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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 0-23486


NN, INC.
(Exact name of registrant as specified in its charter)

Delaware 62-1096725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2000 Waters Edge Drive
Johnson City, Tennessee 37604
(Address of principal executive offices) (Zip Code)

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


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

Title of Name of each exchange
each class on which registered
---------------- -------------------------
None None

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

Common Stock, par value $.01
(Title of class)

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

Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [_]

The number of shares of the registrant's common stock outstanding on March
9, 2005 was 16,885,913.

The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 9, 2005, based on the closing price on the NASDAQ
National Market System on that date was approximately $123,917,374.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement with respect to the 2005 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.



PART I

Item 1. Business Overview

NN, Inc. manufactures and supplies high precision bearing components, consisting
of balls, cylindrical rollers, tapered rollers, seals, and plastic and metal
retainers, for leading bearing manufacturers on a global basis. We are a leading
independent manufacturer of precision steel bearing balls for the North American
and European markets. In 1998, we began implementing a strategic plan designed
to position us as a worldwide supplier of a broad line of bearing components and
other precision plastic components. Through a series of acquisitions executed as
part of that plan, we have built on our strong core ball business and expanded
our bearing component product offering. Today, we offer among the industry's
most complete line of commercially available bearing components. We emphasize
engineered products that take advantage of our competencies in product design
and tight tolerance manufacturing processes. Our bearing customers use our
components in fully assembled ball and roller bearings, which serve a wide
variety of industrial applications in the transportation, electrical,
agricultural, construction, machinery, mining and aerospace markets. As used in
this Annual Report on Form 10-K, the terms "NN", "the Company", "we", "our", or
"us" mean NN, Inc. and its subsidiaries.

For managerial and financial analysis purposes, management views the Company's
operation in three segments: the domestic ball and roller operations of Erwin,
Tennessee and Mountain City, Tennessee, also includes costs related to our
start-up operation in China and corporate office costs, ("Domestic Ball and
Roller Segment"), the European facilities of Kilkenny, Ireland, Eltmann,
Germany, Pinerolo, Italy, Veenendaal, The Netherlands and Kysucke Nove Mesto,
Slovakia ("NN Europe Segment" or "NN Europe") and the operations of Industrial
Molding Corporation ("IMC") and The Delta Rubber Company ("Delta") (collectively
"Plastic and Rubber Components Segment"). On March 12, 2004 we changed the name
of our primary European entity from NN Euroball, ApS to NN Europe ApS. To avoid
confusion between the entity and the segment, we will refer to the segment as
the NN Europe Segment and the entity as NN Europe. Financial information about
the Domestic Ball and Roller Segment, the NN Europe Segment and the Plastic and
Rubber Components Segment is set forth in Note 11 of the Notes to Consolidated
Financial Statements.

Recent Developments

On May 2, 2003, we acquired the 23 percent interest in NN Europe, ApS ("NN
Europe") held by AB SKF ("SKF"). NN Europe was formed in 2000 by the Company,
FAG Kugelfischer George Schaefer AG, which was subsequently acquired by INA -
Schaeffler KG (collectively, "INA"), and AB SKF ("SKF"). SKF is a global bearing
manufacturer and one of our largest customers. We paid approximately 13.8
million Euros ($15.6 million) for SKF's interest in NN Europe. Following the
closing of the transaction, we own 100 percent of the outstanding shares of NN
Europe.

On May 2, 2003 we acquired 100 percent of the tapered roller and metal cage
manufacturing operation of SKF in Veenendaal, The Netherlands. The results of
Veenendaal's operations have been included in the consolidated financial
statements since that date. We paid consideration of approximately 23.0 million
Euros ($25.7 million) and incurred other costs of approximately $1.0 million,
for the Veenendaal net assets acquired from SKF. The Veenendaal operation
manufactures rollers for tapered roller bearings and metal cages for both
tapered roller and spherical roller bearings allowing us to expand our bearing
component offering. The financial results of the Veenendaal operation are
included in the NN Europe Segment.

On October 9, 2003, we acquired certain assets comprised of land, building and
machinery and equipment of the precision ball operations of KLF - Gulickaren
("KLF"), based in Kysucke Nove Mesto, Slovakia. We paid consideration of
approximately 1.7 million Euros ($2.0 million). The assets are being utilized by
our wholly-owned subsidiary AKMCH ("NN Slovakia") based in Kysucke Nove Mesto,
Slovakia, which began production in June 2004. The financial results of the
operations are included in our NN Europe Segment.

During 2004 we formed a wholly owned subsidiary, NN Precision Bearing Products
Company, LTD, ("NN Asia)". This subsidiary, which is expected to begin
production of precision balls during the second half of 2005, will be located in
the Kunshan Economic and Technology Development Zone, Jiangsu, The People's
Republic of China and is a component of our strategy to globally expand our
manufacturing base. The costs incurred as a result of this start-up are included
in our Domestic Ball and Roller Segment.

2



Corporate Information

NN, originally organized in October 1980, is incorporated in Delaware, with our
principal executive offices located at 2000 Water's Edge Drive, Johnson City,
Tennessee 37604 and our telephone number is (423) 743-9151. Our web site address
is www.nnbr.com. Information contained on our web site is not part of this
Annual Report. Our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments thereto are available on our web site
under "Investor Relations."

Products

Precision Steel Balls. At our Domestic Ball and Roller Segment facilities and
our NN Europe Segment facilities, we manufacture and sell high quality,
precision steel balls in sizes ranging in diameter from 1/8 of an inch to 12 1/2
inches. We produce and sell balls in grades ranging from grade 3 to grade 1000,
as established by the American Bearing Manufacturers Association. The grade
number for a ball or a roller indicates the degree of spherical or cylindrical
precision of the ball or roller; for example, grade 3 balls are manufactured to
within three-millionths of an inch of roundness and grade 50 rollers are
manufactured to within fifty-millionths of an inch of roundness. Our steel balls
are used primarily by manufacturers of anti-friction bearings where precise
spherical, tolerance and surface finish accuracies are required. At our Domestic
Ball and Roller Segment, sales of steel balls accounted for approximately 86%,
86% and 88% of the segment's net sales in 2004, 2003 and 2002 respectively. At
our NN Europe Segment, sales of steel balls accounted for approximately 68%,
76%, and 100% of the segment's net sales in 2004, 2003 and 2002, respectively.

Steel Rollers. We manufacture cylindrical rollers at our Erwin, Tennessee
facility. These cylindrical rollers are produced in a wide variety of sizes,
ranging from grade 50 to grade 1000. Rollers are used in place of balls in
anti-friction bearings that are subjected to heavy load conditions. Our roller
products are used primarily for applications similar to those of our ball
product lines, plus certain non-bearing applications such as hydraulic pumps and
motors. We manufacture tapered rollers at our Veenendaal, The Netherlands
facility. These tapered rollers are used in tapered roller bearings that are
used in a variety of applications including automotive gearbox applications,
automotive wheel bearings and a wide variety of industrial applications.

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

Retainers: We manufacture and sell precision metal and plastic retainers for
ball and roller bearings used in a wide variety of industrial applications.
Retainers are used to separate and space balls or rollers within a fully
assembled bearing. We manufacture plastic retainers at our Lubbock, Texas
facility and metal retainers at our Veenendaal, The Netherlands facility.

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

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

Customers

Our bearing component products are supplied primarily to bearing manufacturers
for use in a broad range of industrial applications, including transportation,
electrical, agricultural, construction, machinery, mining and aerospace. We
supply over 500 customers; however, our top 10 customers account for
approximately 81% of our revenue. These top 10 customers include SKF, INA,
Timken, GKN, SNR, Iljin, Delphi, Koyo, NTN and FTE. In 2004, 29% of our products
were sold to customers in North America, 60% to customers in Europe, and the
remaining 11% to customers located throughout the rest of the world, primarily
Asia. Sales to various U.S. and foreign divisions of SKF accounted for
approximately 48% of net sales in 2004 and sales to INA accounted for
approximately 14% of net sales in 2004, demonstrating our long-term, strategic
relationships with these key customers. These gains are directly attributed to
the success of NN Europe, Veenendaal and our efforts to develop a closer
partnering relationship with our global bearing customers. Sales to various
divisions of the Timken Co. accounted for approximately 6% of net sales in 2004.
None of our other customers accounted for more than 5% of our net sales in 2004.

3



Certain customers have contracted to purchase all or a majority of their bearing
component requirements from us, although only a few are contractually obligated
to purchase any specific amounts. While firm orders are generally received on a
monthly basis, we are normally aware of future order levels well in advance of
the placement of a firm order. For our Domestic Ball and Roller Segment, we
maintain a computerized, bar coded inventory management system with most of our
major customers that enables us to determine on a day-to-day basis the amount of
these components remaining in a customer's inventory. When such inventories fall
below certain levels, we automatically ship additional product.

NN Europe has entered into six-year supply agreements with SKF and INA providing
for the purchase of NN Europe products in amounts and at prices that are subject
to adjustment on an annual basis. The agreements contain provisions obligating
NN Europe to maintain specified quality standards and comply with various
ordering and delivery procedures, as well as other customary provisions. SKF may
terminate its agreement if, among other things, NN Europe acquires or becomes
acquired by a competitor of SKF. INA may terminate its agreement if, among other
things, NN Europe assigns its rights under the agreement, whether voluntarily or
by operation of law. These agreements expire May 31, 2006.

Veenendaal has entered into a five-year supply agreement with SKF providing for
the purchase of Veenendaal products in amounts and at prices that are subject to
adjustment on an annual basis. The agreement contains provisions obligating
Veenendaal to maintain specified quality standards and comply with various
ordering and delivery procedures, as well as other customary provisions. This
agreement expires during 2008.

We ordinarily ship our products directly to customers within 60 days, and in
some cases, during the same calendar month, of the date on which a sales order
is placed. Accordingly, we generally have an insignificant amount of open
(backlog) orders from customers at month end. Certain of our customers have
entered into contracts with us pursuant to which they have agreed to purchase
all of their requirements of specified balls and rollers and plastic molded
products from us, although only a few are contractually obligated to purchase
any specific amounts. Certain agreements are in effect with some of our largest
customers, which provide for targeted, annual price adjustments that may be
offset by material cost fluctuations.

During 2004, the Domestic Ball and Roller Segment sold its products to more than
250 customers located in more than 25 different countries. Approximately 55% of
the Domestic Ball and Roller Segment net sales in 2004 were to customers outside
the United States. Sales to the Domestic Ball & Roller Segment's top ten
customers accounted for approximately 74% of the segment's net sales in 2004.
Sales to SKF and INA accounted for approximately 25% and 18%, respectively, of
the segment's net sales in 2004.

During 2004, the NN Europe Segment sold its products to more than 70 customers
located in more than 30 different countries. Approximately 89% of its net sales
in 2004 were to customers within Europe. Sales to the segment's top ten
customers accounted for approximately 95% of the segment's net sales in 2004.
Sales to SKF and INA accounted for approximately 66% and 16% of the segment's
net sales in 2004, respectively. Sales to SKF and INA are made pursuant to the
terms of supply agreements which expire in 2006 and 2008.

During 2004, the Plastic and Rubber Components Segment sold its products to more
than 100 customers located in more than 10 different countries. Approximately
11% of the Plastic and Rubber Components Segment net sales were to customers
outside the United States. Sales to the segment's top ten customers accounted
for approximately 68% of the Plastics Segment's net sales in 2004.

See Note 11 of the Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations" for additional segment financial information. In both the
foreign and domestic markets, the Company principally sells its products
directly to manufacturers and not to distributors.

4


The following table presents a breakdown of our net sales for fiscal years 2002
through 2004:


(In Thousands)


2004 2003 2002
------------ ------------ -------------


Domestic Ball and Roller Segment $ 58,435 $ 55,437 $ 52,634
19.2% 21.9% 27.3%
NN Europe Segment 193,930 147,127 90,653
63.8% 58.0% 47.0%
Plastic and Rubber Components Segment 51,724 50,898 49,569
17.0% 20.1% 25.7%
------------ ------------ -------------
Total $304,089 $253,462 $192,856
============ ============ =============
100% 100% 100%
============ ============ =============


Sales and Marketing

A primary emphasis of our marketing strategy is to expand key customer
relationships by offering them the value of a single supply chain partner for a
wide variety of components. As a result, we have progressed toward integrating
our sales organization on a global basis across all of our product lines. Our
sales organization includes nine direct sales and twelve customer service
representatives. Due to the technical nature of many of our products, our
engineers and manufacturing management personnel also provide technical sales
support functions, while internal sales employees handle customer orders and
other general sales support activities.

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

As shown in the chart below, the addition of the plastic and metal retainer,
tapered roller and seal product lines have further enhanced many of our key
customer relationships, making us a more complete and integrated supplier of
bearing component parts.



Products
-------------
Name Country Description Balls & Rollers Seals Retainers
- ---- ------- ----------- --------------- ----- ---------

SKF Sweden Global bearing manufacturer X X X
INA Germany Global bearing manufacturer X X X
NTN Japan Global bearing manufacturer X X X
SNR France Global bearing manufacturer X
Timken USA Global bearing manufacturer X X X
Delphi USA Automotive component supplier X X X
Iljin Korea Global bearing manufacturer X
NSK Japan Global bearing manufacturer X X
Koyo Japan Global bearing manufacturer X X X
GKN Germany Global bearing manufacturer X


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

5



Manufacturing Process

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

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

Employees

As of December 31, 2004, we employed a total of 1,747 full-time employees. Our
Domestic Ball and Roller Segment employed 288 workers, the NN Europe Segment
employed 1,025 workers, our Plastic and Rubber Components Segment employed 426
workers, and there were 8 employees at the Company's corporate headquarters. Of
our total employment, 17% are management/staff employees and 83% are production
employees. We believe we are able to attract and retain high quality employees
because of our quality reputation, technical expertise, history of financial and
operating stability, attractive employee benefit programs, and our progressive,
employee-friendly working environment. Only the employees in the Eltmann,
Germany, Pinerolo, Italy, and Veenendaal, The Netherlands plants are unionized
and we have never experienced any involuntary work stoppages. We consider our
relations with our employees to be excellent.

Competition

The precision ball and roller and metal retainer industry is intensely
competitive, and many of our competitors have greater financial resources than
we do. Our primary domestic competitor is Hoover Precision Products, Inc., a
division of Tsubakimoto Precision Products Co. Ltd. Our primary foreign
competitors are Amatsuji Steel Ball Manufacturing Company, Ltd. and Tsubakimoto
Precision Products Co. Ltd.

We believe that competition within the precision ball, roller and metal retainer
market is based principally on quality, price and the ability to consistently
meet customer delivery requirements. Management believes that our competitive
strengths are our precision manufacturing capabilities, our reputation for
consistent quality and reliability, and the productivity of our workforce.

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

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

While intensely competitive, the markets for Delta's products are less
fragmented than IMC. The bearing seal market is comprised of approximately six
major competitors that range from small privately held companies to Fortune 500
global enterprises. Bearing seal manufacturers compete on design, service,
quality and price. Delta's primary competitors in the United States bearing seal
market are Freudenburg-NOK, Chicago Rawhide Industries (an SKF subsidiary),
Trostel, and Uchiyama.

Raw Materials

The primary raw material used in our Domestic Ball and Roller Segment and NN
Europe Segment is 52100 Steel. During 2004, approximately 98% and 99% of the
steel used by these two segments, respectively, was 52100 Steel in rod and wire
form. Our other steel requirements include type 440C stainless steel and type S2
rock bit steel.

6



The Domestic Ball and Roller Segment purchases substantially all of its 52100
Steel requirements from foreign mills in Europe and Japan because of the lack of
domestic producers of such steel in the form we require. The principal suppliers
of 52100 Steel to the Domestic Ball and Roller Segment are Daido Steel Inc.
(America), Shinsho Steel America, Lucchini USA Inc. (affiliate of Ascometal
France) and Ohio Star Forge Co. The NN Europe Segment purchases all of its 52100
Steel requirements from European mills. The principal supplier of 52100 Steel to
the NN Europe Segment is Ascometal France (See Note 14 of the Notes to
Consolidated Financial Statements). Our other steel requirements are purchased
principally from foreign steel manufacturers. There are a limited number of
suppliers of the 52100 Steel that we use in our Domestic Ball and Roller and NN
Europe Segments. We believe that if any of our current suppliers were unable to
supply 52100 Steel to us, we would be able to obtain our 52100 Steel
requirements from alternate sources. We cannot provide assurances that we would
not face higher costs or production interruptions as a result of obtaining 52100
Steel from alternate sources.

We purchase steel on the basis of price and, more significantly, composition and
quality. The pricing arrangements with our suppliers are typically subject to
adjustment once every three to six months for the Domestic Ball and Roller
Segment. Steel pricing is contractually adjusted on an annual basis within the
NN Europe Segment. For the NN Europe Segment scrap surcharges are adjusted
quarterly based upon market activity in the preceding quarter. In general, we do
not enter into written supply agreements with suppliers or commit to maintain
minimum monthly purchases of steel except for the supply arrangements between
Ascometal and NN Europe (see Note 14 of the Notes to Consolidated Financial
Statements). For the Domestic Ball and Roller and NN Europe Segments, the
average price of 52100 Steel increased approximately 9.8% in 2004, increased
approximately 3.5% in 2003, and increased approximately 2.5% in 2002.

