Financial Information: Annual Report 2004

	Risk Management

Due to the nature of its operations, NSK is exposed to various risks, some of which are listed below:
(Note: The following are risks that have been identified by the Company as of June 29, 2004, the date of our Annual Meeting of Shareholders.)

1. Country, Region, and Industry Risks

NSK products are sold to customers from a wide variety of industries in many countries and regions. Furthermore, our production facilities and sales offices are located all over the world. As a result, the NSK Group is exposed to both the economic environments of these countries, as well as the business environments surrounding our customers’ respective industries. The deterioration of economic conditions in relevant countries, regions and industries may have an effect on the NSK Group’s ability to deliver sustained earnings.

2. Market Risks

The competition NSK is facing is intensifying at a global level, and the surrounding business environment is changing at an accelerating rate.
  Low cost bearings produced by manufacturers from emerging countries such as China have infiltrated the standard ball bearing market. This is one example of a market risk. In addition, a delay in the overseas expansion of our automotive business could result in a loss of business opportunities. However, we consistently review our business policies to ensure that we have the right strategies to provide sustained profitability.

3. Customer-specific Risks

NSK’s sales tend to center on certain industries. Nearly half of our revenue is attained from sales of bearings and components to the automotive industry. Sales of our precision machinery and parts are weighted towards the semiconductor production equipment and machine tool sectors. Therefore, a down-cycle in demand in these industries would have a significant impact. To lessen this impact, we are expanding bearing and precision machinery sales to the general industrial machinery sector and to the aftermarket, where the demand source is varied.
  However, a dramatic drop in demand from such heavily relied-upon industries would quite likely impact the NSK Group’s overall financial performance and balance sheet.

4. Credit Risks

We believe most of NSK’s customers are comparatively stable companies with fairly low credit risk. We have a generally good accounts receivable turnover. Nevertheless, we have appropriated allowances for doubtful accounts.
  Given the long period of recession in Japan after the bubble economy, we feel the need to monitor the soundness of our customers’ capital base.

5. Business Alliance Risks

The NSK Group currently has a number of global business alliances, with the objective of efficiently using both companies’ management resources. Furthermore, we aim for a synergy effect in the areas of production, research and development. Essentially, we endeavor to maximize the advantages of our alliances. However, disputes regarding issues such as management and finance may prevent the joint venture from achieving the expected benefits and results. As such, the NSK Group may feel a negative impact on the overall financial performance and balance sheet.

6. Supplier Risks

To prevent over-dependence on a certain supplier, the NSK Group has a basic policy to procure materials and components from multiple suppliers. Due to the nature of an order though, there are cases where it is technically impossible to divide an order between two or more suppliers. In this case, quality problems or a supplier’s lack of production capacity may make procuring necessary materials or components impossible. Inevitably, the supply to our customers would be disrupted. In addition, when alternative materials and components are sought, quality problems and cost increases may result. In the end, the NSK Group’s overall financial performance and balance sheet would suffer.

7. Quality Risks

NSK products are used in a wide number of industries. In many cases, they are installed in areas requiring a high level of precision and safety, such as automobiles, railway vehicles, and airplanes. The NSK Group is acutely aware of the importance of quality and has established a highlevel quality assurance system. However, the possibility remains that an undetected critical defect could cause a serious accident, resulting in a large liability claim. Such an event would force a product recall, or force us to stop manufacture of the relevant product. This, in turn, would inconvenience our customers, who would then probably demand some form of compensation, thus negatively affecting the NSK Group’s reputation as well as overall financial performance.
  The NSK Group is covered by a global product liability insurance policy. For certain products, the Company is covered by a recall insurance plan. However, these insurance plans do not necessarily cover all damages.
  Regarding discontinued businesses, such as the seat belt business, NSK is liable for damages caused by NSKmanufactured products dating prior to the discontinuation.

8. New Product Development Risks

Developing new products is an integral part of our business. However, for a variety of reasons, newly developed products may not be well-received by the market, or our competitors may develop a product ahead of us. In order to minimize these types of risks, we must constantly maintain a pulse on the market.

9. Intellectual Property Rights and Risks

The NSK Group does not consider the shipment of products to be the end of our research and development process. The development cycle is considered complete when our original technologies become part of our intellectual property. We consider patents and intellectual property rights extremely important in maintaining our competitiveness. As such, we are applying for patents not only in Japan, but also to authorities in relevant countries.
  Because intellectual property rights are becoming so important, any third party claim of invalidity or infringement upon their intellectual property rights may impact our financial performance.

