1,243 275 -113 23 -34 1,092295 257 -231 23 16 230Unrecognized deferred tax assetsAt the balance sheet date the SKF Group had unrecognized deferredtax assets of SEK 154 m (184) related to tax loss carry-forwards andSEK 74 m (96) related to other deductible temporary differences.These were not recognized due to the uncertainty of future profitstreams. Of these unrecognized deferred tax assets SEK 51 m wererelated to tax losses which will expire during the period 2008 to 2012.The remaining unrecognized assets will expire after 2013 and/or maybe carried forward indefinitely.Corporate income taxThe corporate statutory income tax rate in Sweden was 28% in 2007and 2006. The actual tax rate on profit before taxes was 33% (31).Reconciliation of the statutory tax in Sweden to the actual tax (SEKm) 2007 2006Tax calculated on statutory tax rate in Sweden -1,999 -1,788Difference between statutory tax rate in Sweden and foreign subsidiaries’weighted statutory tax rate -354 -176Other taxes -52 -93Permanent differences -97 12Tax loss carry-forwards, net of changes in unrecognized deferred tax assets 24 34Current tax referring to previous years 4 -51Other 103 107Actual tax -2,371 -1,955Gross value of tax loss carry-forwardsAt 31 December 2007, certain subsidiaries had tax loss carry-forwards amountingto SEK 1,685 m (1,412), which are available for offset against future profits.Such tax loss carry-forwards expire as follows:2008 1572009 942010 972011 1152012 1762013 and thereafter 1,046Notes Group 57

10 Intangible assetsSEKm2007ClosingbalanceAdditionsBusinessesacquiredDisposalsOtherTranslationeffects2007OpeningbalanceAcquisition costGoodwill 2,467 – 674 – – 6 -12 1,799Patents, trademarks and similar rights 367 1 154 -8 – 4 8 208Capitalized software 553 14 1 -30 – 0 1 567Capitalized customer relationships 673 – 202 – – -4 13 462Leaseholds 42 2 – 0 – 3 1 36Capitalized development 202 31 – -9 – -3 4 179Other intangible assets 121 2 35 -1 – -32 -1 1184,425 50 1,066 -48 – -26 14 3,369SEKm2007ClosingbalanceBusinessesacquiredDisposalsImpairmentsImpairmentsAmortizationImpairmentsOtherTranslationeffects2007OpeningbalanceAccumulated amortization and impairmentsGoodwill 233 – – – 13 0 -7 227Patents, trademarks and similar rights 73 28 – -8 6 2 1 44Capitalized software 396 63 – -30 – 1 0 362Capitalized customer relationships 108 53 – – – -3 1 57Leaseholds 18 2 – 0 – 1 1 14Capitalized development 28 14 – -9 – -12 -1 36Other intangible assets 53 20 – 0 – -10 0 43909 180 – -47 19 -21 -5 783Net book value 3,516 -130 1,066 -1 -19 -5 19 2,586SEKm2006ClosingbalanceAdditionsBusinessesacquiredDisposalsImpairmentsOtherTranslationeffects2006OpeningbalanceAcquisition costGoodwill 1,799 – 755 – – -24 -127 1,195Patents, trademarks and similar rights 208 2 97 – – -4 -8 121Capitalized software 567 25 10 -156 – 1 -7 694Capitalized customer relationships 462 – 338 – – -3 -15 142Leaseholds 36 6 0 -1 – 0 -3 34Capitalized development 179 28 112 – – – -7 46Other intangible assets 118 17 29 – – 10 -8 703,369 78 1,341 -157 – -20 -175 2,302SEKmAccumulated amortization and impairments2006ClosingbalanceBusinessesacquiredDisposalsAmortizationOtherTranslationeffects2006OpeningbalanceGoodwill 227 – – – 128 -24 -15 138Patents, trademarks and similar rights 44 13 – – – -4 0 35Capitalized software 362 66 – -156 – 6 0 446Capitalized customer relationships 57 25 – – – -3 -3 38Leaseholds 14 3 – – – 0 -2 13Capitalized development 36 9 – – 7 – -3 23Other intangible assets 43 23 – – – -1 -5 26783 139 – -156 135 -26 -28 719Net book value 2,586 -61 1,341 -1 -135 6 -147 1,58358 Notes Group

In 2007, additions to capitalized software and development includedSEK 26 m (18) that was internally generated. No significant impairmentlosses were recognized during 2007.Impairment losses related to intangible assets for 2006 totalledSEK 135 m. The most significant was SEK 66 m which related to theimpairment of goodwill in the Industrial Division’s bearing reconditioningoperations in North America, which experienced a significantloss of market share after a consolidation of competitors. Thisimpairment was based on a value in use using a discount rate of 19%.The previous value in use calculation used 21%. A minor impairment ofSEK 15 m was taken on the Jaeger Group goodwill in 2006.The other impairments in 2006 were minor and related primarily togoodwill in the Automotive Division’s DGBB production in China andService Division’s railroad bearing reconditioning operations in Australia.Cash generating units (CGUs) containing significant intangible assets with indefinite useful livesGoodwillSEKm 2007 2006S2M Group (acquired 2007) 239 –ABBA Group (acquired 2007) 264 –SNFA Group (acquired 2006) 376 362SKF Sealing Solutions NA (acquired 1990) 240 255Other individual CGUs 1,115 955Total goodwill 2,234 1,572The goodwill included in the above CGUs are individual intangibleassets that are material to the Group. The recoverable amounts forthese other individual CGUs were based on value in use, where a DCFmodel is used. Refer to Note 1 for a description of the model, includingassumptions.S2M Group and ABBA GroupGoodwill related to the acquisitions of S2M Group and ABBA Grouphas only been determined provisionally and will be subject to an annualimpairment test in 2008 once the purchase price allocation and allocationof goodwill to the GCU’s is reviewed and approved. However, therewere no indications that the provisional goodwill would be impaired.SNFA Group and SKF Sealing Solutions NAThe recoverable amounts for these CGUs have been determinedbased on the value in use method. As discussed in Note 1, the significantassumptions used in determining value in use are the growthrates and the discount rates. The revenue growth rate was 5% forSNFA and 4% for SKF Sealing Solutions, and the growth rates used tocalculate the terminal values were 2.5% for both CGUs. The pre-taxdiscount rate was 13% for SNFA and 14% for SKF Sealing Solutions.The Group also evaluates the sensitivity of the recoverableamounts considering a reasonably possible adverse changes in thegrowth and discount rates, noting no impairment.11 Property, plant and equipmentSEKm2007ClosingbalanceAdditionsBusinessesacquiredDisposalsImpairmentsTranslationOther 1) effects2007OpeningbalanceAcquisition costBuildings 5,353 117 51 -63 – 152 115 4,981Land and land improvements 734 29 6 -89 – 2 21 765Machinery and supply systems 22,351 697 59 281 – 785 458 20,071Machine toolings, factory fittings, etc 2,895 186 11 -127 – 15 42 2,768Construction in process including advances 1,052 878 20 -3 – -972 13 1,11632,385 1,907 147 -1 – -18 649 29,701SEKm2007ClosingbalanceDepreciationBusinessesacquiredDisposalsImpairmentsOtherTranslationeffects2007OpeningbalanceAccumulated depreciation and impairmentsBuildings 2,702 142 – -60 -2 -3 72 2,553Land improvements 176 4 – -18 2 0 7 181Machinery and supply systems 15,235 1,149 – 302 57 40 315 13,372Machine toolings, factory fittings, etc 2,312 223 – -121 2 -32 33 2,20720,425 1,518 – 103 59 5 427 18,313Net book value 11,960 389 147 -104 -59 -23 222 11,3881)Property, plant and equipment classified as held for sale are reflected under “Other”, for additional information see Note 17.Notes Group 59

11 Property, plant and equipment (cont.)SEKm2006ClosingbalanceAdditionsBusinessesacquiredDisposalsImpairmentsTranslationOther 1) effects2006OpeningbalanceAcquisition costBuildings 4,981 97 198 -93 – -12 -289 5,080Land and land improvements 765 6 48 -10 – -11 -41 773Machinery and supply systems 20,071 455 488 -1,026 – 188 -1,347 21,313Machine toolings, factory fittings, etc 2,768 155 66 -131 – 50 -184 2,812Construction in process including advances 1,116 1,220 4 -20 – -942 -68 92229,701 1,933 804 -1,280 – -727 -1,929 30,900SEKm2006Closingbalance DepreciationBusinessesacquired DisposalsImpairmentsOtherTranslationeffects2006OpeningbalanceAccumulated depreciation and impairmentsBuildings 2,553 194 – -79 34 -254 -150 2,808Land improvements 181 4 – -7 2 -1 -9 192Machinery and supply systems 13,372 1,056 – -1,030 47 -234 -961 14,494Machine toolings, factory fittings, etc 2,207 222 – -125 1 -29 -149 2,28718,313 1,476 – -1,241 84 -518 -1,269 19,781Net book value 11,388 457 804 -39 -84 -209 -660 11,1191)Property, plant and equipment classified as held for sale are reflected under “Other”, for additional information see Note 17.Impairment losses related to property, plant and equipment 2007amounted to SEK 59 m, including the effect of a reversal of SEK 5 m.The most significant was SEK 55 m related to the Automotive Division’smanufacturing facilities in France under restructuring plans announcedin December 2007. The reversal of impairments related to an impairmentof building in the Industrial Division’s operations in South Africamade in 2006. This building was sold at a gain in 2007.Impairment losses in 2006 for property, plant and equipmentamounted to SEK 84 m, including the effect of a reversal of SEK 9 m.The most significant was SEK 67 m related to the impairment ofbuilding and equipment in the Automotive Division’s forging and ringproduction facilities in Eastern Europe which is experiencing problemswith volumes. This impairment was based on value in use using adiscount rate of 12%.The other impairments in 2006 were minor and related to individualassets used in the Industrial Division’s operations in South Africa, aswell as certain assets held for sale in the Industrial Division’s spindleoperations in Italy. The reversal of impairments related to an impairmentof the Aiken operations made in 2005.Finance leases included in property, plant and equipment consisted of the following (SEKm) 2007 2006Acquisition valueBuildings 51 72Land and land improvements 11 11Machinery and supply systems 6 7Machine toolings, factory fittings, etc 2 270 92Accumulated depreciationBuildings 2 24Machinery and supply systems 2 2Machine toolings, factory fittings, etc 1 15 27Net book value 65 65Tax value of Swedish real estateLand and land improvements 96 103Buildings 481 295577 398For further leasing disclosures, see Note 23.60 Notes Group

12 Jointly controlled and associated companiesInvestments in jointly controlled and associated companies (SEKm) 2007 2006Investments in jointly controlled companies 49 86Investments in associated companies 24 1673 102Income from jointly controlled and associated companies (before taxes) (SEKm) 2007 2006Jointly controlled companies -3 735Associated companies – 3-3 7382007The liquidation process of Oy Ovako AB is expected to be finalized inthe beginning of 2008. During 2007, AB SKF received SEK 46 m fromthe liquidation as additional pre-liquidation proceeds.2006In November 2006, the jointly controlled entity, Oy Ovako Ab, sold allits operations to a third party and recognized a substantial gain on thetransaction. Consequently, the SKF Group recorded its 26.5%share of this gain amounting to SEK 433 m as income from jointlycontrolled companies. In December 2006, the joint owners initiatedthe liquidation process of the remaining Ovako holding companies.Pre-liquidation proceeds were, however, distributed to AB SKF,Wärtsilä Corporation and Rautaruukki Corporation, the jointowners, in December 2006, where AB SKF’s share amounted toSEK 1,217 m.Specification of investmentsin jointly controlled andassociated companiesHoldingin per centNumberof sharesCurrencyNom.value in localcurrency,millions2007 2006Book value (SEKm)Parent ConsolidatedCompany accountsBook value (SEKm)ParentCompanyConsolidatedaccountsHeld by Parent company:Jointly controlled companiesOy Ovako Ab, Finland 26.5 2,650 EUR 3 – 3 39 48Associated companiesEndorsia.com International AB,Göteborg, Sweden 20 34,000 SEK 3 9 15 5 9AEC Japan Co. Ltd., Japan 50 400 JPY 20 1 1 1 110 19 45 582007 2006Specification of investments in jointlycontrolled and associated companiesHoldingin percentNumberof sharesCurrencyBook value inthe consolidatedaccounts (SEKm)Book value inthe consolidatedaccounts (SEKm)Held by subsidiaries:Jointly controlled companiesInternational Component Supply,Ltda, Brazil 50 24,050 BRL 44 38Associated companiesCoLinx LLC, USA 20 1 USD 2 2Mongolia: Seal Jet Mongolia Ltd., Mongolia 30 3,000 USD 1 1Economos Singapore Pte Ltd., Singapore 50 50,000 SGD 1 1Other 6 2Total investments in jointly controlledand associated companies 73 102Notes Group 61

12 Jointly controlled and associated companies (cont.)Aggregated financial statements of jointly controlledand associated companies (SEKm) 2007 2006Non-current assets 116 123Current assets 179 392Total assets 295 515Equity 168 342Non-current liabilities 28 30Current liabilities 99 143Total equity and liabilities 295 515Net sales 719 11,485Profit before taxes 3 2,89813 InventoriesSEKm 2007 2006Raw materials and supplies 2,928 2,318Work in process 2,246 1,852Finished goods 6,389 5,76911,563 9,939Inventory values are stated net of a provision for net realizable valueof SEK 817 m (802). The amount charged to expense for net realizableprovisions during the year was SEK 64 m (86). Reversals of net realizableprovisions during the year were SEK 49 m (45).14 Trade receivablesPast due, net of allowanceSEKm Carrying amount Not yet due 1-30 days 31-60 days 61-90 days > 91 days2007 9,894 8,812 732 197 68 852006 8,845 7,782 724 177 55 107The carrying amount of trade receivables approximated fair value.The average days outstanding of trade receivables in 2007 were62 days (60 days). The Group aims to reach 57 days. Trade receivablesas a percentage of annual net sales totaled 16.9% (16.7%).Included in trade receivables were receivables sold with recoursethat amounted to SEK 459 m (0). The risk of customer default forthese receivables has not been transferred in such a way that thefinancial assets qualify for derecognition.The following table shows the development of allowance accountsfor credit losses on trade receivables.SEKm 2007 2006Allowances as of 1 January 185 212Additions 35 41Reversals -8 -6Changes through the income statement 27 35Allowances used to cover write-offs -18 -56Business acquired 6 10Currency translation adjustments 1 -16Allowances as of 31 December 201 18562 Notes Group

15 Other financial assets2007 Other financial assets per categoryFair value through profit and lossSEKmLoans andreceivablesAvailablefor-saleAt initialrecognitionTradingTotalOf which:currentLoan receivables 533 – – – 533 112Equity securities – 614 – – 614 –Marketable securities – – – 242 242 –Debt securities – 19 405 – 424 405Deposits 395 – – – 395 395Cash and cash equivalent 2,368 3 575 – 2,946 2,946Derivatives – – – 481 481 4173,296 636 980 723 5,635 4,2752006 Other financial assets per categoryFair value through profit and lossSEKmLoans andreceivablesAvailablefor-saleAt initialrecognitionTradingTotalOf which:currentLoan receivables 421 – – – 421 7Equity securities – 291 – – 291 –Marketable securities – – – 249 249 –Debt securities – 25 1,434 – 1,459 1,441Deposits 240 – – – 240 240Cash and cash equivalent 2,187 3 5,052 – 7,242 7,242Derivatives – – – 229 229 732,848 319 6,486 478 10,131 9,003The fair value of instruments measured at amortized cost amountedto SEK 3,371 m in 2007. The fair value of instruments measuredat amortized cost in 2006 was not materially different from theircarrying amounts.Equity securities which have quoted market prices amounted toSEK 577 m (243). Additional information regarding derivatives isdisclosed in Note 30.16 Other short-term assetsSEKm 2007 2006Other current receivables 1,414 904Receivables from jointly controlled and associated companies 1 1Prepaid expenses 447 402Accrued income 186 199Advances to suppliers 116 1032,164 1,609Notes Group 63

17 Assets classified as held for saleAssets classified as held for sale (SEKm) 2007 2006Property, plant and equipment 53 191Inventories 18 144Trade receivables 15 –86 335Liabilities related to assets classified as held for sale (SEKm)Provisions for post-employment benefits – 44Other provisions – 6Other liabilities – 9– 592007Assets classified as held for sale relate to the Industrial Division’sbearing reconditioning business in the US, as well as the building inAiken, USA. Both sales are expected in 2008.2006The majority of assets classified as held for sale relate to AutomotiveDivision’s forging business at the Luchow plant in Germany. Alsoincluded is the disposal group representing the spindle manufacturingbusiness in Italy as well as individual assets from the Aiken plant inthe US, which was closed down.18 Share capitalNumber of shares authorized and outstandingA Shares B Shares Total 1)Share capital(SEKm)Opening balance 1/1/2006 50,735,858 404,615,210 455,351,068 1,138Conversion of A shares to B shares -1,202,828 1,202,828 – –Closing balance 31/12/2006 49,533,030 405,818,038 455,351,068 1,138Share split 2:1 49,533,030 405,818,038 455,351,068 –Redemption of shares -49,533,030 -405,818,038 -455,351,068 -569Bonus issue – – – 569Conversion of A shares to B shares -536,996 536,996 – –Closing balance 31/12/2007 48,996,034 406,355,034 455,351,068 1,1381)Quota value for all shares is SEK 2.50.An A share has one vote and a B share has one-tenth of one vote. Atthe Annual General Meeting on 18 April 2002, it was decided to inserta share conversion clause in the Articles of Association which allowsowners of A shares to convert those to B shares. Since the decisionwas taken, 177,940,713 A shares have been converted to B shares.DividendsIn view of the company’s strong performance, cash generating capacityand outlook, the Board of Directors proposes an increase in dividendby 11.1% to SEK 5.00 per share to be paid to the shareholders on24 April 2008. The proposed dividend for 2008 is payable to allshareholders on the VPC AB’s public share register as of 21 April2008. The total estimated dividend to be paid is SEK 2,277 m.The Board of Directors also proposes a share split 2:1 combinedwith an automatic redemption procedure. Through this procedure theshareholders will receive one new ordinary share and one redemptionshare, which will be automatically redeemed for SEK 5.00. The proposedrecord day for the share split is on or about 9 May 2008 and paymentof the redemption amount is proposed to be made on or about 5 June2008.The redemption proposal will result in SEK 2,277 m being distributedto the shareholders, in addition to the proposed dividenddistribution. The total distribution to shareholders in 2008 will beSEK 4,554 m.The dividend is subject to approval by shareholders at the AnnualGeneral Meeting and has not been included as a liability in thesefinancial statements.On 3 May 2007, a dividend of SEK 4.50 (4.00) per share was paid toshareholders.64 Notes Group

19 Earnings per share2007 2006Net profit attributable to shareholders of AB SKF (SEKm) 4,595 4,317Weighted number of ordinary shares outstanding 455,351,068 455,351,068Basic earnings per share (SEK) 10.09 9.48Dilutive effect of stock option programme 2001-2003 1,051,455 1,493,950Weighted average diluted number of shares 456,402,523 456,845,018Diluted earnings per share (SEK) 10.07 9.45As of 31 December 2007, there were no other potential ordinary shares outstanding besides stock options allocated in 2002 and 2003.20 Provisions for post-employment benefitsAmount recognized in theconsolidated balance sheet (SEKm)2007 2006Pensions Other Total Pensions Other TotalPresent value of unfunded defined benefit obligations 812 1,814 2,626 795 2,084 2,879Present value of funded defined benefit obligations 11,277 196 11,473 11,893 245 12,138Less: Fair value of plan assets -10,621 -76 -10,697 -10,575 -69 -10,644Deficit 1,468 1,934 3,402 2,113 2,260 4,373Asset limitation – – – 2 – 2Unrecognized past service costs 16 6 22 9 11 20Unrecognized actuarial gains/losses (-) 906 208 1,114 215 -26 189Net post-employment benefit liabilities 2,390 2,148 4,538 2,339 2,245 4,584Reflected asOther long-term assets -302 – -302 -191 – -191Liabilities related to assets classified as held for sale – – – 44 – 44Provisions for post-employment benefits 2,692 2,148 4,840 2,486 2,245 4,731Net post-employment benefit liabilities 2,390 2,148 4,538 2,339 2,245 4,584Post-employment pension benefitsThe Group sponsors defined benefit pension plans in a number ofcompanies, where the employees are eligible for retirement benefitsbased on pensionable remuneration and length of service. The mostsignificant plans are in Sweden, Germany, the UK and the US. TheSwedish plan supplements a statutory pension where benefits areestablished by national organizations. Plans in Germany, the UK andthe US are designed to supplement these countries’ social securitypensions.Other post-employment benefitsThe majority of other post-employment benefits relate to post-retirementhealth care plans and retirement and termination indemnities.The post-retirement health care plans cover most salaried andhourly employees in the US. These plans provide certain healthcare and life insurance benefits for eligible retired employees.The subsidiaries in Italy sponsor termination indemnities, TFR, inaccordance with Italian law, which are paid out as a lump sum amountto all employees immediately upon termination, for any reason. As of1 January 2007, the rules applicable to TFR were amended under newItalian law, resulting in a curtailment during 2007. The subsidiaries arenow required to pay the contribution related to current service to anexternal social security fund as defined by the employees, thus theselected social security fund will assume the obligation to pay the benefitmaturing after that date and it is now treated as a defined contributionplan. The obligation to pay the defined benefit matured up to 31December 2006 will be retained .The subsidiaries in France sponsor a retirement indemnity plan inaccordance with French National Employer/Employee agreementswhere a lump sum is paid to employees upon retirement. During 2007,a curtailment occurred as a result of restructuring activities.Notes Group 65

20 Provisions for post-employment benefits (cont.)Components of total post-employment benefit expense (SEKm) 2007 2006Defined benefit expenseCurrent service cost, net of contribution by plan participants 329 392Interest cost 725 723Expected return on assets -704 -690Amortization of unrecognized losses 1 11Curtailments -49 –Past service cost -2 -1Other 19 20Post-employment defined benefit expense 319 455Post-employment defined contribution expense 234 199Total post-employment benefit expense 553 654WhereofAmounts charged to operating profit 325 444Amounts charged to financial expense 228 210Total post-employment benefit expense 553 654Geographical distribution of total defined benefit obligations (SEKm)Europe 8,790 9,153Americas 5,120 5,686Rest of the world 189 17814,099 15,017Geographical distribution of total plan assets (SEKm)Europe 5,493 5,441Americas 5,101 5,102Rest of the world 103 10110,697 10,644Specification of total plan assets (SEKm)Government bonds 2,277 2,369Corporate bonds 900 796Equity instruments 5,121 5,605Real estate 1,356 1,064Other, primarily cash and other financial receivables 1,043 81010,697 10,644The fair value of real estate in the specification of plan assets aboveincludes SEK 75 m (72) related to buildings in the USA and Switzerlandwhere SKF is the lesee under operating lease arrangements. Leaseexpenses for SKF under these leases was SEK 8 m (9).66 Notes Group

Changes in the present value of the definedbenefit obligation (SEKm)2007 2006Pensions Other Total Pensions Other TotalOpening balance 1 January 12,688 2,329 15,017 13,414 2,505 15,919Interest cost 620 105 725 616 107 723Current service cost 308 41 349 294 100 394Contributions by plan participants 29 11 40 26 12 38Benefits paid -666 -208 -874 -660 -212 -872Actuarial gains (-)/losses -775 -141 -916 -128 -8 -136Acquisitions/divestments 2 17 19 121 39 160Curtailments – -149 -149 -3 1 -2Settlements – – – -10 – -10Other (including reclassifications) -23 – -23 25 1 26Translation differences -88 -1 -89 -1,007 -216 -1,223Closing balance 31 December 12,095 2,004 14,099 12,688 2,329 15,017Changes in the fair value of plan assets (SEKm)2007 2006Pensions Other Total Pensions Other TotalOpening balance 1 January 10,575 69 10,644 10,729 68 10,797Expected return on assets 700 4 704 687 3 690Actuarial gains/losses (-) -11 – -11 472 – 472Contributions by employer 68 – 68 64 1 65Contributions by plan participants 20 – 20 18 – 18Benefits paid -524 – -524 -523 – -523Acquisitions/divestments 1 – 1 85 – 85Settlements – – – -12 – -12Other (including reclassifications) 1 – 1 -1 – -1Translation differences -209 3 -206 -944 -3 -947Closing balance 31 December 10,621 76 10,697 10,575 69 10,644Actual return on plan assets 693 1,162Expected cash outflowsExpected cash outflows for 2008 are SEK 421 m, which includescontributions to funded plans as well as payments made directly bythe companies under unfunded plans and partially funded plans.Multi-employer plansSKF Group has commitments for retirement pensions and familypensions for office personnel in Sweden which are secured throughan insurance policy with Alecta. This is a defined benefit plan coveringseveral employers, a so-called multi-employer plan. Alecta is currentlyunable to provide defined benefit accounting for such participants, andtherefore premiums paid to Alecta are accounted for as defined contributionexpense. Fees for the year paid covering such arrangementsamounted to SEK 15 m (18).Alecta’s profit in the form of the so-called collective consolidationlevel amounted to 152% (143). The collective consolidation levelcomprises the fair value of Alecta’s assets as a percentage of theinsurance commitments calculated in accordance with Alecta’sinsurance calculation principles and assumptions which are not inconformity with IAS 19.Notes Group 67

20 Provisions for post-employment benefits (cont.)Principal weighted-average assumptions 2007 2006Discount rateEurope 5.3 4.6Americas 6.2 5.7Rest of the world 6.0 5.3Expected return on plan assetsEurope 4.7 4.9Americas 8.9 8.9Rest of the world 6.4 5.6Rate of salary increaseEurope 2.7 3.1Americas 5.0 5.0Rest of the world 5.5 4.4Medical cost trend rateUSA 9.0 10.0A one percentage point increase in the assumed medical care cost trend rateEffect on the aggregate current service cost and interest cost 3 3Effect on the defined benefit obligation 45 62A one percentage point decrease in the assumed medical care cost trend rateEffect on the aggregate current service cost and interest cost -3 -3Effect on the defined benefit obligation -39 -54The assumed medical care cost trend rate at the end of 2007 was 9.0%, and is projected to declineto an ultimate rate of 5.0% beginning in 2014.Historical information (SEKm) 2007 2006 2005 2004 2003Total present value of defined benefit obligations 14,099 15,017 15,919 13,521 13,298Fair value of plan assets -10,697 -10,644 -10,797 -8,782 -5,636Deficit 3,402 4,373 5,122 4,739 7,662Experience adjustments on plan liabilities,losses/gains(-) 171 -220Experience adjustments on plan assets,losses (-)/gains -11 472Experience adjustments are a portion of the actuarial gains and losses that arise because of differences betweenthe actuarial assumptions made at the beginning of the period and actual experience during the period.68 Notes Group