Because 52100 Steel is principally produced by foreign manufacturers, the
Company's operating results would be negatively affected in the event that the
U.S. or European governments impose any significant quotas, tariffs or other
duties or restrictions on the import of such steel, if the U.S. dollar decreases
in value relative to foreign currencies or if supplies available to us would
significantly decrease. On March 6, 2002, the U.S. government adopted
legislation that imposed certain tariffs on the import of certain foreign
produced steel into the United States. Because the vast majority of the 52100
Steel we use was exempted from these recent U.S. tariffs on imported steel, we
were not materially affected by related import regulations.

The price of steel has risen over the last twelve to eighteen months with the
potential for 2005 prices to reflect even greater increases. The increase is
principally due to general increases in global demand and, more recently, due to
China's increased consumption of steel. This has had the impact of increasing
steel prices we pay in procuring our steel in the form of higher unit prices and
scrap surcharges and could adversely impact the availability of steel. Our
contracts with key customers allow us to pass a majority of the steel price
increases on to those customers. However, for our NN Europe Segment, material
price changes in any given year are typically passed along with price
adjustments in January of the following year. Until the current increases can be
passed through to our customers, income from operations, net income and cash
flow from operations will be adversely affected.

The primary raw materials used by IMC are engineered resins. Injection grade
nylon is utilized in bearing retainers, gears, automotive and other industrial
products. We purchase substantially all of our resin requirements from domestic
manufacturers and suppliers. The majority of these suppliers are international
companies with resin manufacturing facilities located throughout the world. We
experienced price increases for engineered resins of approximately 5.3% in 2004,
price decreases of approximately 1.0% in 2003, and price decreases of
approximately 1.0% in 2002.

Delta uses certified vendors to provide a custom mix of proprietary rubber
compounds. Delta also procures metal stampings from several domestic suppliers.
We experienced price increases for Delta's raw materials of approximately 10.2%
in 2004, and price decreases of 2.5% in 2003 and 0% in 2002, respectively.

For the Plastic and Rubber Components Segment, we base purchase decisions on
price, quality and service. Generally, we do not enter into written supply
contracts with our suppliers or commit to maintain minimum monthly purchases of
resins. The pricing arrangements with our suppliers typically can be adjusted at
anytime.

Patents, Trademarks and Licenses

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

7



Seasonal Nature of Business

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

Environmental Compliance

Our operations and products are subject to extensive federal, state and local
regulatory requirements both domestically and abroad relating to pollution
control and protection of the environment. We maintain a compliance program to
assist in preventing and, if necessary, correcting environmental problems. Based
on information compiled to date, management believes that our current operations
are in substantial compliance with applicable environmental laws and
regulations, the violation of which would have a material adverse effect on our
business and financial condition. There can be no assurance, however, that
currently unknown matters, new laws and regulations, or stricter interpretations
of existing laws and regulations will not materially affect our business or
operations in the future. More specifically, although we believe that we dispose
of wastes in material compliance with applicable environmental laws and
regulations, there can be no assurance that we will not incur significant
liabilities in the future in connection with the clean-up of waste disposal
sites.

Executive Officers of the Registrant

Our executive officers are:



Name Age Position
-------- --- --------

Roderick R. Baty 51 Chairman of the Board, Chief Executive Officer, President and Director
Frank T. Gentry, III 49 Vice President - Manufacturing
Robert R. Sams 47 Vice President - Market Services
David L. Dyckman 40 Vice President - Corporate Development and Chief Financial Officer
William C. Kelly, Jr. 46 Treasurer, Secretary and Chief Administrative and Compliance Officer


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

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

Frank T. Gentry, III, was originally appointed Vice President - Manufacturing in
August 1995. Mr. Gentry is responsible for the Domestic Ball and Roller Segment.
Mr. Gentry joined NN in 1981 and held various manufacturing management positions
within NN from 1981 to August 1995.

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

David L. Dyckman was appointed Vice President of Corporate Development and Chief
Financial Officer in April 1998. Prior to joining NN, Mr. Dyckman served from
January 1997 until April 1998 as Vice President--Marketing and International
Sales for the Veeder-Root Division of the Danaher Corporation. From 1987 until
1997, Mr. Dyckman held various positions with Emerson Electric Company including
General Manager and Vice President of the Gearing Division of Emerson's Power
Transmission subsidiary. Mr. Dyckman resigned his position effective January 14,
2005.

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

8



Item 2. Properties

The Company has two operating domestic ball manufacturing facilities located in
Erwin, Tennessee and Mountain City, Tennessee. Of these two facilities, rollers
are produced only at the Erwin, Tennessee facility. Production began in early
1996 at the Mountain City facility. During December 2001, we ceased production
and closed our facility in Walterboro, South Carolina and sold the land and
building assets during 2004.

The Erwin and Mountain City plants currently have approximately 125,000 and
86,400 square feet of manufacturing space, respectively. The Erwin plant is
located on a 12 acre tract of land owned by the Company and the Mountain City
plant is located on an eight acre tract of land owned by the Company.

Through NN Europe we manufacture precision steel balls in four manufacturing
facilities located in Kilkenny, Ireland, Eltmann, Germany, Pinerolo, Italy and
Kysucke Nove Mesto, Slovakia. The facilities currently have approximately
125,000, 175,000, 330,000 and 135,000 square feet of manufacturing space,
respectively. The Kilkenny facility is located on a two acre tract owned by NN
Europe, the Eltmann facility is leased from FAG and the Pinerolo facility is
located on a nine acre tract owned by NN Europe. The Kysucke facility is also
owned by NN Europe.

Our Veenendaal, The Netherlands operation manufactures rollers for tapered
roller bearings and metal retainers in two facilities. The facilities, owned by
the Company, have approximately 107,000 and 52,000 square feet of manufacturing
space, respectively.

IMC manufactures a wide range of plastic molded products through two facilities
located in Lubbock, Texas. The Slaton facility, located on a six and one half
acre tract of land owned by the Company, contains approximately 193,000 square
feet of manufacturing, warehouse and office space. The Cedar facility is
situated on a two and one half acre tract of land which is also owned by the
Company and contains approximately 35,000 square feet of manufacturing and
warehouse space.

Delta's operations are located in two facilities on a 12-acre site in Danielson,
Connecticut, owned by the Company. The two facilities encompass over 50,000
square feet of rubber seal manufacturing and administrative functions.

The property related to our NN Asia ball production facility in the People's
Republic of China is leased.

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Item 3. Legal Proceedings

From time to time the Company is subject to legal actions related to its
operations, most of which are of an ordinary and routine nature and are
incidental to the operations of the Company. Management believes that such
proceedings should not, individually or in the aggregate, have a material
adverse effect on the Company's business or financial condition or on the
results of operations.

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

No matters were submitted for a vote of stockholders during the fourth quarter
of 2004.


9

Part II

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

Since the Company's initial public offering in 1994, the Common Stock has been
traded on the Nasdaq National Market under the trading symbol "NNBR." Prior to
such time there was no established market for the Common Stock. As of March 11,
2005, there were approximately 4,500 holders of the Common Stock.

The following table sets forth the high and low closing sales prices of the
Common Stock, as reported by Nasdaq, and the dividends paid per share on the
Common Stock during each calendar quarter of 2004 and 2003.

Close Price
-----------
High Low Dividend
---- ----- --------
2004
First Quarter $13.13 $11.08 $0.08
Second Quarter 12.94 11.03 0.08
Third Quarter 12.00 9.40 0.08
Fourth Quarter 13.21 11.06 0.08

2003
First Quarter $10.00 $8.01 $0.08
Second Quarter 12.66 9.35 0.08
Third Quarter 13.75 11.12 0.08
Fourth Quarter 12.90 10.70 0.08


The declaration and payment of dividends are subject to the sole discretion of
the Board of Directors of the Company and depend upon the Company's
profitability, financial condition, capital needs, future prospects and other
factors deemed relevant by the Board of Directors. The terms of the Company's
revolving credit facility restrict the payment of dividends by prohibiting the
Company from declaring or paying any dividend if an event of default exists at
the time of, or would occur as a result of, such declaration or payment.

Additionally, the terms of the Company's revolving credit facility restrict the
declaration and payment of dividends in excess of certain amounts specified in
the credit agreement in any fiscal year. The amount of consolidated retained
earnings which represents undistributed earnings of 50 percent or less owned
persons accounted for by the equity method is zero at December 31, 2004 and
2003. For further description of the Company's revolving credit facility, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" herein.

Item 6. Selected Financial Data

The following selected financial data of the Company are qualified by reference
to and should be read in conjunction with the consolidated financial statements
and the Notes thereto included as Item 8. The data set forth below as of
December 31, 2004 and 2003 and for the periods then ended has been derived from
the consolidated financial statements of the Company which have been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
whose report thereon is included as part of Item 8. The data below as of
December 31, 2002, 2001 and 2000 and for the periods then ended has been derived
from the consolidated financial statements of the Company, which have been
audited by KPMG LLP, an independent registered public accounting firm. These
historical results are not necessarily indicative of the results to be expected
in the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

10





(In Thousands, Except Per Share Data) Year Ended December 31,
-----------------------


2004 2003 2002 2001 2000
---- ---- ---- ---- ----

Statement of Income Data:

Net sales $304,089 $253,462 $192,856 $180,151 $132,129
Cost of products sold (exclusive of
depreciation shown separately below) 240,580 195,658 144,274 137,221 93,926
Selling, general and administrative expenses 29,755 21,700 17,134 16,752 11,571
Depreciation and amortization 16,133 13,691 11,212 13,150 9,165
(Gain) loss on disposal of assets 856 (147) (25) -- 1,194
Restructuring and impairment costs 2,398 2,490 1,277 2,312 --
----------- ------------- ------------- ------------- -----------
Income from operations 14,367 20,070 18,984 10,716 16,273
Interest expense 4,029 3,392 2,451 4,196 1,773
Equity in earnings of unconsolidated affiliate -- -- -- -- (48)
Net gain on involuntary conversion -- -- -- (3,901) (728)
Other income (853) 99 (462) (186) (1,330)
---------- ------------- ------------- ------------- ------------
Income before provision for income taxes 11,191 16,579 16,995 10,607 16,606
Provision for income taxes 4,089 5,726 6,457 4,094 5,959
Minority interest in income of consolidated
subsidiary -- 675 2,778 1,753 660
---------- ------------- ------------- -------------- ------------
Income before cumulative effect of change in 7,102 10,178 7,760 4,760 9,987
accounting principle

Cumulative effect of change in accounting
principle, net of income tax benefit of $112
and related minority interest impact of $84 -- -- -- 98 --
---------- ------------- ------------- -------------- ------------
Net income $ 7,102 $ 10,178 $ 7,760 $ 4,662 $ 9,987
========== ============= ============= ============== ============
Basic income per share:
Income before cumulative effect of change in
accounting principle $ 0.42 $ 0.64 $ 0. 51 $ 0.31 $ 0.66
Cumulative effect of change in accounting
principle -- -- (0.01) --
---------- ------------- ------------- -------------- ------------
Net income $ 0.42 $ 0.64 $ 0. 51 $ 0.31 $ 0.66
========== ============= ============= ============== ============
Diluted income per share:
Income before cumulative effect of change in
accounting principle $ 0.41 $ 0.62 $ 0.49 $ 0.31 $ 0.64
Cumulative effect of change in accounting
principle -- -- -- (0.01) --
---------- ------------- ------------- -------------- -----------
Net income $ 0.41 $ 0.62 $ 0.49 $ 0.30 $ 0.64
========== ============= ============= ============== ===========

Dividends declared $ 0.32 $ 0.32 $ 0.32 $ 0.32 $ 0.32
========== ============= ============= ============== ===========
Weighted average number of shares 16,728 15,973 15,343 15,259 15,247
outstanding - Basic ========== ============= ============= ============== ===========
Weighted average number of shares 17,151 16,379 15,714 15,540 15,531
outstanding - Diluted =========== ============= ============= ============== ===========


11



(In Thousands, Except Per Share Data)



Year Ended December 31,
-----------------------

2004 2003 2002 2001 2000
---- ---- ---- ---- ----

Balance Sheet Data:
Current assets $ 108,338 $ 89,901 $ 61,412 $ 55,617 $ 63,866
Current liabilities 74,431 64,176 40,234 32,534 33,840
Total assets 289,869 267,899 195,215 184,477 183,951
Long-term debt 67,510 69,752 46,135 47,661 50,515
Stockholders' equity 115,140 106,468 77,908 70,982 74,675


During 2004 we formed a wholly owned subsidiary, NN Precision Bearing Products
Company, LTD. This subsidiary, which is expected to begin production of
precision balls during the second half of 2005, will be located in the Kunshan
Economic and Technology Development Zone, Jiangsu, The People's Republic of
China.

On October 9, 2003, we acquired certain assets comprised of land, building and
machinery and equipment of the precision ball operations of KLF - Gulickaren
("KLF"), based in Kysucke Nove Mesto, Slovakia.

On May 2, 2003 we acquired 100% of the tapered roller and metal cage
manufacturing operations of SKF in Veenendaal, The Netherlands.

On May 2, 2003 we acquired the 23% interest in NN Europe, held by SKF. Upon
consummation of this transaction, we became the sole owner of NN Europe.

On December 20, 2002 we completed the purchase of the 23% interest in NN Europe
held by INA. As a result of this transaction, we own 77% of the shares of NN
Europe.

Effective January 1, 2002 we adopted the provision of Statement of Financial
Accounting Standards (SFAS) No. 142. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized. See Note
1 of the Notes to Consolidated Financial Statements.

On February 16, 2001 we completed the acquisition of all of the outstanding
stock of The Delta Rubber Company.

On July 31, 2000 we completed the formation of NN Europe. As a result of this
transaction, we owned 54% of the shares of NN Europe ApS.

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

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

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

The Company wishes to caution readers that this report contains, and future
filings by the Company, press releases and oral statements made by the Company's
authorized representatives may contain, forward-looking statements that involve
certain risks and uncertainties. Readers can identify these forward-looking
statements by the use of such verbs as expects, anticipates, believes or similar
verbs or conjugations of such verbs. The Company's actual results could differ
materially from those expressed in such forward-looking statements due to
important factors bearing on the Company's business, many

12



of which already have been discussed in this filing and in the Company's prior
filings. The differences could be caused by a number of factors or combination
of factors including, but not limited to, the risk factors described below.

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

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

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

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

The steel that we use to manufacture precision balls and rollers is of an
extremely high quality and is available from a limited number of producers on a
global basis. Due to quality constraints in the U.S. steel industry, we obtain
substantially all of the steel used in our U.S. ball and roller production from
overseas suppliers. In addition, we obtain substantially all of the steel used
in our European ball production from a single European source. If we had to
obtain steel from sources other than our current suppliers we could face higher
prices and transportation costs, increased duties or taxes, and shortages of
steel. Due to China's increasing consumption of steel, we have received
indications from our suppliers that steel availability in the quantities and
types we require may be volatile in 2005. Problems in obtaining steel, and
particularly 52100 chrome steel, in the quantities that we require and on
commercially reasonable terms, could increase our costs, adversely impacting our
ability to operate our business efficiently and have a material adverse effect
on the revenues and operating and financial results of our Company.

The price of steel has risen over the last twelve to eighteen months with the
potential for 2005 prices to reflect even greater increases. The increase is
principally due to general increases in global demand and, more recently, due to
China's increased consumption of steel. This has had the impact of increasing
scrap surcharges we pay in procuring our steel in the form of higher unit prices
and scrap surcharges and could adversely impact the availability of steel. Our
contracts with key customers allow us to pass a majority of the steel price
increases on to those customers. However, by contract, material price changes in
any given year are typically passed along with price adjustments in January of
the following year. Until the current increases can be passed through to our
customers, income from operations, net income and cash flow from operations will
be adversely affected.

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

Sales to various U.S. and foreign divisions of SKF, which is one of the largest
bearing manufacturers in the world, accounted for approximately 48% of
consolidated net sales in 2004, and sales to INA accounted for approximately 14%
of consolidated net sales in 2004. Sales to various divisions of the Timken
Company accounted for approximately 6% of our net sales in 2004. During 2004,
our ten largest customers accounted for approximately 79% of our consolidated
net sales. None of our other customers individually accounted for more than 5%
of our consolidated net sales for 2004. The loss of all or a substantial portion
of sales to these customers would cause us to lose a substantial portion of our
revenue and would lower our operating profit margin and cash flows from
operations.

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

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

13




o adverse foreign currency fluctuations;

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

o the imposition of trade restrictions or prohibitions;

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

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

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

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

In addition, due to the typical slower summer manufacturing season in Europe, we
expect that revenues in the third fiscal quarter will reflect lower sales, as
our sales to European customers have increased as a percentage of net sales.

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

We cannot assure you that any future acquisition will enhance our financial
performance. Our ability to effectively integrate any future acquisitions will
depend on, among other things, the adequacy of our implementation plans, the
ability of our management to oversee and operate effectively the combined
operations and our ability to achieve desired operating efficiencies and sales
goals. The integration of any acquired businesses might cause us to incur
unforeseen costs, which would lower our profit margin and future earnings and
would prevent us from realizing the expected benefits of these acquisitions.