10. Global Business Expansion Risks

The NSK Group has expanded globally to the point where approximately half of our consolidated sales were to overseas customers in fiscal 2003. We have production sites in the U.S., Brazil, the U.K., Poland, Germany, China, South Korea, Indonesia, Malaysia, Thailand, and India. We also have sales offices all over the world. In expanding business overseas, NSK faces risks such as the possibility of being unable to recover invested capital as planned. There are also the inevitable risks common with all business expansion overseas, as listed below. Any of the following would certainly affect the NSK Group’s ability to deliver sustained earnings, and may adversely affect our financial position.

1. Unexpected changes in laws and regulations by local governments
2. Changes in social, political, and economic conditions, as well as the deterioration of public security
3. Problems in infrastructure, such as delays in transportation and power shortages
4. Foreign currency limitations and rate fluctuations
5. Unfavorable changes in taxation policies
6. Adoption of transfer pricing taxation
7. Implementation of protectionist trade regulations
8. Credit risks arising from differences in commercial practices
9. Changes in the labor market, including difficulty in recruiting and retaining human resources

11. Disaster and Terrorist Risks

Disasters such as earthquakes, floods, and fires, as well as terrorist incidents, are of great concern to the NSK Group. If the Company or its customers were to encounter such an event, this would have a major impact on our production and sales activities.
  Disaster and terrorism are two of the most important issues management faces today. While NSK is not fully insured for fires or natural disasters, we are taking every possible step to prevent any of the aforementioned events. However, it is extremely difficult to completely eliminate these risks.

12. Compliance Risks

The NSK Group issued NSK’s Business Ethics Regulations to ensure that laws and regulations are observed. We also released NSK’s Code of Conduct Policies, which defines the most important and basic rules that must be followed, such as anti-trust laws and export regulations. These documents are available on the Intranet and distributed as necessary. In addition, executive officers and employees learn these guidelines through educational programs, in an effort to reduce noncompliance risks.

13. Legal Risks

As the NSK Group is a manufacturer, past and present legal disputes have been concerned with mainly product liability. Therefore, our chief legal risks should continue to be product liability-related lawsuits, although we cannot dismiss the possibility of other legal disputes.

14. Environmental Risks

NSK has never caused major damage to the environment. However, if such were to occur, we would face the possibility of damage compensation, expenses for removing the damage/pollutant, fines, and the effect of production stoppages. The possibility also exists that we would have to appropriate a large amount of money to comply with new environmental regulations. These would have a negative impact on the NSK Group’s overall financial performance and balance sheet.

15. Information Systems Risks

For many years now, the NSK Group has been promoting the adoption of on-line systems to control production, sales, and logistics. As a result, computers play a large role in communication and routine duties, ranging from the receipt of orders through to the delivery of products. Any glitch in our computer systems can potentially disrupt production and seriously affect our customers’ production plans. This in turn could result in compensation liabilities, and damage our reputation.
　　In order to minimize risks associated with system failures, we have installed back-up systems in various locations around the world.

16. Labor Dispute Risks

The NSK Group has established a good, stable relationship with its labor union. But, as our operations become more globalized, rifts between the Company and the union could develop. Differences in local labor practices and regulations, changes in the economic environment, and other unexpected phenomena could all result in labor disputes that may disrupt business operations.

17. Foreign Exchange and Interest Rate Risks

The NSK Group currently has sales and production operations in various locations around the world. Therefore, foreign exchange fluctuations pose a risk to transactions and profits from investments denominated in foreign currencies.
　　NSK is currently working on strengthening its balance sheet position by reducing interest-bearing debts. However, the NSK Group is still vulnerable to any increase in interest rates. In order to reduce the negative impact of exchange and interest rate fluctuations, we are trying to balance our foreign-based credit and debt. As well, we are using forward exchange contracts consistent with internal guidelines to hedge exchange risks.
　　The financial statements of our overseas subsidiaries and affiliates are indicated in local currencies. However, when preparing consolidated financial statements, the amounts are converted into yen. Therefore, even if the results in local currencies do not change, the NSK Group’s assets, liabilities, profits, and expenses are all affected by foreign exchange fluctuations.

18. Retirement Benefit Liabilities

NSK Ltd. has adopted a defined benefit pension plan. This plan is also followed by the Company’s subsidiaries in Japan, as well as a number of overseas subsidiaries such as in the U.K.
  The NSK Group’s retirement benefit expenses and liabilities are calculated using assumptions such as discount rates and expected rate of return on plan assets. These assumptions, returns on investments, share prices of the entrusted stocks, and accounting policies could change. Consequently, such changes may have a negative impact on the NSK Group’s overall financial performance and balance sheet.