21 Other provisionsSEKm2007ClosingbalanceProvisionsfor the yearUtilizedamountsReversalunutilizedamountsOtherTranslationeffect2007OpeningbalanceRestructuring provisions 379 274 -174 -4 2 8 273Environmental provisions 124 16 -51 -5 – 2 162Warranty provisions 299 145 -66 -39 8 2 249Long-term employee benefits 462 152 -162 -96 -17 24 561Other 765 231 -86 -38 -8 -8 6742,029 818 -539 -182 -15 28 1,919Restructuring activities include, among other things, plant closuresand relocations, as well as significant changes in organizationalstructure which are expected to be resolved within 18 months.The restructuring provisions in 2007 include personnel related costsin connection with the closure of the Automotive Division’s Glasgowfacility in the US as well as costs in connection with personnelreduction activities in the Automotive and the Industrial Division’soperations at the Fontenay-le-Comte facility in France.Provisions for 2006 included costs for closing of the factory inSouth Africa and other activities to reduce the number of employeesin China, South Africa and Italy, among other countries.Environmental and warranty provisions cover obligations not settledat year-end. Long-term employee benefits primarily include jubileebonuses and part-time retirement programmes which are providedto employees in certain countries and are expected to be settledbefore employment ends. Other provisions primarily include litigation,insurance and anti-dumping duties.22 Other financial liabilitiesSEKm Maturity 2007 2006Bond loansEUR 28 m 2008 269 257EUR 250 m 2010 2,176 2,152EUR 500 m 2013 4,616 4,428USD 97 m 2007 – 665Other long-term loans 2009-2013 214 169Medium-term loans > 3 months 180 135Short-term loans =< 3 months 280 247Derivatives 376 1728,111 8,225The maturities stated in the table above are based on the earliest dateon which the loans can be required to be repaid.The EUR 28 m bond, carries a floating 3 months’ interest rate andis therefore carried at a value almost equal to fair value.The EUR 250 m and EUR 500 m bonds have been hedged by crosscurrencyinterest rate swaps. The fixed EUR interest rates have beenswapped into floating 3 months’ SEK interest rates. These bonds,which are subject to fair value hedging, are further described in Note 30.The fair value of these bonds amounted to SEK 6,850 m (6,677).The fair values of other loans carried at amortized cost were notmaterially different from their carrying amounts.Derivatives are carried at fair value and further described in Note 30.Notes Group 69

23 LeasesFuture minimum lease payments at 31 December (SEKm)FinanceLeases2007 2006OperatingLeasesFinanceLeasesOperatingLeasesWithin one year 12 304 10 300Later than one year but within five years 44 628 34 640Later than five years 48 343 41 360Total 104 1,275 85 1,300Less: Interest and executory costs -25 -18Present value of minimum lease payments under finance leases 79 67Less: Current portion -7 -7Non-current portion 72 60Net rental expense primarily related to operating leases wasSEK 335 m (331). The more significant operating leases involve theuse of buildings, other office locations as well as machineries in USA,Sweden, Germany, Belgium and other countries. Contingent rentals,sub-lease revenues and future minimum lease payments for financeleases were not significant in any of the years presented.24 Other short-term liabilitiesSEKm 2007 2006Accrued salaries 1,174 995Vacation pay 721 675Social charges 442 402Liabilities to jointly controlled and associated companies 1 –Other current liabilities 1,644 1,408Accrued expenses and deferred income 1,854 1,6845,836 5,16470 Notes Group

25 Assets pledged and contingent liabilitiesAssets that have been pledged to secure loans and other obligations (SEKm) 2007 2006Mortgages on real estate 31 50Chattel mortgages – –31 50Mortgages are stated at the nominal value of the mortgage deeds. The pledged assets secured loansand other obligations of SEK 34 m (41) at 31 December.Contingent liabilities at nominal values (SEKm) 2007 2006Guarantees 66 210Other contingent liabilities 2 268 212Guarantees were made in respect of leases and loans, supplierguarantees and additionally, in 2006, for minor disposed operations.Guarantees on behalf of the ICS joint venture amounted toSEK 31 m (26).Other commitmentsSKF Group has a right and obligation to purchase the remaining 49%of Macrotech Polyseal Inc., first in 2009, according to a pre-agreedresult based formula.In connection with Oy Ovako Ab’s sale of its operations in 2006to a third party, the joint partners AB SKF, Wärtsilä Corporation andRautaruukki Corporation were required to provide indemnificationsto the buyer customary for such transactions. Any claims undersuch indemnifications are regulated by an agreement between thejoint venture owners. Pre-liquidation proceeds were distributedto the joint owners AB SKF, Wärtsilä Corporation and RautaruukkiCorporation in 2006 and 2007, as a result of the joint ownersproviding a first demand guarantee relating to claims by creditors.The liquidation is expected to be finalized in 2008.26 Related partiesThe SKF Group’s transactions with related parties (SEKm)Associatedcompanies2007 2006JointlycontrolledcompaniesAssociatedcompaniesJointlycontrolledcompaniesSales of goods and services 36 3 – 27Purchases of goods and services 114 205 100 1,643Receivables as of 31 December 6 – – –Liabilities as of 31 December 6 5 – –Oy Ovako Ab became a related party to the SKF Group when it began itsoperations in May 2005. Oy Ovako Ab had no related party transactionswith the SKF Group in 2007, other than pre-liquidation proceeds(see Note 12). However, Oy Ovako AB constituted 69% and 85% of thetotal sales and purchases, respectively of related party transactionsin 2006.At the end of 2006, Knut och Alice Wallenbergs Stiftelse held 29.0%of the voting rights and 10.0% of the share capital. In November 2007,Knut och Alice Wallenbergs Stiftelse transferred its shares in theParent company to Foundation Asset Management Sweden AB (“FAM”).FAM is the major shareholder of the Parent company, holding 28.7% ofthe voting rights and 10.0% of the share capital at the end of 2007.FAM’s mission is to create, through co-ordination and in an efficientway, good and sustainable return for Knut och Alice WallenbergsStiftelse, Marianne och Marcus Wallenbergs Stiftelse and StiftelsenMarcus och Amalia Wallenbergs Minnesfond (the “Foundations”).Aim of the Foundations is to support research and education throughcontributions, primarily to Swedish universities. SKF Group has hadno indication that FAM has obtained its ownership interest in SKF forother than investment purposes. No significant transactions havebeen identified between the parties with the exception of dividendpaid during the year to Knut och Alice Wallenbergs Stiftelse, prior toNovember 2007.For related party transactions involving key management,see Note 27.For a list of subsidiaries, see Note 6 to the financial statements ofthe Parent company.Notes Group 71

27 Remuneration to Key ManagementSalaries and other remunerations for SKF Board of Directors,Chief Executive Officer and Group ManagementPrinciples in year 2007In April 2007, the Annual General Meeting adopted principles forremuneration of Group management. These principles are summarizedin the Corporate Governance Report, section “Principles forRemuneration of Group Management”.Board of DirectorsThe Chairman of the Board and the Board members are remuneratedin accordance with the decision taken at the Annual GeneralMeeting. At the Annual General Meeting held in 2007 it was decidedthat the Board be entitled to a fixed allotment of SEK 3,275,000to be distributed with SEK 800,000 to the Chairman of the Board,with SEK 550,000 to the Deputy Chairman of the Board and withSEK 275,000 to each of the other Board members elected by theAnnual General Meeting and not employed by the company. It wasfurther decided that an allotment corresponding to the value of 3,200SKF B shares be received by the Chairman, an allotment correspondingto the value of 2,400 SKF B shares be received by the Deputy Chairmanand an allotment corresponding to the value of 1,200 SKF B shares bereceived by each of the other Board members elected by the AnnualGeneral Meeting and not employed by the company. When decidingupon the amount of the allotment, the value of a share of Series Bshall be determined at the average latest payment rate according tothe quotations on the OMX Nordic Exchange Stockholm during thefive trading days after publication of the company’s press release forthe financial year 2007. Finally, it was decided that an allotment ofSEK 555,000 for committee work shall be divided with SEK 150,000to the Chairman of the Audit Committee, with SEK 75,000 to each ofthe other members of the Audit Committee and with SEK 60,000 toeach of the members of the Remuneration Committee.Chief Executive OfficerTom Johnstone, Chief Executive Officer and President of AB SKFreceived from the company in year 2007 as salary and other remunerationsa total of SEK 11,608,979, of which SEK 3,600,000 wasvariable salary for 2006 performance. Tom Johnstone’s fixed annualsalary 2008 will amount to SEK 7,500,000. The variable salary for2006 and paid in 2007 was according to a performance-based programmedivided into two parts, a short-term and a long-term part,both based on the financial performance of the SKF Group establishedaccording to the SKF management model which is a simplified economicvalue-added model called Total Value Added; TVA (see ”Financialobjectives and dividend policy” for description). The variablesalary for 2006 and paid in 2007 only considered the short-termpart. The variable salary for 2006 including both the short-term andthe long-term part could amount to a maximum of 90% of the fixedannual salary for year 2006.Tom Johnstone’s retirement age is 60 years. Tom Johnstone isentitled to a lifelong defined benefit pension amounting to 37% ofSEK 3,181,536 corresponding to SEK 1,177,168 per year. The amountSEK 3,181,536 shall be adjusted in accordance with the Income Baseamount (defined in accordance with Chapter 1 § 6 of the law (1998:674)on income-based retirement pension). The defined benefit pensionis gradually earned according to the principles generally applied withinthe company. The pension is thereafter not conditioned upon futureemployment. In addition thereto, AB SKF shall pay a yearly premiumcorresponding to 35% of the difference between Tom Johnstone’sfixed annual salary and the amount on which Tom Johnstone’sdefined benefit pension is calculated as described above. This partof Tom Johnstone’s pension is a defined contribution pension andvested. The 2007 cost for Tom Johnstone’s total pension benefits wasrecorded in the amount of SEK 3,206,498. The remuneration to theChief Executive Officer did not include any stock option entitlements.Tom Johnstone held in the beginning of 2007, from earlier allocationsaccording to the AB SKF Stock Option Programme, described below,stock options allowing him to acquire 90,731 existing SKF B shares.Tom Johnstone has not exercised any stock options during the yearand, thus, holds at the end of the year stock options allowing him toacquire 90,731 existing SKF B shares. In the event of termination atthe request of AB SKF, Tom Johnstone will receive severance paymentsamounting to maximum two years’ salary.Group ManagementSKF’s Group management (exclusive of the Chief Executive Officer),consisting of 12 people at the end of the year, received in 2007, salaryand other remunerations amounting to a total of SEK 64,155,178, ofwhich SEK 34,619,104 was fixed annual salary and SEK 14,213,645was variable salary for 2006 performance. The fixed salary is for themanagers that have joined or left Group management during the year,accounted in relation to the period that each individual has been amember of Group Management.The variable salary for Group management was according to a performance-basedprogramme divided into two parts, a short-term anda long-term part, primarily based on the financial performance of theSKF Group established according to the SKF management model whichis a simplified economic value-added model called Total Value Added;TVA (see ”Financial objectives and dividend policy” for description).The variable salary for 2006 and paid in 2007 only considered theshort-term part. The variable salary for 2006 including both theshort-term and the long-term part could amount to a maximum percentageof the fixed annual salary for year 2006. The percentage islinked to the position. The remuneration to Group managementincluded SEK 12,733,646 related to options exercised under Stockoption programmes 2001-2003, but did not include any new stockoption entitlements. Group management held in the beginning of2007, from earlier allocations according to the AB SKF Stock OptionProgramme, stock options allowing them to acquire 257,703 existingSKF B shares. Group management has during the year exercised stockoptions corresponding to 161,888 existing SKF B shares and holds atthe end of the year stock options allowing them to acquire 95,815existing SKF B shares. In the event of termination of employment at72 Notes Group

the request of AB SKF of a person in Group management, that personwill receive a severance payment amounting to a maximum of twoyears’ salary.The SKF Group’s Swedish defined benefit pension plan for Groupmanagement has a normal retirement age of 62 years. The ChiefExecutive Officer is not covered by this pension plan. The plan entitlessenior managers covered to receive an additional pension over andabove the ordinary ITP-plan. This additional pension amounts to ayearly compensation from the retirement age of up to 32.5% of thepensionable salary above 20 basic amounts, provided the seniormanager has been employed by the SKF Group for at least 30 years.The pension benefit is thereafter not conditioned upon futureemployment.During 2003, the Board decided to introduce a premium basedSwedish supplementary pension plan for Group management of theSwedish companies within the SKF Group. The normal retirement ageis 62 years. The Chief Executive Officer is not covered by this pensionplan. The plan entitles senior managers covered to receive an additionalpension over and above the pension covered by the ITP-plan.The senior managers in question are not covered by the defined benefitpension plan described in the previous paragraph. The companypays for senior managers covered by the premium based plancontributions based on each individual’s pensionable salary (i.e. thefixed monthly salary excluding holiday pay, converted to yearly salary)exceeding 30 Income Base amounts. This pension is a definedcontribution pension and vested.All amounts in SEKBoard of Directors of AB SKFSalaries and other remunerations to Key ManagementFixed salary/fixed BoardremunerationVariable salary/variable Boardremuneration 1)Amounts receivedRemuneration forcommittee workAnders Sharp 800,000 440,640 135,000Leif Östling 550,000 330,480 60,000Vito H Baumgartner 275,000 165,240 60,000Ulla Litzén 275,000 165,240 75,000Clas Åke Hedström 275,000 165,240 150,000Winnie Fok 275,000 165,240 75,000Eckard Cordes 275,000 165,240Hans-Olov Olsson 137,500Lena Treschow Torell 137,500Exercisedoptions underStock optionprogrammes2001-2003OtherbenefitsGrosspensioncosts 2)Chief Executive Officer 7,381,998 3,600,000 626,981 3,206,498Group Management 3) 34,619,106 14,213,645 12,733,646 2,588,781 11,964,823whereof Parent Company 23,075,493 8,346,582 6,107,782 2,213,814 9,968,242Total received by key management 4) 45,001,104 19,410,965 555,000 12,733,646 3,215,762 –whereof Parent Company 33,457,491 13,543,902 555,000 6,107,782 2,840,795 –Total expensed for key management 4) 47,359,605 24,768,734 555,000 9,446,483 3,215,762 15,171,321whereof Parent Company 35,815,992 17,918,916 555,000 6,107,782 2,840,795 13,174,7401)Variable Board remuneration was decided in year 2006, but paid in year 2007. The value of the SKF B share has been determined to SEK 137.70 based onthe average latest payment rate according to the quotations on the OMX Nordic Exchange Stockholm during the five trading days after the publication of thecompany’s press release for the financial year 2006.2)Represents premiums paid under defined contribution plans as well as gross expenses under defined benefits plans.3)Includes managers who have joined or left Group management during the year, accounted in relation to the period that each individual has been a memberof Group management.4)Differences between amounts received and amounts expensed relate to benefits which are paid out in a year other than the year that the benefit was earned.Amounts relate primarily to accrued short-term and long-term variable salary, board remunerations including amounts based on value of SKF B shares,accrued vacations and accumulated leaves. A further difference relates to the Stock option programme 2001-2003 when only options granted 2001 and 2002are expensed when exercised. See Note 1 for a description of the accounting for share based payments.Notes Group 73

27 Remuneration to Key Management (cont.)AB SKF’s Stock option programmeThe Stock option programme started in 2000 and grants were madefrom 2001 until 2003. Since 2004, the remuneration to the SKFGroup managers does not include any allocations of stock options.Accordingly, SKF Group managers did not receive any stock options inrelation to the 2007 performance.The allocation of options under the Stock option programme wasbased on financial performance defined as the Group’s managementmodel TVA and varied from year to year depending on whether thefinancial targets were totally or partly reached. The options underthe Stock option programme, which were granted free of charge, arenot assignable or transferable and are linked to employment with theSKF Group. The options are valid during a period of six years and areexercisable two years from the date of grant, provided the optionholder is still employed with the SKF Group.To fulfil its obligations under the Stock option programmes with theemployees, AB SKF entered into a service agreement with a financialinstitution to purchase its shares on the open market upon exercise ofoptions and to deliver them to its employees. The difference betweenexercise price and market price is then settled in cash between ABSKF and the financial institution. There are no holdings of SKF sharesby AB SKF and there is no issuance of new shares. The service contractwith the financial institution is considered an executory contract forwhich no provision is recorded since both parties will perform to anequal extent under the contract.Costs and exercise of the Stock option programmeIn 2007, the costs at exercise of options allocated in 2001 and2002 under the Stock option programme, excluding social charges,amounted to SEK 58 m (46) of which SEK 9 m (6) related to keymanagement.At the end of 2007, exercisable stock options granted in 2002entitling the holders to acquire 263,776 existing SKF B shares hadnot yet been utilized. Based on the share price for the SKF B shareat 31 December 2007, SEK 109.50, and the exercise prices of theunderlying shares, the unrealized cost for the SKF Group, excludingsocial charges, could be estimated to SEK 15 m (69). The cost was notrecognized in the income statement of the Group. The future actual costfor the Group will, however, be determined by the price of the SKF Bshare at exercise date.The initial fair value at grant date of the Stock option programmeallocated in 2003, was expensed during the vesting period, whichended in February 2005, see Note 1. The expense for 2005 and 2004amounted to SEK 1 m and SEK 14 m, respectively. As the financialinstitution’s acquisitions of SKF B shares represent, from anaccounting perspective only, a repurchase of treasury shares inaccordance with IAS 32, the difference in exercise price and shareprice is recorded as a decrease in equity when these options areexcercised. The decrease amounted in 2007 to SEK 40 m (25) ofwhich SEK 3 m (2) related to key management.At the end of 2007, exercisable stock options granted in 2003entitling the holders to acquire 1,036,519 existing SKF B shareshad not yet been utilized. Based on the price of the SKF B share at31 December 2007, SEK 109.50, and the exercise price of the underlyingshares, the unrealized fair value was estimated to SEK 62 m (105),excluding social charges. The amount was not recognized as adecrease of equity in 2007. The future actual fair value will be determinedby the price of the SKF B share at exercise date.A provision amounting to SEK 13 m (24) has been recorded forsocial charges payable by the employer when stock options are exercised.A reversal of the provision increased the result with SEK 5 m in 2007.In 2006, an expense was recognized and amounted to SEK 1 m.The social charges have been calculated for all outstanding options at31 December 2007. The costs recognized for administration andconsultancy fees were SEK 1 m (1).Cash-settled share-based compensationAs part of their remuneration, the Board of Directors of AB SKF weregranted an allotment corresponding to 14,000 SKF B shares (11,600)by the Annual General Meeting of Shareholders in April 2007. Thevalue of the SKF B share will be set at the average latest payment ratequoted on the OMX Nordic Exchange Stockholm during the five tradingdays following the publication of the SKF Group’s press release for thefinancial year. The liability incurred is recognized over the vestingperiod and amounted to SEK 2 m (2), including social charges, basedon the price of the SKF B share on 31 December 2007, SEK 109.50.Specification of AB SKF’s Stock option programmeNo. ofoptionsallocatedNo. ofpeopleExercisepriceSEKTheoreticalvalue atallocationSEKExerciseperiodOutstandingoptions 1)1 Jan.Forfeited total(of whichduring the year)Exercisedduringthe yearAveragepriceSEKOutstandingoptions 1)31 Dec.SKF B shareClosing price31 Dec.Grant 20012007 1,872,037 183 37.37 9.82 2003-07 158,354 123,315 (18,724) 139,630 122.00 – 109.502006 1,872,037 183 37.37 9.82 2003-07 412,923 97,803 (2) 264,843 120.00 148,078 126.50Grant 20022007 2,747,285 271 52.83 10.75 2004-08 850,580 171,823 (0) 586,804 132.00 263,776 109.502006 2,747,285 271 52.83 10.75 2004-08 1,211,624 160,672 (0) 416,243 117.00 795,381 126.50Grant 20032007 3,776,672 330 50.04 8.65 2005-09 1,545,650 214,163 (9,261) 499,870 131.00 1,036,519 109.502006 3,776,672 330 50.04 8.65 2005-09 1,836,920 191,604 (0) 391,576 120.50 1,445,344 126.501)Options mean the number of existing SKF B shares that the stock options entitle the holders to acquire.74 Notes Group

28 Fees to the auditorsFees to SKF Group statutory auditors were split as follows (SEKm) 2007 2006Audit fees 33 46Audit related fees 7 0Tax fees 2 2Other fees to auditors 0 242 50The Parent company’s share (SEKm)Audit fees 10 9Audit related fees 0 0Tax fees 0 010 9Auditing assignments involve examination of the annual report andfinancial accounting and the administration by the Board and thePresident, other tasks related to the duties of a company auditor andconsultation or other services that may result from observationsnoted during such examination or implementation of such other tasks.All other tasks are defined as other assignments. At the AnnualGeneral Meeting of Shareholders in 2005, KPMG Bohlins AB waselected auditor for AB SKF until the Annual General Meeting ofShareholders in 2009.29 Average number of employeesNumber ofemployees2007 2006WhereofmenNumber ofemployeesWhereofmenParent company in Sweden 195 57% 169 56%Subsidiaries in Sweden 2,978 82% 2,910 83%Subsidiaries abroad 38,472 79% 36,701 80%41,645 79% 39,780 80%Geographic specification of average numberof employees in subsidiaries abroadEmployees2007 2006WhereofmenEmployeesWhereofmenFrance 4,257 83% 3,966 83%Italy 4,580 79% 4,643 80%Germany 5,859 87% 6,051 88%Other Western Europe excluding Sweden 4,067 83% 3,856 83%Central/Eastern Europe 3,394 62% 3,318 63%USA 4,759 72% 4,539 73%Canada 240 75% 229 78%Latin America 2,569 82% 2,248 83%Asia 8,349 81% 7,228 80%Middle East and Africa 398 79% 623 79%38,472 79% 36,701 80%Notes Group 75

30 Risk management and financial derivativesThe SKF Group’s operations are exposed to various types of financialrisks; market risks (being currency risk, interest rate risk and otherprice risks), liquidity risks and credit risks, each being discussedbelow.The Group’s risk management incorporates a financial policy thatestablishes guidelines and definitions of currency, interest rate, creditand liquidity risks and establishes responsibility and authority for themanagement of these risks. The policy states that the objective is toeliminate or minimize risk and to contribute to a better return throughthe active management of risks. The management of the risks and theresponsibility for all treasury operations are largely centralized atSKF Treasury Centre, the Group’s internal bank.The policy sets forth the financial risk mandates and the financialinstruments authorized for use in the management of financial risks.Financial derivative instruments are used primarily to manage theGroup’s exposure to fluctuations in foreign currency exchange ratesand interest rates. The Group also uses financial derivative instrumentsfor trading purposes, limited according to Group policy.The Group also has a policy for the management of financial risksinvolved in the stock options allocated in 2001-2003. The expense forthe Stock option programme (see Note 27) has been partially offset byshare swap arrangements.Net currency flows (SEKm) 2007 2006USD 4,200 3,970CAD 360 400EUR -400 -200Other 1) 1,540 820SEK -5,700 -4,9901)Other is a sum comprising some 14 different currencies.A sensitivity analysis based on the assumption that the net currencyflows in USD will be the same for 2008 shows that an unfavorablechange of 10% in the SEK against the USD would have a negative effecton profit before taxes of approximately SEK 390 m (371), includingthe effects of hedging transactions. At year end, the outstandinghedges covered approximately 6 (3) months of net USD flows.The sensitivity analysis based on the outstanding positions at31 December shows that profit before taxes for the year would haveincreased by SEK 2 m (-76) and decreased by SEK -2 m (2) if SEK hadstrengthened and weakened, respectively, by 10% against all othercurrencies. The corresponding effect on the hedge reserve in shareholdersequity would have been an increase/decrease by SEK 160 m(34) and SEK -169 m (-34), respectively.Market risk – Currency riskThe Group is exposed to changes in exchange rates in the future flowsof payments related to firm commitments and forecasted transactionsand to loans and investments in foreign currencies, i.e. transactionexposure. The Group’s accounts are also affected by translating theresults and net assets of foreign subsidiaries into SEK, i.e. translationexposure.Transaction exposureTransaction exposure mainly arises as a result of intra-group transactionsbetween the Group’s manufacturing companies and theGroup’s sales companies, situated in other countries and selling theproducts to end-customers normally in local currency on their localmarket. The Group’s principal commercial flows of foreign currenciespertain to exports from Europe to North America and Asia and toflows of currencies within Europe. Currency rates and payment conditionsto be applied to the internal trade between SKF companies areset by SKF Treasury Centre. Currency exposure and risk is primarily,and to a large extent, reduced by netting internal transactions. Insome countries, transaction exposure may arise from sales to externalcustomers in a currency different from the local currency. Thecurrency flows between SKF companies managed by SKF TreasuryCentre were reduced through netting from SEK 52,000 m (49,300)to SEK 5,700 m (4,990). This amount represented the Group’s maintransaction exposure excluding hedges.For the commercial foreign exchange exposure, the SKF Group isprimarily exposed to USD and USD-related currencies, as shown inthe table below. Therefore the sensitivity analysis regarding net currencyflows is based on USD only. The effects of fluctuations upon thetranslation of subsidiaries’ financial statements into the Group’s presentationcurrency are not considered.Translation exposureTranslation exposure is defined as the Group’s exposure to currencyrisk arising when translating the results and net assets of foreignsubsidiaries to Swedish kronor. In accordance with Group policy,these translation effects on the Group’s accounts are not hedged.Market risk – Interest rate riskThe Group defines interest rate risk as the risk of negative fluctuations in theGroup’s cash flow caused by changes in the interest rates. At year-end,total interest bearing financial liabilities amounted to SEK 7,735 m (8,053)and total interest bearing financial assets amounted to SEK 4,540 m(9,611). Liquidity management and borrowing is concentrated toSKF Treasury Centre. By matching the duration of investments andborrowings, the interest rate exposure of the Group can be reduced.The objective of of the SKF Group is to have a relatively short interestduration on the interest bearing assets and liabilities. At year end theduration was 3 months (3 months).To manage the interest rate risk and currency risk in the borrowing,the SKF Group uses cross-currency interest rate swaps, where fixedEUR interest rates are swapped into floating SEK interest rates.The large holding of interest bearing assets and loans at year end2006 was unrepresentative for the year since EUR 500 m was borrowedin December 2006 and mostly paid out as dividend and shareredemption in May and June 2007. As a consequence, the sensitivityanalysis for 2006 is adjusted to only reflect one month’s exposureregarding the EUR 500 m bond. At 31 December 2007, given the prevailingnet amount of interest bearing financial assets and interestbearing financial liabilities of SEK -3,195 m (1,558) and duration of9 months, an unfavorable change of the interest rates for the yearby 1% would have reduced post-tax profit for the year by SEK 53 m (8).76 Notes Group

Market risk – Price risksMarket risks also include other price risks, where the relevant riskvariables for the Group are stock exchange prices or indexes.As of 31 December, the Group held investments in equity securitieswith quoted stock prices, amounting to SEK 577 m (243), which arecategorized as available for sale. If the market share prices had been10% higher/lower at 31 December, shareholders’ equity would haveincreased/decreased by SEK 58 m (24).Liquidity riskLiquidity risk, also referred to as funding risk, is defined as the riskthat the Group will encounter if difficulties occur in raising funds tomeet commitments. Group policy states that, in addition to currentloan financing, the Group should have a payment capacity in the formof available liquidity and/or long-term committed credit facilities. Inaddition to its own liquidity, the Group had committed credit facilitiesof EUR 500 m syndicated by 10 banks at 31 December 2007. Thesefacilities, which are unutilized, will expire in 2014. A good rating isimportant in the management of liquidity risks. The long-term ratingof the Group by Standard & Poor’s and Moody’s Investor Service isA- and A3 respectively, both with a stable outlook.The following tables show the Group’s contractually agreed (undiscounted)interest payments and repayments of the non-derivativefinancial liabilities and the derivatives with payment outflows:Cash flowSEKmCarryingamountGross nominalinflow/outflow 2008 2009 2010-20122013 andthereafterBond loansEUR 28 m -269 -276 -276 – – –EUR 250 m -2,176 -2,551 -74 -74 -2,403 –EUR 500 m -4,616 -5,957 -204 -204 -613 -4,936Other loans -674 -742 -472 -93 -129 -48Accounts payable -4,904 -4,904 -4,904 – – –Derivatives with payment outflowsCurrency forwards: outflows -23 -14,115 -14,115 – – –Currency forwards: inflows 14,092 14,092 – – –Currency and interest rateswaps: outflows 25 -9,269 -1,092 -351 -3,074 -4,752Currency and interest rateswaps: inflows 9,301 1,055 273 3,040 4,933Embedded derivatives: outflows 1 -730 -577 -66 -70 -17Embedded derivatives: inflows 731 583 64 67 17-14,420 -5,984 -451 -3,182 -4,803All instruments held at 31 December, 2007 and for which paymentswere already contractually agreed were included. Planning data forfuture, new liabilities was not included. Amounts in foreign currencywere each translated at the closing rate at the reporting date. Thevariable interest payments arising from the financial instrumentswere calculated using the last interest rates fixed before 31 December,2007. Financial liabilities that can be repaid at any time are alwaysassigned to the earliest possible time period.Credit riskCredit risk is defined as the Group’s exposure to losses in the eventthat one party to a financial instrument fails to discharge an obligation.The SKF Group is exposed to credit risk from its operating activitiesand certain financing activities. With regard to financing activities,the Group’s policy states that only well-established financial institutionsare approved as counterparties. The major part of these financialinstitutions has signed an ISDA agreement (International Swaps andDerivatives Association, Inc.). Transactions are made within fixedlimits and exposure per counterparty is continuously monitored.At operational level, the outstanding receivables are locally continuouslymonitored in each area. The Group’s concentration of creditrisk related to trade receivables is mitigated primarily because of itsmany geographically and industrially diverse customers. Tradereceivables are subject to credit limit control and approval proceduresin all subsidiaries.The maximum exposure to credit risk for the Group amounts toSEK 14,915 m (18,685). The exposure is represented by the carryingamounts of total financial assets that are carried in the balance sheetwith the exception of equity securities. No granting of significantfinancial guarantees increasing the credit risk and no significant collateralagreements reducing the maximum exposure to credit riskexisted as of the reporting date.With respect to the financial assets that are neither impaired norpast due, there are no indications as of the reporting date that thedebtors will not meet their payment obligations.Notes Group 77