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

Acquiring businesses that complement or expand our operations has been and
continues to be an important element of our business strategy. This strategy
calls for growth through acquisitions constituting approximately three-fourths
of our future growth, with the remainder resulting from internal growth and
market penetration. We bought our plastic bearing component business in 1999,
formed NN Europe with our two largest bearing customers, SKF and INA, in 2000
and acquired our bearing seal operations in 2001. During 2002, we purchased
INA's minority interest in NN Europe and during 2003 we purchased SKF's minority
interest in NN Europe and SKF's tapered roller and metal cage manufacturing
operations in Veenendaal, The Netherlands. See Note 2 of the Notes to
Consolidated Financial Statements. We cannot assure you that we will be
successful in identifying attractive acquisition candidates or completing
acquisitions on favorable terms in the future. In addition, we may borrow funds
to acquire other businesses, increasing our interest expense and debt levels.
Our inability to acquire businesses, or to operate them profitably once
acquired, could have a material adverse effect on our business, financial
position, results of operations and cash flows.

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

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

14



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

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

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

We have expanded our ball and roller production facilities and capacity over the
last several years. During 1997, we built an additional manufacturing plant in
Kilkenny, Ireland, and we continued this expansion in 2000 through the formation
of NN Europe with SKF and INA. Our ball and roller production facilities have
not always operated at full capacity and from time to time our results of
operations have been adversely affected by the under-utilization of our
production facilities, and we face risks of further under-utilization or
inefficient utilization of our production facilities in future years.

The price of our common stock may be volatile.

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

o our operating and financial performance and prospects;

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

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

o loss of any member of our senior management team;

o speculation in the press or investment community;

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

o sales of our common stock by stockholders;

o general market conditions;

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

o loss of a major customer.

The stock markets in general have experienced extreme volatility that has often
been unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our common stock.

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

Our certificate of incorporation and bylaws, as well as Delaware corporate law,
contain provisions that could delay or prevent a change of control or changes in
our management that a stockholder might consider favorable and may prevent you
from receiving a takeover premium for your shares. These provisions include, for
example, a classified board of directors and the authorization of our board of
directors to issue up to 5,000,000 preferred shares without a stockholder vote.
In addition, our restated certificate of incorporation provides that
stockholders may not call a special meeting.

15



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

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

Overview and Management Focus

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

o Captive growth, providing a competitive and attractive alternative to the
operations of our global customers

o Expansion of our bearing product offering, and

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

Management generally focuses on these trends and relevant market
indicators:

o Global industrial growth and economics

o Global automotive production rates

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

o Raw material

o Wages and benefits, including health care costs

o Regulatory compliance

o Energy

o Raw material availability

o Trends related to the geographic migration of competitive manufacturing

o Regulatory environment for United States public companies

o Currency and exchange rate movements and trends

o Interest rate levels and expectations

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

o Sales growth

o Cost of products sold levels

o Selling, general and administrative expense levels

16


o Net income

o Cash flow from operations and capital spending

Our core business is the manufacture and sale of high quality, precision steel
balls and rollers. In 2004, sales of balls and rollers accounted for
approximately 77% of the Company's total net sales with 60% and 17% of sales
from balls and rollers, respectively. Sales of metal bearing retainers accounted
for 6% and sales of precision molded plastic and rubber parts accounted for the
remaining 17%. See Note 11 of the Notes to Consolidated Financial Statements.

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

In 1997, we recognized changing dynamics in the marketplace, and as a result,
developed and began implementing an extensive long-term growth strategy building
upon our core business and leveraging our inherent strengths to better serve our
global customer base. As part of this strategy, we sought to augment our
intrinsic growth with complementary acquisitions that fit specific criteria.

On July 4, 1999, we acquired substantially all of the assets of Earsley Capital
Corporation, formerly known as Industrial Molding Corporation ("IMC") for
consideration of approximately $30.0 million. Formed in 1947, IMC provides
full-service design and manufacture of plastic injection molded components to
the bearing, automotive, electronic, leisure and consumer markets with an
emphasis on value-added products that take advantage of its capabilities in
product development, tool design and tight tolerance molding processes. IMC
operates two manufacturing facilities in Lubbock, Texas.

On July 31, 2000, we formed a majority owned stand-alone company in Europe, NN
Europe ApS ("NN Europe"), for the manufacture and sale of chrome steel balls
used for ball bearings and other products. As a result of this transaction, we
owned 54% of NN Europe. SKF and INA respectively each owned 23% of NN Europe. As
part of the transaction, NN Europe acquired the ball factories located in
Pinerolo, Italy (previously owned by SKF), Eltmann, Germany (previously owned by
INA), and Kilkenny, Ireland (previously owned by the Company). Acquisition
financing of approximately 31.5 million Euro (approximately $29.7 million) was
drawn at closing, and the credit facility provided for additional working
capital expenditure financing. In connection with this transaction, total
equity, specifically additional paid in capital, increased by 10.0 million Euros
($9.3 million) to reflect the increase in our proportionate interest in NN
Europe as related to our 54% ownership as more fully detailed in Note 2 to the
Consolidated Financial Statements. We have always consolidated NN Europe due to
our majority ownership and have accounted for the acquisitions of the Pinerolo,
Italy and Eltmann, Germany ball factories in a manner similar to the purchase
method of accounting. On December 20, 2002 we completed the purchase of the 23%
interest held by INA. We paid approximately 13.4 million Euros ($13.8 million)
for INA/FAG's interest in NN Europe. The excess of the purchase price paid to
INA for its 23% interest over fair value of INA's 23% interest in the net assets
of NN Europe of approximately $1.5 million has been allocated to goodwill (see
Note 2 of the Notes to Consolidated Financial Statements). On May 2, 2003 we
acquired the 23% interest in NN Europe held by SKF. We paid approximately 13.8
million Euros ($15.6 million) for SKF's interest in NN Europe. The excess of the
purchase price paid to SKF for its 23% interest over the fair value of SKF's 23%
interest in the net assets of NN Europe of approximately $2.1 million was
allocated to goodwill.

On February 16, 2001, we completed the acquisition of all of the outstanding
stock of The Delta Rubber Company, a Connecticut corporation ("Delta"), for
$22.5 million in cash. Delta provides high quality engineered bearing seals and
other precision-molded rubber products to original equipment manufacturers.
Delta operates two manufacturing facilities in Danielson, Connecticut. We have
accounted for this acquisition using the purchase method of accounting.

On September 11, 2001, we announced the closing of our Walterboro, South
Carolina ball manufacturing facility effective December 2001. The closing was
made as part of our strategy to redistribute our global production in order to
better utilize capacity and serve the needs of our worldwide customers. The
precision ball production of the Walterboro facility has been fully absorbed by
our remaining U.S. ball & roller manufacturing facilities located in Erwin and
Mountain City, Tennessee. In 2002 and 2001 we recorded before tax charges
associated with the closing of $1.3 million and $1.9 million, respectively. In
2001, this amount includes a $1.1 million before-tax charge for the recording of
impairment on our manufacturing facility located in Walterboro, South Carolina
and $0.8 million related to employee severance costs. In 2002, this amount
includes a $0.6 million before-tax charge for the recording of an additional
impairment on the facility, a $0.6 million before-tax charge for the recording
of impairment on the machinery and equipment and a $0.1 million charge related
to employee severance

17


costs. There were no impairment charges related to these assets recorded in
2003. These amounts are reflected as restructuring and impairment costs in the
accompanying Consolidated Statements of Income. The land and building assets
were sold during the fourth quarter of 2004. As a result, we recorded a loss on
disposal of assets of approximately $0.8 million which has been recorded as a
loss on disposal of assets, a component of income from operations. Additionally,
during the fourth quarter of 2004, we recorded an impairment charge of
approximately $0.1 million related to certain remaining machinery and equipment
assets of this facility. This amount was recorded as a component of
restructuring and impairment costs. The financial results of this operation have
been reflected in the Domestic Ball and Roller Segment. See Note 11 of the Notes
to Consolidated Financial Statements.

Effective December 21, 2001, we sold our minority interest in Jiangsu General
Ball & Roller Company, LTD, a Chinese ball and roller manufacturer located in
Rugao City, Jiangsu Province, China. To effect the transaction, we sold our 50%
ownership in NN General, LLC, which owns a 60% interest in the Jiangsu joint
venture to our partner, General Bearing Corporation for cash of $0.6 million and
notes of $3.3 million.

On May 2, 2003 we acquired 100% of the tapered roller and metal cage
manufacturing operations of SKF in Veenendaal, The Netherlands. The results of
Veenendaal's operations have been included in the consolidated financial
statements since that date. We paid consideration of approximately 23.0 million
Euros ($25.7 million) and incurred other costs of approximately $1.0 million,
for the Veenendaal net assets acquired from SKF. The Veenendaal operation
manufactures rollers for tapered roller bearings and metal cages for both
tapered roller and spherical roller bearings allowing us to expand our bearing
component offering. The financial results of the Veenendaal operation are
included in the NN Europe Segment.

On October 9, 2003, we acquired certain assets comprised of land, building and
machinery and equipment of the precision ball operations of KLF - Gulickaren
("KLF"), based in Kysucke Nove Mesto, Slovakia. We paid consideration of
approximately 1.7 million Euros ($2.0 million). The assets are being utilized by
our wholly-owned subsidiary NN Slovakia based in Kysucke Nove Mesto, Slovakia,
which began production in 2004. The financial results of the operations are
included in our NN Europe Segment.

During 2004 we formed a wholly-owned subsidiary, NN Precision Bearing Products
Company, LTD. This subsidiary, which is expected to begin production of
precision balls during the second half of 2005, will be located in the Kunshan
Economic and Technology Development Zone, Jiangsu, The People's Republic of
China and is a component of our strategy to globally expand our manufacturing
base.

The implementation and successful execution of this acquisition strategy to date
has allowed the Company to expand its global presence and positions the Company
for continued global growth and expansion into core served markets.

Critical Accounting Policies

Our significant accounting policies, including the assumptions and judgment
underlying them, are disclosed in Note 1 of the Notes to Consolidated Financial
Statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition, inventory valuation,
asset impairment recognition, business combination accounting and pension and
post-retirement benefits. Due to the estimation processes involved, management
considers the following summarized accounting policies and their application to
be critical to understanding the Company's business operations, financial
condition and results of operations. There can be no assurance that actual
results will not significantly differ from the estimates used in these critical
accounting policies.

Accounts Receivable. Accounts receivable are recorded upon recognition of a sale
of goods and ownership and risk of loss is assumed by the customer.
Substantially all of the Company's accounts receivable are due primarily from
the core served markets: bearing manufacturers, automotive industry,
electronics, industrial, agricultural and aerospace. The Company experienced
$0.1 million of bad debt expense during 2002, $0.1 million during 2003 and $0
million during 2004. In establishing allowances for doubtful accounts, the
Company performs credit evaluations of its customers, considering numerous
inputs when available including the customers' financial position, past payment
history, relevant industry trends, cash flows, management capability, historical
loss experience and economic conditions and prospects. Accounts receivable are
written off or reserves established when considered to be uncollectible or at
risk of being uncollectible. While management believes that adequate allowances
for doubtful accounts have been provided in the Consolidated Financial
Statements, it is possible that the Company could experience additional
unexpected credit losses.

Inventories. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. The Company's inventories are
not generally subject to obsolescence due to spoilage or expiring product life
cycles. The Company operates generally as a make-to-order business; however, the
Company also stocks products for certain customers

18


in order to meet delivery schedules. While management believes that adequate
write-downs for inventory obsolescence have been made in the Consolidated
Financial Statements, the Company could experience additional inventory
write-downs in the future.

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

Impairment of Long-Lived Assets. The Company's long-lived assets include
property, plant and equipment. The recoverability of the long-term assets is
dependent on the performance of the companies which the Company has acquired, as
well as volatility inherent in the external markets for these acquisitions. In
assessing potential impairment for these assets the Company will consider these
factors as well as forecasted financial performance. For assets held for sale,
appraisals are relied upon to assess the fair market value of those assets.
Future adverse changes in market conditions or adverse operating results of the
underlying assets could result in the Company having to record additional
impairment charges not previously recognized.

Pension and Post-Retirement Obligations. The Company uses several assumptions in
determining its periodic pension and post-retirement expense and obligations
which are included in the Consolidated Financial Statements. These assumptions
include determining an appropriate discount rate, rate of compensation increase
as well as the remaining service period of active employees. The Company uses an
independent actuary to calculate the periodic pension and post-retirement
expense and obligations based upon these assumptions and actual employee census
data.

Results of Operations

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



As a percentage of Net Sales
Year Ended December 31,

2004 2003 2002
----------- ---------- ---------

Net sales 100.0% 100.0% 100.0%
Cost of product sold (exclusive of depreciation shown
separately below) 79.0 77.2 74.8
Selling, general and administrative expenses 9.8 8.6 8.9
Depreciation and amortization 5.3 5.4 5.8
(Gain) loss on disposal of assets 0.3 (0.1) --
Restructuring and impairment costs 0.8 1.0 0.7
----------- ---------- ---------
Income from operations 4.8 7.9 9.8
Interest expense 1.3 1.3 1.3
Other income (0.2) 0.1 (0.3)
----------- ---------- ---------
Income before provision for income taxes 3.7 6.5 8.8
Provision for income taxes 1.4 2.2 3.4
Minority interest in income of consolidated subsidiary -- 0.3 1.4
----------- ---------- ---------
Net income 2.3% 4.0% 4.0%
=========== ========== =========


19



Off Balance Sheet Arrangements

We have operating lease commitments for machinery, office equipment, vehicles,
manufacturing and office space which expire on varying dates. The following is a
schedule by year of future minimum lease payments as of December 31, 2004 under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year.

Year ended December 31,
------------------------------------
2005 $ 2,306
2006 2,122
2007 1,879
2008 1,854
2009 1,789
Thereafter 15,315
-----------
Total minimum lease payments $ 25,265
===========

On June 1, 2004, our wholly-owned subsidiary, NN Precision Bearing Products
Company LTD, entered into a twenty year lease agreement with Kunshan Tian Li
Steel Structure Co. LTD for the lease of land and building (approximately
110,000 square feet) in the Kunshan Economic and Technology Development Zone,
Jiangsu, The People's Republic of China. The building will be newly constructed
and we expect to begin usage of the leased property during the second quarter or
third quarter of 2005. The land and building remain under the control of the
lessor until such time as usage of the leased property commences. The agreement
satisfies the requirements of a capital lease and we anticipate recording the
lease as a capital lease in our Consolidated Financial Statements when usage of
the leased property begins. Accordingly, as of December 31, 2004, no amount has
been recorded related to the asset and corresponding obligation associated with
the lease agreement in our Consolidated Financial Statements. We estimate the
fair value of the land and building to be approximately $2.0 million and
undiscounted annual lease payments of approximately $0.2 million (approximately
$4.1 million aggregate non-discounted lease payments over the twenty year term).
The lease terms include fair value buy-out provisions and we maintain the option
to extend the lease term.








20

Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003

Net Sales. Our net sales increased by $50.6 million or 20.0% from $253.5 million
in 2003 to $304.1 million in 2004. Net sales of our NN Europe Segment increased
$46.8 million or 31.8% from $147.1 million in 2003 to $193.9 million in 2004.
The impact of a full year's activity in 2004 from our Veenendaal, The
Netherlands tapered roller and metal retainer operation acquired on May 2, 2004
accounted for $17.2 million of the increase. Impacts of foreign currency
translation within the NN Europe Segment contributed $15.9 million of the
increase. The remaining increase of $13.7 million within the NN Europe Segment
is a result of increased product demand. Net sales of our Domestic Ball and
Roller Segment increased $3.0 million or 5.4% from $55.4 million in 2003 to
$58.4 million in 2004 principally due to increases in product demand. Net sales
of our Plastic and Rubber Components Segment increased $0.8 million or 1.6% from
$50.9 million in 2003 to $51.7 million in 2003 principally due to increases in
product demand.

Cost of Products Sold. Our cost of products sold increased by $44.9 million or
23.0% from $195.7 million in 2003 to $240.6 million in 2004. Cost of products
sold of our NN Europe Segment increased $39.9 million or 34.9% from $114.3
million in 2003 to $154.2 million in 2004. The impact of a full year's activity
in 2004 from our Veenendaal, The Netherlands tapered roller and metal retainer
operation acquired on May 2, 2004 accounted for $14.4 million of the increase.
Impacts of foreign currency translation within the NN Europe Segment contributed
$15.3 million of the increase. The remaining increase of $10.2 million within
the NN Europe Segment is a result of increased product demand, increases in
material cost and the impact of inventory reductions. Cost of products sold of
our Domestic Ball and Roller Segment increased $3.1 million or 7.9% from $39.2
million in 2003 to $42.3 million in 2004 with the total increase principally due
to increases in product demand and increases in raw material steel cost. Cost of
products sold of our Plastic and Rubber Components Segment increased $1.9
million or 4.6% from $42.2 million in 2003 to $44.1 million in 2004 principally
due to increases in product demand and the impact of inventory reductions. As a
percentage of net sales, cost of products sold increased from 77.2% in 2003 to
79.0% in 2004.

