Financial Information: Annual Report 2002

Although the "Business Restructuring" activities initiated from fiscal year 1998 increased sales and profits in the fiscal years 1999 and 2000, the global economic slowdown in 2001, triggered by the bursting of the IT bubble economy, rapidly cooled down demands for NSK products, resulting in reduced profits. At the same time, our customers are increasingly globalizing their operations, and with the regrouping of companies on a worldwide scale, competition is becoming more intensified. To cope with these global changes and to improve our profitability, we implemented the 2nd phase of our "Business Restructuring Program" in November 2001.
 This is not a temporary measure aimed at short-term profits. It is an "NSK Regeneration" project and the goal is to further reinforce our competitiveness and secure overall profitability in difficult environment. This can be accomplished only by aggressive reforms, that is, slashing unprofitable businesses and making our core businesses more competitive.
 The 2nd phase of our "Business Restructuring Program" is made of five key points:

1. Reforming the domestic employment structure
2. Reorganization of the production system in Japan
3. Reinforcement of management and profit accountability
4. Reduction of external procurement costs
5. Restructuring of our European business

 To reinforce our cost-competitiveness, we will reduce labor costs by 10% and external procurement costs by at least 15% in Japan. We will also reorganize and streamline production of our price-sensitive miniature, small-sized and standard ball bearings in Japan by shifting production to Asia.
 Our European business, which has long been hurt by the overvaluation of the British pound against the euro, will face restructuring. This restructuring will be accomplished by scaling down production in the U.K. of standard ball bearings and others products and shifting them to continental Europe, and by reducing over 1,500 employees. We believe we can become more competitive by divesting out of unprofitable businesses and concentrating on areas where NSK is dominant. Our production in the U.K. will specialize in value-added products such as automotive bearings and EPS and continental Europe will specialize in the commodity products. We are confident that our European business will become profitable at the operating income level in the fiscal year ending March 2004, when our restructuring efforts begin to take full effect.

NSK's corporate philosophy is to be proactive in both our defensive and offensive management strategies. We will reinforce standard ball bearings, automotive bearings, EPS and ball screws, products in which NSK is No.1 worldwide, as our core businesses. We have made efforts to enhance services by introducing supply chain management (SCM) and e-innovation. Development of major potential products such as our half toroidal continuously variable transmissions (CVTs), is also a priority.
 As a company that has continued to maintain the spirit of traditional "Japanese craftsmanship (Monozukuri)," NSK's No.1 competitive edge is our technology development capabilities. NSK has 13 technological centers worldwide, providing quick product and service response to meet customer needs of each region. The mainstay of NSK's R&D is located in Japan, where we develop next-generation technologies to support the Company's success in the 21st century. In April 2002, we unveiled our new Research and Development Center located on the site of our Fujisawa Plant in Kanagawa Prefecture with ¥4.8 billion in investments At the Center, we practice our innovative and precise "Monozukun" by integrating advanced technologies from our three major business divisions: bearings, automotive components, and precision machinery and parts businesses, for the development of large-scale, next-generation products. At the Center, we also improve fundamental technologies that form the basis of R&D in all divisions. We have already had progress in developing new products for future growth, such as electric linear actuators.
 NSK is about to launch two new initiatives. Spinning off business units is the first initiative.
 We will spin off our steering column business and precision machinery and parts business by the end of 2002. The market for automotive products is characterized by conglomerates and alliances among manufacturers; the precision machinery market is constantly experiencing major fluctuations in demand. These two markets require their own separate business models, different from our traditional model focused on bearings. Going forward, these two businesses will utilize strategies customized for their specific markets, strategies that are designed to increase adaptability and flexibility in business deployment and product development. Our Fukushima Plant, which is a production facility for small-sized ball bearings, has also been spun off to re-establish its business model. Our long-sought strategy to make NSK an assembly of streamlined, highly competitive business units, is now being implemented in these spin-offs.
 The second initiative of our management offensive is the formation of global alliances.
 In April 2002, we made an alliance agreement with AB SKF of Sweden, the world's largest manufacturer of bearings. Although this agreement is only a limited one, covering a phased transfer of aerospace bearings currently handled by our U.K. subsidiary to SKF, it is an epoch-making event that the world's top two bearing companies are now in partnership for the first time.
 We have also signed an alliance agreement with The Timken Company of the U.S., the largest supplier of tapered roller bearings in the world, to jointly establish a supply system to provide the Toyota Motor Corporation group companies with tapered roller bearings. At the same time, we are planning a joint venture with Timken to build an efficient tapered roller bearing production base in China.
 Furthermore, we are strengthening our relationship with NTN Corporation of Japan, which we have built up through the mutual supply of certain products on an OEM basis and sharing of intellectual property, with a new tie-up announced in June 2002. This comprehensive agreement will cover production and sales, technological support and procurement relating to our large-sized ball bearing business.
 Reorganization within the bearing industry has reduced the number of major players to approximately ten worldwide. We are determined to lead the formation of worldwide "superpower alliances" by taking advantage of our expertise in ball bearings and automotive bearings. We will also search out opportunities to strengthen our global position in areas other than bearings by working with the optimum partner.

Reform of the employment system is vital if we are to reduce our labor cost and increase our cost-competitiveness. It is time to make bold changes to the traditional seniority-based employment practices that have been prevalent in Japan for many years. A new employment system based on the performance of each business and individual employee contributions will be adopted by the newly spun-off companies and will subsequently be extended to the whole NSK organization.
 The "Management Innovation Project" implemented by the NSK Group since April 2001 has successfully increased cost consciousness throughout the organization, and our corporate culture is also dramatically changing. We are committed to creating a new, more dynamic corporate culture in which employees feel more self-esteem and responsibility in their jobs and are rewarded based on performance.
 "Double-digit operating income margins and ROE" are major goals of our "Mid-term Business Strategy." We will concentrate our efforts in returning to profitability at the operating income and net income levels for the fiscal year ending March 2003.

 The U.S. economy seems to have touched bottom and there are signs that the Japanese economy is picking up. However, a full-fledged capital spending recovery is still unclear. We are currently observing a sharp rise in our capacity utilization ratio from the upturn in the macroeconomic environment. However, our reform efforts will not be sidetracked by this situation. It is impossible to build a robust profit structure capable of adapting to economic fluctuations without fundamentally changing business structures. By working as a unified Group, we will achieve the "Creative Destruction" and complete our "Business Restructuring" activities, so that NSK can continue to exert its presence as a winning Group in the 21st century.
 We appreciate the continued understanding and support of our shareholders and investors in our management strategy.

July 1, 2002

Tetsuo Sekiya, Chairman of the Board

Seiichi Asaka, President & CEO