30 Risk management and financial derivatives (cont.)Hedge accountingFair Value HedgesTo hedge the fair value risk of fixed-interest liabilities, the SKF Groupused cross-currency interest rate swaps (receive fixed EUR interest,pay SEK variable interest) denominated in EUR in the 2007 and 2006financial years. Fixed-interest bonds with the amount of EUR 750 m(EUR 750 m) denominated in EUR were designated as hedged items.The changes in the fair values of the hedged items resulting fromchanges in the Euribor rate were offset against the changes in thevalue of the interest rate swaps. The aim of this hedging was to transformthe EUR fixed-income bonds into variable SEK interest debt,thus hedging the fair value of the financial liabilities.The effectiveness of the hedging relationship is prospectivelytested using the critical terms match method. An effectiveness test iscarried out retrospectively at each balance sheet date using the dollaroffsetmethod. The dollar-offset method compares past changes inthe fair value of the hedged item expressed in currency units withpast changes in the fair values of the used derivatives expressed incurrency units. The changes in the fair value of the two transactionsare calculated on the basis of the outstanding cash flows at the beginningand end of the test period and are adjusted for accrued interest.All hedging relationships were effective within the range of the ratiosof the two past changes in value (between 80 and 125 percent).When the effectiveness was being measured, the change in the creditspread was not taken into account for calculating the change in thefair value of the hedged item.As the list of the fair values of derivatives shows (see table in theDerivatives section), the Group had designated interest rate derivativeswith a net amount of SEK 23 m (-192) as fair value hedges as of31 December, 2007. The remeasurement of the hedged items resultedin gains of SEK 102 m (130) being recorded in interest expense duringthe year; the changes in the fair values of the hedging derivativesresulted in losses of SEK -107 m (-133) being recorded on the sameline, interest expense.The following table shows the contractual maturities of the hedginginstruments and when the hedged item will be recognized inprofit or loss:Nominal amount(USDm)MaturityEffect in profitand loss2 January, 2008 January, 200843 February, 2008 May, 20082 February, 2008 February, 200835 March, 2008 June, 20082 March, 2008 March, 200850 April, 2008 July, 20082 April, 2008 April, 20082 May, 2008 May, 20082 June, 2008 June, 20082 July, 2008 July, 20082 August, 2008 August, 20082 September,2008 September,20082 October, 2008 October, 20082 November, 2008 November, 2008150In the 2007 financial year, gains totaling SEK 55 m (156) resultingfrom the change in the fair values of currency derivatives were takendirectly to equity (hedging reserve). These changes constitute theeffective portion of the hedging relationship. During the year gainsof SEK 72 m (135) were transferred from equity (hedging reserve) tonet sales. In 2006, a gain of SEK 11 m was transferred from equityinto operating profit and a loss of SEK 51 m was reclassified andrecognised as financial expense because the hedge designation wasrevoked. There was no material ineffectiveness of these hedgesrecorded as of the balance sheet date. A list of the fair values ofderivatives is shown in the table in the Derivatives section below.Cash flow hedgesDuring 2007, forward exchange contracts and currency options werethe derivative financial instruments used by the Group to hedge itsforeign currency rate exposure.The Group’s cash flow hedges are only hedges of forecastedsales against foreign currency risks arising from spot rate changes.The hedged items designated in 2007 as well as 2006 were highlyprobable U.S. dollar sales.DerivativesThe following table shows the fair values of the various derivativescarried as at 31 December. A distinction is made depending onwhether these are part of an effective hedging relationship as set outin IAS 39 (fair value hedge, cash flow hedge) or not. Other derivativescan also be embedded (i.e., a component of a hybrid instrument thatcontains a non-derivative host contract).Derivatives (SEKm)Category2007 2006Interest rate and currency swapsused for economic hedging Trading 2 –used for fair value hedging Hedge accounting 23 -192Currency forwards/currency optionsused for economic hedging and trading Trading -12 93used for cash flow hedging Hedge accounting -2 -4Share swaps Trading 86 164Electricity derivatives Trading 7 –Embedded derivatives Trading 1 -4105 5778 Notes Group

31 Men and women in Management and BoardThe GroupNumber ofpersons2007 2006WhereofmenNumber ofpersonsWhereofmenBoard of Directors of the Parent company incl. President 12 75% 10 80%Group Management incl. President 13 85% 12 83%Parent CompanyNumber ofpersons2007 2006WhereofmenNumber ofpersonsWhereofmenBoard of Directors of the Parent company incl. President 12 75% 10 80%Group Management incl. President 10 80% 9 78%32 Events after the balance sheet dateThe significant events that have occurred after 31 December 2007,until the date of the signing of this annual report on 31 January 2008refer to:• The Board of Directors proposes an increase in the dividend of11.1%, giving a dividend of SEK 5.00 per share. The Board of Directorsalso proposes a share split 2:1 combined with an automaticredemption prodecure. Through this procedure the shareholderswill receive one new ordinary share and one redemption share,which will be automatically redeemed for SEK 5.00. The proposalmeans that SEK 2,277 m will be distributed to the shareholders,in addition to the proposed dividend distribution. The totaldistribution to shareholders will be SEK 4,554 m;• The Board of Directors proposes that the Annual General Meetingresolves to authorize the Board, until the next Annual GeneralMeeting, to decide upon the repurchase of the company’s own shares.If shares are repurchased, the Board intends to cancel such ownshares through reduction of the share capital. These proposals aresubject to resolutions by the Annual General Meeting in April 2008;• The Group’s income and balance sheets, as well as the ParentCompany’s income and balance sheets, are subject to approval at theAnnual General Meeting in April 2008.Notes Group 79

Parent Company income statementsYears ended 31 DecemberSEKm Note 2007 2006Net sales 1 1,648 1,439Cost of services provided 5, 9, 15 -1,648 -1,439Gross profit 0 0Administrative expenses 5, 9, 15 -324 -326Other operating income 7 22Other operating expenses -1 -9Operating loss -318 -313Financial income 2 3,064 9,191Impairment loss of financial assets 2 -135 -324Financial expenses 2 -743 -365Profit before provisions to untaxed reserves and taxes 1,868 8,189Provisions to untaxed reserves 3 -245 -315Taxes 4 111 165Net profit 1,734 8,03980 Parent Company income statements

Parent Company balance sheetsAs of 31 DecemberSEKm Note 2007 2006ASSETSNon-current assetsProperty, plant and equipment 5 11 11Investments in subsidiaries 6 10,214 9,469Long-term receivables from subsidiaries 7,291 7,335Investments in jointly controlled and associated companies 6 10 45Investments in equity securities 7 588 264Deferred tax assets 4 32 44Other long-term assets – 31318,146 17,481Current assetsShort-term receivables from subsidiaries 1,839 5,174Other short-term assets 8 245 212Cash and bank accounts 4 72,088 5,393Total assets 20,234 22,874SHAREHOLDERS’ EQUITY, PROVISIONS AND LIABILITIESShareholders’ equityRestricted equityShare capital (455,351,068 shares, quota value SEK 2.50 per share) 1,138 1,138Statutory reserve 918 918Unrestricted equityRetained earnings 5,125 2,558Net profit 1,734 8,0398,915 12,653Untaxed reserves 3 1,120 875ProvisionsProvisions for pensions and similar commitments 9 133 122133 122Non-current liabilitiesLong-term loans 10 7,072 7,015Long-term liabilities to subsidiaries 14 8177,086 7,832Current liabilitiesShort-term loans 11 268 665Trade payables 27 41Short-term liabilities to subsidiaries 2,392 321Tax payables 77 140Other short-term liabilities 12 216 2252,980 1,392Total shareholders’ equity, provisions and liabilities 20,234 22,874Assets pledged 13 0 0Contingent liabilities 14 3 3Parent Company balance sheets 81

Parent Company statements of cash flowYears ended 31 DecemberSEKm 2007 2006Operating activitiesProfit before provisions to untaxed reserves and taxes 1,868 8,189Adjustments forDepreciation, amortization and impairment loss 138 351Net gain(-) on sales of property, plant and equipment 0 -5Net gain(-) on sales of equity securities -252 -4,671Income taxes paid -266 -172Pensions paid -47 -48Changes in working capitalTrade payables -14 14Other operating assets and liabilities, net 6,482 -3,081Net cash flow from operating activities 7,909 577Investment activitiesAdditions to property, plant and equipment -1 0Sales of property, plant and equipment 0 6Investments in subsidiaries -791 -175Sales of equity securities 0 5,170Change in other long-term assets and liabilities, net -139 -7,621Net cash flow used in investment activities -931 -2,620Net cash flow after investments before financing 6,978 -2,043Financing activitiesProceeds from medium- and non-current loans 0 4,516Repayment of medium- and non-current loans 0 -650Change in current loans -378 0Cash dividends to shareholders -2,049 -1,821Redemption of shares -4,554 –Net cash flow used in financing activities -6,981 2,045Increase(+)/decrease(-) in cash and cash equivalents -3 2Cash and cash equivalents at 1 January 7 5Cash and cash equivalents at 31 December 4 7Change in net interest-bearing liabilities (SEKm)2007ClosingbalanceExchangerate effectChangein items2007OpeningbalanceLoans, long and short term 7,340 325 -665 7,680Provisions for pensions and similar commitments 133 – 11 122Liabilities to subsidiaries, long and short term 2,179 – 1,249 930Receivables from subsidiaries, long and short term -7,291 -310 2,753 -9,734Other long-term assets – – 300 -300Financial assets, short term -4 – 3 -7Net interest-bearing liabilities 2,357 15 3,651 -1,309Interest received amounted to SEK 375 m (199). Interest payments amounted to SEK 398 m (342).82 Parent Company statements of cash flow

Parent Company statements of changes in shareholders’ equitySEKmSharecapital 1)StatutoryreserveOther restrictedreservesUnrestrictedequityTotalOpening balance 1/1/2006 1,138 918 7 3,230 5,293Dividend – – – -1,821 -1,821Exercise of share options – – – -24 -24Change in fair value of investmentsin equity securities – – -7 29 22Net of received and paid Group contributions – – – 1,589 1,589Tax on Group contributions, net – – – -445 -445Net profit – – – 8,039 8,039Closing balance 31/12/2006 1,138 918 – 10,597 12,653Dividend – – – -2,049 -2,049Redemption of shares -569 – – -3,985 -4,554Bonus issue 569 – – -569 –Exercise of share options – – – -40 -40Change in fair value of investmentsin equity securities – – – 332 332Net of received and paid Group contributions – – – 1,165 1,165Tax on Group contributions, net – – – -326 -326Net profit – – – 1,734 1,734Closing balance 31/12/2007 1,138 918 – 6,859 8,9151)The distribution of share capital between share types is shown in Note 18 to the consolidated financial statements.Restricted equityShare capital, statutory reserve and other restricted reserves are not available for dividend payments.Unrestricted equityUnrestricted equity includes (SEKm) 2007 2006Retained earnings 4,764 2,529Investment revaluation reserve 361 29Net profit 1,734 8,0396,859 10,597Unrestricted equity include accumulated net profits which can be distributed to shareholders.Parent Company statements of changes in shareholders’ equity 83

Notes to the financial statements of the Parent CompanyAmounts in SEKm unless otherwise stated. Amounts in parentheses refer to comparable figures for 2006.1 Accounting policiesThe financial statements of the Parent company are prepared inaccordance with the “Annual Accounts Act” and Swedish FinancialAccounting Standards Council recommendation RR 32:06, “Accountingfor Legal Entities” and statements of Emerging Issues Task Force.In accordance with RR 32:06, IFRS is applied to the greatest extentpossible under Swedish legislation, but full compliance is not possible.The areas in which the Parent company’s accounting policies differfrom the Group’s are described below. For a description of the Group’saccounting policies, see Note 1 to the consolidated financial statements.With regard to pensions, the Group applies IAS 19, “EmployeeBenefits”, where as the Parent company continues to apply FAR’sRecommendation 4, ”Accounting of Pension Liabilities andPension Costs”.Shares in subsidiaries, jointly controlled and associated companiesare recorded at acquisition cost, reduced by any impairment.The tax legislation in Sweden allows companies to make provisionsto untaxed reserves. Hereby, the companies may, with certain limits,allocate and retain profits in the balance sheet instead of immediatetaxation. The untaxed reserves are taken into taxation at the timeof their dissolution. In the event that the business shows losses,the untaxed reserves may be dissolved in order to cover the losseswithout any taxation. Group Contributions are reported in accordancewith Emerging Issues Task Force ( Swedish Financial AccountingStandards Council) URA 7.2 Financial income, impairment of financial assets and financial expensesSEKm 2007 2006Financial incomeDividends from investments in subsidiaries 2,073 2,810Other income from investments in subsidiaries 192 4,673Income from investments in jointly controlled and associated companies 86 1,502Income/expense from other equity securities and non-current interest investments 663 179Other interest income and similar items 50 273,064 9,191Impairment loss of financial assetsInvestments in subsidiaries -139 -324Investments in associated companies 4 0-135 -324Financial expensesInterest expense and similar items related to subsidiaries -92 -179Other financial expense -651 -186-743 -365Other income from investments in subsidiaries consists of Group-internal profits in connection with sales of shares in subsidiariesand liquidation surpluses.3 Untaxed reservesProvisions to untaxed reserves (SEKm) 2007 2006Change in tax allocation reserves -245 -315-245 -315Untaxed reserves (SEKm)Accelerated depreciation reserve 2 2Tax allocation reserves 1,118 8731,120 87584 Notes Parent Company

4 TaxesTaxes on profit before taxes (SEKm) 2007 2006Current taxes -203 -271Tax on Group contribution 326 445Deferred taxes -12 -9111 165Taxes attributable to exercise of share options, accounted for in unrestricted equity, amounted to SEK 1 m (1).Net deferred taxes per type (SEKm) 2007 2006Provisions for pensions and other similar commitments 20 24Other 12 20Deferred tax assets 32 44Corporate income taxThe corporate statutory income tax rate in Sweden was 28% in 2007 and 2006.Reconciliation of the statutory tax in Sweden and the actual tax (SEKm) 2007 2006Tax calculated on statutory tax rate in Sweden -454 -2,205Non-taxable dividends and other financial income 648 2,521Current tax referring to previous years 4 -7Non-deductible/taxable profit items, net -87 -144Actual tax 111 1655 Property, plant and equipmentSEKm2007Closingbalance Additions Disposals2007OpeningbalanceAcquisition costBuildings 9 0 0 9Land and land improvements 2 – 0 2Machine toolings, factory fittings, etc. 11 1 0 1022 1 0 212007Closingbalance Depreciation Disposals2007OpeningbalanceAccumulated depreciationBuildings 2 0 0 2Land and land improvements 0 – 0 0Machine toolings, factory fittings, etc. 9 1 0 811 1 0 10Net book value 11 0 0 11Depreciation is included in administrative expenses.Tax value of real estateLand and land improvements 2 – – 2Buildings 5 – – 57 – – 7Notes Parent Company 85

6 Investments in subsidiaries, jointly controlled and associated companiesInvestments in subsidiaries are specified below. For a specification of investments in jointly controlled and associated companiesheld by the Parent company, see Note 12 to the consolidated financial statements.Investments in subsidiaries heldby the Parent company on 31 December (SEKm) 2007 Additions ImpairmentsDisposalsand capitalrepayments 2006Investments in subsidiaries 10,214 1, 053 -137 -171 9,469Name and locationHoldingin percentNumberof sharesCurrencyNominal valuein local currency,millionsBookvalueManufacturing companiesSKF USA Inc., Pa., USA 99.9 1,522,651 USD 76 862SKF Österreich AG, Austria 100 200 EUR 15 176SKF GmbH, Germany 0.1 – EUR 0 2SKF Española S.A., Spain 100 3,650,000 EUR 22 501SKF Polska Spólka Akcyjna, Poland 90.6 3,353,130 PLN 67 153SKF Bearings Bulgaria EAD, Bulgaria 100 2,376,230 BGN 2 47SKF Ukraine, Ukraine 99.7 481,829,623 UAH 104 133SKF Actuators AB, Göteborg, Sweden 100 1,000 SEK 1 7SKF do Brasil Limitada, Brazil 99.9 237,130,248 BRL 237 538SKF Argentina S.A., Argentine 99.9 553,507 ARS 1 17SKF India Ltd., India 46.7 24,639,048 INR 246 94SKF Couplings Systems AB, Hofors, Sweden 100 75,000 SEK 8 259SKF Sealing Solutions AB, Landskrona, Sweden 100 10,000 SEK 1 27SKF Transmission AB, Jönköping, Sweden 100 16,000 SEK 2 2SKF Automotive Components Corporation, Republic of Korea 100 3,035,350 KRW 15,177 74SKF Sealing Solutions Korea Co., Ltd., Republic of Korea 51.0 153,320 KRW 1,533 15PT. SKF Indonesia, Indonesia 84.2 74,930 IDR 74,930 34SKF de Mexico S.A. de C.V.,, Mexico 32.3 108,224,966 MXN 108 65SKF Technologies (India) Private Limited, India 78.3 626,500,101 INR 627 58Sales companiesSKF Danmark A/S, Denmark 100 5 DKK 5 0SKF Norge A/S, Norway 100 50,000 NOK 5 0Oy SKF Ab, Finland 100 48,400 EUR 2 12SKF NV/SA, Belgium 100 167,587 EUR 3 97SKF Portugal-Rolamentos, Lda., Portugal 95.0 – EUR 0 4SKF Ložiska, a.s., Czech Republic 100 430 CZK 43 10SKF Svéd Golyóscsapágy Zrt., Hungary 100 3,000 HUF 1 0SKF Canada Limited, Canada 76.9 100,000 CAD – 0SKF del Peru S.A., Peru 100 2,565,160 PES 3 0SKF Chilena S.A.I.C., Chile 100 88,192 CLP 468 0SKF Venezolana S.A., Venezuela 100 194,832 VEB 195 0SKF South East Asia & Pacific Pte Ltd., Singapore 100 1,000,000 SGD 1 0PT. Skefindo Primatama, Indonesia 5.0 5 IDR 5 1SKF Pakistan Private Limited, Pakistan 100 1,781,293 PKR 18 2SKF New Zealand Limited, New Zealand 100 375,000 NZD 1 0SKF Lubrication Competence Center Nordic Region AB, Linköping, 100 1,000 SEK 0 8SwedenSKF Eurotrade AB, Göteborg, Sweden 100 83,500 SEK 8 12SKF Multitec AB, Helsingborg, Sweden 100 29,500 SEK 3 5Monitoring Control Center MCC AB, Kiruna, Sweden 67.5 3,375 SEK 0 1SKF Condition Monitoring Center (Luleå) AB, Luleå, Sweden 100 5,000 SEK 1 10Carried forward 3,22686 Notes Parent Company

6 Investments in subsidiaries, jointly controlled and associated companies (cont.)Name and locationHoldingin percentNumber ofsharesCurrencyNominalvalue in localcurrency, millionsBookvalueCarried forward 3,226Other CompaniesSKF (U.K.) Corporate Holdings Ltd., United Kingdom 20.0 6,965,000 GBP 7 120SKF Holding Maatschappij Holland B.V., The Netherlands 100 60,002 EUR 27 5,042SKF Engineering & Research Services B.V., The Netherlands 13.4 121 EUR 0 8SKF Verwaltungs AG, Switzerland 100 500 CHF 0 502SKF Holding Mexicana, S.A. de C.V., Mexico 98.0 2,268,763 MXN 2 120SKF (China) Investment Co. Ltd., Peoples Republic of China 100 – USD 85 602Barseco (Pty) Ltd., South Africa 100 300 ZAR 0 62SKF Australia (Manufacturing) Pty. Ltd., Australia 100 1,000,000 AUD 2 0SKF (Thailand) Ltd, Thailand 92.4 1,847,000 THB 185 37Scandrive Control AB,Göteborg, Sweden 100 5,000 SEK 1 8SKF International AB, Göteborg, Sweden 100 20,000 SEK 20 320Återförsäkringsaktiebolaget SKF, Göteborg, Sweden 100 30,000 SEK 30 80SKF Förvaltning AB, Göteborg, Sweden 100 125,000 SEK 13 40SKF Fondförvaltning AB, Göteborg, Sweden 100 10,000 SEK 1 1Bagaregården 16:7 KB, Göteborg, Sweden 99.9 – SEK 46 1) 46Other holdings 010,2141)As the nominal value, the Parent company’s share of the equity in the limited partnership company is disclosed.Investments in major SKF subsidiaries held by other subsidiariesName and locationHolding inpercentOwned bysubsidiary in:SKF GmbH, Schweinfurt, Germany 99.9 The NetherlandsSKF Industrie S.p.A, Turin, Italy 100 The NetherlandsSKF France S.A., Montigny-le-Bretonneux , France 100 FranceSociété de Mécanique S.A, Vernon, France 99.4 FranceSKF (U.K.) Ltd., Luton, U.K. 100 United KingdomSKF China Ltd., Hong Kong, China 100 Hong KongSKF India Ltd., Mumbai, India 0.4 SwedenSKF India Ltd., Mumbai, India 6.5 United KingdomOfficine Meccaniche di Villar Perosa S.r.l., Villar Perosa, Italy 100 ItalyRFT S.p.A., Turin, Italy 100 ItalyWilly Vogel AG, Berlin, Germany 100 GermanySKF Aerospace France, Saint-Vallier-sur-Rhône, France 100 FranceSKF Argentina S.A., Buenos Aires, Argentina 10.1 AustriaSKF de Mexico S.A. de C.V., Puebla, Pue, Mexico 67.6 MexicoSKF Canada Ltd., Scarborough, Canada 23.1 The NetherlandsSKF Sealing Solutions GmbH, Leverkusen-Opladen, Germany 100 GermanySKF Bearing Industries (Malaysia), Sdn.Bhd., Nilai, Malaysia 100 The NetherlandsSKF Linearsysteme GmbH, Schweinfurt, Germany 100 GermanySKF Japan Ltd., Tokyo, Japan 100 The NetherlandsSKF B.V., Nieuwegein, The Netherlands 100 The NetherlandsSKF Bearing Services Taiwan Ltd., Taipei, Taiwan 100 The NetherlandsSKF Sverige AB, Göteborg, Sweden 100 SwedenSKF Mekan AB, Katrineholm, Sweden 100 SwedenEconomos Austria GmbH, Judenburg, Austria 100 AustriaSNFA SA, Valenciennes, France 100 FranceSKF Polyseal Inc., Salt Lake City, USA 51.0 USAJaeger Industrial Co, Ltd., Taipei, Taiwan 100 TaiwanABBA Linear Technology Co, Ltd., Taipei, Taiwan 99.3 TaiwanDalian SKF Wazhou Bearings Co, Ltd, Wufangtium, Peoples Republic of China 51.0 Peoples Republic of ChinaBeijing Nankou SKF Railway Bearings Co, Ltd., Peking, Peoples Republic of China 51.0 Peoples Republic of ChinaSKF Sealing Solution (Wuho) Co. Ltd., Anhui, Peoples Republic of China 100 Peoples Republic of ChinaNotes Parent Company 87

7 Investments in equity securitiesName and locationHoldingin percentNumberof sharesCurrencyNominalvalue in localcurrency, millionsWafangdian Bearing Company Limited, China 19.7 79,300,000 CNY 79 535NN, Inc., USA 4.5 700,000 USD 7 43Other shares and securities 10Bookvalue,SEKm5888 Other short-term assetsSEKm 2007 2006Other current receivables 216 166Prepaid expenses and accrued income 29 46245 2129 Provisions for pensions and similar commitmentsAmount recognised in the balance sheet (SEKm) 2007 2006Present value of unfunded pension obligations 119 113Present value of funded pension obligations 144 134Less: Fair value of plan assets -130 -125Net provisions for pensions and similar commitments 133 122For description of pension benefits, see Note 20 to the consolidated financial statements.Components of pension expense (SEKm) 2007 2006Pension cost excluding interest cost 6 5Interest cost 5 4Return on assets -5 -5Pension insurance premiums 47 44Total pension expense 53 4888 Notes Parent Company

10 Long-term loans2007 2006SEKmBookvalueFairvalueBookvalueFairvalueBonds and debentures 7,072 6,850 7,015 6,837The current portion of long-term loans is included in short-termloans, see Note 11. Fair value has been calculated by discountingfuture cash flows at the market interest rate for each maturity.2007 2006Long-term loans outstanding at 31 December, per currency Amount Interest rate % AmountEUR 7,072 3.00 - 4.25 7,0157,072 7,015The long-term bond loans in EUR consist of SEK 4,714 m which has afixed interest rate until maturity in 2013 and SEK 2,358 m which hasa fixed interest rate until maturity in 2010.11 Short-term loansSEKm 2007 2006Current portion of long-term loans 268 66512 Other short-term liabilitiesSEKm 2007 2006Other short-term liabilities 6 8Accrued expenses and deferred income 210 217216 225Accrued expenses and deferred income include accrued interest of SEK 46 m (68).13 Assets pledgedSEKm 2007 2006Current financial receivables 0 014 Contingent liabilitiesSEKm 2007 2006Guarantees in respect of subsidiaries’ obligations 0 0Other guarantees and contingent liabilities 3 33 3See Note 25 to the consolidated financial statements for information on other commitments related to the jointly controlled entity Oy Ovako Ab.Notes Parent Company 89

15 Salaries, wages, other remunerations, average number of employeesand men and women in Management and BoardFor the average number of employees – see Note 29 to the consolidatedfinancial statements. For men and women in management and onthe Board – see Note 31 to the consolidated financial statements.For information regarding other benefits to the Board and Presidentand fees for statutory auditors – see Note 27 and 28 to the consolidatedfinancial statements.SEKm 2007 2006Salaries, wages and other remuneration 228 186Social charges (whereof pension cost) 130 (53) 96 (48)16 Absence due to illness2007 2006Total absence due to illness as a percentage of entire ordinary working hours 0.6% 0.8%• absence due to illness, men 0.5% 0.3%• absence due to illness, women 0.8% 1.4%• employed age –29 0.8% 0.2%• employed age 30 – 49 0.6% 0.9%• employed age 50 – 0.5% 0.8%• long-time absence due to illness (60 days or more) as a percentageof total absence due to illness 5.6% 31.7%17 Events after the balance sheet dateSee Note 32 to the consolidated financial statements.18 Related partiesInformation regarding sales to and costs invoiced from subsidiaries isincluded in the Administration report. Financial income from andfinancial expenses to subsidiaries and jointly controlled and associatedcompanies is presented in Note 2. Assets and liabilities attributable tosubsidiaries and jointly controlled and associated companies ispresented in the balance sheet.For related party transactions involving key management,see Note 27 to the consolidated financial statements.90 Notes Parent Company