The price of steel has risen over the last twelve to eighteen months with the
potential for 2005 prices to reflect even greater increases. The increase is
principally due to general increases in global demand and, more recently, due to
China's increased consumption of steel. This has had the impact of increasing
scrap surcharges we pay in procuring our steel in the form of higher unit prices
and scrap surcharges and could adversely impact the availability of steel. Our
contracts with key customers allow us to pass a majority of the steel price
increases on to those customers. However, by contract, material price changes in
any given year are typically passed along with price adjustments in January of
the following year. Until the current increases can be passed through to our
customers, income from operations, net income and cash flow from operations will
be adversely affected.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $8.1 million or 37.1% from $21.7 million in
2003 to $29.8 million in 2004. Selling, general and administrative expenses of
our NN Europe Segment increased $4.3 million or 39.4% from $10.9 million in 2003
to $15.2 million in 2004. The impact of a full year's activity in 2004 from our
Veenendaal, The Netherlands tapered roller and metal retainer operation acquired
on May 2, 2004 accounted for $1.5 million of the increase. Impacts of foreign
currency translation within the NN Europe Segment contributed $1.4 million of
the increase. The remaining increase of $1.4 million within the NN Europe
Segment is related to the start-up of our previously announced Level 3 program
which integrates the principles of Lean Enterprise, Six Sigma and Total
Productive Maintenance (the "Level 3 Program"), expenses associated with our
Slovakia ball production facility and severance costs. Selling, general and
administrative expenses of our Domestic Ball and Roller Segment increased $2.8
million in 2004 over 2003 levels. The increase is principally related to
Sarbanes-Oxley compliance efforts in the area of internal controls, the Level 3
program and costs associated with the start-up of NN Asia. Selling, general and
administrative expenses of our Plastic and Rubber Components Segment increased
$0.5 million in 2004 over 2003 levels. The increase is principally related to
the Level 3 program and costs associated with employee severance. As a
percentage of net sales, selling, general and administrative expenses increased
from 8.6% in 2003 to 9.8% in 2004.

Depreciation and amortization. Depreciation and amortization expense increased
$2.3 million or 17.8% from $13.7 million in 2003 to $16.1 million in 2004.
Depreciation and amortization expense of our NN Europe Segment increased $2.3 or
30.3% from $7.6 million in 2003 to $9.9 million in 2004. Of this amount, the
impact of a full year's activity in 2004 from our Veenendaal, The Netherlands
tapered roller and metal retainer operation acquired on May 2, 2004 accounted
for $1.0 million of the increase. Impacts of foreign currency translation within
the NN Europe Segment contributed $0.9 million of the increase. The remaining
increase of $0.4 million within the NN Europe Segment is related to our Slovakia
ball production facility and capital spending increases. There was no change to
depreciation and amortization expense within the Domestic Ball and Roller
Segment and the Plastic and Rubber Components Segment. As a percentage of net
sales, depreciation and amortization expenses decreased from 5.4% in 2003 to
5.3% in 2004.

21

(Gain) loss on disposal of assets. (Gain) loss on disposal of assets changed
$1.0 million from a gain of $0.1 million in 2003 to a loss of $0.9 million in
2004. Within the Domestic Ball and Roller Segment, the loss recorded in 2004 is
principally associated with the December 2004 sale of our idle Walterboro, South
Carolina land and building assets. This ball production facility was closed in
2001 as a part of our ongoing strategy to locate manufacturing capacity in
closer proximity to our customers. The loss on disposal of assets was 0.3% of
net sales in 2004.

Restructuring and impairment costs. Restructuring and impairment costs decreased
by $0.1 million from $2.5 million in 2003 to $2.4 million in 2004. In 2004, the
$2.4 million of restructuring and impairment costs is related to severance costs
and related charges for approximately 86 employees at our Eltmann, Germany ball
production facility, a component of the NN Europe Segment. In 2003, the $2.5
million of restructuring and impairment costs are related to asset impairments,
severance and lease exit costs due to the closing of our Guadalajara, Mexico
plastic injection molding facility. As a percentage of net sales, restructuring
and impairment costs decreased from 1.0% in 2003 to 0.8% in 2004.

Interest expense. Interest expense increased $0.6 million, or 18.8%, from $3.4
million in 2003 to $4.0 million in 2004. Of this amount, approximately $0.4
million is related to the April 26, 2004 issuance of our $40.0 million aggregate
principal amount of senior notes in a private placement. These notes bear
interest at a fixed rate of 4.89%. See "Liquidity and Capital Resources." Within
our NN Europe Segment, $0.1 million is related the impacts of foreign currency
translation. As a percentage of net sales, interest expense was unchanged at
1.3% in 2003 and 2004.

Net income. Net income decreased $3.1 million or 30.2% from $10.2 million in
2003 to $7.1 million in 2004. As a percentage of net sales, net income decreased
from 4.0% in 2003 to 2.3% in 2004.

Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002

Net Sales. Our net sales increased by $60.6 million or 31.4% from $192.9 million
in 2002 to $253.5 million in 2003. Net sales of the NN Europe Segment increased
$56.5 million or 62.3% from $90.7 million in 2002 to $147.2 million in 2003.
Sales from our Veenendaal, The Netherlands tapered roller and metal retainer
operation acquired on May 2, 2003 accounted for $35.1 million of the increase.
Impacts of foreign currency translation within the NN Europe segment contributed
$18.7 million of the increase. The remaining increase of $2.7 million is a
result of increased product demand. Net sales of the Domestic Ball and Roller
Segment increased $2.8 million or 5.3% from $52.6 million in 2002 to $55.4
million in 2003. Net sales of the Plastics and Rubber Components Segment
increased $1.3 million or 2.6% from $49.6 million in 2002 to $50.9 million in
2003. Sales increases in these two segments are a result of increased product
demand.

Cost of Products Sold. Our cost of products sold increased by $51.4 million or
35.6% from $144.3 million in 2002 to $195.7 million in 2003. Cost of products
sold of the NN Europe Segment increased $46.4 million or 68.4% from $67.9
million in 2002 to $114.3 million in 2003. Cost of products sold from our
Veenendaal, The Netherlands operation accounted for $29.2 million of the
increase and impacts of foreign currency translation accounted for $14.7 million
of the increase. The remaining increase of $2.5 million within the NN Europe
segment is principally attributed to increased product demands and material cost
increases. Cost of products sold of the Domestic Ball and Roller Segment
increased by $2.6 million due to production costs associated with increased
product demand of approximately $1.9 million and increases in material costs and
export costs of approximately $0.7 million. Cost of products sold of the
Plastics and Rubber Components Segment increased $2.3 million due to production
costs associated with increased product demand of approximately $1.0 million,
$0.1 million related to inventory impairment charges due to the closing of our
NN Arte business in Guadalajara, Mexico, and $1.2 million due to product mix and
insurance expense increases. As a percentage of sales, cost of products sold
increased from 74.8% in 2002 to 77.2% in 2003.

The price of steel has risen over the last twelve to eighteen months with the
potential for 2005 prices to reflect even greater increases. Prior to that time,
steel prices had gradually declined since approximately 1997. The increase is
principally due to general increases in global demand and, more recently, due to
China's increased consumption of steel. This has had the impact of increasing
steel prices we pay in procuring our steel in the form of higher unit prices and
scrap surcharges and could adversely impact the availability of steel. Our
contracts with key customers allow us to pass a majority of the steel price
increases we incur on to those customers. However, by contract, material price
changes in any given year are passed along with price adjustments in January of
the following year. Until the current increases can be passed through to our
customers, income from operations, net income and cash flow from operations will
be adversely affected.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.6 million or 26.6% from $17.1 million
during 2002 to $21.7 million during 2003. Selling, general and administrative
expenses of the NN Europe Segment increased $3.8 million principally due to the
acquisition of Veenendaal on May 2, 2003 contributing $2.6 million of the
increase and impacts of foreign currency translation accounting for $1.5 million
of the increase, offset by

22


decreased spending of $0.3 million. Selling, general and administrative expenses
of the Domestic Ball and Roller Segment increased by $0.9 million over 2002
spending levels. The increase is attributed to non-cash compensation charges
associated with a portion of employee stock options accounted for under the
variable accounting method of $0.4 million, certain audit and legal charges of
$0.3 million and corporate development initiatives of $0.2 million. Selling,
general and administrative expenses decreased by $0.1 million within the Plastic
and Rubber Components Segment. As a percentage of net sales, selling, general
and administrative costs decreased from 8.9% in 2002 to 8.6% in 2003.

Depreciation and Amortization. Depreciation and amortization expense increased
$2.5 million or 22.1% from $11.2 million in 2002 to $13.7 million in 2003.
Depreciation and amortization expense of the NN Europe Segment increased $2.8
million. Of this amount, $1.5 million is related to the acquisition of
Veenendaal on May 2, 2003 and impacts of foreign currency translation accounted
for $1.0 million of the increase. The other $0.3 million is related to capital
spending increases. Offsetting this amount was a decrease in depreciation and
amortization expense in the Plastic and Rubber Components Segment of $0.3
million related to decreased capital spending within this segment. There was no
change to depreciation and amortization expense within the Domestic Ball and
Roller Segment.

Interest Expense. Interest expense increased $0.9 million or 38.4% from $2.5
million in 2002 to $3.4 million in 2003. Interest expense increased $0.9 million
related to additional borrowings necessary to fund the May 2, 2003 acquisition
of Veenendaal and $0.8 million related to the purchase of the minority interests
in NN Europe held by INA/FAG and SKF on December 20, 2002 and May 2, 2003,
respectively. Offsetting these increases was a decrease interest expense of $0.8
million due to debt principal payments and decreased interest rates.

Minority Interest in Consolidated Subsidiary. Minority interest in consolidated
subsidiary decreased $2.1 million or 75.7% from $2.8 million in 2002 to $0.7
million in 2003. The decrease is attributed to the purchase of the minority
interests in NN Europe held by INA/FAG and SKF on December 20, 2002 and May 2,
2003, respectively. As of May 2, 2003 we became the sole owner of NN Europe.

Net Income. Net income increased $2.4 million or 31.2% from $7.8 million in 2002
to $10.2 million in 2003. As a percentage of net sales, net income was 4.0% in
both 2002 and 2003.

Liquidity and Capital Resources

On May 1, 2003 in connection with the purchase of SKF's Veenendaal component
manufacturing operations and SKF's 23 percent interest in NN Europe, we entered
into a $90 million syndicated credit facility with AmSouth Bank ("AmSouth") as
the administrative agent and Suntrust Bank as the Euro loan agent for the
lenders under which we borrowed $60.4 million and 26.3 million Euros ($29.6
million) (the "$90 million credit facility"). This financing arrangement
replaced our prior credit facility with AmSouth and Hypo Vereinsbank Luxembourg,
S.A. The credit facility as originally entered into consisted of a $30.0 million
revolver ("$30.0 million revolver") originally expiring on March 15, 2005, and
subsequently extended to March 31, 2006 bearing interest at a floating rate
equal to LIBOR (2.56% at December 31, 2004) plus an applicable margin of 1.25%
to 2.0%, a $30.4 million term loan expiring on May 1, 2008, bearing interest at
a floating rate equal to LIBOR (2.56% at December 31, 2004) plus an applicable
margin of 1.25% to 2.0% and a 26.3 million Euro ($29.6 million) term loan ("26.3
million Euro term loan") expiring on May 1, 2008 which bears interest at a
floating rate equal to Euro LIBOR (2.15% at December 31, 2004) plus an
applicable margin of 1.25% to 2.0%. All amounts owed under the $30.4 million
term loan were paid during the second quarter of 2004 with the proceeds from our
issuance of $40 million aggregate principal amount of senior notes in a private
placement and we no longer have borrowing capacity under that portion of the $90
million credit facility. The terms of the $30.0 million revolver and the 26.3
million Euro term loan remain unchanged except for the maturity date of the
$30.0 million revolver has been extended to March 31, 2006. The loan agreement
contains customary financial and non-financial covenants. Such covenants specify
that we must maintain certain liquidity measures. The loan agreement also
contains customary restrictions on, among other things, additional indebtedness,
liens on our assets, sales or transfers of assets, investments, restricted
payments (including payment of dividends and stock repurchases), issuance of
equity securities, and mergers, acquisitions and other fundamental changes in
the Company's business. The credit agreement is un-collateralized except for the
pledge of stock of certain foreign subsidiaries. We were in compliance with all
such covenants as of December 31, 2004.

In connection with the acquisition of KLF's operations in Slovakia, on September
23, 2003 we entered into a $2.0 million short-term unsecured promissory note
(the "$2.0 million note") with AmSouth as the lender. This note bore interest at
the prime rate. All amounts owed under this note were paid during the second
quarter of 2004 with the proceeds from our $40 million notes.

On March 23, 2004 we entered into a $2.7 million short-term promissory note (the
"$2.7 million note") with AmSouth Bank ("AmSouth") as the lender. This note bore
interest at the prime rate. This agreement was entered into to fund short term

23


operating capital requirements. All amounts owed under this note were paid
during the second quarter of 2004 with the proceeds from our $40 million notes.

On April 26, 2004 we issued $40.0 million aggregate principal amount of senior
notes in a private placement (the "$40 million notes"). These notes bear
interest at a fixed rate of 4.89% and mature on April 26, 2014. Interest is paid
semi-annually. As of December 31, 2004, $40.0 million remained outstanding.
Annual principal payments of approximately $5.7 million begin on April 26, 2008
and extend through the date of maturity. Proceeds from this credit facility were
used to repay our existing US dollar denominated term loan, $24 million, and
repay a portion, of our borrowings under our US dollar denominated revolving
credit facility, $13 million, which are both components of our $90 million
credit facility, and to repay borrowings remaining under our $2.0 million note
and our $2.7 million note of $2 million and $1 million, respectively. The
agreement contains customary financial and non-financial covenants. Such
covenants specify that we must maintain certain liquidity measures. The
agreement also contains customary restrictions on, among other things,
additional indebtedness, liens on our assets, sales or transfers of assets,
investments, restricted payments (including payment of dividends and stock
repurchases), issuance of equity securities, and mergers, acquisitions and other
fundamental changes in our business. No event of default had occurred as of
December 31, 2004. The notes are not collateralized except for the pledge of
stock of certain foreign subsidiaries. We incurred $0.8 million of related costs
as a result of issuing these notes which have been recorded as a component of
other non-current assets and are being amortized over the term of the notes. In
connection with the issuance of the $40 million notes, capitalized costs in the
amount of approximately $0.3 million associated with structuring of the $90
million credit facility were written off during the twelve months ended December
31, 2004 and are included as a component of other (income) expense.

During May 2003, we completed a public offering of 3.6 million shares of our
stock by a group of selling shareholders. We did not receive any proceeds from
the sale of the shares previously held by the group of selling shareholders,
however, the underwriters did exercise their over-allotment option of 533,600
shares, which were offered by us. Net proceeds received by us in connection with
the exercise of the over-allotment option were approximately $5.1 million, net
of issue costs. Per the terms of our credit facility, we repaid a portion of our
credit facility with these proceeds.

On October 27, 2004 we completed the sale of our idle warehouse in Kilkenny,
Ireland for approximately 1.6 million euro ($2.0 million), net of selling costs
incurred. As a result of this transaction, we recorded a loss on disposal of
assets of approximately 0.1 million euro ($0.1 million) during the fourth
quarter which was recorded as a component of loss on disposal of assets. Prior
to the sale this asset was classified as a component of Property, plant and
equipment, net. Proceeds received from the sale of this asset were used to repay
a portion of our $90 million credit facility.

To date, cash generated by NN Europe and its subsidiaries has been used
exclusively for general, NN Europe-specific purposes including investments in
property, plant and equipment and prepayment of the Euro term loan, which is
secured by NN Europe and its subsidiaries. Accordingly, no dividends have been
declared or paid by NN Europe that may have been used by the Company to pay down
our domestic credit facilities.

The Company's arrangements with its domestic customers typically provide that
payments are due within 30 days following the date of the Company's shipment of
goods, while arrangements with foreign customers (other than foreign customers
that have entered into an inventory management program with the Company)
generally provide that payments are due within 90 or 120 days following the date
of shipment. Under the Domestic Ball and Roller Segments inventory management
program with certain European customers, payments typically are due within 30
days after the customer uses the product. The Company's sales and receivables
can be influenced by seasonality due to the Company's relative percentage of
European business coupled with many foreign customers ceasing production during
the month of August. For information concerning the Company's quarterly results
of operations for the years ended December 31, 2004 and 2003, see Note 15 of the
Notes to Consolidated Financial Statements.

The Company bills and receives payment from some of its foreign customers in
Euro as well as other currencies. To date, the Company has not been materially
adversely affected by currency fluctuations or foreign exchange restrictions.
Nonetheless, as a result of these sales, the Company's foreign exchange
transaction and translation risk has increased. Various strategies to manage
this risk are available to management including producing and selling in local
currencies and hedging programs. As of December 31, 2004, no currency hedges
were in place. In addition, a strengthening of the U.S. dollar and/or Euro
against foreign currencies could impair the ability of the Company to compete
with international competitors for foreign as well as domestic sales.

Working capital, which consists principally of accounts receivable and
inventories, was $33.9 million at December 31, 2004 as compared to $25.7 million
at December 31, 2003. The ratio of current assets to current liabilities
increased from to 1.40:1 at December 31, 2003 and 1.46:1 at December 31, 2004.
Cash flow from operations increased to $31.6 million during 2004

24


from $19.5 million during 2003 and $31.1 million during 2002. Contributing to
this change were principally improvements in the changes in operating assets and
liabilities for the twelve months ended 2004 in comparison to the twelve months
ended 2003 as follows: inventory $5.8 million, accounts receivable $1.1 million
and accounts payable $4.7 million.

During 2005, we plan to spend approximately $9.1 million on capital expenditures
related primarily to equipment and process upgrades and replacements and
approximately $7.9 million principally related to geographic expansion of our
manufacturing base. We intend to finance these activities with cash generated
from operations and funds available under our credit facilities. The Company
believes that funds generated from operations and borrowings will be sufficient
to finance the Company's working capital needs, projected capital expenditure
requirements and dividend payments through December 2005.

The table below sets forth certain of the Company's contractual obligations and
commercial commitments as of December 31, 2004:


=========================== ===============================================================================
Certain Payments Due by Period
Contractual Obligations
=========================== ===============================================================================
Total Less than 1 1-3 years 3-5 years After 5 years
year


Long-Term Debt $ 74,670 $ 7,160 $25,720 $13,219 $28,571
=========================== ================ ============== ================ =============== ==============
Expected interest payments 15,091 3,293 4,915 3,390 3,493
=========================== ================ ============== ================ =============== ==============
Operating Leases 25,265 2,306 4,001 3,643 15,315
=========================== ================ ============== ================ =============== ==============
Capital Leases (1) 4,150 104 416 416 3,214
=========================== ================ ============== ================ =============== ==============
Expected pension
contributions and benefit
payments 5,978 468 1,056 1,134 3,320
=========================== ================ ============== ================ =============== ==============
Other Long-Term
Obligations (2) 44,710 44,710 -- -- --
=========================== ================ ============== ================ =============== ==============
Total Contractual Cash
Obligations $169,864 $58,041 $36,108 $21,802 $53,913
=========================== ================ ============== ================ =============== ==============


(1) On June 1, 2004, our wholly owned subsidiary, NN Precision Bearing Products
Company LTD, entered into a twenty year lease agreement with Kunshan Tian Li
Steel Structure Co. LTD for the lease of land and building (approximately
110,000 square feet) in the Kunshan Economic and Technology Development Zone,
Jiangsu, The People's Republic of China. The building will be newly constructed
and we expect to begin usage of the leased property during the second quarter of
2005. The land and building remain under the control of the lessor until such
time as usage of the leased property commences. The agreement satisfies the
requirements of a capital lease at June 1, 2004 and we anticipate recording the
lease as a capital lease in our consolidated financial statements when usage of
the leased property begins. Accordingly, as of December 31, 2004, no amount has
been recorded related to the asset and corresponding obligation associated with
the lease agreement in our consolidated financial statements. We estimate the
fair value of the land and building to be approximately $2.0 million and
undiscounted annual lease payments of approximately $0.2 million (approximately
$4.1 million aggregate non-discounted lease payments over the twenty year term).
The lease terms include fair value buy-out provisions and we maintain the option
of extend the lease term. Although no amounts have been recorded related to this
lease agreement in our consolidated financial statements as of December 31,
2004, the Capital Leases line in the table above reflects the obligation as if
the lease was recorded as of June 1, 2005, the date we estimate the Company will
begin to use the property. No other amounts are included in Capital Leases
above.

(2) Other Long-Term Obligations consist of steel purchase commitments at the NN
Europe Segment (See Note 14 of the Notes to Consolidated Financial Statements.)

The Euro

The Company currently has operations in Ireland, Germany, Italy and The
Netherlands, all of which are Euro participating countries, and, each facility
sells product to customers in many of the participating countries. The Euro has
been adopted as the functional currency at all locations in the NN Europe
Segment, except Slovakia whose functional currency is the Slovak Korona.
Slovakia joined the European Union in May 2004 and current plans call for
Slovakia to adopt the Euro as its functional currency at a later date.

25



Seasonality and Fluctuation in Quarterly Results

The Company's net sales historically have been seasonal in nature, due to a
significant portion of the Company's sales being to European customers that
cease or significantly slow production during the month of August. For
information concerning the Company's quarterly results of operations for the
years ended December 31, 2004 and 2003, see Note 15 of the Notes to Consolidated
Financial Statements.

Inflation and Changes in Prices

While the Company's operations have not been materially affected by inflation
during recent years, prices for 52100 Steel, engineered resins and other raw
materials purchased by the Company are subject to material change, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview and Management Focus". For example, during 1995, due to an
increase in worldwide demand for 52100 Steel and the decrease in the value of
the United States dollar relative to foreign currencies, the Company experienced
an increase in the price of 52100 Steel and some difficulty in obtaining an
adequate supply of 52100 Steel from its existing suppliers. In our U.S.
operations our typical pricing arrangements with steel suppliers are subject to
adjustment once every six months. The Company's NN Europe Segment has entered
into long term agreements with its primary steel supplier which provide for
standard terms and conditions and annual pricing adjustments to offset material
price fluctuations in steel and quarterly scrap surcharge adjustments. The
Company typically reserves the right to increase product prices periodically in
the event of increases in its raw material costs. In the past, the Company has
been able to minimize the impact on its operations resulting from the 52100
Steel price fluctuations by taking such measures. However, by contract, material
price changes in any given year are passed along with price adjustments in
January of the following year. Certain sales agreements are in effect with SKF
and INA, which provide for minimum purchase quantities and specified, annual
sales price adjustments that may be modified up or down for changes in material
costs. These agreements expire during 2006 and 2008.

Recently Issued Accounting Standards

On December 16, 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
which requires companies to expense the value of employee stock options and
similar awards and establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods. SFAS No. 123R is
effective for interim and annual periods beginning after June 15, 2005 and
applies to all outstanding and unvested share-based payment awards. This
Statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award (usually the vesting period). We are currently evaluating
the impacts of SFAS No. 123R on the Company's consolidated financial statements.

In December 2003 the FASB issued SFAS No. 132R (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132R
revises employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans
required by FASB Statements No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pensions Plans and for Termination Benefits, and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". SFAS No. 132R requires
additional disclosures to those in the original Statement 132R about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. With certain
exceptions, principally related to disclosure requirements of foreign plans and
expected benefit payments, SFAS No. 132R was effective for financial statements
with fiscal years ending after December 15, 2003. Disclosure requirements
related to foreign plans and expected benefit payments are effective for fiscal
years ending after December 15, 2004. As of December 31, 2004, we have complied
with the requirement of SFAS No. 132R.

On May 19, 2004, the FASB issued FASB Staff Position (FSP) No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003", which supersedes FSP No.
106-1, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003," (the Act). FSP
No. 106-2 permits a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting for
the effects of the Act until authoritative guidance on accounting for subsidies
provided by the Act is issued. The Act introduces a prescription drug benefit
under Medicare as well as a federal subsidy to sponsors of retiree health care
benefit plans. The Act did not have a material effect on the Company's Financial
Statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS No. 151
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). SFAS No. 151 requires

26



these items be recognized as current-period charges. In addition, SFAS No. 151
requires the allocation of fixed production overheads to the costs of conversion
be based on the normal capacity of the production facilities. This statement is
effective for fiscal years beginning after June 15, 2005. We are currently
evaluating the impact of SFAS No. 151 on the Company's Financial Statements.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
an amendment of APB Opinion No. 29". SFAS No. 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions,
and replaces it with an exception for exchanges that do not have commercial
substance. This Statement specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The provisions of this Statement are
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. We are currently evaluating the impact of SFAS 153 on the
Company's Financial Statements.

Deduction for Qualified Domestic Production Activities

On October 22, 2004, the President signed the American Jobs Creation Act of 2004
(the "Act"). The Act provides a deduction for income from qualified domestic
production activities, which will be phased in from 2005 through 2010. In
return, the Act also provides for a two-year phase out of the existing
extra-territorial income exclusion (ETI) for foreign sales that was viewed to be
inconsistent with international trade protocols by the European Union. We are
not yet in a position to determine the net effect of the phase out of the ETI
and the phase in of this new deduction on the effective tax rate in future
years. We expect to be in a position to finalize our assessment by December 31,
2005.

Under the guidance in FASB Staff Position No. FAS 109-1, Application of FASB
Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004, issued and effective on December 21, 2004, the deduction will be treated
as a "special deduction" as described in FASB Statement No. 109. As such, the
special deduction has no effect on deferred tax assets and liabilities existing
at the enactment date. Rather, the impact of this deduction will be reported in
the period in which qualifying activities occur.

Repatriation of Foreign Earnings

On October 22, 2004, the President signed the American Jobs Creation Act of 2004
(the "Act"). The Act creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent dividends
received deduction for certain dividends from controlled foreign corporations.
The deduction is subject to a number of limitations and uncertainty remains as
to how to interpret numerous provisions in the Act. As such, we are not yet in a
position to decide on whether, and to what extent, we might repatriate foreign
earnings that have not yet been remitted to the U.S. We expect to be in a
position to finalize our assessment by December 31, 2005. On December 21, 2004
the FASB issued FSP No. 109-2, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004", effective on the date of issuance, and sets forth certain disclosure
requirements for an enterprise that has not yet completed its evaluation of the
repatriation provision. The disclosure requirements are discussed in Note 12 of
the Notes to Consolidated Financial Statements.


27


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to changes in financial market conditions in the normal course of
our business due to our use of certain financial instruments as well as
transacting in various foreign currencies. To mitigate our exposure to these
market risks, we have established policies, procedures and internal processes
governing our management of financial market risks. We are exposed to changes in
interest rates primarily as a result of our borrowing activities. At December
31, 2004, these borrowings included $40.0 million aggregate principal amount of
senior notes, a $30 million revolving credit facility, and a 26.3 million Euro
($29.6 million) term loan which was used to maintain liquidity and fund our
business operations. At December 31, 2004, we had $40.0 million outstanding of
senior notes, $11.4 million outstanding under the domestic credit facilities and
NN Europe had 17.1 million Euro ($23.3 million) outstanding under the Euro term
loan. At December 31, 2004, a one-percent increase in the interest rate charged
on our outstanding borrowings under both credit facilities would result in
interest expense increasing annually by approximately $0.4 million. In
connection with a variable EURIBOR rate debt financing in July 2000 our majority
owned subsidiary, NN Europe entered into an interest rate swap with a notional
amount of Euro 12.5 million for the purpose of fixing the interest rate on a
portion of their debt financing. The interest rate swap provides for us to
receive variable Euribor interest payments and pay 5.51% fixed interest. The
interest rate swap agreement expires in July 2006 and the notional amount
amortizes in relation to principal payments on the underlying debt over the life
of the swap. This original debt was repaid in May 2003, however, the swap
remains pursuant to its original terms. On May 1, 2003, we entered into a new
$90 million syndicated credit facility. This new financing arrangement replaces
our prior credit facility with AmSouth and NN Europe's credit facility with Hypo
Vereinsbank Luxembourg, S.A., see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources". The nature and amount of our borrowings may vary as a result of
future business requirements, market conditions and other factors.

Translation of the Company's operating cash flows denominated in foreign
currencies is impacted by changes in foreign exchange rates. Our NN Europe
Segment bills and receives payment from some of its foreign customers in their
own currency. To date, the Company has not been materially adversely affected by
currency fluctuations of foreign exchange restrictions. However, to help reduce
exposure to foreign currency fluctuation, management has incurred debt in Euros
and periodically used foreign currency hedges. These currency hedging programs
allow management to hedge currency exposures when these exposures meet certain
discretionary levels. The Company did not hold a position in any foreign
currency hedging instruments as of December 31, 2004.


28



Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

Financial Statements Page

Report of Independent Registered Public Accounting Firm
for the years ended December 31, 2004 and 2003.................30

Report of Independent Registered Public Accounting Firm
for the year ended December 31, 2002...........................32

Consolidated Balance Sheets at December 31, 2004 and 2003......33

Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 2004, 2003 and 2002...........34

Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2004, 2003 and 2002...........35

Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002.........................36

Notes to Consolidated Financial Statements.....................37














29


Report of Independent Registered Public Accounting Firm
-------------------------------------------------------

To the Board of Directors and Shareholders' of NN, Inc.:

We have completed an integrated audit of NN, Inc.'s 2004 consolidated financial
statements and of its internal control over financial reporting as of December
31, 2004 and an audit of its 2003 consolidated financial statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements
- ---------------------------------

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of NN,
Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting
- -----------------------------------------

Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.


30


A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

/s/PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 15, 2005























31



Report of Independent Registered Public Accounting Firm
--------------------------------------------------------

The Board of Directors
NN, Inc.:

We have audited the accompanying consolidated statements of income and
comprehensive income, consolidated statements of changes in stockholders'
equity, and consolidated statements of cash flows of NN, Inc. for the year ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of NN, Inc. for the year ended December 31, 2002 in conformity with U.S.
generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2002.



/s/ KPMG LLP

Charlotte, North Carolina
February 24, 2003







32


NN, Inc.
Consolidated Balance Sheets
December 31, 2004 and 2003
(In thousands, except per share data)



Assets 2004 2003
------------ -------------

Current assets:
Cash and cash equivalents $ 10,772 $ 4,978
Accounts receivable, net 51,597 40,864
Inventories, net 35,629 36,278
Income tax receivable 4,401 1,482
Other current assets 4,787 4,698
Current deferred tax asset 1,152 1,601
------------ -------------
Total current assets 108,338 89,901

Property, plant and equipment, net 131,169 128,996
Assets held for sale -- 1,805
Goodwill 44,457 42,893
Non-current deferred tax asset 1,629 --
Other non-current assets 4,276 4,304
------------ -------------
Total assets $ 289,869 $ 267,899
============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 45,217 $ 32,867
Accrued salaries, wages and benefits 16,332 12,032
Income taxes 1,599 1,332
Short term loans -- 2,000
Current maturities of long-term debt 7,160 12,725
Other liabilities 4,123 3,220
------------ -------------
Total current liabilities 74,431 64,176

Non-current deferred tax liability 17,857 13,423
Long-term debt 67,510 69,752
Accrued pension and other 14,931 14,080
------------ -------------
Total liabilities 174,729 161,431
------------ -------------

Commitments and Contingencies (Note 14)

Stockholders' equity:
Common stock - $0.01 par value, authorized 45,000 shares, issued and
outstanding 16,777 shares in 2004 and,

16,712 shares in 2003 168 168
Additional paid-in capital 53,423 52,960
Retained earnings 45,676 43,931
Accumulated other comprehensive income 15,873 9,409
------------ -------------
Total stockholders' equity 115,140 106,468
------------ -------------
Total liabilities and stockholders' equity $ 289,869 $ 267,899
============ =============


See accompanying notes to consolidated financial statements


33



NN, Inc.
Consolidated Statements of Income and Comprehensive Income
Years ended December 31, 2004, 2003 and 2002
(In thousands, except per share data)


2004 2003 2002
------------ ----------- -----------

Net sales $304,089 $253,462 $192,856
Cost of products sold (exclusive of depreciation shown separately below) 240,580 195,658 144,274
Selling, general and administrative 29,755 21,700 17,134
Depreciation and amortization 16,133 13,691 11,212
(Gain) loss on disposal of assets 856 (147) (25)
Restructuring and impairment costs 2,398 2,490 1,277
------------ ----------- ------------
Income from operations 14,367 20,070 18,984

Interest expense 4,029 3,392 2,451
Other (income) expense (853) 99 (462)
------------ ----------- ------------
Income before provision for income taxes 11,191 16,579 16,995
Provision for income taxes 4,089 5,726 6,457
Minority interest in consolidated subsidiaries -- 675 2,778
------------ ----------- ------------
Net income $ 7,102 $ 10,178 $ 7,760
------------ ----------- ------------

Other comprehensive income (loss):
Additional minimum pension liability, net of tax (200) (177) (28)
Unrealized holding gain on securities 73 -- --
Foreign currency translation 6,591 11,273 3,763
------------ ----------- ------------
Comprehensive income $ 13,566 $ 21,274 $ 11,495
============ =========== ============
Basic income per share:
Net income $ 0.42 $ 0.64 $ 0.51
============ =========== ============
Weighted average shares outstanding 16,728 15,973 15,343
============ =========== ============
Diluted income per share:
Net income $ 0.41 $ 0.62 $ 0.49
============ =========== ============
Weighted average shares outstanding 17,151 16,379 15,714
============ =========== ============
Cash dividends per common share $ 0.32 $ 0.32 $ 0.32
============ =========== ============



















See accompanying notes to consolidated financial statements


34


NN, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2004, 2003 and 2002
(In thousands)




Common Stock Accumulated
------------------------ Additional Other
Number Par Paid-In Retained Comprehensive
of shares Value Capital Earnings (Loss) Gain Total
------------ ---------- ------------ ----------- --------------- -----------


Balance, December 31, 2001 15,317 $154 $40,111 $36,139 $ (5,422) $ 70,982
Shares issued 53 -- 346 -- -- 346
Net income -- -- -- 7,760 -- 7,760
Dividends declared -- -- -- (4,915) -- (4,915)
Additional minimum pension liability -- -- -- -- (28) (28)
Cumulative translation gain -- -- -- -- 3,763 3,763
---------- ------- --------- --------- ----------- -----------

Balance, December 31, 2002 15,370 $154 $40,457 $38,984 $ (1,687) $ 77,908
Shares issued 1,342 14 12,503 -- -- 12,517
Net income -- -- -- 10,178 -- 10,178
Dividends declared -- -- -- (5,231) -- (5,231)
Additional minimum pension liability -- -- -- -- (177) (177)
Cumulative translation gain -- -- -- -- 11,273 11,273
---------- ------- --------- --------- ------------ -----------

Balance, December 31, 2003 16,712 $ 168 $52,960 $43,931 $ 9,409 $106,468
Shares issued 65 -- 463 -- -- 463
Net income -- -- -- 7,102 -- 7,102
Dividends declared -- -- -- (5,357) -- (5,357)
Additional minimum pension liability -- -- -- -- (200) (200)
Unrealized holding gain -- -- -- -- 73 73
Cumulative translation gain -- -- -- -- 6,591 6,591
---------- ------- -------- --------- ----------- -----------