Proposed distribution of surplusRetained earnings SEK 5,125,258,178Net profit for the year SEK 1,733,525,043Total surplus SEK 6,858,783,221The Board of Directors and the President recommendto the shareholders, a dividend of SEK 5.00 per share 1) SEK 2,276,755,340 2)to be carried forward SEK 4,582,027,8811)Suggested record day for right to dividend, April 21, 2008.2)Board Members’ statement: The members of the Board are of the opinion that the proposed dividend is justifiable consideringthe demands on Company and Group equity imposed by the type, scope and risks of the business and with regards to the Company’sand the Group’s financial strength, liquidity and overall position. Shareholders’ equity would have been 361,108,950 Swedishkronor lower if financial assets, which have been evaluated according to Chapter 4, 14§ a Annual Accounts Act, had been valuedin accordance with lower of cost and net realizable value.SEK 6,858,783,221The results of operations and the financial position of the Parent Company, AB SKF, and the Group for the year 2007are given in the income statements and in the balance sheets together with related notes.The Board of Directors and the President certify that the annual financial report has been prepared in accordance withgenerally accepted accounting principles and that the consolidated accounts have been prepared in accordance with the internationalset of accounting standards referred to in Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002on the application of international accounting standards, and give a true and fair view of the position and profit or loss of the Company andthe Group, and that the management report for the Company and for the Group gives a fair review of the development and performanceof the business, position and profit or loss of the Company and the Group, and describes the principal risks and uncertaintiesthat the Company and the companies in the Group face.Stockholm, January 31, 2008Anders ScharpVito H BaumgartnerUlla LitzénClas Åke HedströmTom JohnstoneWinnie FokLeif ÖstlingEckhard CordesHans-Olov OlssonLena Treschow TorellGöran JohanssonLennart LarssonKennet CarlssonJeanette StenborgOur auditors’ report for this Annual Report and the consolidated Annual Report was issued January 31, 2008.KPMG Bohlins AktiebolagThomas ThielAuthorized public accountantProposed distribution of surplus 91

Auditors’ reportTo the Annual General Meeting of the shareholders of AB SKF. Corporate identity number 556007-3495We have audited the annual accounts, the consolidated accounts, theaccounting records and the administration of the Board of directorsand the Managing Director of AB SKF for the year 2007. The annualaccounts and the consolidated accounts are presented in the printedversion of this document on pages 6-91. The Board of directors andthe Managing Director are responsible for these accounts and theadministration of the company as well as for the application of theAnnual Accounts Act when preparing the annual accounts and theapplication of International Financial Reporting Standards IFRSs asadopted by the EU and the Annual Accounts Act when preparing theconsolidated accounts. Our responsibility is to express an opinion onthe annual accounts, the consolidated accounts and the administrationbased on our audit.We conducted our audit in accordance with generally acceptedauditing standards in Sweden. Those standards require that we planand perform the audit to obtain high but not absolute assurancethat the annual accounts and the consolidated accounts are free ofmaterial misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the accounts. Anaudit also includes assessing the accounting principles used and theirapplication by the Board of directors and the Managing director andsignificant estimates made by the Board of directors and the Managingdirector when preparing the annual accounts and the consolidatedaccounts as well as evaluating the overall presentation of informationin the annual accounts and the consolidated accounts. As a basis forour opinion concerning discharge from liability, we examined significantdecisions, actions taken and circumstances of the company in order tobe able to determine the liability, if any, to the company of any boardmember or the managing director. We also examined whether anyboard member or the Managing director has, in any other way, actedin contravention of the Companies Act, the Annual Accounts Act or theArticles of Association. We believe that our audit provides a reasonablebasis for our opinion set out below.The annual accounts have been prepared in accordance with theAnnual Accounts Act and give a true and fair view of the company’sfinancial position and results of operations in accordance with generallyaccepted accounting principles in Sweden. The consolidated accountshave been prepared in accordance with International FinancialReporting Standards IFRSs as adopted by the EU and the AnnualAccounts Act and give a true and fair view of the Group’s financialposition and results of operations. The statutory administrationreport is consistent with the other parts of the annual accounts andthe consolidated accounts.We recommend to the Annual General Meeting of shareholdersthat the income statements and balance sheets of the Parentcompany and the Group be adopted, that the profit of the Parentcompany be dealt with in accordance with the proposal in theadministration report and that the members of the Board ofdirectors and the Managing director be discharged from liabilityfor the financial year.Göteborg, 31 January 2008KPMG Bohlins AktiebolagThomas ThielAuthorized Public Accountant92 Auditors’ report

SKF’s business is divided into three divisions, each focusing onspecific customer groups worldwide. The divisions are interdependent,however, in that they constitute a market within theSKF Group with products, services and know-how on offer to eachother to enable any of the divisions to serve its final customers.To obtain a better understanding of the business concept,see also page 21, SKF – the knowledge engineering company.The SKF divisionsContent94 Industrial Division98 Service Division102 Automotive Division106 Awards

Industrial DivisionThe Industrial Division is responsible for sales to industrial OriginalEquipment Manufacturer (OEM) customers and for the product developmentand production of a wide range of bearings (in particular spherical andcylindrical roller bearings, angular contact ball bearings, medium deep grooveball bearings and high precision bearings), lubrication systems, linear motionproducts, by-wire systems and couplings. The division has four specializedbusiness areas: Aerospace & High Precision Bearings, Railways, LubricationSystems, and Actuation & Motion Control.Henrik LangePresident, Industrial DivisionWe provide and develop products and solutionsfor our OEM customers in many customersegments. To continue developing oursales growth we use a customer key accountmanagement to serve various technologicaland industry leading customers. This enablesus to better meet their needs and developsolutions for them. The five SKF technologyplatforms play an important role in identifyingsolutions meeting these specific industryrequirements.Net sales in 2007 amounted to SEK 19,266million (17,176). Sales including intra-Groupsales totalled SEK 29,318 million (26,698).The operating profit was SEK 3,430 million(3,027), with an operating margin of 11.7%(11.3). The operating profit includes a chargefor restructuring activities of around SEK 30(210) million during the fourth quarter.The increase in net sales was attributableto organic growth 10.0%, structure 5.0% andcurrency effects -2.8%. Structure wasrelated to the acquisitions of ABBA LinearTech Co., Ltd in 2007 and SNFA SAS in 2006.Sales were significantly higher in Europeand Asia and higher in North America. Somesegments that showed significantly highersales were energy, heavy industrial machinery,off-highway vehicles, aerospace and railways.The global wind energy industry experiencedanother year of significant growth.Sales to the wind energy industry were significantlyhigher compared with 2006 in Asia,North America and Europe. We are activelyworking closely together with leading windturbine and gearbox manufacturers in thisfast growing market segment. As one example,we entered during the year a long termsupply agreement with Suzlon Energy Ltd.Off-highway is another segment thatshowed strong growth. SKF and Caterpillarforged a strategic partnership in 2007. Theaim of the partnership is to accelerate theleveraging of our mutual global manufacturingfootprints, technical expertise, andknowledge for joint growth. Collaborativeprojects utilizing Six Sigma methodology arerun in order to promote fact based decisionmaking in improving product and process,including extended field life and optimizedservice intervals for the diversified and broadvehicle range in the Caterpillar product line.We also developed a parking brake-bywiresolution for tractors together with aleading manufacturer. It is a brake and safetysolution that is activated and released automatically,for example when the driverswitches off the motor or opens a door, orwhen the vehicle starts moving. The launchwill be made during 2008.Global air traffic continued to grow stronglyin 2007. The organic sales and production ofbearings, components and fly-by-wire equipmentfor the fixed wing aircraft, helicopter andjet engine markets were significantly higherthan in 2006. In addition to organic growth, theSNFA aero engine business was integrated withSKF Aerospace in 2007 to further enhance our94 Industrial Division

factory in Russia for tapered roller bearingunits strengthens our position to and presencein the fast growing Russian railwaymarket.As an example we signed a contract withBombardier Transportation to supply thetapered roller bearing units used for axle boxapplications on the Île de France suburbantrains. The total contract value would bearound EUR 5 million including options foradditional orders. The new suburban traingeneration will be run by the French railwaysSNCF and will serve the Greater Paris / Île deFrance area. The first trains will start runningin 2009.SKF utilizes proprietary system calculations and Design For Six Sigma methodology in collaborationwith Caterpillar to optimise vehicle system performance and new product introduction.offer to the aerospace market. In 2007 we machine tool, renewable energy and offhighway.New lubrication application centersentered a partnership with GE Aviation toestablish a new company, which will manufactureand refurbish bearings for GE’s engines for Africa, Canada, UK and Spain. They act aswere opened in China, India, Brazil, Southlarge aircraft.local providers of engineering support andThe high precision machine tool segment suppliers of lubrication systems and servicesgrew significantly in 2007 compared to 2006. to end-users in the respective markets.Our offer portfolio has been strengthened by The railway industry demands modernthe SNFA acquisition which had a favourable rolling stock solutions with high safety andimpact on both our sales and manufacturing reliability as well as low lifecycle cost. We areunits serving this market.participating very successfully in this globalOur sales to the global lubrication system trend with several prestigious train developmentprojects for passenger and freight cars.market progressed very positively and thedemand for SKF lubrication solutions was Major orders for freight car wheel-set bearingsignificantly higher compared with last year. solutions were secured, specifically in Europe,Growth was mainly achieved in the segments China and Russia. The decision to build a newDeveloping value added solutions for theindustrial marketWe have developed and launched some 60 new,specific industrial offers since the beginningof 2005, aimed at expanding SKF’s businessin the target industries. This will, for example,help to produce greater operational reliability,productivity and reduce the maintenancecosts of the machine or application.Solutions for continuous castingin metal industryFrom 2005 to 2007 SKF has launched acomprehensive offer portfolio to the continuouscasting industry that demonstrates oursingle face to the market with the ServiceDivision. Today we can offer customers aself-aligning bearing system with a sealedoption. SKF ConRo, both for top and lowersegments in the continuous casting process,is a sealed relubrication free unit and todayan established offer in our portfolio for thisContinuous casters operate in an extremely harshenvironment. High temperatures, heavy loads,large volumes of water and contamination presenta challenge to equipment reliability andproductivity.In response, SKF has developed a sealed, relubrication-freeroller unit incorporating bearings,housings, lubricant, seals and roll bodies called SKFConRo. Designed for improved reliability, it eliminatesthe problems and costs associated with thegrease systems found on conventional casters.Significant cost savings result as grease consumptionand maintenance downtime fall.Industrial Division 95

SKF launched the SKF Agri Hub for manufacturers of agriculture attachmentsduring 2007. This new hub solution for tillage discs is supplied as a completelyintegrated, relubrication-free unit, which is easy to fit and reduces maintenance.Productivity can be increased by up to 150%, based on SKF’s tests. TheSKF Agri Hub sealing solution protects the environment from pollution by minimizingthe risk of grease leakage for the duration of the hub’s service life.industry. Utilizing our technologies in reliabilitysystems, we have also developed andlaunched SKF Caster Analyst, a tool thatmeasures running conditions in the steelmaking process more precisely. This placesus in a strong position to meet specificrequirements from our customers in thisvery challenging industry.Greater farm productivityIn 2007 we launched SKF Agri Hub for tillagediscs, which is a relubrication-free solutionfor agricultural implements. The farmer’sgreater demand for higher productivity andalso greater respect for the environment areboth met with the SKF Agri Hub. Farm productivitycan be increased by up to 150%,based on SKF’s extensive testing.Energy-efficient bearings and solutionsOur launch of new energy-efficient bearingstook place in February 2007. These productsand many other SKF solutions are goodexamples of our business care from a sustainabilityperspective. They open up opportunitiesfor developing energy-efficientsolutions in various industrial equipments.Lubrication system for machine tool spindlesSKF Lubrication Systems has developed anddelivered a compact robust oil and air lubricationunit for the machine tool industry.Incorporating an air cleaner, oil lubricationunit and optical sensors, this system providesthe optimum quantity of lubrication to amachine tool spindle. The systems have beendelivered worldwide to machine tool andspindle manufacturers as well as to SKF factories.Minimizing the lubrication is highlycost-effective, coupled with the more sustainableapproach.AcquisitionsThe Taiwanese based ABBA Linear Tech Co.,Ltd., a leading Asian manufacturer of linearguides, was acquired in the second quarter.Through this acquisition SKF gains anextended product range and additional saleschannels in the Asian market.In the fourth quarter we also acquiredS2M, which is leading in the market of magneticlevitated bearings. SKF was previouslya minority shareholder in the company.S2M is based in Vernon, France and hashistorically been focused on application segmentsthat include vacuum pumps, turboexpanders and compressors, mainly for theoil and gas industry, as well as small air andgas compressors. The acquisition of S2M fitsin with our existing business with the abovementioned industry segments, both geographicallyand from a product range viewpoint.The acquisition widens our range ofmagnetic bearings.Excellence in productdevelopment and manufacturingWe are using Six Sigma to achieve operationalexcellence and to ensure that variations areeliminated in all our processes. One part ofSix Sigma is the Design for Six Sigma (DfSS)methodology, which we successfully use inour own product development. Over the yearwe trained over 100 OEM customers in thismethodology.The roll-out of reaching manufacturingexcellence, focusing on reliability and flexibility,has now expanded to cover all bearingfactories in the Industrial Division. In terms offlexibility we continued to see double-digitimprovements in resetting times in severalfactories.The supply of raw material and componentswas very tight throughout 2007. A lot of effortduring the year focused on both securingsupply for the coming years and the releasesof new suppliers.Expanding manufacturingbase of large sized bearingsThe new large size bearing factory in Dalian,China had a very good start and the ramp uphas been ahead of plan. Customer interest forthis new capacity has been very high.To further satisfy the global market demandfor large size bearings we decided to invest ina new large size bearing factory in India in96 Industrial Division

2007. The factory will be built in the Gujaratregion. First production is expected by thefirst quarter 2009. By doing this we arewell positioned to support the strong Indianmarket, primarily for the energy and heavyindustry segments.To further satisfy the market growth forlarge size bearings, we have made significantcapacity investment in our existing manufacturingsites in Europe and North America.Moving forwardThe division will continue to create and capturevalue in the industrial market throughlaunching new market offers to new andcurrent customers and through an enhancedkey account management structure. The aimis to continue to grow both organically and viaacquisitions. In 2008, the integration of bothABBA Linear Tech Co., Ltd. and S2M will continue,at the same time as new acquisitionswill be targeted. In manufacturing, the drivefor operational excellence will continue tofurther improve flexibility and reliability.Capacity will increase by both eliminatingbottlenecks at existing factories and rampingup recently installed capacity invested induring 2007.Henrik LangeThe SKF industrial market is divided intosome 30 industrial customer segments.Those segments are for the OEM’s salesgrouped into eight main customer categoriesbased on SKF’s portfolio of platform offerings,see chart below.General industryFluid power, industrial gearboxes andmaterial handling.Special industrial machineryFood & beverage, machine tools, marine,medical & health care, printing & packing,and textile.IndustrialAerospaceBearings, structural components and sealsto the aerospace markets with producers ofboth aero engines and airframes.Heavy industrial machineryMetalworking (steel), mining, pulp & paperRailwayAxleboxes and sensorized bearing solutionsfor the railway industry, freight cars, locomotives,multiple units and high-speed vehicles.Off-highwayConstruction, farm & forestry, lift truckdrives (so called non-public road vehicles.)EnergyRenewable power (e.g wind energy), oil & gas,and non-renewable energy industrymachineries.OtherOther businessesNet sales by customer segmentNet sales by geographic areaEnergy 9%Special industrialmachinery 19%Off-highway 8%Railway 8%Heavy industrialmachinery 9%Other 11%General industry 20%Aerospace 16%NorthAmerica 18%Asia/Pacific 10%WesternEurope 72%Sales, SEKm*Net salesSales incl. intra-Group salesOperating profit, SEKm*Additions to property,plant and equipment, SEKm*Registered numberof employees*30,00025,00020,00015,00010,0005,0000200514,82123,69517,17626,698200619,26629,31820073,5002,8002,1001,40070002,37420053,02720063,43020071,2009006003000769200591120061,082200720,00015,00010,0005,000016,513200517,760200618,6502007* Previously published figures have been reclassified to conform to Group structure 2007.Industrial Division 97

Service DivisionThe Service Division is responsible for sales to the industrial aftermarket, mainlyvia a network of around 7,000 distributor locations. In addition to the sales ofproducts, the division supports customers with knowledge-based servicesolutions to optimize plant asset efficiency through consulting and mechanicalservices, predictive and preventive maintenance, condition monitoring, decisionsupportsystems and performance-based contracts. SKF Logistics Services dealswith logistics and distribution for both the SKF Group and external customers. TheService Division is also responsible for all SKF sales in certain smaller markets.Phil KnightsPresident, Service DivisionThe Service Division’s strong performancefor 2007 can be attributed to the continuedsuccessful implementation of our distributordevelopment programme, growth inReliability Systems, both organically andthrough acquisitions, additional new customersin logistic services and favourable economicconditions.Net sales for the division in 2007amounted to SEK 19,597 million (17,984).Sales including intra-Group sales totalledSEK 21,393 million (19,761). The operatingprofit was SEK 2,846 million (2,362), with anoperating margin of 13.3% (12.0).The increase in net sales was attributableto organic growth 12.0%, structure 0.8% andcurrency effects -3.8%.Sales were significantly higher in all regions.Market approachAlong with the Industrial Division, we continuedto apply SKF’s knowledge in developingour industry segment market approach thatfocuses on lowering customers’ Total Cost ofOwnership (TCO) and increasing productivity.Numerous new market offers were launchedin 2007 to the food & beverage, mining, metals,pulp & paper and oil & gas.Our key account management teams providededicated resources to specific customerswho are industrial and technologicalleaders in their industries. These focusedteams have greatly contributed to enhancingour value added TCO propositions and thesales growth for both the Service andIndustrial Divisions.Consisting of three modules – Analyst,Inspector, and Observer – the SKF@ptitude Monitoring Suite forms thebasis for a completely integratedapproach to condition monitoring. Thesoftware program enabling fast, efficientand reliable storage, manipulation andretrieval of large amounts of complexmachine and plant information. Designedfrom the ground up with robust opendatabases and the familiar Windows ®interface, this powerful software acceptsdata from the full range of SKF data collectiondevices. It interfaces with SKF@ptitude Decision Support to facilitateconsistent, reliable decision-making.The SKF Document Solution Program(DSP) allows SKF representatives to calculate,with end-user customers, the plant savingsthey can realize utilizing SKF’s productsand service solutions. Using the customer’sown data, it computes return on investment,breakeven analysis and expected and actualrate of return. This proprietary web-basedprogram continues to build important benchmarkingdata as customers seek plant maintenanceimprovements. In 2007, more than3,400 savings calculations have been approvedby customers totalling more thanSEK 2,000 million. A version of the DSP forour distributors called DVP was developedand launched during the year.Industrial distributionIn celebration of SKF’s 100th anniversary, wehad our first truly global industrial distributorconvention. Over 1,200 distributor delegatesfrom 105 countries attended a three-dayevent in Göteborg, Sweden where our pastsuccesses and future plans were shared withthese key partners. Of particular interest wasthe success of our distributor developmentprogramme, “More with SKF” that waslaunched five years ago. This confirmationhas inspired us to further continue its developmentto provide our distributor partnerswith the tools and support to create differentiationwith value added solutions, utilizingSKF’s products, services and logistics. Thisstrategic partnership programme helps SKFAuthorized Distributors to profitably meetthe increasing demands from end-user98 Service Division

Two new demonstration trucks hit the road in 2007, visiting European distributorsand end-users. These trucks have been specially designed to exhibit anddemonstrate SKF Maintenance Products and services. The trucks have moderninteriors providing an exhibition area and training room. A wide range ofSKF maintenance and lubrication products are available on the trucks alongwith equipment for demonstrating mounting and dismounting techniques.The trucks have been equipped with energy saving solar panels.customers for more value and reduced totalcost of ownership. The following activities in2007 strengthened our distributor programme:• Expansion of SKF’s 360° Solution programmeinto additional industries. Thesesolutions coordinate the distributor andSKF values to solve end-user customers’specific application problems.• SKF Distributor College is an effective webbasedtool for building a solid knowledgebase among distributor employees and forquickly introducing new employees to ourbusiness. It provides a solid base fromwhich distributor personnel can sell effectivesolutions and boost customer satisfaction.The training portal features coursesthat help distributors become more successfulin virtually all areas of business.There are courses on SKF’s products, servicesand industries, as well as business,marketing and selling. The interactivetraining design includes animations, roleplaysand tests, making the learning processengaging and effective. Currentlythere are 28 courses in 12 languages. In2007, eight new courses were introduced.• The new line of SKF power transmissionproducts introduced in selected markets2006 was expanded into the Europeanmarket in 2007. The comprehensive productrange includes a full assortment of V-belts, pulleys/sheaves, synchronous belts,synchronous sprockets, roller chain,sprockets, couplings, bushings and hubs.These new SKF-branded products are alogical extension to the complete SKF offerby our distributor partners. This gives customersa single source for all their bearing,seals and power transmission related productsfrom their SKF distributor, whichreduces their transaction costs.SKF Certified Maintenance PartnersThe SKF Certified Maintenance Partner(CMP) programme provides an excellentopportunity for qualified distributors to offeradded value to end-user customers withentry-level maintenance and reliability services,which are reinforced by SKF ReliabilitySystems’ more advanced capabilities. Weexpect these partnerships to continue togrow as MRO (Maintenance and RepairOperations) customers favour distributorswho are able to provide more value.New to our SKF certification partnershipportfolio in 2007 was the introduction of theSKF Certified Rebuilder programme for electricmotors. The programme extends the collaborativenetwork between SKF, selectedrepair/service firms, and participating SKFAuthorized Distributors, CMP’s and SKFReliability Systems.Electric motors are among the highest inreliability incident reports, a problem thatleads to a continual cycle of costly repair andunplanned downtime. While bearing failureis a symptom of motor failure, many motorrebuilders are not trained to investigate theunderlining causes of failure like impropermaintenance, handling, or installation.SKF Certified Rebuilders undergo specializedtraining in motor repair with emphasison conformance to exact SKF specificationsand standards, root cause failure analysis,bearing installation, lubrication and conditionmonitoring. The rebuilder firms are auditedand re-certified regularly, and the repairs aredone using SKF’s products.New productsWe continue to expand our product offer toend-users with new or improved bearingrelatedproducts as well as maintenance andcondition monitoring products and services.Some of our new offerings can be found onpage 22 in the technology section of thisreport.Two important new tools for the ReliabilitySystems business were launched during theyear:• The SKF@ptitude Monitoring Suite, a completeintegration of our previous conditionmonitoring software which consists ofthree modules – Analyst, Inspector, andObserver and it forms the basis for a completelyintegrated approach to conditionmonitoring, allowing fast, effective reliabledata acquisition, storage, manipulation andretrieval of large amounts of complexmachine and plant information. Designedfrom the ground up with robust open databasesand the familiar Windows ® interface,this powerful software accepts data fromthe full range of SKF data collection devicesand interfaces with SKF @ptitude Decisionsupport to facilitate consistent, reliabledecision-making.Service Division 99

Electrical Repair Service Company, Inc (ERS) is one of the oldest and largestindependent electric motor service centres in the US and has teamed up withSKF to become the first SKF Certified Electric Motor Rebuilder. The SKFCertification Programme promotes new quality assurance standards forrebuilt electric motors. Extensive SKF training methods, investments inprecision equipment and the use of SKF products are required to meet thehigh standards set by SKF for certification. The certification process alsoaddresses many of the goals of ERS customers for longer motor life.• The SKF Client Needs Analysis for Energyand Sustainability, to helps companiesuncover energy waste and discover energysavings. It is an extensive, plant-wideassessment tool that identifies high-energyconsumption areas at an operation. Theassessment also examines chemical treatment,lubrication use and other operatingprocesses that could be improved to reducethe environmental impact. When wasteareas have been identified by the SKF ClientNeeds Analysis for Energy and Sustainability,we then offer a range of solutions to reducethem. SKF’s solutions can range frommachine upgrades to advanced machinemaintenance and condition monitoring.SKF Reliability SystemsSales by the Reliability Systems businesswere significantly higher in 2007 than in2006. Growth came both organically andthrough acquisitions and alliances.An alliance formed last year withMeridium, Inc., a leader in enterprise AssetPerformance Management (APM) software,increases our software range, services andsupport to customers globally. The agreementgrants SKF non-exclusive rights tolicense and distribute Meridium AssetPerformance Management System software.Additionally, we are a preferred service providerfor Meridium, providing consultation,training and services to facilitate implementingasset management methodologies fornew and existing customers. This alliance fitswell into SKF’s expanding asset managementservices portfolio, and extends Meridium’sglobal reach by leveraging SKF resources.The Meridium offer is a perfect complementto SKF’s Asset Efficiency Optimization (AEO)workflow approach, allowing us to fulfil theoptimization aspect of a “living program” forour clients.We acquired Baker Instruments Companyin the US in 2007, a leading manufacturer oftest and diagnostic instruments for electricmotor assessment. The condition monitoringtechnologies used by SKF were based onmeasurement of mechanical properties. Thismove into electric motor diagnostics is animportant addition to our technology. It supportsour new energy-efficiency solutionsactivity and is in line with the SKF Group’s movetowards supporting our customers in their sustainabilityefforts. It also adds substantialexpertise to our new Certified Electric MotorRebuilder offer.The US-based company, PreventiveMaintenance Company Inc. (PMCI), wasacquired in 2007. PMCI is a market leader inPredictive Maintenance (PdM) services forindustrial customers in the pulp & paper,metals, food, automotive and other industries.This acquisition strengthened SKFReliability Systems’ position in services, conditionmonitoring products and maintenancestrategies.We also acquired Automatic LubricationSystems (ALS) in Burlington, Canada. ALS isa leading service company to Canadianmobile transportation equipment and industrialmachinery customers for SKFLubrication systems.SKF has created a company together withone of China’s leading steel manufacturers,Baosteel Iron & Steel Group in Shanghai,where SKF holds 60% and managementresponsibility. The company will be responsiblefor maintenance and repair operationsrelated to bearings at the Baosteel Group.SKF and Aker Kvaerner established a partnershipin 2007 for condition based maintenancefor the offshore and onshore oil and gasindustry. Aker Kvaerner is a leading providerof maintenance, modification and operationservices in the North Sea. The agreementintegrates Aker Kvaerner’s competence inengineering, planning and maintenance withour expertise related to rotating equipment,bearing and lubrication technologies andcondition monitoring integration and analysis.The initial focus will be on customers andinstallations in the North Sea and onshore inNorway, with plans to expand internationally.Reliability services contractsWe continued to sign numerous major newperformance-based Integrated MaintenanceSolutions (IMS) contracts during 2007 andextend existing ones with customers aroundthe globe. These customers operate principallyin the food, paper, hydrocarbonprocessing and metals industries. We alsosigned numerous proactive reliability maintenanceand predictive maintenance contractswith customers worldwide.Two notable contracts are:• A long-term contract signed withArcelorMittal, the world’s number one steelcompany, as a preferred partner for bearingsand related products forArcelorMittal’s operations in Europe. Afterthe first implementation phase in Europe,the contract is planned to be expanded globally.During this period, ArcelorMittal andSKF will implement products and solutionsfocusing on Total Cost of Ownership (TCO)to reduce the significant cost for steel production.SKF will use the Documented100 Service Division