Balance, December 31, 2004 16,777 $ 168 $53,423 $45,676 $ 15,873 $115,140
========== ======= ======== ========= =========== ===========




















See accompanying notes to consolidated financial statements



35



NN, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002
(In Thousands)



2004 2003 2002
------------ ------------- ------------


Cash flows from operating activities:
Net Income $ 7,102 $ 10,178 $ 7,760
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 16,133 13,691 11,212
Amortization of debt issue costs 220 212 260
(Gain) loss on disposals of property, plant and equipment 856 (147) (25)
Allowance for doubtful accounts 22 158 138
Write-off of unamortized debt issue costs 260 455 --
Deferred income taxes 3,254 3,888 2,564

Minority interest in consolidated subsidiary -- 675 2,778
Restructuring costs and impairment costs 2,398 2,328 1,199
Changes in operating assets and liabilities:
Accounts receivable (8,123) (9,242) (3,728)
Inventories 2,059 (3,711) 1,479
Income tax receivable (2,878) (458) --
Other current assets 111 (1,047) 4,795
Other assets (799) (1,578) 35
Accounts payable 9,782 5,118 5,535
Other liabilities 1,175 (1,059) (2,915)
------------ ------------- ------------
Net cash provided by operating activities 31,572 19,461 31,087
------------ ------------- ------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired -- (21,435) --
Purchase of minority interest -- (15,586) (13,802)
Acquisition of property, plant and equipment (12,162) (11,429) (7,591)
Long-term note receivable 200 200 200
Proceeds from disposals of property, plant and equipment 2,342 212 65
------------ ------------- ------------
Net cash used by investing activities (9,620) (48,038) (21,128)
------------ ------------- ------------
Cash flows from financing activities:
Proceeds from long-term debt 40,000 90,332 13,802
Debt issue costs paid (839) (939) --
Bank overdrafts -- 37 (1,103)
Repayment of long-term debt (49,408) (64,196) (16,708)
Proceeds (repayment) of short-term debt (2,000) 2,000 --
Proceeds from issuance of stock and exercise of stock options 463 5,579 346
Cash dividends (5,357) (5,231) (4,915)
------------ ------------ ------------
Net cash provided (used) by financing activities (17,141) 27,582 (8,578)
------------ ------------ ------------

Effect of exchange rate changes 983 829 739

Net change in cash and cash equivalents 5,794 (166) 2,120
Cash and cash equivalents at beginning of period 4,978 5,144 3,024
------------ ------------ ------------
Cash and cash equivalents at end of period $ 10,772 $ 4,978 $ 5,144
============ ============= ============
Supplemental schedule of non-cash investing and financing activities:
Stock issued related to acquisition of Veenendaal $ -- $ 6,938 $ --
Cash paid for interest and income taxes was as follows:
Interest $ 3,318 $ 2,496 $ 1,965
Income taxes 4,887 4,371 4,774


See accompanying notes to consolidated financial statements


36


NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

1) Summary of Significant Accounting Policies and Practices

(a) Description of Business

NN, Inc. (the "Company") is a manufacturer of precision balls, cylindrical
and tapered rollers, bearing retainers, plastic injection molded products,
and precision bearing seals. The Company's balls, rollers, retainers, and
bearing seals are used primarily in the domestic and international
anti-friction bearing industry. The Company's plastic injection molded
products are used in the bearing, automotive, instrumentation and fiber
optic industries. The Domestic Ball and Roller Segment is comprised of two
manufacturing facilities located in the eastern United States, our start-up
operations in The People's Republic of China and corporate office costs.
The Company's NN Europe Segment is comprised of manufacturing facilities
located in Kilkenny, Ireland, Eltmann, Germany, Pinerolo, Italy,
Veenendaal, The Netherlands and Kysucke Nove Mesto, Slovakia. On March 12,
2004 we changed the name of our primary European entity from NN Euroball,
ApS to NN Europe ApS. To avoid confusion between the entity and the
segment, we will refer to the segment as the NN Europe Segment and the
entity as NN Europe. The facilities in the NN Europe Segment are engaged in
the production of precision balls, tapered rollers and metal retainers. The
Plastic and Rubber Components Segment consists of Industrial Molding
Corporation ("IMC"), acquired in July 1999 and Delta Rubber, acquired in
February 2001. IMC has two production facilities in Texas and Delta Rubber
has two production facilities in Connecticut (see Note 2). All of the
Company's segments sell to foreign and domestic customers.

(b) Cash and Cash Equivalents

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

(c) Inventories

Inventories are stated at the lower of cost or market. Actual costs are
evaluated and do not exceed the lower of cost or market. Cost is determined
using the first-in, first-out method. The Company accounts for inventory
under a full absorption method, and accordingly, our inventory carrying
value includes cost elements of material, labor and overhead.

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

(d) Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated
depreciation. Assets held for sale are stated at lower of cost or fair
market value less estimated selling costs. Expenditures for maintenance and
repairs are charged to expense as incurred. Major renewals and betterments
are capitalized. When a major property item is retired, its cost and
related accumulated depreciation are removed from the property accounts and
any gain or loss is recorded in the statement of income. The Company
reviews the carrying values of long-lived assets for impairment whenever
events or changes in circumstances indicate the carrying amount of an asset
may not be recoverable. During the years ended December 31, 2004, 2003 and
2002, the Company recorded an impairment charge of $108, $0 and $1,199
respectively, to write-down the land, building and equipment at the
Walterboro, SC production facility to its net realizable value, which was
principally based upon fair market value appraisals and valuations. The
land and building assets were sold at a loss during the fourth quarter of
2004. As a result, we recorded a loss of approximately $750 which has been
recorded as a loss on disposal of assets, a component of income from
operations. Additionally, during the fourth quarter of 2004, we recorded an
impairment charge of approximately $108 related to certain remaining
machinery and equipment assets of this facility. This amount was recorded
as a component restructuring and impairment costs. As of December 31, 2003,
the carrying value of this land, building and equipment was classified as a
component of assets held for sale in the accompanying financial statements
at $1,805.

37


NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

Property, plant and equipment includes tools, molds and dies principally
used in our Plastic and Rubber Components Segment that are the property of
the Company. These assets are stated at cost less accumulated depreciation.

Depreciation is provided principally on the straight-line method over the
estimated useful lives of the depreciable assets for financial reporting
purposes. Accelerated depreciation methods are used for income tax
purposes.

(e) Revenue Recognition

The Company generally recognizes a sale when goods are shipped and the
risks of ownership are transferred to the customer. The Company has an
inventory management program for certain major ball and roller customers
whereby sales are recognized when products are used by the customer from
consigned stock, rather than at the time of shipment. Under both
circumstances, revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the sellers' price is
determinable and collectibility is reasonably assured.

(f) Income Taxes

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

(g) Net Income Per Common Share

Basic earnings per share reflect reported earnings divided by the weighted
average number of common shares outstanding. Diluted earnings per share
include the effect of dilutive stock options outstanding during the year.

(h) Stock Incentive Plan

The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
including Financial Accounting Standards Board (FASB) Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation (an
interpretation of APB Opinion No. 25)" issued in March 2000, to account for
its fixed plan stock options. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. The Company also applies the
provision of APB Opinion No. 25 to its variable stock options. Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee compensation
plans.

We have elected to continue accounting for our stock compensation plan
using the intrinsic value based method under APB Opinion No. 25 and,
accordingly, have not recorded compensation expense for each of the three
years ended December 31, 2004, except as related to stock options accounted
for under the variable method of accounting. Had compensation cost for the
Company's stock compensation plan been determined based on the fair value
at the option grant dates consistent with the method of SFAS No. 123 and
SFAS No. 148, the Company's net income and earnings per share would have
been as follows:

38





NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)


Year ended December 31,
2004 2003 2002
------------ ----------- ------------

Net income - as reported $7,102 $ 10,178 $ 7,760
Stock based compensation costs, net of income
tax, included in net income as reported 27 160 (69)
Stock based compensation costs, net of income
tax, that would have been included in net
income if the fair value method had been
applied (494) (1,001) (488)
------------ ----------- ------------
Net income - proforma $6,635 $ 9,337 $ 7,203
============ =========== ============

Earnings per share - as reported $ 0.42 $ 0.64 $ 0.51
Stock based compensation costs, net of income
tax, included in net income as reported -- 0.01 (0.01)
Stock based compensation costs, net of income
tax, that would have been included in net
income if the fair value method had been
applied $(0.02) (0.06) (0.03)
----------- ----------- -----------
Earnings per share - proforma $ 0.40 $ 0.59 $ 0.47
============ =========== ============

Earnings per share-assuming dilution - as reported $ 0.41 $ 0.62 $ 0. 49
Stock based compensation costs, net of income tax,
included in net income as reported -- 0.01 --
Stock based compensation costs, net of income tax,
that would have been included in net income if
the fair value method had been applied (0.02) (0.06) (0.03)
------------ ----------- ------------
Earnings per share - assuming dilution-proforma $ 0.39 $ 0.57 $ 0.46
============ =========== ============


The fair value of each option grant was estimated based on actual
information available through December 31, 2004, 2003 and 2002 using the
Black Scholes option-pricing model with the following assumptions:

Term Vesting period
Risk free interest rate 3.25%, 3.38% and 3.28% for 2004, 2003 and
2002, respectively
Dividend yield 2.42%, 3.7%, and 3.2% annually for 2004, 2003
and 2002, respectively
Volatility 48.4%, 49.8% and 50.1% for 2004, 2003 and 2002,
respectively

39



NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

(i) Principles of Consolidation

The Company's consolidated financial statements include the accounts
of NN, Inc. and subsidiaries in which the Company owns more than 50%
voting interest. Unconsolidated subsidiaries and investments where
ownership is between 20% and 50% are accounted for under the equity
method. All significant intercompany profits, transactions, and
balances have been eliminated in consolidation. The ownership
interests of other shareholders in companies that are more than 50%
owned, but less than 100% owned by the Company, are reflected as
minority interests. Minority interest in consolidated subsidiaries
represents the minority shareholders interest of NN Europe ApS at
December 31, 2002. There were no minority interests in consolidated
subsidiaries at December 31, 2004 or December 31, 2003 as a result of
the Company acquiring the remaining additional interests in NN Europe
on May 2, 2003.

(j) Foreign Currency Translation

Assets and liabilities of the Company's foreign subsidiaries are
translated at current exchange rates, while revenue, costs and
expenses are translated at average rates prevailing during each
reporting period. Translation adjustments are reported as a component
of other comprehensive income. Net exchange gains or losses resulting
from the translation of foreign financial statements are accumulated
with other comprehensive earnings as a separate component of
shareholders equity.

(k) Goodwill and Other Intangible Assets

Goodwill: The Company recognized the excess of the purchase price of
an acquired entity over the fair value of the net identifiable assets
as goodwill. Goodwill is tested for impairment on an annual basis as
of October 1 and between annual tests in certain circumstances.
Impairment losses are recognized whenever the implied fair value of
goodwill is less than its carrying value. Goodwill is not amortized.

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

We completed our annual required goodwill impairment review during the
fourth quarter of 2002, 2003 and 2004. In performing the impairment
reviews, the Company estimated the fair values of the reporting units
using a method that incorporates valuations derived from EBITDA
multiples based upon market multiples and recent capital market
transactions and also incorporates valuations determined by each
segment's discounted future cash flows. As of January 1, 2002, the
transition date and as of October 1, 2003 and 2004, the annual review
dates, there was no impairment to goodwill as the fair values of the
reporting units exceeded their carrying values of the reporting units.
As a result of closing our NN Arte facility in Guadalajara, Mexico, we
performed a test of the recoverability of the goodwill asset
associated with this operation. This test was pursuant to the
provisions of Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" which require that interim
tests of the recoverability of goodwill be performed under certain
circumstances. As a result, we recorded an impairment charge of
approximately $1.3 million to fully write-off the goodwill asset
during the twelve month period ended December 31, 2003. There were no
impairment charges recorded as a result of the annual goodwill
impairment review during the twelve month period ended December 31,
2004. See Note 3.

40


NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

The changes in the carrying amount of goodwill for the years ended December 31,
2003 and 2004 are as follows:


Plastic and
Rubber Components NN Europe
In thousands Segment Segment Total
------------------- --------------- -----------------

Balance as of January 1, 2003 $ 26,712 $ 12,662 $ 39,374
Goodwill acquired -- 2,151 2,151
Impairment losses (1,285) -- (1,285)
Currency impacts/reclassification 328 2,325 2,653
------------------- --------------- -----------------
Balance as of January 1, 2004 $ 25,755 $ 17,138 $ 42,893
Goodwill acquired -- -- --
Impairment losses -- -- --
Currency impacts -- 1,564 1,564
------------------- --------------- -----------------
Balance as of December 31, 2004 $ 25,755 $ 18,702 $ 44,457
=================== =============== =================

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

The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment of or
Disposal of Long-Lived Assets." Assets to be held and used are tested
for recoverability when indications of impairment are evident. If the
reviewed carrying value of the asset is not recoverable based on
underlying cash flows related to specific groups of acquired
long-lived assets, the asset is written down to the lesser of
recoverable value or carrying value. Assets held for sale are carried
at the lesser of carrying value or fair value less costs of disposal.
The fair value of impaired assets is generally determined with the
assistance of independent appraisals and valuations, when available.

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

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

(n) Reclassifications

Certain 2003 and 2002 amounts have been reclassified to conform with
the 2004 presentation.

(o) Derivative Financial Instruments

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Certain Hedging
Activities." In June 2000, the FASB issued SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activity, an
Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138 require that all
derivative instruments be recorded on the balance sheet at their
respective fair values. SFAS No. 133 and SFAS No. 138 are effective
for all fiscal quarters of all fiscal years beginning after June 30,
2000, which for the Company was effective January 1, 2001.

In connection with a variable EURIBOR rate debt financing in July 2000
the Company's majority owned subsidiary, NN Europe ApS entered into an
interest rate swap with a notional amount of 12.5 million Euro for the
purpose of fixing the interest rate on a portion of their debt
financing. The interest rate swap provides for the Company to receive
variable Euribor interest payments and pay 5.51% fixed interest. The
interest rate swap agreement expires in July 2006 and the notional
amount amortizes in relation to the life of the swap.

Continued
41

NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

The interest rate swap does not qualify for hedge accounting under the
provisions of SFAS No. 133; therefore, the transition adjustment for
adoption of SFAS No. 133 and any subsequent periodic changes in fair
value of the interest rate swap are recorded in earnings as a
component of other income.

As of December 31, 2004 and 2003, the fair value of the swap is a
liability of approximately, $167 and $360, respectively, which is
recorded in other non-current liabilities. The change in fair value
during the years ended December 31, 2004 and 2003 was a gain of
approximately $193 and $125, respectively, and for the year ended
December 31, 2002 the change in fair value was a loss of approximately
$51 which has been included as a component of other income.

(p) Recently Issued Accounting Standards

On December 16, 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment," which requires companies to expense the value of employee
stock options and similar awards and establishes standards for the
accounting for transactions in which an entity exchanges its equity
instruments for goods. SFAS No. 123R is effective for interim and
annual periods beginning after June 15, 2005 and applies to all
outstanding and unvested share-based payment awards. This Statement
requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exception). That cost
will be recognized over the period during which an employee is
required to provide service in exchange for the award-the requisite
service period (usually the vesting period). We are currently
evaluating the impacts of SFAS No. 123R on the Company's consolidated
financial statements.

In December 2003 the FASB issued SFAS No. 132R (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement
Benefits". SFAS No. 132R revises employers' disclosures about pension
plans and other postretirement benefit plans. It does not change the
measurement or recognition of those plans required by FASB Statements
No. 87, "Employers' Accounting for Pensions", No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit
Pensions Plans and for Termination Benefits, and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". SFAS No.
132R requires additional disclosures to those in the original
Statement 132R about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. With certain exceptions,
principally related to disclosure requirements of foreign plans and
expected benefit payments, SFAS No. 132R is effective for financial
statements with fiscal years ending after December 15, 2003.
Disclosure requirements related to foreign plans and expected benefit
payments are effective for fiscal years ending after December 15,
2004. As of December 31, 2004, we have complied with the requirements
of SFAS No. 132R.

On May 19, 2004, the FASB issued FASB Staff Position (FSP) No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003", which
supersedes FSP No. 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," (the Act). FSP No. 106-2 permits a sponsor
of a postretirement health care plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the
effects of the Act until authoritative guidance on accounting for
subsidies provided by the Act is issued. The Act introduces a
prescription drug benefit under Medicare as well as a federal subsidy
to sponsors of retiree health care benefit plans. The Act did not have
a material effect on the company's financial statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs".
SFAS No. 151 clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material
(spoilage). SFAS No. 151 requires these items be recognized as
current-period charges. In addition, SFAS No. 151 requires the
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. This
statement is effective for fiscal years beginning after June 15, 2005.
We are currently evaluating the impact of SFAS No. 151 on the
company's financial statements.

42
Continued

NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets an amendment of APB Opinion No. 29". SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces
it with an exception for exchanges that do not have commercial
substance. This Statement specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The
provisions of this Statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005.
We are currently evaluating the impact of SFAS 153 on the Company's
Financial Statements.