Solution Program (DSP) to document thesavings and cascade the concept to differentArcelorMittal sites.• A two-year IMS contract signed with theworld’s leading producer of bleached eucalyptuspulp, Brazilian company Aracruz,focuses on condition monitoring, lubrication,Operator Driven Reliability (ODR) andRisk Based Maintenance (RBM).Logistic servicesSKF Logistics Services provides warehousing,transportation, packaging and valueadded services for not only the SKF Groupworldwide, but also a growing list of othercompanies. Based on their wide expertise inindustrial logistics, SKF Logistics Servicesoffers over 40 third party manufacturers anintegrated logistics solution, providing themwith a competitive edge in costs, services andflexibility. Today, SKF Logistics Services managesa worldwide transportation networkoperating out of 28 locations around theworld, shipping to 170 countries and some50,000 customer destinations.SKF Logistics Services continued to attractnew customers over the year. Agfa Graphics,a leader in graphic pre-press, chose ourservices for global spare parts distributionand handling returns. For Metso Minerals, werun their distribution centre for spare andwear parts, primarily for Europe but also forglobal markets. We provide HAY SpeedUmformtechnik GmbH with warehousingservices and packaging support for theircomponents to European OEM’s manufacturingengines, gears and axles; and we alsooperate a central warehouse for distributionof PIAB AB’s industrial vacuum componentsand systems in the European market.Six SigmaDuring 2007 we continued to train projectsponsors in their role and responsibilities inSix Sigma. Training has also begun at ourReliability System Condition Monitoring unitsin Design for Six Sigma, the methodology forcreating robust and risk-free products. In theService Division, Six Sigma projects havecontributed to improving the supply chainefficiency of the industrial distribution inEurope, improving freight recovery costs andreducing time to market.Moving forwardOur forward direction for the Service Divisioncan be summed up in one phrase: “stay thecourse”. As stated in last year’s annualreport, end-user customers continue to seekgreater value from distributors and manufacturers.We will continue to expand our “Morewith SKF” distributor development programme.Additional Certified MaintenancePartners and Certified Rebuilders will berecruited, the product range will be expandedincluding further penetration of the mechanicalpower transmission product range, andadditional industry solutions will be added toour “360° Solution” programme. New acquisitionswill be sought to further extend our localreliability service capabilities and additionalsolutions introduced to our plant asset managementrange.Phil KnightsServiceNet sales by customer segmentNet sales by geographic areaService andservice-relatedproducts 17%Middle East /Africa 7%NorthAmerica 15%Bearings 83%Asia/Pacific 31%WesternEurope 27%LatinAmerica 10%EasternEurope 10%Sales, SEKm*Net salesSales incl. intra-Group salesOperating profit, SEKm*Additions to property,plant and equipment, SEKm*Registered numberof employees*25,00020,00015,00010,0005,00016,41918,08017,98419,76119,59721,3933,0002,0001,0002,1202,3622,8461007550254769986,0004,5003,0001,5005,0255,2795,7800200520062007020052006200702005200620070200520062007* Previously published figures have been reclassified to conform to Group structure 2007.Service Division 101

Automotive DivisionThe Automotive Division is responsible for sales to the manufacturers of cars,light trucks, heavy goods vehicles, buses, two-wheelers, household appliances,power tools, and electric motors and for the vehicle service market. The divisiondevelops and manufactures bearings, seals and related products and servicesolutions. Products include wheel hub bearing units, tapered roller bearings,small deep groove ball bearings, seals, specialist automotive products andcomplete repair kits for the vehicle service market including a new product linewith driveshafts and control velocity joints.Tryggve SthenPresident, Automotive DivisionNet sales in 2007 amounted to SEK 19,617million (17,869), an increase of 9.8%. Salesincluding intra-Group sales totalled SEK23,795 million (21,807). The operating profi twas SEK 1,154 million (946), with an operatingmargin of 4.8% (4.3). The operating profi tincludes restructuring activities of aroundSEK 270 (170) million during the fourthquarter. Excluding one-off charges, theoperating margin was 6.0%.The increase in net sales was attributableto organic growth 8.3%, structure 3.8%, currencyeffects -2.3%. Structure is attributableto the acquisitions in 2006 of EconomosAustria GmbH and Macrotech Polyseal Inc.and the currency effects come mainly fromNorth and Latin America.Sales to the car and light truck industry inEurope and North America were higher. Salesto the heavy truck industry in Europe weresignifi cantly higher and signifi cantly lower inNorth America. Sales to the vehicle servicemarket were signifi cantly higher in Europe,slightly higher in North America and signifi -cantly higher in Asia. Sales to the electricalbusiness and to two-wheelers producers weresignifi cantly higher in Europe and lower in Asia.In 2007, the Automotive Division focused on:• increasing the sales of value added solutionsto improve price and product offer mix• improving our market share in emergingmarkets• expanding our market share of thevehicle service market• improving our effi ciency and competitivenessin our operations• continuing the integration of SKF PolysealInc. and SKF Economos GmbH, both sealscompanies, acquired in 2006.Together with our customers we continuouslylook at developing and providing morefuel-effi cient, sustainable solutions.In line with the Group’s strategy of reducingvertical integration, SKF sold the forgingbusiness in Lüchow, Germany, to Hay SpeedUmformtechnik GmbH in the fi rst quarterof 2007.Car segmentWe are continuously increasing our competitivestrength through offering customized,value added solutions, which help our customersto save time and assembly costs.During the year we extended our range ofinnovative solutions that reduce friction andhelp save energy. In line with our target ofcontributing to the energy-effi ciency of ourproducts, we launched a new high performancewheel bearing solution to extend serviceThe SKF Hybrid Pinion Unit consists ofa tapered roller bearing and angularcontact ball bearing, which improvessystem stiffness, reduces power lossand enhances bearing service life dueto optimized raceway profiles and morereliable lubrication conditions. Thisnew solution provides 30% frictionreduction compared to existing solutions.The fi rst customer for SKF’shybrid pinion unit is a major transmissionsupplier.102 Automotive Division

life and reduce fuel consumption. The newsolution contributes to a bearing frictionreduction of 20%, which directly helps toreduce CO 2emissions. We have also developeda new pinion unit solution providing 30%friction reduction compared to existing solutions.The first customer for the SKF’s hybridpinion unit is a major transmission supplier.Asia is the fastest growing market for theautomotive segment and one of SKF’s keymarkets. We continued to strengthen ourposition in 2007 by developing relationshipsand business with the Chinese companiesChery and Shanghai Automotive IndustryCooperation (SAIC). Production of productshas started on three new car programmes.As a result of new business acquired duringthe year, we expect the number of new productionprogrammes starting in 2008, to tripleto nine. To support the growing demand inAsia, three new factories were opened duringthe year. These are located in China for theproduction of bearings and in the Republicof Korea for the production of bearings andseals.We enjoyed strong growth in Europe andNorth America during the year. New businesswas acquired with, for instance, Renault, forthe new Renault Master platform, Fiat for anew Alfa Romeo platform and Ford for thenew Ford Focus generation in North America.In order to remain competitive in the NorthAmerican market we announced the closureof the manufacturing facility at Glasgow, andthe transfer of production to a factory atPuebla, Mexico, in December 2007.Truck segmentIn 2007, the global market continued itsstrong economic growth in all regions, exceptfor North America, where new emission legislationled to pre-buys in 2006 and a subsequentvery weak market in 2007.One key trend in the truck and trailer marketis the reduction of the cost of ownershipfor end-users, with the emphasis on lowmaintenance products. We are benefitingfrom this trend, as wheel end modules aregaining market share over more conventionalsolutions globally. In line with SKF’s target ofdelivering value added products, the trucksegment made some major launches in 2007.SKF and Haldex jointly developed an integratedhub unit for usage together with adual disc brake and fixed calliper. This is acompletely new solution for the commercialvehicle industry where the dual disc brakeshas a number of advantages for the user,mainly from a performance and usabilityperspective, but also the service lifecycle issignificantly improved in comparison to existingsolutions. The first customer is GIGANT,the German trailer axle company.To also save costs for end-users, we havedeveloped the wheel end monitor that helpscut back on unplanned stops and reduce preventativemaintenance and unnecessary bearingreplacement. The solution helps trackpossible damage and wear of trailer wheelbearings. We have gained our first order fromthe company Hendrickson in the USA.In 2007, we delivered the one millionthtruck hub unit to MAN and celebrated thislong lasting relationship by presenting MANwith a golden truck hub unit.The rapidly expanding emerging marketsare a priority area and we enjoy a strongposition on the Indian truck market. Duringthe year we followed the market’s growth andnew business was gained with leading truckmanufacturers, such as Tata Motors andMahindra.We are continuing our activities to improveour competitiveness and reduce costs. Thetransfer of production of small tapered rollerbearings from Germany to existing factoriesin Brazil and India continued in 2007. We arealso continuing to make good progress inincreasing component sourcing from Asiaand Eastern Europe.Vehicle Service Market (VSM)Our European vehicle service market salesenjoyed strong growth, clearly above the market’sgrowth figure. This was driven by addingmore than 20 new distributors during the yearand the addition of new references to the existingkit range, thereby further increasing ourcoverage of the European car pool.When SKF delivered its 1,000,000th truck hub unit to MANNutzfahrzeuge AG it was a perfect opportunity of passingover a token of its gratitude for many years trust and verypositive business relations. MAN was the first customer inGermany to switch over to SKF’s new truck hub units. TodaySKF is the sole supplier of MAN’s front axles.In the picture from left are Bernd Stephan, Director ofSKF business unit Trucks, Hans-Jürgen Dau, Plant ManagerLüchow and Dr.-Ing. Karl-Viktor Schaller, Board MemberTechnology and Purchasing of MAN Nutzfahrzeuge AG.Automotive Division 103

During the year vehicle service marketcontinued to strengthen itsaftermarket position by expandingits kit business and providing addedvalue and more features. A newproduct range including constantvelocity joint, driveshaft and bootkits was launched for the Europeanaftermarket. Constant velocity jointsare part of the driveshaft and fi ttedinto the wheel bearing on one sideand to the differential on the other.They transfer rotational energy fromthe engine, through the wheel bearingsand out to the drive wheels.We continued to strengthen our positionby expanding the business in kits withgreater value and added features. A newproduct line including constant velocity joints,drive shafts and boot kits was launched forthe European aftermarket. These productsare in line with the SKF’s target of reducingcustomer stock levels to improve theirprofi tability.In North America, our sales of car partswere rather strong, in particular during thesecond half of the year. Our sales of heavytruck parts declined during the year driven bya weak market. A new broader and morecompetitive line of tapered roller bearings forthe heavy truck market was launched duringthe year.We also enjoyed continued strong growthin the emerging markets of Eastern Europe.Furthermore we added several new distributorsto our Chinese network and increasedthe coverage of the Chinese car pool byextending the kit range.We are constantly aiming to provide thebest possible support to distributors in criticalareas such as marketing, logistics andtraining. One example is EXPONENTIA,a training concept run in cooperation withother Original Equipment (OE) suppliers likeValeo, Tenneco Inc. and TRW Automotive,which provide training and technical supportto garages in Europe. Gates Corporation, aleading OE brand in belts, joined EXPONENTIAin 2007. This much-appreciated trainingconcept strengthens the relationshipbetween SKF and garages and received twoGold Awards in 2007 for the best trainingformat in the independent aftermarket in Italyand for service innovations assigned by a juryof 82 journalists in Paris.Electrical segmentWe continued to expand our value addedbusiness in washing machine applications in2007 with sales of condition monitoring andcalculation as well as simulation tools. Thefi rst composite drums for front-loadedmachines have been developed and are nowtested with two major customers.Following the transfer of our customers’production to Eastern Europe, SKF Bulgariahas started deliveries to a number of customersincluding Electrolux and Arcelik.To further increase our competitivestrength, we announced a new restructuringscheme in December 2007. We decided toreduce the number of employees at theFontenay-le-Comte facility in France. This isanother important step in the SKF Group’songoing aim to reduce costs and improveeffi ciency at our operations.Two-wheeler segmentWe are well-positioned in Asia and a marketleader in both India and Indonesia. In 2007the two-wheeler market as well as SKF salescontinued to slow down and were signifi -cantly lower than in 2006, due to higherinterest rates and high fuel prices.104 Automotive Division

We have a strong position in India with theleading manufacturers Honda and Bajaj AutoLtd. We also gained business over the yearfrom Piaggio India for its renewed range ofthree-wheelers for passenger and goodstransportation. Due to cooperation involvingboth the two-wheeler and car segments, wealso gained business from Piaggio for wheelhub units for a four-wheeled light vehicle.Ducati in Europe renewed several of theirmodels during the year with a significantnumber of components from us.Sealing solutionsThe Automotive Division develops and producessealing solutions for the automotiveand industrial markets, as well as seals integratedinto bearings.In the automotive seals business, we havecontinued to develop business with key customersand to expand in Asia. Initial deliveriesfor a major order of bonded piston seals,which required an expansion of the factoryin the Republic of Korea has started. Wereceived a quality award from AW NorthCarolina Inc., a supplier of transmission partsto Toyota, for meeting stringent qualityrequirements for the past two years.In the industrial seals business, the twoacquisitions, SKF Polyseal Inc. and SKFEconomos GmbH made in 2006, were successfullyintegrated, and have furtherstrengthened SKF’s market position. To meetgrowth, a major expansion of the manufacturingfacility in Judenburg, Austria has beenstarted. 2007 was the first full year of thelaunch of a range of rubber outer diametershaft seals for industrial application in metricsizes, which has been very well received bythe market.In the bearing seals business, we havecontinued to successfully meet the in-housedemand for seals integrated into bearings,which has required both technological innovationand cost competitiveness.Moving forwardWe will continue our efforts to increase efficiencyin the North American and Europeanorganization in 2008, while expanding inemerging markets, particularly Asia, in orderto secure the full effect of investments.Another focus area is to expand the aftermarketbusiness globally, including the continuousextension of the product line. We willcontinue to grow globally in the industrialseals business following the acquisition of thetwo seals businesses.We are also aiming to further increaseSKF’s sales of value added solutions, byintensifying our work on product developmentand by fully leveraging our range in thedifferent platforms.Our range of energy-efficient bearings andsolutions is constantly growing and we have avery strong focus on extending our range ofinnovative solutions that help reduce emissionsand save energy.Tryggve SthenAutomotiveNet sales by customer segmentNet sales by geographic areaOther 16%Two-wheelers 3%NorthAmerica 20%Asia/Pacific 12%EasternEurope 1%Vehicle servicemarket 24%Cars 43%LatinAmerica 6%Trucks 14%WesternEurope 61%Sales, SEKm*Net salesSales incl. intra-Group salesOperating profit, SEKm*Additions to property,plant and equipment, SEKm*Registered numberof employees*25,00020,00015,00010,0005,00017,05020,88217,86921,80719,61723,7951,2009006003004999461,1541,2009006003007811,17677120,00015,00010,0005,00016,05316,83217,1850200520062007020052006200702005200620070200520062007* Previously published figures have been reclassified to conform to Group structure 2007.Automotive Division 105

AwardsThe quality of SKF’s products and services is highly esteemed. The following is a list of some of the awards received by the Group in 2007.Achievment Award, Quality and Delivery targets 2007 • Honda Motorcycle & Scooter, IndiaAsia Pacific Super Excellent Brand 2006/2007 • Asia Entrepreneur Alliance Worldwide (AEAW), MalaysiaATA Innovation Award • ATA, the Italian Member Society of FISITA, ItalyAutop (Top Five) certificate 2007/2008 • Autop, BrazilAward for Mobile Company • The Transportation Research Institute of Hasselt University, BelgiumBest Bearing Brand 2007 Award • AP Magazine Melhor Marca, PortugalBest Quality Award 2007 • Siemens Large Drives, GermanyBest Quality Supplier Award 2007/2008 • M/s Subros Auto Air-conditiong Systems, IndiaBest Supplier Award • Lucas TVS, ItalyBest Vendor Award • GEMI Motors India Pvt Ltd., IndiaThe Biggest Bearing Supplier for heavy application • Jornauto, BrazilCaterpillar MQ11005 Supplier Certification, bronze plaque • Caterpillar, PolandCertificate of Appreciation • California State Assembly, USACertified Data Supplier 2007 • TecDoc, GermanyFiat Qualitys Award • FIAT, BrazilGold Award for best Training format in the aftermarket 2007 • GIPA, ItalyGold Award for innovation in the services area in the aftermarket 2007 • Equip Auto, FranceHigh level of competence in the global performance evaluation 2006 • Picanol, BelgiumIUTI Award • Instituto Universitario de Tecnología Industrial – IUTI, VenezuelaOutstanding achievements in Safety and Health • Oklahoma Safety Council, USAPremier Supplier Award • Bell Helicopter, USAPrix d’Excellence 2007 • Swedish Chamber of Trade, FranceQuality Award • AWNC, USA2007 Safety Culture Award for excellence in successfully establishing safety as a value company • Oklahoma Department of Labor, USASHARP (Safety & Health Achievement Recognition Program) Award • Oklahoma Department of Labor, OSHA Division, USASupplier Management System - Excellence in general performance as a supplier • Voith Paper, Brazil2007 Supplier of the Year Award • Hans Hess, GermanyToyota Quality Award • Toyota, ItalyZero Defect Supplier • Remy International, Brazil106 Awards

SKF issued its first separate environmental report in 1994.Social, health and safety performances were subsequently addedin the environmental report, which became SKF’s SustainabilityReport. To emphasize that sustainability issues are embedded inall of SKF’s operations, financial and sustainability performancedata has been integrated in SKF’s Annual Report since 2002.This report is based on the applicable parts of the GlobalReporting Initiative’s G3 Guidelines and has been subject to anindependent review, in accordance with FAR SRS standard RevR 6Independent limited review of voluntary separate sustainabilityreport and AccountAbility’s AA1000 Assurance Standard.Sustainability ReportContent108 Organization, External principles and charters,Policies and management systems109 Stakeholder involvement and communication110 Awards and recognition110 Business Care113 Environmental Care118 Employee Care119 Community Care122 Key performance indicators,Transparency of information and Reporting scope124 Independent Assurance Report107

Sustainability at SKFAs a global company, SKF’s policy on sustainability is to work to thehighest standards in each country where it operates.The SKF Group has a significant sphere of environmental andsocial influence with factories and sales offices as well as a networkof 15,000 distributors in over 130 countries. Sustainability is takenseriously at SKF and is regarded as one of the success factors toachieve financial targets in a sustainable manner. It has thereforebeen incorporated as the fifth business driver for SKF, which areProfitability, Quality, Innovation, Speed and Sustainability.Sustainability at SKF centres on SKF Care approach to business,the environment, employees, and the community. In each section,SKF has established key focus areas and targets to drive continuousperformance improvement.BusinessCareBeyondZeroEnvironmentalCareSKF CareEmployeeCareCommunityCareOrganizationThe SKF Code of Conduct stipulates that it isthe duty of all SKF employees to be seen andacknowledged as economically, socially andethically responsible.The implementation of sustainability programmesis driven by the respective SKFdivisions and country management organizations.This is monitored and supported by theCorporate Sustainability Department, whichreports to the Senior Vice President, GroupHuman Resources and Sustainability.Follow-ups on sustainability performancefor the Group are submitted to the GroupManagement at a quarterly basis. Thisincludes Zero Accidents and carbon dioxideemissions reports. Group Management isalso updated at an annual basis on SKF’sISO 14001, OHSAS 18001 managementsystems and key performance indicators.The divisional presidents and humanresource directors are updated regularly onthe Group’s internal audit results on environment,health and safety as well as the SKFCode of Conduct.Industrial and Automotive Divisions withmanufacturing operations worldwide both haveduring the year appointed managers fully dedicatedto ensuring the successful implementationof sustainability programmes.In each country where the Group has manufacturingor logistics units, there is a countryco-ordinator who oversees environment,health and safety (EHS) at the local SKF facilitieswith the EHS site co-ordinators. Countryco-ordinators also act as liaison officers tothe corporate staff and a number of them aremembers of the corporate EHS audit team,who inspect SKF units at two-yearly intervalsto ensure compliance with Group standardsand national legislation.External principles and chartersGlobal CompactSKF has taken part in the United NationsGlobal Compact framework since September2006, with the aim of enforcing its Ten Principlesfocusing on human rights, labour, environmentand anti-corruption.Global Compact is an international voluntaryinitiative instituted by the United Nationsto realize the vision of having a more sustainableand inclusive global economy, whereboth the private and public sectors worktogether to identify and implement solutionsto the challenges of globalization.External chartersThe Business Charter for Sustainable Developmentwas issued by the International Chamberof Commerce (ICC) more than 10 years agoand SKF was quick to endorse it.As required by the ICC Charter, SKF appliesthe precautionary approach to the provision ofproducts and services. Regular assessments ofenvironmental risks and programmes for preventiveaction are a feature of the Group’s environmentalmanagement system.In addition, SKF adheres to the OECDGuidelines for Multinational Companies andthe ILO Declaration on Fundamental Principlesand Rights at Work.The OECD Guidelines for MultinationalEnterprises stress the importance of responsiblebusiness conduct by multinationalenterprises, owing to the crucial role playedby these enterprises in contributing to sustainabledevelopment via internationalinvestments as well as relationships betweensuppliers and contractors globally.Policies and management systemsThe SKF Code of ConductSKF’s responsibilities towards its customers,distributors, suppliers, employees, shareholdersand society, are defined in the SKFCode of Conduct, which has its roots in SKF’slong tradition as an international company.The formal document related to businessethics was first issued in 2002 and furtherunderpinned in 2007. It adheres to the GlobalCompact principles and the OECD Guidelinesfor Multinational Enterprises.As a monitoring procedure, SKF introducedinternal verification of all units’ compliancewith the Code of Conduct in 2004. The audit isintegrated into the ISO 14001 and OHSAS108 Sustainability Report

18001 audit processes and units are inspectedat two-yearly intervals by corporate auditteams.The SKF Code of Conduct was also addedto a new publication called the SKF Commitmentlaunched at the 2007 Group ManagementConference. This was to re-enforce theobligation of each employee in abiding by theCode of Conduct.The SKF Commitment is available in 17languages and it covers the SKF Vision, Mission,Drivers, Values and Code of Conduct.This booklet is intended for and distributed toall SKF employees but is also a useful communicationtool for other stakeholders aboutthe company’s corporate culture, way ofworking, brand and competitive advantages.The SKF Environmental,Health and Safety PolicySKF’s fi rst environmental policy was issued in1989. The policy is reviewed regularly andwas updated in 1994 and 1999. The policywas also revised in 2001 to increase theemphasis on health and safety.The SKF Environmental, Health and SafetyPolicy describes SKF’s commitment to bothshort- and long-term contributions in protectingthe environment as well as providinga safe working environment for employees.The minimum requirement is for laws andregulations to be upheld in relation to environmental,health and safety matters. Nonethelessthe policy also requires SKF units to take thesevital issues into consideration during all businessactivities and decision-making.The SKF Social PolicySKF issued its Social Policy in 2006 to promoteemployees’ involvement in commendablelocal social projects.The policy aims to support personal developmentfor less privileged people by promotingeducation, vocational training, localsports and health initiatives. This is carriedout through voluntary schemes run by SKFemployees and/or fi nancial contributions.Management systems for environment,health and safetySKF was the fi rst international bearing manufacturerto receive global certifi cation accordingto the ISO 14001 international standard forenvironmental management in 1998. Moreinformation can be found on page 114.The purpose of having global certifi cationis that all SKF companies are required tomaintain and uphold high performanceThe SKF Commitment covers SKF Vision, Mission,Drivers, Values and Code of Conduct.standards regardless of geographical locationsor social and economic conditions in thecountry. All SKF manufacturing sites, technicaland engineering centres and logisticslocations are covered in the audit except forrecently acquired companies, which arerequired to work towards the inclusion tomeet the SKF Group’s requirements andstandards.SKF was also the fi rst major bearing manufacturercertifi ed as meeting the internationalstandard for occupational health andsafety management – OHSAS 18001 – in2005.The implementation of OHSAS 18001Health and Safety Management System atSKF is to assist the Group’s drive towardsZero Accidents (work-related injuries and illness)at all units worldwide. This ensures thatall SKF units globally have the same highstandards in health and safety management.Further information on the SKF Zero Accidentsprogramme is on page 118.In 2007, these companies were added tothe Group’s ISO 14001 certifi cate: Jaegercompanies in Pinghu, China, and Taipei, Taiwan,Muurame, Finland, Pianezza, Italy, Dalian,China, and Valenciennes, France. Theseunits together with, Lutsk, Ukraine, andSopot, Bulgaria, were also included in theOHSAS 18001 certifi cation scope in 2007.The schedule for new acquisitions’ inclusion ison page 122.Stakeholder involvement and communicationMany stakeholders, namely shareholders,investors, customers, analysts, employees,suppliers, national and local authorities andcommunities have interests in SKF’s sustainabilityperformance.SKF takes a proactive approach in communicatingits sustainability initiatives and performanceto the stakeholders. This is doneregularly via various communication meanssuch as press releases, the SustainabilityReport (integrated in the Annual Report),company website, conferences and meetings.The communication approach ensures andunderpins SKF’s commitment and the integrityof sustainable development initiatives.More than 800 managers and directorsfrom SKF organizations worldwide gatheredat the 2007 Group Management Conferencestaged in Göteborg, Sweden. This was to celebrateSKF 100th Anniversary but also toenhance the strategic factors for ensuringSKF’s continual development and success.The strategic success factors include the SKFCommitment, Sustainability, ConnectingKnowledge and Six Sigma.The annual Capital Market Day was alsoheld in Göteborg where investors and analystsreceived updates on SKF’s performanceby the company’s Chief Executive Offi cer,Chief Financial Offi cer, and the divisionalpresidents.SKF also holds annual World Works Counciland European Works Council meetingwhere employee representatives meet withGroup Management to discuss matters ofimportance for the Group and employees.The most recent meeting was held in September2007 in Göteborg, Sweden.Communication of SKF’s commitment andexpectations particularly about sustainabilityperformance to suppliers also took place atthe annual SKF Supplier Conference. 50 globalsuppliers took part at the conference inGöteborg (March 2007) and 31 in India (April2007) respectively.Distributor conferences were also hostedin 2007 with sustainability as the conferencetheme where guest speakers such as RayAnderson, CEO and founder of Interface Inc. –a company world-renowned for its environmentalinitiatives – were invited.Apart from meetings and conferences,questionnaires from investment companies,fi nancial analysts, non-profi t making organizationsand university students are also vitalto provide feedback about SKF’s sustainabilityperformance. SKF’s Sustainability Reportis enforced by independent assurance toensure stakeholders receive transparent andcredible information.SKF joined the World Business Council forSustainable Development (WBCSD) in 2005,which is a coalition of about 200 multina-Sustainability Report 109

tional companies with a shared commitmentto sustainable development.Active participation in various businessorganizations such as the WBCSD and theAssociation of Swedish Engineering Industries(Teknikföretagen) enables SKF to entertalks with other multinationals on how tocontribute to ecologically-balanced andsocially-sound economic development.In addition, SKF collaborated with sevenother multinational fi rms in a forum calledRespect Table, which is coordinated byRespect and chaired by Margot Wallström,Vice President of the European Commission.Respect Table was established in partnershipwith UN Global Compact to bring aboutcorporate governance and sustainable developmentdiscussions among business andpolitical leaders. Together with the othermembers of Respect Table, SKF took part in aproject called Road to Copenhagen, organizedby Respect Table, Club of Madrid and GLOBEEurope. The fi rst event took place in Brussels(November 2007) to support to the GlobalLeadership for Climate Action (GLCA) whoseaim was to provide recommendations foraction to the UN Framework Convention onClimate Change (UNFCC) on the post-KyotoProtocol global agreement in Bali, Indonesia.Awards and recognitionThe Dow Jones Sustainability Index andFTSE4Good Index Series are two internationally-recognizedbenchmarking indexesrelated to multinational companies’ economical,environmental and social performances.SKF was included in the Dow Jones SustainabilityIndexes for the eighth year in successionsince the index was established in1999. SKF was classifi ed SAM Silver Class inthe Industrial Engineering sector. SKF wasalso included in the FTSE4Good Index Seriessince its establishment, for the seventh yearin succession.SKF was ranked number 1 among 150Swedish international organizations in a surveybased on responses by SKF, commissionedby the Amnesty Business Group inSweden. The Amnesty Business Rating is anannual survey of large Swedish companies’performance in dealing with human rightsissues, as well as the risks of these companiesviolating human rights principles.Globe Forum, a business network of companies,entrepreneurs and researchersawarded SKF for being the “Best CorporateSocial Responsibility (CSR) Company” indemonstrating “the best integration andtransparency of CSR in business operationsand reporting”. This achievement was alsoacknowledged by the Swedish business journalVeckans Affärer, when it presented SKFwith the fi rst Social Capitalist Award in Sweden.In addition to its social performance, SKFalso topped the Folksam Corporate ResponsibilityIndex for the second successive yearfor environmental performance. Folksam is aSwedish insurance company that is also oneof the largest investment companies in Swedenwith SEK 220 billion in assets (2007).More information on awards and recognitioncan be found on page 106.Business CareAnti-corruption is one of the fundamentalfocus areas for promoting ethical and healthyeconomic growth. The Tenth Principle in thefi ght against corruption was thereforeadopted in June 2004 by the UN Global Compact,the largest global corporate citizenshipinitiative in the world.SKF endorses both the Global Compactand OECD Guidelines for Multinational Enterprises.SKF takes a non-negotiable stance inupholding good corporate citizenship in corporategovernance, business transactions,supply chain and its products and servicessupplied.The responsibility of a company in developing,producing and marketing products,solutions and services that satisfy customers’needs and are ultimately safe for theirintended use, are equally important. By voluntarilyadhering to the Business Charter forSustainable Development, SKF applies theprecautionary approach to the provision ofproducts and services.In addition to upholding the principles anddeploying good corporate citizenship practices,SKF provides range of products andservices aimed at achieving energy effi ciencyfor the customers. This is orchestratedthrough SKF’s BeyondZero concept. A furtherdescription of BeyondZero can be found onpage 111.Compliance with SKF policiesSKF applies the principles of sound corporategovernance through maintaining an effi cientorganizational structure with clear areas ofresponsibility, transparent fi nancial reportingand good corporate citizenship. The corporategovernance principles applied by SKFare based on Swedish law, in particular theSwedish Companies Act, and the regulatorysystem of the OMX Nordic Exchange Stockholm.SKF’s Corporate Governance Reportcan be found on page 25.110 Sustainability Report

Jiangyin XingCheng Special Steel Works Co., LtdOne of the majorsuppliers subject toSKF’s requirementsfor quality, the environmentand businessethics isJiangyin XingChengSteel Works in China.It is one of China’slargest specialisedsteel producers with an annual output of 3 million tonnes.As per SKF’s requirements, XingCheng Special Steel issueda code of conduct similar to SKF’s and is ISO 14001 certifi ed.XingCheng Special Steel has also reported its CO 2emissionsrelated to SKF’s demand and presented its CO 2reductionachievements as well as ongoing plan.By utilising gases from blast furnaces, XingCheng SpecialSteel now generates 50% of its own electricity, which wouldotherwise have been sourced from coal-fi red power plants.This resulted in CO 2emissions reduction by 400,000 tonnesper year.An additional reduction of 40,000 tonnes of CO 2wasachieved by investing in blast furnace top pressure recoveryturbine units (TRT), to recover the pressure from the furnacesfor powering generators.The latest investment made by the factory is for two sets ofwaste-heat recovery power generators that reuse the steamfrom blast furnace and heating furnace-cooling systems. Thisinvestment not only generates an additional 150 GWh of electricityper year but also reduces the factory’s CO 2emissions byan additional 130,000 tonnes.SKF has 18 major active Group suppliers in China. All thesesuppliers have submitted their code of conduct to SKF forreview; all but one have submitted their CO 2reports and 7 haveobtained ISO 14001 certifi cation, with the remaining workingtowards the certifi cation.Formulating business ethics into offi cialdocuments enables systematic complianceassessment and risks identifi cation. SKF’sCode of Conduct was formulated in 2002,followed by establishing the compliancemonitoring procedures in 2004.In addition to SKF’s Code of Conduct,Group Antitrust Policy and Group Policy onthe Use of Gifts and other Favours to PromoteBusiness Contacts and Relationshipswere set up to promote free and fair trade aswell as to endorse honesty and integrity inbusiness relationships. Both policies are governedby Group Legal.Suppliers and distributorsSKF has many manufacturing units locatedaround the world and source materials andcomponents from global suppliers. The SKFGroup’s major suppliers have been requiredto issue an offi cial document of business ethicsin line with SKF’s Code of Conduct, to becertifi ed according to ISO 14001, and toreport carbon dioxide emissions related toSKF demand, followed by a plan for emissionsreduction. These requirements, togetherwith others based on quality policies andstandards, are stated in the SKF QualityStandard for Suppliers. Suppliers arerequired to review and formally agree to thecontent by signing the agreement.Most of the major suppliers have issued acode of conduct, meeting SKF’s standardsand have started to report their carbon dioxideemissions in relation to SKF’s demands.More than 50% of these suppliers are presentlycertifi ed according to ISO 14001 andthe remainder are required by SKF to demonstratetheir commitment in seeking certifi -cation. All major suppliers’ quality andsustainability performance are audited by SKF.Distributors are expected to adhere toSKF’s Code of Conduct. SKF will be incorporatingthe expectation formally into distributoragreements.BeyondZeroSKF is committed to realizing business objectivesin such a way that it minimizes any negativeimpact, while the positive impact isenhanced. This commitment is leading SKF todeveloping and providing new environmentally-sound,energy-effi cient products andservices, as well as introducing effective energyconservation programmes in its operations.BeyondZero was fi rst launched as a conceptin 2005. This concept aims to go beyondthe traditional practice of reducing negativeimpact towards zero or being environmentallyneutral, by striving for an overall positiveimpact on the environment through a varietyof energy-effi cient products and solutions.In conjunction with its 100th Anniversary,SKF launched numerous energy-effi cientproducts and solutions including a newenergy-effi cient bearing family that outperformsstandard ISO products with a minimum30% energy saving for customers. The demonstrationof the potential of these bearingsin relation to the reduction of energy consumptionof machinery is supported by theEU’s LIFE-Environment project. With thesupport, SKF has also developed an advancedcalculation tool – Slewind – for the windenergy industry. Slewind, built on the SKF inhouseOrpheus platform, is a software comprisingmodules for analyzing blade and yawSustainability Report 111

SKF’s dry-lubricated chain unit also has asafety benefit by substantially reducing therisks of fire hazard in high temperature productionconditions, which commonly occurwhen the lubricants catch fire in the curingovens.SKF’s Slewind is an advanced calculation tool developed for analyzing blade and yaw bearings as well asthe associated components in wind turbines.bearings and their associated components in Bearing: SKF’s dry-lubricated chain unitwind turbines. Information on the various A glass wool insulation manufacturer in theproducts and services was covered in SKF’s USA has installed SKF’s dry-lubricated chain2006 Annual Report (including Sustainability) unit in its curing oven conveyor chain systemand is available at www.skf.com.and has seen a 90% energy saving, achievingSKF also partners in the RELIAWIND project,an EU-sponsored project aimed at devel-The SKF solution is equipped with rollerboth financial and environmental benefits.oping new technology for highly-efficient wind bearing, allowing higher energy-efficiencyturbines. This project consists of ten partners compared with conventional plain bearingsrepresenting the full value chain and is expectedto be completed by December 2010.Another competitive advantage of SKF’sused in the oven conveyor chain systems.Working with customers from diverse dry-lubricated chain unit is the use of graphiteindustries around the world provides distinct cages. Graphite is a non-metallic materialopportunities for accumulating knowledge. found naturally in the environment. It providesThis bank of knowledge is essential when good self-lubrication at high temperatures thusdeveloping new solutions for customers, not eliminates the need for oil consumption. Thisleast in the area of environmental performance.By combining its expertise on bearings, ciency. Moreover the costs of lubricating thehelps customers to increase production effi-seals, mechatronics, lubrication and service, conveyor chain system and waste-lubricantSKF works as a partner to customers in all handling are eliminated.industries, developing environmentallysoundsolutions.SKF’s dry-lubricated chain unit provides higher energyefficiency and eliminates the need for lubrication and thuswaste-lubricant handling.Lubrication: SKF Dry-Lubrication SystemSKF presented the “SKF Dry Lubrication System”to a major European beverage manufacturer.The innovation requires no water,which in a typical bottling plant would savemore than 1,000 m 3 of water annually perline, while reducing the need for lubricants by95%. The cost of waste-water handling wasalso substantially reduced.The elimination of spraying a water-solublelubricant mixture on the flat top chainsalso helped the customer improve employeesafety by reducing the risk of slipping andtripping on wet floors.The SKF Dry Lubrication System significantlyenhances product safety by reducingthe risks of bacterial contamination duringproduction process, helping customersmaintain high cleanliness levels in the factory.Production efficiency was enhanced as aresult of reduced motor corrosion in the conveyorsystem and reduced maintenancerequirements.Through the SKF Dry Lubrication Systemsolution, SKF showed how it can produceperceptive innovations that financially, environmentallyand socially benefit its customers.Seal: SKF Economos on-site joining sealSKF Economos plays an important role insupplying the hydroelectric power industrywith better quality, greater reliability andcompetitive sealing solutions, which in turnbringing environmental benefits.Without having to compromise the reliabilityof a non-split rotor blade seal applicationin turbines, customers can opt for SKF’sunique on-site-joining sealing solutions forthe same or improved reliability and performancelevels as with nonsplit seals.Oil contamination to water cause significantenvironmental hazards. This can occurwhen using other on-site-joining rubber sealsolutions where the hardening joint can fracture.With SKF’s special welding technologyand better performance polyurethane material,the risk of contamination is minimized.Also, SKF’s on-site-joining sealing solutionsrequire only 5 to 8 hours to install,which is much less than traditional non-splitsolutions that usually take days or weeks.112 Sustainability Report

Conventional compressor solution with fixed speedmotor, gearbox and oil bearingsNew SKF solution based on variable high speed PermanantMagnet (PM) with motor magnetic bearings100%100%3.9%Frequencyconverter lossesPowersupply3%Oil pump,fans losses2%Motorlosses10%Gear &bearinglosses85%UsefulpowerPowersupply0.1%0.7%IronAMB lossesrack losses0.7%10%0.6%JoulelossesAir windagelosses94%UsefulpowerThe greater efficiency of the seal installationsallows water turbines to return to operation,reducing the dependency on less environmentally-friendlypower generation such ascoal-fired power generation. SKF’s innovationalso provides better protection for sealmetal housings, thus eliminating unscheduleddowntime. Repairing worn-out metalhousings can also take days where the turbinehas to be lifted out for maintenance.Mechatronics: SKF magnetic bearings inturbomachinesThe most common turbomachines today arecentrifugal and air compressors.The traditional technical solution to driveand support a standard range 200kW to300kW compressor is typically a low speedelectrical motor driving the compressor via amechanical gearbox. The rotor of the compressoris then supported by fluid film bearings.SKF today provides solutions that allowOEM partners to eliminate both the gearboxand the lubrication system by replacing thelow speed motor and gear box with a variablehigh speed Permanent Magnet (PM) motor.The drive solution is integrated in the compressorsolution and is fully supported onactive magnetic bearings. The new solutioneliminates the energy loss in oil pump, fans,motor, gearbox and bearing.In a typical fixed speed centrifugal machine,9% energy efficiency gain could be achieved(see illustration above). For a variable speedcompressor the savings derived from the newtechnology are even higher. In addition to thereduction in power consumption leading topositive environmental effects and reducedoperating costs, the new active magnetic bearingsolution from SKF also provides greateroperating reliability, reduced maintenancecosts and eliminates a bulky hydraulic system.SKF’s recent acquisition of S2M, the leadingglobal company in magnetic bearings solutions,will further strengthen SKF’s capability in providingsustainable solutions in the future.Service: The SKF Client Needs Analysis– Energy and SustainabilityThe SKF Client Needs Analysis – Energy andSustainability is an extensive, web-enabledenergy and environmental assessment toolused in industrial operations. Energy-intensiveindustries such as pulp and paper, mining,and hydrocarbon processing will benefitextensively from the SKF solution. Withextensive experience and knowledge of bearings,seals, lubrication, mechatronics andservices, SKF helps customers identify andimplement energy- and cost-saving measures.Energy savings come from SKF’s supportwith proactive maintenance, minimizingasset downtime, avoiding costly machinedamage, and maximizing the efficiency of themachinery.The assessment also examines chemicaltreatments, lubrication use and other operatingprocesses that can be improved toreduce the environmental impact at a facility.A customer in the cement industry achieved2% reduction in energy consumption, equivalentto a saving of EUR 20,000 annually, as aresult of SKF’s analysis. SKF has also helpedan oil refinery in the US to increase the plant’sdaily power output by a further 12 MW,eliminating the need to purchase the requiredquantity from the local utility company. Thisled to an annual saving of USD 5 million.Environmental CareSKF recognizes the inherent impact productionprocesses have on the environment andas a vital factor in achieving BeyondZero, SKFconstantly implements focused actions tominimize this impact.Before any acquisitions or divestments,environmental due diligence assessment isconducted to determine whether a clean-upis required. Potential liabilities identified by apreliminary (Phase I) investigation may besubject to a further (Phase II) investigation.Legal and regulatory complianceEvery country where the SKF Group operateshas similar rigorous legislation covering theenvironmental, health and safety sectors. Themain difference between countries is the extentto which this legislation is enforced. SKF’s policyis to ensure the highest standards of legal compliance,regardless of the location of a unit andthe level of enforcement by EHS authorities.A legal non-compliance concerning wastewater was identified in 2005 in Karnare, Bulgaria.This issue was described in the 2005and 2006 Annual Report. A new waste-watertreatment plant was installed and in operationsince 2006 but is yet to receive thenecessary formal approval by the authorities.SKF has a stringent process for preventingenvironmental pollution from its manufacturingprocesses. Nonetheless, like otherlong-established industrial companies, SKFis involved in various action plans, resultingfrom historical activities. Because of stricterlaws and regulations - some with a retroactiveeffect - relating to landfill disposal, someSKF companies are currently involved incleaning up old landfills, most of which havenot been used for many years.Sustainability Report 113

Tools & document for environmental impact• Enviromental product declaration, EPD• Life-cycle analysis, LCA• Modelling environmental impactThe majority of these cases involve so-calledSuperfund sites in the US. In most of thesecases, SKF USA was one of many companiescontributing to waste disposal at landfill sites inthe past and SKF’s share is generally very low –a few per cent or less. Relevant provisions havebeen made to cover these costs.ISO 14001Waste management• Process fluids• Filters• Metal scrapEnvironmental Management SystemAll SKF manufacturing sites, technical andengineering centres and logistics locationsare certified according to ISO 14001. Thesesites are included in a single Group-wide certificate,which at the end of 2007, consisted of91 sites in 28 countries. Newly acquired companiesare given a timeframe for implementingthe management system. The schedulecan be found on page 122.EmissionsSustainable manufacturingThe SKF Sustainable Manufacturing projectwas deployed in 2007 to systematically identifyand map out the environmental impact ofSKF’s manufacturing. Information collectedis essential to orchestrate efforts on minimizingSKF’s environmental footprint.The SKF Sustainable Manufacturingproject is made up of four phases with energymanagement being the first. This was successfullycompleted with the launch of SKFEnergy Toolbox and Energy Training, whichaimed at reducing the energy intensity ofSKF’s manufacturing processes. For moreinformation, see page 115.Resources&Process fluidswasteCO 2Energy management• Reduce energy demand• Optimize efficiency of energyconversion / optimize energy usageRaw materialEnergyMetallic residualsProcess fluids• Reducing the amount of processmedia needed• Finding environmentally soundprocess mediathe way in which energy is produced and usedin order to avoid irreversible damage to theglobal climate. SKF has recognized the obligationsimplied by these conclusions for sometime, and has acted, and will continue to actto reduce the greenhouse gases released as aresult of the Group’s energy consumption.SKF adopts the Greenhouse Gas reportingprotocol and broadens its scope of reportingSKF has voluntarily reported all direct andsome indirect emissions of carbon dioxideresulting from manufacturing operationssince 2002. This information, along with theannual energy and fuel consumption figureson which it is based, has been published inthe annual Sustainability Report.In 2007, the SKF management teamdecided that in order to gain a more completeunderstanding of the global warming impactof the Group’s activities, it will be necessaryto increase the scope of reporting to includeSKF definitions of CO 2reporting scopesScope 2IndirectCO 2Scope 1Directaspects not currently considered. Examplesof emissions that should be measured in thefuture are those generated as a result ofbusiness travel, logistics and out-sourcedcomponents or materials. In light of theincreased complexity of such reporting, andthe need to provide this information to stakeholdersin a clear and transparent way, SKFhas decided to adopt the Greenhouse Gasreporting protocol, published by the WorldBusiness Council for Sustainable Developmentand the World Resource Institute. Thisprotocol is widely recognized as the mostcomprehensive and well-supported accountingmethodology for the voluntary reportingof greenhouse gases.The protocol characterizes an organization’sgreenhouse gas (GHG) emission intothree scopes, as explained in the diagrambelow.SKF has established that carbon dioxide(CO 2) is by far the most significant greenhousegas produced as a result of operations.In addition, considering the main processesdirectly or indirectly applied, emissions ofother greenhouse gases are typically generatedin proportion to those of CO 2. For thesereasons SKF has, and will continue to onlyreport CO 2emissions.Considering this, and applying the GHGprotocol, SKF will apply the following definitionsin this and future reports:Scope 1 direct emissions: CO 2generatedas a result of combustion processes deployedat SKF facilities. Examples could be oil or gasused for heating buildings or heat treatmentand butane gas used to power fork-lift trucks.Scope 3IndirectBusiness travelClimate changeContinued commitmentThe report published in 2007 by the UnitedNations Inter-governmental Panel on ClimateChange, confirms that societies andeconomic entities must significantly changePower / heat providersSKF FactoriesOutsourced components, material, logistics114 Sustainability Report

Scope 2 indirect emissions: CO 2generatedby the producers of electrical energy and districtheat consumed by SKF’s operations.Scope 3 indirect emissions: CO 2generatedby suppliers of materials, products and servicesused by SKF.SKF has started developing the tools andprocedures necessary to measure and reportscope 3 emissions. However, obtaining suchdata with sufficient accuracy is complex,therefore it will not be possible to immediatelyinclude all aspects. SKF shall work togradually develop and implement the measuringand reporting tools. Over the comingyears, SKF will aim to report and act on ascomplete a reflection of its global warmingimpact as is practically possible.SKF in St. Cyr (France) reduces process fluid electricitydemand by 25%, while production increases by 22%The team pictured at SKF’s medium deepgroove ball bearing production facility inSt Cyr, France, started to work on energysaving projects in 2005. Focusing on thesystems which supply the necessary fluidsfor bearing production, they were able toidentify simple and highly effective strategieswhich resulted in immediate andsignificant savings. In total they reduced the energy consumption from this part of theplant by more than 1.5 GWh or 25%, between 2005 and 2007, this at the same time asbearing production volume increased by 22%. To put this in perspective, this saving isequivalent to around 1/3 of the typical annual output of a modern wind-turbine.Re-statement of emissionsresulting from purchased electricityPurchased electricity represents around 70%of the SKF Group’s total energy supply and isthe most significant source of CO 2emissions(considering scope 1 and 2). Voluntarilyreported CO 2emissions resulting from purchasedelectricity are calculated by multiplyingthe measured electricity consumed by an‘emissions factor’ which should reflect thepower generation resources used. Emissionsfactors vary significantly from location tolocation, depending on the mix of powersource (nuclear, coal, hydro etc) - it is thereforenecessary for each reporting location toestablish a specific emissions factor.In 2001, when SKF first started to calculateCO 2emissions, it was found that obtainingreliable emissions factors from suppliersor national authorities was extremely difficultin some locations. In order to overcome thisproblem, Group guidelines (based on datataken from the Folksam and FinanstidningenEnvironmental Index 2000) were distributedto all sites. These guidelines allowed siteswhich were not able to obtain emissions factorsfrom external sources, to calculate thembased on certain assumptions of the natureof power supply at the specific location.More recently, the general availability ofsupplier or regional authority publishedemissions factors has improved. Therefore,during 2007 SKF issued all sites with arevised set of guidelines which ensure thatthe most up to date and reliable source ofemission factor is used. This has led to significantchanges in the calculated emissions atsome sites therefore SKF Group Managementhas decided to re-state the Group CO 2results. Due to the difficulties of obtaininghistorical emission factors, only the 2006 figureswill be restated. 2006 will become the“base year” and acquisitions or divestmentswill be adjusted back to this year in accordancewith the GHG protocol.Considering the 2006 figures, the previouslycalculated total Group CO 2emissions (419,000tonnes) will be revised to 573,000 tonnes. It isimportant to recognize that this revision doesnot reflect any change in actual energy consumptionfor 2006, or previous years. Thesechanges will however, provide improvedaccuracy of the CO 2emissions data reportedand will allow more precise internal quantificationof the environmental impact of energysourcing choices and energy savings actions.Actions to reduce direct and indirectemissions (scope 1 and 2)The SKF Group acts to reduce scope 1 and 2emissions by working on two issues. Firstly,by increasing the energy efficiency of productionactivities so that less energy is used, andsecondly by acting to reduce the amount ofcarbon emitted during the production of theenergy used. These two aspects are oftenreferred to as energy and carbon intensityrespectively.Reduced energy intensity at SKF facilities(scope 1 and 2 - direct and indirect)During 2007, SKF undertook numerousactions aimed at reducing the energy intensityof the Group’s manufacturing facilities.Some significant new developments include:• All SKF sites with significant energy consumptionnow have a designated energycoordinator, responsible for running energysaving activities at the site.• SKF Manufacturing Development Centrehas worked with several SKF manufacturingfacilities as well as with internal andexternal experts to develop specific energymanagement approaches and tools for theGroup’s manufacturing activities. Theseinclude defined procedures for measuringenergy use and identifying and implementingenergy savings. This information,together with best practice examples, hasbeen launched on the SKF intranet and isavailable to all relevant personnel.• An energy management training scheme(aimed specifically at the site energy coordinators)has been developed and will berolled out throughout SKF in 2008.As well as providing the knowledge andresources required to deploy effective energymanagement at SKF, related business processeshave also been adapted to ensureeffective realization. For example, during thegeneral business planning process, all SKFsites are now required to calculate energyconsumption and related CO 2emissions forthe coming year. At the same time, sites arealso required to provide quantified energysaving proposals. This data is then aggregatedby the divisions and used during thebusiness planning process to select the mosteffective and efficient energy saving investmentsfrom around the Group.Energy intensity is being developed as a keyperformance indicator (KPI) for all SKF manufacturingoperations. This KPI will be used inconjunction with the existing CO 2target to driveenergy savings and CO 2emissions reduction.Sustainability Report 115

meeting formats such as video and webconferencing, as part of an overallapproach to leading international teams.• Several sites have invested in, or are aboutto invest in state-of-the-art video conferencingequipment.• General awareness training on the environmentalimpacts of business travel hasbeen provided for frequent travellers.• During 2007, the Group revised its companycar policy to exclude vehicles with CO 2emissionsgreater than 185 gram per kilometre,with the objective of reducing the emissionsfrom company car use.SKF Logistics Services Centre in Schweinfurt, Germany invested in a major solar panel project,covering its 15,000m 2 roof structure.Reduced carbon intensity at SKF facilities(scope 1 and 2 - direct and indirect)During 2007, SKF continued to act on reducingthe carbon intensity of the energy consumedin operations. The Group has beenable to achieve this by purchasing certifiedrenewable or low carbon energy at somesites and by direct participation (investment)in renewable energy installations.An example in 2007 can be found at SKF’sBusiness Technology Park (BTP) in the Netherlands,where a 100% renewable electricitysupply contract was agreed. This actionresulted in a reduction of CO 2emissions ofmore than 2,500 tonnes.Considering the direct involvement inrenewable energy production, SKF announceda major solar power project at the SKF LogisticsServices Centre in Schweinfurt, Germany,where a new 15,000m 2 roof structurewill be equipped with solar panels. Constructionbegan in July 2007 and, when completedin 2008, the installation will be the third largestof its kind in Germany. The energy producedwill meet 90% of the centre’s demandfor electricity, and will result in a reduction ofaround 260 tonnes of CO 2emissions per year.Results for 2007The Group target set out in the 2005 AnnualReport was to reduce scope 1 and 2 emissionsby 5% per year in absolute terms. This target iswidely recognized as one of the toughest set byany industrial enterprise, because of its magnitudeand the fact that it is not normalizedagainst any measure of volume.When compared to the total CO 2emissions(scope 1 and 2) generated in 2006 and usingthe GHG reporting protocol, SKF hasachieved an absolute reduction of emissionsin 2007 of 2.2%. While this does not meet theGroup target, when considered in the contextof production volume growth of 12%, it doesrepresent a dramatic reduction in both carbonand energy intensity which has resultedfrom the concerted efforts of all SKF units.SKF is confident that the range of actionsand initiatives described will increase thespeed of improvement during 2008, and reaffirmsthe continued commitment to the5% reduction target.Actions for measuring and reducing otherindirect (scope 3) emissionsSKF carried out various projects in 2007aimed at developing measurement andreduction approaches for scope 3 emissions.The status and objectives of these projects issummarized below.Business TravelSKF commissioned a study in 2007 into theenvironmental impact of the Group’s businesstravel activities. The work was carried out bytwo postgraduate students at Chalmers University.The study found that in 2006, around24,000 tonnes of CO 2were released as aresult of SKF’s business travel, with the vastmajority of these emissions (80%) resultingfrom flights.A number of initiatives aimed at reducingthese emissions are ongoing, these include:• A training package – “travel less, managemore” has been developed and is beingrolled out to SKF managers. The trainingencourages the effective use of alternativeTools have been developed to monitor andreport CO 2emissions from flights, and theintention is for this aspect of the Group’sscope 3 emissions to be included in the 2008Annual Report.LogisticsSKF worked alongside Chalmers Universityand NTM – the Swedish Network for Transportand Environment in 2007 to understandthe CO 2impact of SKF’s European DirectTransportation Network (DTS). The DTS networkforms a significant part of the Group’sdownstream logistical activities and is managedby SKF Logistics Services AB. The investigationsfound the annual CO 2emissionsresulting from the DTS network amounted toaround 10,000 tonnes, mostly resulting fromtruck freight transportation. Further work isongoing to investigate the impact of otherparts of the logistical operations.SKF will commence reporting on CO 2impact from down-stream logistical activitiesin the 2008 Annual Report, the geographicaland operational scope to be applied will bedefined in due course.Outsourced components and raw materialsPrevious life cycle assessments have shownthe significance of the CO 2emissions generatedby the Group’s suppliers during productionof the components and materialspurchased by SKF. SKF developed and implementeda system in 2007, which allows theGroup to track on a quarterly basis, the CO 2emissions of major direct suppliers which canbe attributable to SKF. Several key supplierswere consulted during the development of thereporting system. At the same time the generalsupplier assessment tools have been adaptedto include an evaluation of the future intentshown by suppliers in this regard. These116 HållbarhetsredovisningSustainability Report

issues will be added to the existing aspects ofsupplier performance evaluation, such asquality, costs, delivery speed and flexibility.Material consumptionSKF also uses various types of materials suchas metal, rubber, solvents, hydraulic oil andgrease.Metal consumption was reduced by 49%between 2004 and 2006, which largely wasdue to the divestment of Ovako steel manufacturingoperations. Metal consumption for2007, in comparison to 2006 rose by 3.8%,with production volumes increase of 12%.The divestment also caused a significantdifference in carbon (coal) consumptionbetween 2004 and 2006, a decline of 90%.Carbon was used by SKF as an alloying elementin steel production, not as a fuel. Carbonconsumption for 2007 was 442 tonnes, comparedto 1,180 tonnes in the previous year.SKF set a solvent reduction target of 25%over a five-year period, compared to 2002’slevel and in relation to production volumes.The target was incorporated into the ISO14001 in order to comply with the EU CouncilDirective 1999/13/EC on the limitation ofvolatile organic compound (VOC) emissions.This target was successfully achieved with adrop of 29% compared to 2002’s level, whilethe production volume rose by 37%.SKF also aimed at eliminating the use of allequipment containing PolyChlorinated Bifenyls(PCBs) at all manufacturing sites. PCB isclassified as a highly toxic organic compoundthat causes harmful health problems. PCBhas been eliminated at all sites except forLutsk, Ukraine and Valenciennes, Francewhere there are a number of PCB transformerson site. An action plan for removal of allequipment containing PCB has been deployed.The second phase of the SKF SustainableManufacturing project will also be focusingon reducing the use of process media in manufacturingas well as substituting it withenvironmentally-sound process media.WaterWater consumption by the Group in 2007 was6.96 million cubic metres, compared with7.08 million cubic metres in 2006. A downwardtrend in water consumption has beenseen since 2001, reflecting the Group’s waterconservation activities.Various individual initiatives were deployedat SKF sites and best practises have beengathered and shared in the Sustainabilitysections of SKF’s Annual Reports. Such casesincluded the installation of a new penetrantinspection facility equipped with a wastewatertreatment in SKF Saint Vallier, France.It successfully reduced waste-water by 85%and used-water is recycled into the processafter the filtration process (2006).SKF’s award-winning US factory in Gainesvillerecycled water condensed from thefactory’s air conditioning system during thesummer as a base for coolant used in grindingoperations. Water consumption subsequentlyfell by 1,000 cubic metres per year. The costfor disposing the waste-water was also savedas the condensed water, which containedtraces of oil, was treated previously as awaste product. A further saving of 3,700cubic metres of water was achieved byimproving the method of separating oil from awater-based cleaning fluid used to wash steelbearing components after hardening. Water isrecycled for production processes (2002).SKF Industrie S.p.A, in Airasca, Italy,also reduced water consumption by750,000 cubic metres in 2004, by investingin closed-circuit systems for cooling of productionmachines (2004).Waste management/recyclingAll SKF units are aiming to minimize wasteand increase recycling, for both environmentaland cost reasons. All scrap metal fromSKF’s operations is recycled, totalling169,350 tonnes in 2007. The recycling percentagesfor the main residual products areshown in Table 4, page 123.Some SKF units have expanded theirwaste-collecting activities to provide socialbenefits. Money collected from recycling thewaste was donated to help under-privilegedpeople and support animal shelters.BiodiversityBy the end of 2007, SKF’s manufacturing sites,technical and engineering centres and logisticslocations covered about 823 hectares.SKF has no activities in protected areas, norareas of high biodiversity value.Despite this, SKF carries out variousschemes locally for biodiversity protection.One global approach of this was “Planting theSKF Tree” campaign in 2007. All SKF unitsplanted an SKF Tree at each site to mark the100th Anniversary celebrations. In total,more than 100 SKF units globally haveplanted almost 500 trees. Some units suchas those in China, India and Mexico havecombined the event with employee outings orfamily days where employees and their familieswere invited to plant the trees together.SKF in Mexico towards zero accidentsSKF Mexico has been finding itdifficult for several years to demonstrateany progress in meetingthe Group’s target of Zero Accidents.This has been partly dueto a lack of awareness and heedtaken to the risks of injury andincidents at the workplace.In order to change the mindsetof employees, SKF Mexico implementeda creative and effective way of communicating theimportance of safety at work. Employees’ children were invitedto visit their parents at work and to attend free safety workshopsat SKF.At the workshops, the children learned about safety precautionsand the need for wearing protective clothing and in turnthey reinforced the message of safety awareness to their parents.As a result, the SKF factory at Puebla saw a substantialdecline in accident rates from 9.58 in 2000 to today’s 1.34,whereas the SKF factory in Guadalajara was jubilant overachieving twelve months of an accident-free workplace thusentitling them to their first SKF Zero Accidents white award.Reported by Jorge Rios, HR & EHS managerSustainability Report 117