Deduction for Qualified Domestic Production Activities

On October 22, 2004, the President signed the American Jobs Creation
Act of 2004 (the "Act"). The Act provides a deduction for income from
qualified domestic production activities, which will be phased in from
2005 through 2010. In return, the Act also provides for a two-year
phase out of the existing extra-territorial income exclusion (ETI) for
foreign sales that was viewed to be inconsistent with international
trade protocols by the European Union. We are not yet in a position to
determine the net effect of the phase out of the ETI and the phase in
of this new deduction on the effective tax rate in future years. We
expect to be in a position to finalize our assessment by December 31,
2005.

Under the guidance in FASB Staff Position No. FAS 109-1, Application
of FASB Statement No. 109, "Accounting for Income Taxes," to the Tax
Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004, issued and effective on December 21, 2004,
the deduction will be treated as a "special deduction" as described in
FASB Statement No. 109. As such, the special deduction has no effect
on deferred tax assets and liabilities existing at the enactment date.
Rather, the impact of this deduction will be reported in the period in
which qualifying activities occur.

Repatriation of Foreign Earnings

On October 22, 2004, the President signed the American Jobs Creation
Act of 2004 (the "Act"). The Act creates a temporary incentive for
U.S. corporations to repatriate accumulated income earned abroad by
providing an 85 percent dividends received deduction for certain
dividends from controlled foreign corporations. The deduction is
subject to a number of limitations and uncertainty remains as to how
to interpret numerous provisions in the Act. As such, we are not yet
in a position to decide on whether, and to what extent, we might
repatriate foreign earnings that have not yet been remitted to the
U.S. We expect to be in a position to finalize our assessment by
December 31, 2005. On December 21, 2004 the FASB issued FSP No. 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004",
effective on the date of issuance, and sets forth certain disclosure
requirements for an enterprise that has not yet completed its
evaluation of the repatriation provision. The disclosure requirements
are discussed in Note 12.

2) Acquisitions, Purchase of Minority Interest and New Businesses

During 2004 we formed a wholly-owned subsidiary, NN Precision Bearing
Products Company, LTD, ("NN Asia)". This subsidiary, which is expected to
begin precision ball production during the second half of 2005, will be
located in the Kunshan Economic and Technology Development Zone, Jiangsu,
The People's Republic of China and is a component of our strategy to
globally expand our manufacturing base. The costs incurred as a result of
this start-up of approximately $481 were expensed and are included in the
Domestic Ball and Roller Segment.

On October 9, 2003, we acquired certain assets comprised of land, building
and machinery and equipment of the precision ball operations of KLF -
Gulickaren ("KLF"), based in Kysucke Nove Mesto, Slovakia. We paid
consideration of approximately 1,664 Euros ($1,967). The assets are being
utilized by our wholly owned subsidiary AKMCH based in Kysucke Nove Mesto,
Slovakia, which began production in 2004. The financial results of the
operations are included in our NN Europe Segment.

43
Continued


NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

On May 2, 2003 we acquired the 23 percent interest in NN Europe, ApS ("NN
Europe") held by SKF. We paid approximately 13,842 Euros ($15,586) for
SKF's interest in NN Europe. The excess of the purchase price paid to SKF
for its 23% interest over the fair value of SKF's 23% interest in the net
assets of NN Europe of approximately $2,151 was allocated to goodwill. Upon
consummation of this transaction, we became the sole owner of NN Europe.

On May 2, 2003 we acquired 100 percent of the tapered roller and metal cage
manufacturing operations of SKF in Veenendaal, The Netherlands. The results
of Veenendaal's operations have been included in the consolidated financial
statements since that date. We paid consideration of approximately 22,952
Euros ($25,671) and incurred other costs of approximately $1,022, for the
Veenendaal net assets acquired from SKF. The excess of the fair value of
the net assets acquired over the purchase price paid of 4,195 Euros
($4,692) has been allocated as a proportionate reduction of certain assets
acquired. The Veenendaal operation manufactures rollers for tapered roller
bearings and metal cages for both tapered roller and spherical roller
bearings allowing us to expand our bearing component offering. The
financial results of the Veenendaal operation are included in the NN Europe
Segment.

In connection with the acquisition of SKF's Veenendaal, The Netherlands
operations, SKF purchased from us 700,000 shares of our common stock for an
aggregate fair value of approximately $6,937 million which was applied to
the purchase of SKF's Veenendaal, The Netherlands operations. For purposes
of valuing the 700,000 common shares issued in our consolidated financial
statements, the value was determined based on the average market price of
NN, Inc.'s common shares over the two-day period before, the day of, and
the two-day period after the terms of the acquisition were agreed to, April
14, 2003.

The following table summarizes the allocation of the purchase price related
to the assets acquired and liabilities assumed at the date of acquisition.

At May 2, 2003
---------------
Current assets $6,611
Property, plant and equipment 27,690
-------------
Total assets acquired 34,301
Total liabilities 7,608
-------------
Total purchase price $ 26,693
=============





44

Continued

NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

The following unaudited proforma summary presents the financial information
for the twelve month periods ended December 31, 2003 as if our Veenendaal
acquisition had occurred as of the beginning of the period presented. These
pro forma results have been prepared for comparative purposes and do not
purport to be indicative of what would have occurred had the acquisition
been made as of the beginning of the period presented, nor are they
indicative of future results.


Twelve months ended
December 31, 2003
(unaudited)
--------------------
Net sales $ 270,989
Net income 10,478
Basic earnings per share 0.66
Diluted earnings per share 0.64

Twelve months ended
December 31, 2002
(unaudited)
-------------------
Net sales $ 245,437
Net income 8,658
Basic earnings per share 0.56
Diluted earnings per share 0.55

On December 20, 2002 the Company completed the purchase of the 23% interest in
NN Europe, ApS ("NN Europe") held by INA. NN Europe was formed in 2000 by the
Company, FAG Kugelfischer George Schaefer AG, which was subsequently acquired by
INA - Schaeffler KG (collectively, "INA"), and AB SKF ("SKF"). INA is a global
bearing manufacturer and one of our largest customers. The Company paid
approximately 13,400 Euro ($13,802) for INA interest in NN Europe. The excess of
the purchase price paid to INA/FAG for its 23% interest over the fair value of
INA's 23% interest in the net assets of NN Europe of approximately $1,517 was
recorded as goodwill.

Effective July 31, 2000, the Company completed its NN Europe transaction.
Completion of the transaction required the Company to start a majority owned
stand-alone company in Europe, NN Europe ApS, for the manufacture and sale of
precision steel balls used for ball bearings and other products. As a result of
this transaction the Company owned 54% of the shares of NN Europe, ApS, AB SKF
(SKF), a Swedish Company, and FAG, a German Company, owned 23% each. NN Europe
ApS subsequently acquired the steel ball manufacturing facilities located in
Pinerolo, Italy (previously owned by SKF), Eltmann, Germany (previously owned by
INA) and Kilkenny, Ireland (previously owned by the Company). NN Europe ApS paid
approximately $47,433 for the net assets originally acquired from SKF and FAG.
The acquisitions of the Pinerolo, Italy and Eltmann, Germany ball manufacturing
facilities have been accounted for by the purchase method of accounting. The
excess of the purchase price over the fair value of the net identifiable assets
acquired of $8,761 was recorded as goodwill.

45
Continued



NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

Restructuring and Impairment Charges

Eltmann, Germany Restructuring
------------------------------
During the fourth quarter of 2004, the Company's NN Europe subsidiary, a
component of the Company's NN Europe Segment, announced a reduction in
staffing at its Eltmann, Germany ball production facility. This
restructuring will affect approximately 86 employees and is expected be
completed during 2005. As a result, the Company has recorded restructuring
charges of approximately 1,700 Euro ($2,290) related to severance costs of
approximately $2,115 and other related charges of approximately $175. The
workforce reduction is a result of the Company's continuing strategy of
rationalizing its global manufacturing capacity and transfer of production
principally to its facility in Kysucke Nove Mesto, Slovakia. The charges
have been recorded in restructuring and impairment costs, a component of
income from operations.

The following summarizes the 2004 restructuring charges related to the
restructuring at the Company's Eltmann, Germany facility:



Reserve Balance at
Charges Paid in 2004 12/31/04
--------------- --------------- -------------------------

Severance and other employee costs $2,290 -- $2,290
--------------- --------------- -------------------------
Total $2,290 -- $2,290
=============== =============== =========================

We expect to pay all amounts during 2005 and no additional charges are
expected to be incurred. As a result of the workforce reduction and
rationalization of global manufacturing capacity, we performed a test of
the recoverability of the goodwill and long-lived assets associated with
the Eltmann, Germany facility. This test was pursuant to the provisions of
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" and Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment on Disposal of Long-Lived Assets" which
require that interim tests of asset recoverability be performed under
certain circumstances. As a result of the test, we concluded that no
indication of impairment exists at December 31, 2004.

NN Arte Plant Closing in Guadalajara, Mexico
--------------------------------------------
In May 2003, we decided to close our Guadalajara, Mexico plastic injection
molding facility. This operation was started in September of 2000 to supply
certain Mexican operations of multi-national manufacturers of office
automation equipment. The closure was substantially completed during the
third quarter of 2003. The financial results of this operation have been
included in the Plastic and Rubber Components Segment.

The plant closing resulted in the termination of approximately 42 full time
hourly and salary employees located at the Guadalajara facility. For the
twelve months ended December 31, 2003 total restructuring costs of $230
were recorded related to the severance payments for the affected employees.

As a result of the closing, we performed a test of the recoverability of
the goodwill asset associated with the Guadalajara, Mexico operation. This
test was pursuant to the provisions of Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" which require that
interim tests of the recoverability of goodwill be performed under certain
circumstances. As a result, we recorded an impairment charge of
approximately $1,285 to fully write-off the goodwill asset during the
twelve month period ended December 31, 2003.

We sold much of the machinery and equipment with certain pieces of
machinery and equipment to be transferred and utilized by our Industrial
Molding facility in Lubbock, Texas. Pursuant to the provisions of Statement
of Accounting Standards No. 144 "Accounting for the Impairment or Disposal
of Long-lived Assets" we recorded an impairment charge of approximately
$1,049 during 2003 to write-down the machinery and equipment to its
estimated fair market value. During the three months ended September 30,
2003 we recorded a gain of $145 related to the disposition of certain
pieces of the machinery and equipment assets that

46
Continued

NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

were previously assessed as impaired. During the twelve months ended
December 31, 2003, we recorded a total impairment charge related to the
machinery and equipment of approximately $904.

During 2003, we also recorded an accounts receivable write-down of $31 to
reduce accounts receivable to its estimated fair market value.
Additionally, we recorded an inventory write-down of $108 during 2003 to
reduce the carrying value of inventory to its estimated fair market value.
These amounts related to the inventory asset have been recorded as a
component of cost of products sold.

The following summarizes the 2004 and 2003 restructuring and impairment
charges related to the closure of NN Arte:



Reserve
Non-Cash Paid in Balance At
Charges Write-downs 2004 12/31/04
------------ ------------------- ----------------- -------------

Asset impairments $ -- $ -- $ -- $ --
Lease exit costs -- -- -- --
Severance and other employee costs -- -- 45 --
------------ ------------------- ----------------- -------------
Total $ -- $ -- $ 45 $ --
============ =================== ================= =============
Reserve
Non-Cash Paid in Balance At
Charges Write-downs 2003 12/31/03
------------ ------------------- ----------------- -------------
Asset impairments $2,328 $2,328 $ -- $ --
Lease exit costs 40 -- 40 --
Severance and other employee costs 230 -- 185 45
------------ ------------------- ----------------- -------------
Total $2,598 $2,328 $ 225 $ 45
============ =================== ================= =============


Walterboro, South Carolina Plant Closing

In September 2001, we announced the closure of our Walterboro, South
Carolina ball manufacturing facility as a part of our ongoing strategy to
locate manufacturing capacity in closer proximity to our customers. This
facility is included in our Domestic Ball and Roller Segment (see Note 11).
The closure was substantially completed by December 31, 2001.

Prior to December 31, 2001, production capacity and certain machinery and
equipment was transferred from the Walterboro facility to the Company's two
domestic ball facilities in Erwin, Tennessee and Mountain City, Tennessee.
The plant closing resulted in the termination of approximately 80 full time
hourly and salaried employees located at the Walterboro facility. The
Company recorded restructuring costs of $62 during the years ended December
31, 2002 for the related severance payments. All of the severance payments
were paid by December 31, 2002. Additionally, prior to December 31, 2001,
the Company decided to sell the Walterboro land, building and certain
machinery. The Company incurred an impairment charge of $564 during 2002 to
write-down the land and building at the Walterboro facility to its net
realizable value of $1,128 at December 31, 2002 which was based upon fair
market value appraisals. Additionally, the Company incurred an impairment
charge of $635 during 2002 to write down the equipment to its net
realizable value of $1,086. The land, building, and equipment assets with a
recorded book value of $1,805 were held for sale at December 31, 2003. In
arriving at the carrying value of the assets held for sale, we utilized
independent, third party fair value appraisals and valuations. The land and
building assets were sold at a loss during the fourth quarter of 2004. As a
result, we recorded a loss of approximately $750 which has been recorded as
a loss on disposal of assets, a component of income from operations.
Additionally, during the fourth quarter of 2004, we recorded an impairment
charge of approximately $108 related to certain remaining machinery and
equipment assets of this facility. This amount was recorded as a component
of restructuring and impairment costs.

47
Continued

NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

The Company has charged expenses to cost of products sold for moving
machinery, equipment and inventory to other production facilities and other
costs to close the facility, which will benefit future operations, in the
period they are incurred.

4) Investments in Affiliated Companies and Notes Receivable

Effective December 21, 2001, the Company sold its 50% ownership in NN
General, LLC to its partner, General Bearing Corporation for cash of $622
and notes of $3,305. The notes are due in annual installments of $200 with
the balance of $2,505 due on December 21, 2006. The notes bear interest at
an average LIBOR (2.56% at December 31, 2004) plus 1.5%. Interest income on
this note of $86 and $85 was recorded during 2004 and 2003, respectively,
and has been included as a component of other income in the accompanying
consolidated statement of income. Payments totaling $286 and $285 were
received during 2004 and 2003, respectively which include $200 of principal
and $86 and $85 of interest payments, respectively. At December 31, 2004,
the note receivable balance is $2,705 and is included as a component of
other non-current assets.

5) Accounts Receivable
December 31,
2004 2003
---------------- ----------------
Trade $ 53,331 $ 42,619
Less - Allowance for doubtful accounts 1,734 1,755
---------------- ----------------
Accounts receivable, net $ 51,597 $ 40,864
================ ================

Activity in the allowance for doubtful accounts is as follows:



Balance at
Description beginning of Balance at
year Additions Write-offs end of year
------------------ ----------------- --------------- ----------------

December 31, 2002
Allowance for doubtful
accounts $ 1,791 $ 138 $ 263 $ 1,666
================== ================= =============== ================
December 31, 2003
Allowance for doubtful
accounts $ 1,666 $ 158 $ 69 $ 1,755
================== ================= =============== ================
December 31, 2004
Allowance for doubtful
accounts $ 1,755 $ 22 $ 43 $ 1,734
================== ================= =============== ================


48
Continued


NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

Inventories
December 31,
2004 2003
------------------ ---------------
Raw materials $ 8,584 $ 8,492
Work in process 6,356 6,808
Finished goods 22,334 22,128
Less-inventory reserve (1,645) (1,150)
------------------ ---------------
Inventories, net $ 35,629 $ 36,278
================== ===============

Inventory on consignment at December 31, 2004 and 2003 was approximately
$3,755 and $3,046, respectively.

7) Property, Plant and Equipment
December 31,
Estimated
Useful Life 2004 2003
-------------- --------- ------------
Land $8,454 $7,940
Buildings and improvements 15-40 years 30,833 31,415
Machinery and equipment 3-12 years 168,561 156,263
Construction in process 11,249 4,681
--------- ------------
219,097 200,299
Less - accumulated depreciation 87,928 71,303
--------- ------------
Property, plant and equipment, net $131,169 $128,996
========= ============

On September 11, 2001, the Company announced the closing of its Walterboro,
South Carolina ball manufacturing facility effective December 2001. As a result
of that closing, land and building was classified as a component of assets held
for sale in the accompanying consolidated financial statements with a carrying
value of $1,128 as of December 31, 2003. Certain machinery and equipment assets
are also held for sale with a carrying value of $677 as of December 31, 2003.
The land and building assets were sold during the fourth quarter of 2004. As a
result, we recorded a loss on disposal of assets of approximately $750 which has
been recorded as a loss on disposal of assets, a component of income from
operations. Additionally, during the fourth quarter of 2004, we recorded an
impairment charge of approximately $108 related to certain remaining machinery
and equipment assets of this facility. This amount was recorded as a
restructuring and impairment cost.

On October 27, 2004 we completed the sale of our idle warehouse in Kilkenny,
Ireland for approximately 1,580 euro ($1,959), net of selling costs incurred. As
a result of this transaction, we recorded a loss on disposal of assets of
approximately 37 euro ($46) during the fourth quarter which was recorded as a
component of loss on disposal of assets. Prior to the sale this asset was
classified as a component of property, plant and equipment, net. Proceeds
received from the sale of this asset were used to repay a portion of our $90
million credit facility.

49
Continued

NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

8) Debt

a) Short-term

There were no short term loans outstanding at December 31, 2004.