Employee CareUpholding and protecting human rights principlesare of the utmost importance to SKF. Thiscan be seen in the SKF Code of Conduct and isapplicable to all its operations worldwide.Through the World and European WorksCouncils, which have been in operation in SKFfor many years, SKF and its union leadershave developed a long- standing workingrelationship based on trust.Any issues relating to significant changesin SKF, be it acquiring or divesting operations,are always discussed and resolved in an openand constructive atmosphere. SKF’s Sustainabilityperformance was also introduced tothe World Works Council held in Göteborg inSeptember 2007.Various Employee Care programmes aredesigned to provide SKF employees with safeand satisfactory working conditions wherethe individual’s rights are respected andemployees have equal opportunities forcareer development. The programmes alsofocus on employees’ skills and skills developmentto help realize their full potential as wellas to developing their pride in, and loyalty to,the company.The company’s mission is to be the preferredemployer and its aim is to continuallyattract, develop and retain the best people inthe industry.Compliance with SKF’s Code of ConductSKF implemented internal verification as amonitoring procedure for all units’ compliancewith the Code of Conduct in 2004. The audit isintegrated into the ISO 14001 and OHSAS18001 audit processes.In addition to the Code of Conduct auditprocedure, SKF also established a strictlyconfidential whistle-blowing procedurewhere employees can report behaviour oractions breaching the Code of Conduct bysending an email to the company’s ethics helpline.This is addressed for the attention ofthe Senior Vice President, Group HumanResources and Sustainability.Compliance audits were completed in2007 at 47 units of which 15 were in Europe,15 in Asia, 15 in North America, 1 in SouthAmerica and 1 South Africa.There were 9 non-compliances with legislationon working hours at SKF units in 2007.These units were in China, Indonesia, Taiwan,India, and South Africa. Corrective actions wereimplemented in all cases.Chart 1: This graph shows the accident rate for the SKF Group since 2000, the yearthe Zero Accidents programme was implemented at SKF.65432106.020004.9620013.9820023.02003Note: The accident rate is the average for monitored units within the Group. Some sales and administrationoffices are not monitored by the Zero Accidents programme, as the safety risks are relatively low in these areas.The accident rate for the Group is calculated using the formula:Accident rate = R x 200,000/Hwhere R = number of recordable accidentsand H = total hours worked2.6920042.0520051.7220061.532007Working environmentThe percentage of employees in full-timeemployment was 97% in 2007, while theaverage retention rate of employees was 94%.15% of SKF’s Group Management wasfemale whereas 25% of the Board of Directorspositions were held by women. At thelocal level, 77% of SKF units have at least onefemale in the local management.SKF rolled out a group-wide Working ClimateAnalysis (WCA) in 2007. The WCAquestionnaires, available in paper and electronicformat were distributed to all theemployees, aimed at obtaining their feedbackon SKF’s performance in relation to companyvalues and key focus areas: business, sustainabilityand knowledge-sharing.It also measured the working climate interms of trusts, co-operation, personaldevelopment and continuous improvement ofdifferent departments and individual teams.The participation rate for the WCA in 2007was 90.3% with all 64 countries with SKFoperations participating.Zero AccidentsSKF has monitored accident rates since1994. A quarterly report is submitted by allSKF units to Group Management for review.Remarkable progress has been achieved bythe Group in its drive towards Zero Accidentssince being launched in 2000. 104 out of 204SKF units worldwide achieved a record of norecorded accidents for all four quarters or more.The target was further reinforced whenSKF aimed for the entire Group to be certifiedaccording to OHSAS 18001, the internationalstandard for Occupational Health and SafetyManagement. This single Group-wide certificatecovers 91 sites in 28 countries. Recentacquisitions are subject to an inclusion programsimilar to that of ISO 14001.As part of OHSAS 18001 certificationrequirements, all SKF units must have healthand safety committees established withmanagement and employee representation.Employees at all sites must undergo healthand safety training. Regular hazard and riskassessments on working environment arealso a crucial part of OHSAS 18001.Health and fitnessSKF aims not only to provide a safe workingenvironment to its employees, but it is alsoequally important to promote health andfitness.Several SKF units such as those in Sweden,Germany, and Austria offer on-site fitnesscentres, while many others provide theiremployees with gym cards for free access toexternal fitness centres.This formula is provided by the US Occupational Safety and Health Administration (OSHA).118 HållbarhetsredovisningSustainability Report

SKF in South Africa fights HIV/AidsCombating the spread of HIV/Aids is one of theeight UN Millennium Development Goals. It is estimatedthat 39.5 million people worldwide are livingwith the pandemic and mainly in sub-SaharanAfrica.In order to create awareness among employees,SKF South Africa provides free counsellingand voluntary testing programmes through athird-party service provider to all the employees.This was one of the many activities brought forth by the committee that was setup in 2005, with the aim of providing assistance programmes to employees incombating the spread of HIV/Aids.SKF South Africa also conducted training on the stigma and discriminationassociated with HIV/Aids for employees with the aim of eliminating false perceptionsabout the HIV/Aids infection.Reported by Corle Grobler, HR managerSKF Nankou in China built two badminton ment such as talent management, businesscourts at the factory’s premises for the skills, professional skills, people skills, leadershipdevelopment, and technical training.employees. It was very well-received and theemployees often enjoy playing badminton SKF inaugurated three new SKF Collegeafter work as well as during breaks. Several campuses in 2006 – Pune, India, Shanghai,badminton championships have been held in China, and Elgin, US. This is a stepping-stonethe community by SKF Nankou, fostering a for achieving the vision of creating SKF hubssocial atmosphere in the community.worldwide where knowledge is increased andshared. The next SKF College campus will beTraining and developmentin Latin America.Individual Development PlanIn addition to the individual courses, theAll SKF employees are entitled to an Individual SKF College also houses the Six Sigma campusas well as the SKF Quality Academy.Development Plan (IDP), which is reviewedregularly through Leadership Review discussionswith their managers. The IDP is an Employee assistance programessential tool entitling the employees the SKF in the UK and New Zealand provideopportunities to train for career development employees with access to free counsellingand greater responsibility.and information support offered through aEach individual’s skills profile is assessed third party.according to the job profile during the LeadershipReview discussion in order to identify confidential support, guidance and assistanceEmployees and their families can seekthe potential for improvement and further about personal and professional issues. Thisdevelopment. Training plans are subsequentlylisted in the IDP.to provide them with easily accessible meansis to help promote employee well-being andwhere they can voice their concerns and seekSKF collegessupport.The SKF in-house training centre, SKF Collegeoffers a variety of training and consult-provided through this Employee Care pro-A wide range of specialist services areing services to cater for the development gramme: work-related, family-related,needs of employees to meet business and health, home, law, finance, relationships etc.profession results.and it is accessible via the internet or byCourses are provided either by SKF specialistsor external professionals and cover a 24 hours a day throughout the year.calling a free help-line which is accessiblewide range of skills and competence develop-Community CareSKF operates in over one hundred local communitiesaround the world. SKF’s fundamentalcontribution to these communities is itsability to provide safe, long-term employmentand being a responsible corporate citizen.Business activities must show respect forlocal communities and find ways of workingalongside authorities and community groups.Beyond that, SKF encourages its localmanagement to be actively involved in communitiesnot only by providing financialmeans but also commitment through viablevoluntary work and sports activities, education,training, and helping under-privilegedsociety.SportsSKF was the main sponsorship partner of the2007 Gothia Cup in Göteborg, Sweden for over30,000 young people worldwide.The Gothia Cup is the largest footballtournament in the world for boys and girlsbetween the ages of 11 and 19. SKF alsoenlarged the Gothia Cup concept to twentydifferent countries such as Zambia, the Philippines,India, Argentina, South Africa,Romania and Russia, by hosting local “mini”tournaments called “Meet the World”. Childrenthat would otherwise not have theopportunity to play at the Gothia Cup in Swedenwere invited to take part in local tournaments.The winning team from each countrywas sponsored by SKF to take part at theofficial Gothia Cup championship.Apart from Group sponsorship, many SKFunits throughout the world also providesports activities in their local community. InIndia, SKF established a sports academy toprovide football and cricket training to thelocal children. Children were not only taughtthe ideas of winning but also the values ofteamwork and equality.SKF Nilai in Malaysia organizes campingactivities in the tropical rainforest to sparkinterest among children to protect the environmentand care for biodiversity.SKF in Bulgaria sponsored an outdoor playgroundfor some 40 children at an orphanageto help develop their physical, mental andsocial skills.Education/vocational trainingIlliteracy is one of the main obstacles in eradicatingextreme poverty. SKF values knowledgeand knowledge-sharing is one of thecompany’s key focus areas. Nonetheless, thisdrive is not confined to just within SKF. Exter-Sustainability Report 119

nally, SKF looks to provide society with theopportunity for education and training.Access to primary education varies fromregion to region. In some countries manygirls of school age are deprived of their rightto attend school. This accounts for more thanhalf of the 71 million children in the worldwho lack primary education.SKF Turkey has supported the Siirt campaignfor several years, which pushes for educatinggirls in the province of Siirt, Turkey.There were about 640,000 school-age girls inthe country without access to primary educationand Siirt is one of the 53 provinces wherethis tendency is greatest. By creating a monitoringtool for school enrolment between girlsand boys, as well as speaking to religious leadersand families, SKF Turkey successfully helpedthe campaign to raise girls’ school-enrolmentrate from 57 to 90%.Hands-on training is also a way of sharingknowledge. SKF Steyr in Austria supports ayouth organization that provides training inmetalwork, woodwork, culinary and offi ceskills to teenagers who had previouslydropped out of high school.SKF in Cajamar, Brazil on the other hand,tutors children from poor villages throughgames and theatrical play about safety athome, personal hygiene, values and theimportance of education.Helping under-privileged societiesEvery society has needs and with a presencein more than one hundred communities, SKFcontinually fi nds ways of supporting peoplethat are less fortunate.From helping leprosy patients and abandonedchildren in India to single mothers andtheir children in Ukraine, SKF helped by givingboth fi nancial support and voluntary workby the employees.SKF Thailand combined regular staff outingswith visits to poor villages or under-privilegedpeople where employees raised funds,provided blankets, medicine, preserved foodsand other necessities for the local people. InMalaysia, SKF employees in Nilai regularlyvolunteered to help rebuild or constructhouses for the poor.Youths who are mentally and/or physicallychallenged often face problems in fi ndingemployment, which in turn hinders theirassimilation into society. SKF Steyr in Austriajoined partnership with Basar GemsbH toprovide vocational training for teenagers todevelop their skills, enhance strengths as wellas working on their weaknesses. SKFemployees also act as mentors through frequentmeetings, and together with the teenagers,set up various outdoor activities toraise awareness about hygiene, nutrition,education and recycling.To provide better opportunities for theoften-neglected children with HIV/Aids, SKFSouth Africa established a childcare centre inDaveyton on the East Rand to accommodate40 or more children. In addition, SKF SouthAfrica also adopted the St Francis Care Centreto help children there from two to sixyears old who nearly all have HIV/Aids.As a result of SKF’s Group-wide SustainabilityAwareness Training, SKF Luton in theUK formed a sustainability team to carry outenvironmental activities. In addition, theteam also look for volunteering opportunitiesin the community for employees. Full-timeemployees are allowed up to two paid days ayear to take part in approved activities. SKFLuton employees have completed improvementwork at a local hospice garden, whichprovides care for adults and children withlimited life expectancy.Fund raising activities are a good way offostering teamwork between employeeswhile helping people in need. SKF units invarious parts of the US often volunteer in differentcampaigns to raise money and healthawareness. USD 419,000 was raisedthroughout 2007 and the money wasdonated to charitable organizations such asthe Lance Armstrong Foundation, AmericanCancer Society, Salvation Army, United Wayof America and many more.SKF in China sponsors the SKF Hope SchoolIn China, some childrenhave no accessto basic schooling dueto poverty or the lackof schools, teachersand learning facilitiesin remote villages.Sikong Mountain is located far from any city and only had aragged school facility. SKF China decided to support the constructionof a proper school in the village.On 27 September 2007, the fi rst SKF Hope School was offi -cially inaugurated at Sikong Mountain, Yuexi County in AnhuiProvince. It was a sunny day fi lled with excited people fromSKF, the school, government and local media.The student representative delivered a speech and happilysaid “When everyone was looking forward to the Mid AutumnFestival celebration, we were all looking forward to the arrival ofthe SKF Hope School. We have been looking forward to a properschool for years and SKF has made our dreams come true.”This is just the fi rst SKF Hope School. The company hopes toprovide the same opportunity for more children in differentparts of the country where they can study without having tofreeze during winters or walk tens of kilometres to go to school.Reported by Connie Cheng,Sustainability & HR Development Director120 Sustainability Report

SKF in Germany supports mentally handicapped artistsSKF Germany has supportedphysically or mentally handicappedpeople for years. Forexample, in 2004 the companyopened the entrance hall of itsadministration building inSchweinfurt for the art exhibition“Bewegungsfreiheit”(Freedom to Move) by “KunstwerkstattOBArt” (OBArt Art Project). OBArt is a social projectin Schweinfurt that supports young, mentally handicapped,artists.The initiative was replicated during SKF’s celebration of its 100thAnniversary. Among the activities at Schweinfurt, one importantevent was the anniversary party, which included local suppliers andauthorities being invited to the opening of the OBArt art exhibition“Energie” (Energy) at SKF. EUR 7,000 was raised from the gueststhrough the successful auction of paintings done by the young artists.Even more important was the pleasure of the artists. Klaus Büttner,one of the attending artists said: “I like this auction very much!”Reported by Walter Ragaller,Communication, Public & Press Relations managerSponsorshipGothenburg Award on SustainableDevelopmentSKF is a sponsor of the Gothenburg Award onSustainable Development, previously knownas the City of Göteborg International EnvironmentalPrize. The SEK 1 million award ismade annually to individuals or organizationsfor their significant contribution to sustainabledevelopment.The 2007 award was given to Al Gore forraising public awareness about climatechange through public speaking, publishingbooks, arranging rock concerts and featuringin the renowned documentary film “An InconvenientTruth”.Previous prize winners include Mrs. GroHarlem Brundtland, Forest StewardshipAl Gore was awarded with the 2007Gothenburg Award on SustainableDevelopmentCouncil and KRAV, Abahuzamugambi CoffeeCooperative from Rwanda and the Toyotaengineers, Takeshi Uchiyamada, TakehisaYaegashi and Yuichi Fujii, who developed theworld’s first commercial hybrid vehicle, ToyotaPrius.Shell Eco-marathonSKF has been involved in the Shell Eco-marathonevent for several years and 2007 wasno exception. SKF was the official partner,supplying the participating teams with adviceand products.SKF France set up a website to support allparticipating teams during their designphase. Specialists were online to provideadvice regarding vehicle weight reduction,how to reduce friction, the correct use oflubricants and also to propose products suitablefor the specific needs of their vehicles.During the race, specialists were stationedon the SKF stand to answer questions and giveadvice to participants about various aspectsof automotive mechanical engineering.SKF gift certificatesSKF created an alternative to regular giftsand souvenirs in conjunction with the 100thAnniversary celebrations. Instead of givingstationery or gadgets as gifts to participantsduring conferences, meetings or celebrations,SKF hosts were given the opportunityto donate the money on behalf of the participantsfor environmental or social improvement.This was very well-received by theemployees and around SEK 1 million wascollected for two charitable organizations– the SOS Children’s Villages and the WorldChildhood Foundation. At the SOS Children’sVillages, the money will be used to supportthe building of a new children’s village calledAstrid Lindgren’s Village in Bouar, CentralAfrican Republic, equipped with twelve familyhouses, one kindergarten, a primary schoolfor more than two hundred children and amedical clinic. The World Childhood Foundationis using the donation to fund initiativesby social entrepreneurs to implement innovativemethods and models helping childrenin institutions, abused children, girls andyoung mothers. One example is the EveryChild Project in Ukraine and Moldavia, supportingthe possibilities for young mothers tokeep their children.SEK 304,800 was donated to a hydropowerconstruction project in southern Indiathrough The CarbonNeutral Company. Theproject selected has been approved as a CertifiedEmission Reductions (CER) project inthe Clean Development Mechanism (CDM)under the Kyoto Protocol which requires ahigh level of transparency. The certificationon the reduced amount of carbon dioxideemissions is carried out and granted by theCDM Board of the United Nations FrameworkConvention on Climate Change. The amountcollected from the gift certificate initiative isequivalent to the purchase of 2,015 tonnes ofCertified Emission Reductions (CER) credits.Sustainability Report 121

Key performance indicatorsSKF adopted the “Sustainability Reporting Guidelines” in 2000 whenthey were issued by the Global Reporting Initiative (GRI). GRI is an internationalbody promoting the voluntary reporting of the economical,environmental and social impact of an organization’s activities, productsand services. This 2007 report is based on the applicable parts ofthe G3 Guidelines. The G3 GRI content index can be found onwww.skf.com.units are included when they are on the same site as manufacturingor logistics. Separate sales offices are excluded due to their minorenvironmental impact. Joint ventures are included where SKF hasmanagement control. The section on Employee Care relates to SKF’smanufacturing sites, technical and engineering centres and logisticslocations and those units providing installation and maintenanceservices to customers.Transparency of informationThe financial data in this report has been verified externally andsubject to a full external audit. The Auditor’s Report can be found onpage 92. The sustainability data has been reviewed by independentexternal auditors, in accordance with FAR SRS (the institute for theaccounting profession in Sweden) standard RevR 6 Independent limitedreview of voluntary separate sustainability report andAccountAbility’s AA1000 Assurance Standard. The IndependentAssurance Report is on page 124.Reporting scopeThe reporting period is January-December 2007. The financial sectionof the report encompasses all the units within the Group. Thesection on Environmental Care covers the Group’s manufacturingsites, technical and engineering centres and logistics locations. SalesThe previous SKF Sustainability Report for 2006 was issued in March2007, as an integral part of SKF’s 2006 Annual Report. The scope ofthis 2007 report has changed due to the following:• The establishment of the SKF Dalian LSB factory, China, the acquisitionsof Economos - Judenburg, Austria, Muurame, Finland,Valenciennes, France, and Pianezza, Italy, in 2007. Figures fromthese factories were consolidated in the SKF Group for the first timein 2007.• The closure of SKF’s operation in Uitenhage, South Africa, in 2007.Figures from the factory were included for part of 2007.• SKF’s forging operation in Luechow, Germany, was sold-off in 2007.Figures from the factory were included for part of 2007.• SKF’s factories in Aiken and Springfield, USA, were closed in 2006.Figures from these factories were not included in the 2007 data.Table 1 Status of ISO 14001 and OHSAS 18001 implementation at recently acquired SKF unitsCountry Company Target dateCanada SFF Canada Ltd. 2008China SKF Technologies Shanghai Co. Ltd. 2008USA SKF Polyseal Inc. - Salt Lake City 2008USA SKF Polyseal Inc. - LaVerkin 2008Austria Economos - Judenburg 2009France Economos - Vernouillet 2009Canada S2M 2009USA Baker Instruments Co. 2009USA Preventive Maintenance Co. Inc. (PMCI) 2009Taiwan ABBA 2009In 2007, the Salt Lake City, LaVerkin and Linköping sites were not ISO 14001 / OHSAS 18001 certified according to certification plan. The Salt Lake City and LaVerkin sites were given additionaltime to complete their certifications due to the fact that they went through an ownership restructuring process in 2007. The Linköping site was taken out of the certification plan due to the smallsize of their operations.Table 2 Total consumption of electrical energy, fossil fuels and other hydrocarbons in 2002-2007 for the SKF Group.Units 2007 2006 2005 2004 2003 2002Electrical energy GWh 1,400 1,390 1,660 1,860 1,770 1,730Fuel oil tonnes 1,990 3,590 9,190 13,310 15,000 13,250Natural gas 1,000 m 3 (std) 38,440 39,100 41,760 39,460 42,350 45,150Coal 1) tonnes 2) 440 1,180 6,270 11,460 10,240 9,860Liquefied petroleum gas (LPG) tonnes 1,300 1,390 11,080 18,220 17,670 17,430Oils tonnes 11,310 11,930 11,960 11,880 10,600 10,800Grease tonnes 1,730 1,800 1,780 1,750 1,450 1,420Synthetic rubber tonnes 5,040 4,790 4,710 4,530 4,530 4,760Solvents tonnes 1,600 1,890 2,010 2,030 2,040 2,260Production volume change % +12 +5 +1 +8 +31).Coal (carbon) was used by SKF as an alloying element in steel production, not as a fuel.2).Only metric tons are used in this report.122 Sustainability Report

Table 3 Carbon dioxide emissions associated with energy consumption by SKFEnergy sourceCarbon dioxide (CO 2) emissions tonnes*Scope 1 2007 2006**LPG 3,896 4,178Fuel Oil 5,902 11,390Natural Gas 74,621 77,177Total 84,419 92,745Scope 2Electricity 434,436 434,243Heating energy 42,036 46,329Total 476,472 480,572Scope 1 and 2 560,891 573,317Production volume change % +12* Adjusted for aquisitions and divestments in accordance with WBCSD GHG protocol (see www.ghgprotocol.org for details). Unadjusted data available at www.skf.com.** 2006 figures re-stated with revised emissions factors - see page 115 for detailed explanation.Table 4 Recycling 1 percentages for main residual products.MaterialTotal quantity2007Recycling %2007Recycling %2006Recycling %2005Recycling %2004Recycling %2003Turning chips 92,920 100 100 100 100 100Other scrap metal 76,600 100 100 100 100 100Grinding swarf 25,130 67 65 64 62 66Used oil 5,510 93 76 93 75 73Paper and cardboard 2) 4,220 97 98 98 92 921)Incineration is regarded as recycling if it includes energy recovery.2)The quantity is probably somewhat underestimated, because some paper is discarded together with miscellaneous waste.Table 5 A summary of employee performance data for the SKF GroupSKF dataPercentage of units with independent trade unions 70%Percentage of units with joint health and safety committees 99%Units with HIV/AIDS programmes 24%Percentage of units with women in senior management positions 77%Percentage of units with freedom of association policy allowing collective bargaining 100%Non-compliance with child labour laws 0Registered grievances for forced/compulsory labour 0Table 6 Health and safety statistics for the SKF GroupParameter1)Monitoring of automotive, industrial and service units increased during 2003-2007.2)Requires minimum of 50,000 hours worked in accident-free year to qualify.3)The accident rate is the average for monitored units within the Group. Some sales and administration offices are not monitored by the Zero Accidents programme, as the safetyrisks are relatively low in these areas.4)Includes all sales and administration offices.Result2007 2006 2005 2004 2003 2002Number of reporting units 1) 204 197 192 171 162 151Number of units with zero accidents for one year minimum 104 88 80 59 58 49Number of units qualifying for “Zero Accidents Award” 2) 74 54 55 36 42 32Number of “recordable” accidents in the Group 537 536 646 833 910 1,175Accident rate 3) 1.53 1.72 2.06 2,69 3.0 3.98Number of employees (registered) 4) 42,888 41,090 37,454 39,867 38,700 39,739Sustainability Report 123

Independent Assurance ReportTo the readers of SKF’s sustainability report:At the request of AB SKF, we have performed a review of SKF’ssustainability report 2007. The sustainability report is presented onpages 107-123 of the SKF’s Annual Report 2007 including SustainabilityReport, and on SKF’s website in “Topics related to AnnualReport 2007, including Sustainability Report”, in the form of environmentalperformance data, Zero Accidents Award winners and compliancewith GRI Guidelines (www.skf.com, Investors and Reports)Our undertaking consisted of performing a review of quantitativeand qualitative information in the sustainability report. The purposeof our review is to express whether we have found any indications thatthe sustainability report is not, in all material respects, drawn up inaccordance with the criteria stated below. The review has been performedin accordance with FAR SRS (the institute for the accountancyprofession in Sweden) standard RevR 6 Independent limited review ofvoluntary separate sustainability report and AccountAbility’s AA1000Assurance Standard.In accordance with the AA1000 Assurance Standard, we confirmthat we are independent of AB SKF and impartial in relation to SKF’sstakeholders.SKF’s Executive Management is responsible for the day-to-dayactivities regarding environment, health, safety, quality and sustainabledevelopment, as well as the sustainability report. SKF ExecutiveManagement approved the sustainability report in 31 January 2008.Our task is to express an opinion on the sustainability report basedon our review.The sustainability report has been prepared based on applicableparts of the Sustainability Reporting Guidelines, G3, issued by theGlobal Reporting Initiative (GRI) and specific measurement and reportingprinciples developed and stated by SKF. Together these form thecriteria used in the course of performing our review procedures.The scope of our review included the following activities:• Discussions with Senior Executives concerning material sustainabilityaspects and activities during the reporting period with aspecial focus on the Groups business risks related to these issuesand reporting of these.• Review of information on the scope and limitations of the contentof the sustainability report.• Review of the Group’s principles for reporting sustainabilityinformation.• Discussions with management representatives on the compilationof sustainability data and information, and on the process of developingthe sustainability report.• Review of the Group’s system, and routines for registration,accounting and reporting of sustainability performance data.• Pre-announced visits at five of SKF’s sites located in Hanover,Nilai, Poznan, Saint-Cyr and Valenciennes. Interviews with localmanagement and key sustainability personnel in order to ensurethat sustainability performance data is reported, in all materialrespects, in a uniform manner and in accordance with the reportingprinciples.• Review of underlying documentation, on a test basis, to assesswhether the information in the sustainability report is based onthat documentation.• Review of qualitative information and statements, as well asthe report on compliance with legislation, permits and conditionsrelated to sustainability.• Interviews with certain external and internal stakeholders to verifythat SKF responds to important stakeholders’ concerns in the sustainabilityreport.• Overall assessment of the sustainability report to form an opinionas to whether the reported information, in all material respects,reflects stakeholder requirements regarding sustainability information.• Review to ascertain that the contents of the sustainability reportdoes not contradict other information in Annual Report 2007including Sustainability Report.• Discussion with Senior Executives regarding the results of ourreview.Based on our review procedures, nothing has come to our attentionthat indicates that SKF’s sustainability report 2007 has not, in allmaterial respects, been prepared in accordance with the abovestated criteria.KPMG Bohlins ABGöteborg 31 January 2008Thomas ThielAuthorized Public AccountantKarin SivertssonExpert member FAR SRS124 Sustainability report Report

Lennart Johansson, In memoriam 1921–20081943 Joined SKF1968–1971 Deputy Managing Director1971–1985 Managing Director1985–1992 Chairman1992–2008 Honorary ChairmanLennart Johansson was born in 1921 in Gamlestaden, Göteborg,Sweden, a stone’s throw from SKF, where he spent fifty years workinguntil 1992. He graduated from Göteborg´s Technical High School in1941, and two years later started work at the D factory at SKF. Justover ten years later he was appointed head of the same factory andgradually advanced to manager of what was then called the Gothenburgdivision. He became deputy Managing Director of the Group withresponsibility for manufacturing and information systems and wasalso in charge of a number of major investment projects. In 1971 hewas appointed Managing Director, a position he held until 1985 whenhe became Chairman of SKF. Upon his retirement as Chairman in1992 he was appointed Honorary Chairman.Lennart Johansson was an engineering omnivore, with a specialfocus on developing grinding machines. He was a gifted constructionengineer and innovator, with a passionate interest in all advancedtechnology from gearboxes to watches of all kinds, fromtooling machines to cameras. He was rewarded for his efforts withthe Swedish Royal Engineering Academy’s Gold Medal, and receivedHonorary Doctorates of Engineering from Chalmers Institute of Technologyand from the University of Sarajevo in Bosnia-Herzegovina.Many people benefited from his capacity as an industrialist and businessman.He was Chairman of the Federation of Swedish Industriesfrom 1985 to 1987, and was also vice chairman of SAF and the SwedishMetalworking Industries’ Association. He was on the boards of, amongstothers, Volvo for 20 years, SEB for 15 years, Skanska, Asea, Stora,ESAB, Atlas Copco, Broströms and Investor. Despite all these majorassignments he always prioritized his duties at SKF.At the beginning of the 1970s Lennart Johansson realized thatthe new Europe would mean major challenges for the company. SKFwas also under attack, mainly from competition from the Far East.He began restructuring the Group in a way that still has no equal inEuropean industrial history. The project was called GFSS – GlobalForecasting and Supply System. SKF at that time was a large companywith a number of relatively independent units throughoutEurope manufacturing the whole range sold on their local market.The restructuring led to the Group regarding Europe as a single market,with each factory responsible for a limited part of the range, butsupplying it for the whole of the European market. This involved amajor re-location of production and jobs between different countries.Lennart Johansson succeeded in convincing governments, tradeunions and the company of the need for this dramatic change. Theproject took almost ten years to complete and ensured SKF retainedits world-leading position.Lennart Johansson was an exciting combination of prominentengineer and strong, brilliant leader. He had a remarkable abilityto build consensus at board and management levels and maintainedgood relations with the unions throughout SKF’s internationalorganisation.His leadership was characterised by simplicity, generosity andhuman warmth. He always acted with strength and determination.Those who had the privilege of working closely with Lennart overmany years will always remember him as a great leader and goodfriend. Those of us working at SKF today owe him a huge debt ofgratitude.Lennart Johansson – In memoriam 125

Management as of 31 December 2007* member of the Group Executive CommitteeTom Johnstone Tore Bertilsson Henrik LangePhil KnightsSenior Vice President, Global Relationsas of 2 April 2008Vartan VartanianPresident, Service Divisionas of 2 April 2008Tryggve SthenCarina BergfeltLars G MalmerRetired on 31 December 2007Ingalill Östman,Senior Vice President, GroupCommunication as of 1 January 2008Eva HansdotterTommy G KleinBo-Inge StenssonGiuseppe DonatoAlan BeggManfred Neubert126 Management

Tom Johnstone*President and Chief Executive OfficerBorn 1955Master of Arts degree, the University of Glasgow,Honorary Doctor’s degree in Business Administration,the University of South Carolina, USAEmployed since 1977. Previous positions within SKF:Executive Vice President AB SKF and President,Automotive Division and several other positions.Board member: Husqvarna AB and the Associationof Swedish Engineering IndustriesShareholding in SKF: 41,196 and 90,731 stock optionsTore Bertilsson*Executive Vice President, AB SKF and ChiefFinancial OfficerBorn 1951Bachelor of Science in Economics, School of Business,Economics and Law, Göteborg UniversityEmployed since 1989. Previous positions within SKF:Group Treasury DirectorBoard member: Trygg-stiftelsen, Ågrenska ABand Momentum Maintenance Supply ABShareholding in SKF: 10,000 and 49,244 stock optionsHenrik Lange*President, Industrial DivisionBorn 1961MBA in international Economics and BusinessAdministration, School of Business, Economicsand Law, Göteborg UniversityEmployed since 2003 and 1988-2000. Previouspositions within SKF: Senior Vice President, GroupBusiness Development and several other positions.Phil Knights*President, Service DivisionBorn 1948Bachelor of Arts in Economics, the University ofExeter, and IMD Senior Executive ProgrammeEmployed since 1996 and 1987-1993. Previouspositions within SKF: President of South East AsiaPacific operations.Board member: Endorsia.com International ABShareholding in SKF: 55,546As of 2 April 2008Senior Vice President, Global RelationsAs of 2 April 2008Vartan Vartanian*President, Service DivisionBorn 1953Bachelor of Applied Sciences - Mechanical Engineering,University of TorontoEmployed since 1990. Previous positions within SKF:Area Director, Europe and several other positions.Shareholding in SKF: 18,529 and 10,000 stockoptionsTryggve Sthen*President, Automotive DivisionBorn 1952Master of Science (M.S.E.E.) in Technical Physicsand Electrotechnology, Linköping UniversityEmployed since 2003Carina BergfeltGeneral CounselBorn 1960Master of Law, Lund UniversityEmployed since 1990. Previous positions within SKF:Legal Counsel, Secretary to the Board since 1996Board member: The Association of Exchange-listedCompanies and Göteborgs Symfoniker ABShareholding in SKF: 1,000 and 18,628 stock optionsLars G MalmerSenior Vice President, Group CommunicationBorn 1943School of Journalism, GöteborgEmployed since 1974. Previous positions within SKF:Head of Corporate Communications and severalother positions.Board member: West Sweden Chamber ofCommerce and Industry, International Council ofSwedish Industries, Chalmers Teknikpark andIHM Business SchoolShareholding in SKF: 35,351 and 18,628 stock optionsRetired on 31 December 2007.As of 1 January 2008Ingalill ÖstmanSenior Vice President, Group CommunicationBorn 1956Master of Science in Mechanical Engineering,Luleå University of TechnologyEmployed since 2008Board member: FVB Sverige abShareholding in SKF: 1,000Eva HansdotterSenior Vice President, Group Human Resourcesand SustainabilityBorn 1962Bachelor of Science in Information Systems,Göteborg UniversityEmployed since 1987. Previous positions within SKF:Human Resources Director, Industrial Divisionand several other positions.Member of SNS Board of TrusteesShareholding in SKF: 9,315 stock optionsTommy G KleinSenior Vice President, Group Business Developmentand Six SigmaBorn 1947Tele Technology, Electromechanical Technology,MalmöEmployed since 2005Board member: Endorsia.com International AB andPullmax ABShareholding in SKF: 680Bo-Inge StenssonSenior Vice President, Group Demand Chain and ITBorn 1961Master of Science Industrial & MechanicalEngineering, Linköping Institute of TechnologyEmployed since 2006Giuseppe DonatoSenior Vice President and AdvisorBorn 1944Degree in Engineering in Electronics andTelecommunications, the Polytechnic Universityof TurinEmployed since 1979. Previous positions within SKF:President, Electrical Division and several otherpositions.Council Member: Confindustria Rome (Proboviro),Unione Industriale Turin, FINSAA - MBA Schoolof the University of Turin and General Councilmember of ASSONIME_Rome. Appointed ”Cavalieredel lavoro” by the President of the ItalianRepublic on 2 June 2004.Shareholding in SKF: 5,000Alan BeggSenior Vice President, Group TechnologyDevelopment and QualityBorn 1954Masters degree and PhD, University of CambridgeEmployed since 2007Fellow of Royal Academy of Engineering, UKManfred NeubertPresident, SKF GmbHBorn 1953Master of Economics, Business AdministrationEmployed since 2004Board member: WEHACO HannoverCouncil member: Employers association GermanMetal IndustryManagement 127

GlossarySKF’s platformsBearings & units The broad range of bearingtypes produced globally by SKF offerscustomers an assortment of high-quality,high-performance, low-friction, standardand customized solutions to critical andstandard applications. Units are productcombinations integrated into solutions withunique performance, used in specifi c applicationsrequiring a compact design, combinedperformance and light weight.Lubrication system SKF offers products,solutions and vast support within areas such asindustrial lubricants, lubrication consultancy,lubricator equipment, lubrication assessment,lubricant analysis, lubricant recommendationsand automatic lubrication systems.Seals SKF provides innovative solutions inelastomers or engineered plastics to meetthe needs of various industries for static,rotating, reciprocating and bearing seals.Services The service platform delivers valueby addressing the entire life cycle of a particularasset. The design phase, is covered bydifferent aspects of engineering consultancyand R&D services. The operations stage,which is the main part of the asset life cycle,is covered by a variety of solutions includingservices and service-related products focusingon maintenance strategy, predictivemaintenance, maintenance and logistic services.The last part of the life cycle is coveredby services and service-related productsfocusing on upgrades, refurbishment, bearingdismounting and mounting, alignment,balancing and post-maintenance testing. Awide spectrum of training is available forcustomers, on and off site, around the globe.Mechatronics The mechatronics platformenhances customer value by combining SKF’sstrong mechanical experience and electronictechnology. The platform covers systems forprecision multi-axis positioning, intelligentmonitoring and by-wire applications, as wellas components such as ball & roller screws,actuators, rail guides and sensor modules.A number of mechanical and electronic productsare combined into modules and subsystemsaddressing unique needs where SKFhas specialist industrial-specifi c expertise.The platform and segment approachThe platform and segment approach is SKFspecific and based on combining strong technologyfocus from the platforms and strongcustomer focus from the segments.SKF has defi ned about 40 customer segmentsin which it operates. Examples ofthese segments include the automotive, windpower, railway, machine tool, medical, foodand beverage and the paper industries.Based on a strong understanding of currentand future customer needs and challenges,SKF utilizes the capabilities of all orsome of its platforms to develop tailormadeoffers for each of its customer segments. Inthis way, SKF can offer its customers specifi coffers with improved performance, reducedenergy consumption and reduced total cost,while giving SKF greater added value and betterprice quality.AA 1000 Assurance Standard • An internationallyrecognized standard for assessing,verifying, and strengthening an organization’ssustainability reporting. The AA1000AS is designed to be consistent with, and toenhance, the Global Reporting Initiative (GRI)Sustainability Reporting guidelines. Thestandard requires the independent auditorsto assess a sustainability report againstMateriality, Completeness and Responsiveness.Ball bearings versus roller bearings • Themain difference in the performance of thesetwo bearing types is that ball bearings havelower friction than roller bearings, while rollerbearings have a higher load-carrying capacity.By-wire technology • In by-wire systems,the direct mechanical control of a machine isreplaced by electronic control.Carbon dioxide • A common gas withthe chemical formula CO 2. This gas is generatedin various processes in nature and incombustion of most fuels. CO 2contributes tothe global greenhouse effect.Condition monitoring • By regularly measuringvibration levels in bearings andmachines, maintenance factors impacting onbearing service life and machine operationcan be controlled. Condition-monitoringinstrumentation and software enable theearly detection of bearing and machineryproblems, making it possible for techniciansto take the necessary steps in order toaddress a problem before it results in unanticipateddowntime.EHS • Environment, health and safety.Elastomer • Synthetic rubber.endorsia.com • An e-commerce networkthat connects industrial customers, distributorsand suppliers via the internet. A dynamicelectronic marketplace for branded industrialgoods and services. Jointly owned by SKF,Sandvik, Rockwell Automation, INA and Timken.128 Glossary

Ferroalloy • Alloy containing iron andone or more other metals. Used as a rawmaterial in steel mills for obtaining thedesired composition of the steel.Friction • A force that counteracts movementbetween contact surfaces. Friction is bynature complex and is calculated by means ofan empirical factor. Friction consumes energyand generates heat in rotating machinery.Gigawatt hour (GWh) • One million kilowatthours (kWh). Measure of electrical energyquantity.GHG protocol • The GHG Protocol CorporateStandard provides standards and guidancefor companies and other organizations preparinga GHG (green house gas) emissionsinventory. Through the use of standardizedapproaches and principles, it provides a clearand transparent reporting mechanism.Global warming • Increase in the averagetemperature world-wide, believed to be dueto the greenhouse effect.Greenhouse effect • The effect of certaingases when reaching the atmosphere to causea reduction of heat radiation from the earth,thereby probably causing global warming.Hub bearing unit • Easy-to-mount, compactbearing unit for passenger car wheels. It is basedon a double-row angular contact ball bearingand has integrated seals. It can be equipped witha sensor suitable for Anti-lock Braking Systems(ABS), traction control and so on.Integrated Maintenance Solution (IMS) •An IMS contract is an expanded trouble-freeoperation programme which consists servicessuch as training, installation supervision,root cause failure analysis and the conditionmonitoring of rotating machinery.Landfill • Designated area for disposal of waste.Large size bearings • The range includesstandard bearings as well as bearings tailoredfor specific applications. Bearings with anoutside diameter of more than 420 mm areconsidered as large. The bearings are availableboth in metric and inch dimensions.Life cycle analysis • Systematic analysis ofall environmental impacts of a product duringits entire life cycle, i.e. from raw material toend-of-life product recovery or disposal.Linear products • A common name for components,units and systems for linear movement.They include linear bearings, profilerail guides, linear ball bearing slides and so on.Liquefied Petroleum Gas (LPG) • Propane,butane or similar hydrocarbon gas, compressedto liquid form.Lubricant • Grease, oil or other substance tofacilitate the motion of surfaces relative toeach other, e.g in a bearing.Machine tool bearings • Stringent demandsare imposed on bearing arrangements inmachine tools and the bearings must have ahigh level of running accuracy and stiffness,coupled with low friction, in order to obtainmachining accuracy.OHSAS 18001 • Occupational Health andSafety Assessment Series management systemtargets at controlling occupational healthand safety (OH&S) risks as well as to improveperformance in the area. It is compatible toISO 9000 (Quality Management System) andISO 14001 (Environmental ManagementSystem).Original Equipment Manufacturer • Customerswho buy bearings to use in their ownproducts, such as manufacturers of cars,household appliances, gearboxes and so on.Remediation • Clean-up and restorationof a contaminated site.Resetting • Re-adjusting the machines in aproduction channel for the manufacture ofvarious bearing sizes. Reducing resettingtime increases the availability of bearingsizes and thus improves customer service. Afurther benefit is that inventory can be keptat a lower level.Residual product • Other product thanthe main product from a production process.It may or may not have a net value. Residualproducts without a positive net value arewastes.Self-aligning ball bearing • This bearingtype, invented in 1907 by SKF’s founder SvenWingquist, solved one of the largest industrialproblems of the time – the continualproduction stoppages caused by bearing failure.As the alignment of the shafts was notaccurate enough for the rigid ball bearingsthat were normally used, the bearings faileddue to misalignment. The two-row, selfaligningball bearings accommodated themisalignment without reducing service life,thereby solving the problem.SKF@ptitude • An online web-enabledsource for asset management knowledgethat provides access to the global expertise ofSKF and its alliance partners. Subscribersgain instant access to a knowledge bank ofdocuments including articles, technical handbooks,best practices and benchmarkinginformation, as well as web-based interactivedecision-support services.Superfund site • Old landfill or plantsite in the United States with soil or groundwatercontamination, subject to a remediationprogramme according to a federal law.Remediation funding is provided by thosewho contributed to the contamination.Six SigmaSKF Six Sigma is a continuous improvementprogramme within SKF that targets wasteand defects in all business processes. SKF SixSigma projects are run by extensively trainedBlack Belts and Green Belts, where BlackBelts are required to run two projects a yearand Green Belts one project a year. Withinthe SKF Six Sigma programme are a numberof tools and methodologies ranging from traditionalDMAIC and Design for Six Sigma toLean and other waste reducing methodologies.The foundations for SKF Six Sigmaimprovements are that they are fact basedand sustainable and contribute to the businessobjectives.Design for Six Sigma (DfSS) • A methodologywhich focus on developing new productsand services to the market with optimalperformance levels.Lean Six Sigma • A methodology which combinestools from both Lean Manufacturingand Six Sigma. Lean focuses on speed andwaste, Six Sigma on variation and quality -the result is better quality faster.Six Sigma for Growth • A customer focusedapproach and targets improvements in thegrowth areas such as marketing, sales anddistribution.Transactional Six Sigma • Focuses on peopleprocesses such as service, sales and HR.Glossary 129

Seven-year review of the SKF Group 1)SEKm unless otherwise stated 2001 2002 2003 2004 2005 2006 2007Income statementsNet sales 43,370 42,430 41,377 44,826 49,285 53,101 58,559Operating expenses -39,852 -38,480 -38,189 -40,461 -44,215 -47,110 -51,036Other operating income and expenses, net 104 40 100 72 85 -22 19Profit (+)/loss (-) from jointly controlled and associated companies 12 32 19 -3 172 738 -3Operating profit 3,634 4,022 3,307 4,434 5,327 6,707 7,539Financial income and expense, net -514 -480 -506 -347 -74 -320 -401Profit before taxes 3,120 3,542 2,801 4,087 5,253 6,387 7,138Taxes - 909 -1,055 -703 -1,111 -1,646 -1,955 -2,371Net profit 2,211 2,487 2,098 2,976 3,607 4,432 4,767Attributable to:Shareholders of AB SKF 2,167 2,466 2,042 2,926 3,521 4,317 4,595Minority interest 44 21 56 50 86 115 172Balance sheetsIntangible assets 1,270 1,063 874 1,079 1,583 2,586 3,516Deferred tax assets 540 604 940 718 862 948 989Property, plant and equipment 13,599 12,418 11,138 11,012 11,119 11,388 11,960Non-current financial and other assets 1,814 1,762 836 803 2,263 1,429 1,769Inventories 9,113 8,987 8,429 8,985 9,931 9,939 11,563Current financial assets 12,829 12,370 12,858 10,971 13,020 17,848 14,169Other current assets 1,269 1,473 1,477 1,446 1,571 2,100 2,365Total assets 40,434 38,677 36,552 35,014 40,349 46,238 46,331Shareholders’ equity 16,815 16,935 15,852 17,245 18,233 19,607 18,355Provisions for pensions/post employment benefits 7,044 6,076 7,885 4,655 4,916 4,731 4,840Deferred tax provisions 1,430 1,859 1,124 1,091 1,092 1,243 1,333Other provisions 3,429 3,271 2,371 1,927 2,210 1,919 2,029Financial liabilities 6,767 6,007 4,801 5,014 8,215 12,754 13,015Other liabilities 4,949 4,529 4,519 5,082 5,683 5,984 6,759Total equity and liabilities 40,434 38,677 36,552 35,014 40,349 46,238 46,331Key figures 2) (in percentages unless otherwise stated)Return on total assets 9.9 11.0 9.5 12.7 14.5 16.8 17.1Return on capital employed 14.9 17.1 13.9 19.0 21.8 24.7 25.4Return on shareholders’ equity 14.3 15.6 13.4 17.9 20.7 23.6 25.5Operating margin 8.4 9.5 8.0 9.9 10.8 12.6 12.9Turnover of total assets, times 1.08 1.07 1.10 1.24 1.28 1.27 1.25Portion of risk-bearing capital 46.3 49.4 46.4 52.4 47.9 45.1 42.5Gearing 38.6 33.4 37.4 24.9 33.2 39.1 40.1Equity/assets 41.6 43.8 43.4 49.3 45.2 42.4 39.6Investments and employeesAdditions to property, plant and equipment 1,403 1,442 1,379 1,401 1,623 1,933 1,907Research and development expenses 871 767 750 784 837 875 900Patents - number of first filings 171 158 151 189 176 175 186Average number of employees 37,636 38,609 37,632 38,502 37,454 39,780 41,645Number of employees registered at 31 December 38,091 39,739 38,700 39,867 38,748 41,090 42,8881)Years prior to 2003 are reported according to Swedish GAAP.2)See Note 1 to the consolidated financial statements for definitions of key figures.130 Seven-year review of the SKF Group

Three-year review of the SKF divisions/segments 1)SEKm unless otherwise stated 2005 2006 2007Industrial DivisionNet sales 14,821 17,176 19,266Sales incl. intra-Group sales 23,695 26,698 29,318Operating profit 2,374 3,027 3,430Operating margin 2) 10.0% 11.3% 11.7%Assets and liabilities, net 10,054 11,543 13,776Registered number of employees 16,513 17,760 18,650Service DivisionNet sales 16,419 17,984 19,597Sales incl. intra-Group sales 18,080 19,761 21,393Operating profit 2,120 2,362 2,846Operating margin 2) 11.7% 12.0% 13.3%Assets and liabilities, net 3,359 3,437 4,342Registered number of employees 5,025 5,279 5,780Automotive DivisionNet sales 17,050 17,869 19,617Sales incl. intra-Group sales 20,882 21,807 23,795Operating profit 499 946 1,154Operating margin 2) 2.4% 4.3% 4.8%Assets and liabilities, net 8,772 9,786 9,552Registered number of employees 16,053 16,832 17,1851)Previously published amounts have been restated to conform to the current Group structure in 2007. The structural changes include business units beingmoved between the divisions and from other operations to divisions.2)Operating margin is calculated on sales including intra-Group sales.Three-year review of the SKF divisions/segments 131

General informationAnnual General MeetingThe Annual General Meeting will be held atSKF Kristinedal, Byfogdegatan 4, Göteborg,Sweden, at 15.30 on Wednesday, 16 April2008.For the right to participate in the meeting,shareholders must be recorded in theshareholders’ register kept by VPC AB byThursday, 10 April 2008, and must notify thecompany before 12 noon on Thursday 10April 2008 via the internet, www.skf.com, orby letter toAB SKFGroup LegalSE-415 50 GöteborgSwedenor by fax +46 31 337 16 91or by telephone +46 31 337 25 50When notifying the company, preferably inwriting, this should include details of name,address, telephone number, registeredshareholding and advisors, if any. Where representationis being made by proxy, the originalof the proxy form shall be sent to thecompany before the date of the meeting.Shareholders whose shares are registeredin the name of a trustee must have theshares registered temporarily in their ownname in order to take part in the meeting.Any such re-registration for the purpose ofestablishing voting rights shall take place byThursday, 10 April 2008. This means that theshareholder should give notice of his/herwish to be included in the shareholders’register to the trustee in plenty of timebefore that date. A re-registration fee willnormally be payable to the trustee.Payment of dividendThe Board of Directors proposes a dividendof SEK 5.00 per share for 2007. 21 April2008, is proposed as the record date forshareholders to be entitled to receive dividendsfor 2007. Subject to acceptance by theAnnual General Meeting, it is expected thatVPC AB will send out notices of payment on24 April 2008.Financial information and reportingAB SKF will publish the following financialreports in 2008:Year-end report 2007 31 JanuaryAnnual Report 2007 12 MarchFirst-quarter report 2008 16 AprilHalf-year report 2008 15 JulyNine-month report 2008 16 OctoberThe reports are available in Swedish andEnglish. The financial reports are publishedon SKF’s website, www.skf.com (Investors /Reports). A subscription service for pressreleases and interim reports is available onthe website under News & Events/ Subscribe.Reports can also be ordered fromSKF Investor RelationsAnna AlteSE-415 50 GöteborgSwedenTelephone: +46 31 337 19 88fax: +46 31 337 17 22E-mail: skf.ir@skf.comContact persons:Ingalill ÖstmanSenior Vice President, Group CommunicationE-mail: ingalill.ostman@skf.comMarita BjörkHead of Investor RelationsE-mail: marita.bjork@skf.comwww.skf.com (Investors)SKF Group HeadquartersSE-415 50 GöteborgSwedenTelephone: +46 31 337 10 00www.skf.comCompany reg.no 556007-3495Bengt-Olof HanssonVice President, Corporate Sustainabilityand Managing Director, SKF (UK)SKF (UK) LimitedSundon Park RoadLuton LU3 3BLTelephone: +44 1582 490 049E-mail: bengt.olof.hansson@skf.comCautionary statementThis report contains forward-looking statements thatare based on the current expectations of the managementof SKF. Although management believes that the expectationsreflected in such forward-looking statements arereasonable, no assurance can be given that such expectationswill prove to have been correct. Accordingly, resultscould differ materially from those implied in the forwardlookingstatements as a result of, among other factors,changes in economic, market and competitive conditions,changes in the regulatory environment and other governmentactions, fluctuations in exchange rates and otherfactors mentioned in the Administration Report in thisAnnual Report.132 General information

The following topics related to the SKF Annual Report2007 including Sustainability Report are to be foundat www.skf.com, choose Investors and Reports.• Articles of Association• Code of Conduct• Environmental policy• Environmental performance data• Zero accidents – award winners• Production sites• Compliance with GRI Guidelines• AA1000 Assurance Standard• Carbon dioxide emissions, data® SKF, @PTITUDE, EXPONENTIA,SKF RELIABILITY SYSTEMS andEconomos are registered trademarksof the SKF Group.TMSKF Explorer and BeyondZero aretrademarks of the SKF Group.© SKF Group 2008Production: AB SKF and Admarco.Photo: SKF Group andthe photographer Anna Hult.Paper: Arctic volume, FSC-certifi edPrinting: Falkenbergs tryckeri, FSC-certifi ed

Aktiebolaget SKF • SE-415 50 Göteborg, Sweden • Telephone +46 31 337 10 00 • www.skf.com