At December 31, 2003, we had outstanding a $2,000 unsecured note payable to
AmSouth Bank ("AmSouth") bearing interest at prime rate (4.0% at December
31, 2003). The maturity date of this note was May 12, 2004. All amounts
outstanding under this note were paid in 2004.

b) Long-term debt at December 31, 2004 and 2003 consists of the
following:


2004 2003
------------- ------------

Borrowings under our $30,000 revolving credit facility bearing interest
at a floating rate equal to LIBOR (2.56% at December 31, 2004) plus
an applicable margin of 1.25 to 2.0, expiring on March
1, 2006 $ 11,400 $ 27,104

Borrowings under our $30,400 term loan expiring on May 1, 2008, bearing
interest at a floating rate equal to LIBOR (1.15% at December 31,
2003) plus an applicable margin of 1.25 to 2.0 payable in quarterly
installments of $1,790 beginning July 1,
2003 through April 1, 2008 -- 27,152

Borrowings under our 26,300 Euro term loan expiring on May 1, 2008,
bearing interest at a floating rate equal to Euro LIBOR (2.15% at
December 31, 2004) plus an applicable margin of 1.25 to 2.0 payable
in quarterly installments of Euro 1,314 beginning July 1,
2003 through April 1, 2008 23,270 28,221

Borrowings under our $40,000 aggregate principal amount of senior notes
bearing interest at a fixed rate of 4.89% maturing on April 26, 2014.
Annual principal payments of $5,714 begin on April 26,
2008 and extend through the date of maturity. 40,000 --
------------- ------------
Total long-term debt 74,670 82,477

Less current maturities of long-term debt 7,160 12,725
------------- ------------
Long-term debt, excluding current maturities of long-term debt $ 67,510 $ 69,752
============= ============

On May 1, 2003 in connection with the purchase of SKF's Veenendaal
component manufacturing operations and SKF's 23 percent interest in NN
Europe, we entered into a $90,000 syndicated credit facility with AmSouth
Bank ("AmSouth") as the administrative agent and Suntrust Bank as the Euro
loan agent for the lenders under which we borrowed $60,400 and 26,300 Euros
($29,600) (the "$90 million credit facility"). This financing arrangement
replaced our prior credit facility with AmSouth and Hypo Vereinsbank
Luxembourg, S.A. The credit facility as originally entered into consisted
of a $30,000 revolver ("$30.0 million revolver") originally expiring on
March 15, 2005 and subsequently extended to March 31, 2006 bearing interest
at a floating rate equal to LIBOR (2.56% at December 31, 2004) plus an
applicable margin of 1.25% to 2.0%, a $30,400 term loan expiring on May 1,
2008, bearing interest at a floating rate equal to LIBOR (2.56% at December
31, 2004) plus an applicable margin of 1.25% to 2.0% and a 26,300 Euro
($29,600) term loan ("26.3 million Euro term loan") expiring on May 1, 2008
which bears interest at a floating rate equal to Euro LIBOR (2.15% at
December 31, 2004) plus an applicable margin of 1.25% to 2.0%. All

50
Continued

NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

amounts owed under the $30,400 term loan were paid during the second
quarter of 2004 with the proceeds from our $40,000 notes and we no longer
have borrowing capacity under that portion of the $90,000 credit facility.
The terms of the $30,000 revolver and the 26,300 Euro term loan remain
unchanged except for the maturity date of the $30,000 revolver has been
extended to March 31, 2006. The loan agreement contains customary financial
and non-financial covenants. Such covenants specify that we must maintain
certain liquidity measures. The loan agreement also contains customary
restrictions on, among other things, additional indebtedness, liens on our
assets, sales or transfers of assets, investments, restricted payments
(including payment of dividends and stock repurchases), issuance of equity
securities, and mergers, acquisitions and other fundamental changes in the
Company's business. The credit agreement is un-collateralized except for
the pledge of stock of certain foreign subsidiaries. In connection with
this refinancing, capitalized costs in the amount of $455 associated with
the paid-off credit facilities were written-off during 2003 and are
included as a component of other (income) expense. We incurred $939 of debt
issue costs as a result of entering into this credit facility which are
being amortized over the life of the credit facility. We were in compliance
with all such covenants as of December 31, 2004.

In connection with the acquisition of KLF's operations in Slovakia, on
September 23, 2003 we entered into a $2,000 short-term unsecured promissory
note (the "$2.0 million note") with AmSouth as the lender. This note bore
interest at the prime rate. All amounts owed under this note were paid
during the second quarter of 2004 with the proceeds from our $40 million
notes.

On March 23, 2004 we entered into a $2,700 short-term promissory note (the
"$2.7 million note") with AmSouth Bank ("AmSouth") as the lender. This note
bore interest at the prime rate. This agreement was entered into to fund
short term operating capital requirements. All amounts owed under this note
were paid during the second quarter of 2004 with the proceeds from our $40
million notes.

On April 26, 2004 we issued $40,000 aggregate principal amount of senior
notes in a private placement (the "$40 million notes"). These notes bear
interest at a fixed rate of 4.89% and mature on April 26, 2014. Interest is
paid semi-annually. As of December 31, 2004, $40.0 million remained
outstanding. Annual principal payments of approximately $5,714 begin on
April 26, 2008 and extend through the date of maturity. Proceeds from this
credit facility were used to repay our existing US dollar denominated term
loan, $24,000, and repay a portion, of our borrowings under our US dollar
denominated revolving credit facility, $13,000, which are both components
of our $90 million credit facility, and to repay borrowings remaining under
our $2.0 million note and our $2.7 million note of $2,000 and $1,000,
respectively. The agreement contains customary financial and non-financial
covenants. Such covenants specify that we must maintain certain liquidity
measures. The agreement also contains customary restrictions on, among
other things, additional indebtedness, liens on our assets, sales or
transfers of assets, investments, restricted payments (including payment of
dividends and stock repurchases), issuance of equity securities, and
mergers, acquisitions and other fundamental changes in our business. No
event of default had occurred as of December 31, 2004. The notes are not
collateralized except for the pledge of stock of certain foreign
subsidiaries. We incurred $839 of related costs as a result of issuing
these notes which have been recorded as a component of other non-current
assets and are being amortized over the term of the notes. In connection
with the issuance of the $40 million notes, capitalized costs in the amount
of approximately $260 associated with structuring of the $90 million credit
facility were written off during the three months ended June 30, 2004 and
are included as a component of other (income) expense.

The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 2004 are as follows:

2005 $ 7,160
2006 18,560
2007 7,160
2008 7,504
2009 5,715
Thereafter 28,571
--------
Total $ 74,670
========


51
Continued


NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

9) Employee Benefit Plans

We have one defined contribution 401(k) profit sharing plan covering
substantially all employees of the Domestic Ball and Roller and Plastic and
Rubber Components Segments. All employees are eligible for the plan on the
first day of the month following their hire date. A participant may elect
to contribute between 1% and 60% of compensation to the plan, subject to
Internal Revenue Service ("IRS") dollar limitations. Participants age 50
and older may defer an additional amount up to the applicable IRS Catch Up
Provision Limit. The Company provides a matching contribution which is
determined on an individual, participating company basis. Currently, the
matching contribution for employees of the Domestic Ball and Roller Segment
is the higher of five hundred dollars or 50% of the first 4% of
compensation. The matching contribution for IMC employees is 25% of the
first 6% of compensation and the matching contribution for Delta employees
is 50% of the first 6% of compensation. All participants are immediately
vested at 100%. Contributions by the Company for the Domestic Ball and
Roller Segment were $134, $126, and $126 in 2004, 2003 and 2002,
respectively. Contributions by the Company for the Plastic and Rubber
Components Segment were $133, $126 and $100 in 2004, 2003 and 2002,
respectively.

The Company has a defined benefit pension plan covering its Eltmann,
Germany facility employees (a NN Europe division). The benefits are based
on the expected years of service including the rate of compensation
increase. The plan is unfunded.

Following is a summary of the changes in the projected benefit obligation
for the defined benefit pension plan during 2004 and 2003:


2004 2003

-------------- ------------
Reconciliation of Funded Status:
Accumulated benefit obligations $4,293 $3,651
Additional benefit obligation for future salary increases 423 336
-------------- ------------
Projected benefit obligation 4,716 3,987
Fair value of plan assets -- --
-------------- ------------
Funded status $4,716 $3,987
============== ============

2004 2003
-------------- ------------
Change in projected benefit obligation:
Benefit obligation at beginning of year $3,987 $3,059
Service cost 119 114
Interest cost 230 208
Benefits paid (65) (45)
Effect of currency translation 312 625
Actuarial loss 133 26
-------------- ------------

Benefit obligation at December 31 $4,716 $3,987
============== ============




2004 2003 2002
-------------- ------------ -------------

Weighted-average assumptions as of December 31:
Discount rate 5.25% 5.5% 5.5%
Rate of compensation increase 1.3%-2.5% 1.3%-2.5% 1.5% - 2.1%
Measurement date 10/31/04 10/31/03 10/31/02


52
Continued

NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

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

Pension Benefits
-----------------
2005 $ 68
2006 117
2007 140
2008 154
2009 179
2010-2014 1,319



2004 2003 2002
---------------- -------------- ---------------

Components of net periodic benefit cost:
Service cost $119 $114 $ 95
Interest cost on projected benefit obligation 230 208 161
Amortization of net gain 9 9 9
---------------- -------------- ---------------
Net periodic pension benefit cost $358 $331 $265
================ ============== ===============

We expect to contribute approximately $400 to our pension plan in 2005.

Amounts recognized in the Consolidated Balance Sheets consist of:


2004 2003
-------------- --------------

Accrued benefit liability $4,716 $3,987
Accumulated other comprehensive loss, net of tax (458) (258)
-------------- --------------
Net amount recognized in other non-current liabilities $4,258 $3,729
============== ==============


Accumulated other comprehensive loss is shown net of tax of $253, and $135 at
December 31, 2004, and 2003 respectively.


















53
Continued

NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

10) Stock Incentive Plan

The Company has a Stock Incentive Plan under which 2,450 shares of the
Company's common stock are reserved for issuance to officers and key
employees of the Company. Awards or grants under the plan may be made in
the form of incentive and nonqualified stock options, stock appreciation
rights and restricted stock. The stock options and stock appreciation
rights must be issued with an exercise price not less than the fair market
value of the Common Stock on the date of grant. The awards or grants under
the plan may have various vesting and expiration periods as determined at
the discretion of the committee administering the plan.

A summary of the status of the Company's stock option plan as described
above as of December 31, 2004, 2003 and 2002, and changes during the years
ending on those dates is presented below:


2004 2003 2002
---------------------------- ---------------------------- ---------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
price price price
Shares per share Shares per share Shares per share
----------- --------------- ----------- --------------- ------------ --------------


Outstanding at beginning
of year 1,251 $ 7.53 1,318 $ 7.33 1,373 $ 7.25


Granted 438 12.62 52 10.67 37 9.39

Exercised (65) 7.12 (108) 6.74 (53) 6.61

Forfeited (65) 11.48 (11) 7.63 (39) 7.65
----------- --------------- ----------- ------------
Outstanding at end of
year 1,559 $ 8.82 1,251 $ 7.53 1,318 $ 7.33
=========== =========== ============
Options exercisable at
year-end 1,086 $ 7.84 1,058 $ 7.27 887 $ 7.01
=========== =========== ============












54

Continued



NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

The following table summarizes information about stock options outstanding at
December 31, 2004:


Options outstanding Options exercisable
------------------------------------------------------ -----------------------------------
Weighted-
average Weighted- Number Weighted-
Number remaining average exercisable average
Range of exercise outstanding at contractual exercise price at exercise price
prices per share 12/31/2004 life per share 12/31/2004 per share
----------------- ---------------- ----------------- --------------- -----------------


$5.63 - $6.50 283 4.9 years $6.06 283 $6.06

$7.63 - $12.62 1,276 7.3 years $9.44 803 $8.47


All options granted in the period January 1, 1999 through December 31, 2004
vest ratably over three years, beginning one year from date of grant. The
exercise price of each option equals the market price of the Company's
stock on the date of grant, and an option's maximum term is 10 years. All
options granted in the period January 1, 1995 through December 31, 1998,
vest 20% - 33% annually beginning one year from date of grant. The exercise
price of each option equals the market price of the Company's stock on the
date of grant, and an option's maximum term is 10 years. Certain options
granted in July 1999 were deemed to be repriced options under the
applicable accounting requirements. These options, which were fully vested
as of the effective date of FASB Interpretation No. 44, are treated under
variable accounting. Accordingly, compensation expense is recognized, to
the extent the market price of the Company's stock exceeds $10.50 at the
end of each year. The Company recognized an increase to compensation
expense of $42 during 2004, of $250 during 2003 and, a reduction of
compensation expense of $108 during 2002.

On August 4, 1998 the Company's Board of Directors authorized the
repurchase of up to 740 shares of its Common Stock, equaling 5% of the
company's issued and outstanding shares as of August 4, 1998. The program
may be extended or discontinued at any time, and there is no assurance that
the Company will purchase any or all of the full amount authorized. The
Company has not repurchased any shares under this program through December
31, 2004.

11) Segment Information

The Company determined its reportable segments under the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information". The Company's reportable segments are based on differences in
product lines and geographic locations and are divided among Domestic Ball
and Roller, NN Europe and Plastic and Rubber Components. The Domestic Ball
and Roller Segment is comprised of two manufacturing facilities in the
eastern United States. Additionally, costs related to our start-up
operation in China and corporate office costs are included in the Domestic
Ball & Roller Segment. The NN Europe Segment is comprised of manufacturing
facilities located in Kilkenny, Ireland, Eltmann, Germany, Pinerolo, Italy,
Veenendaal, The Netherlands, and Kysucke Nove Mesto, Slovakia. All of the
facilities in the Domestic Ball and Roller and NN Europe Segments are
engaged in the production of precision balls and rollers used primarily in
the bearing industry. The Plastic and Rubber Components Segment is
comprised of four facilities: two located in Lubbock, Texas, which
represents the IMC business acquired in July 1999 and two facilities
located in Danielson, Connecticut, which represents the Delta business
acquired in February 2001. These facilities are engaged in the production
of plastic injection molded products for the bearing, automotive,
instrumentation and fiber optic markets and precision rubber bearing seals
for the bearing, automotive, industrial, agricultural and aerospace
markets.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
segment performance based on profit or loss from operations after income
taxes. The Company accounts for intersegment sales and transfers at current
market prices; however, the Company did not have any material intersegment
transactions during 2004, 2003 or 2002.

55
Continued


NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)



December 31, 2004 December 31, 2003 December 31, 2002
--------------------------------------------------------------------------------------------------------
Domestic Plastic and Domestic Plastic and Domestic Plastic and
Ball and NN Rubber Ball and NN Rubber Ball and NN Rubber
Roller Europe Components Roller Europe Components Roller Europe Components
---------------------------------------------------------------------------------------------------------

Net sales $58,435 $ 193,930 $51,724 $55,437 $ 147,127 $50,898 $ 52,634 $ 90,653 $49,569
Interest expense 1,639 1,423 967 908 1,401 1,083 109 923 1,419
Depreciation &
amortization 3,662 9,893 2,578 3,610 7,546 2,535 3,732 4,780 2,700
Income tax
expense
(benefit) 1,143 4,546 (1,600) 2,117 4,858 (1,249) 2,595 3,855 7
Segment profit
(loss) (1,930) 7,308 1,724 2,003 7,492 683 2,272 3,313 2,175
Segment assets 50,142 179,478 60,249 55,420 154,889 57,590 58,825 78,846 57,544
Expenditures for
long- lived
assets 3,238 8,021 903 2,948 5,609 2,872 1,778 3,452 2,361


Sales to external customers and long-lived assets utilized by the Company were
concentrated in the following geographical regions:




December 31, 2004 December 31, 2003 December 31, 2002
------------------------------- ----------------------------- ----------------------------
Sales Long-lived Sales Long-lived Sales Long-lived
assets assets assets
--------------- ------------- ------------- -------------- ------------ --------------


United States $ 74,228 $ 34,945 $ 67,756 $ 36,523 $ 68,485 $35,582

Europe 181,224 96,224 134,914 92,473 89,750 51,674

Canada 9,040 -- 10,727 -- 10,598 --

Latin/S.America 8,052 -- 13,435 -- 8,450 943

Other export 31,545 -- 26,630 -- 15,573 --
--------------- ------------- ------------- -------------- ------------ --------------
All foreign countries 229,861 96,224 185,706 92,473 124,371 52,617
--------------- ------------- ------------- -------------- ------------ --------------

Total $304,089 $131,169 $253,462 $128,996 $192,856 $88,199
=============== ============= ============= ============== ============ ==============


For the years ended December 31, 2004, 2003 and 2002, sales to SKF amounted
to $145,534, $107,484, and $64,235, respectively, or 47.9%, 42.4%, and
33.3% of consolidated revenues, respectively. For the years ended December
31, 2004, 2003 and 2002, sales to INA amounted to $41,693, $40,110 and
$36,502 respectively or 13.7%, 15.8% and 18.9% of consolidated revenues,
respectively. For the year ended December 31, 2004, sales to various
divisions of The Timken Co. amounted to $17,148 or 5.6% of consolidated
revenues. None of the Company's other customers accounted for more than 5%
of its net sales in 2004, 2003 or 2002. Accounts receivable concentrations
as of December 31, 2004, 2003 and 2002 are generally reflective of sales
concentrations during the years then ended.

56
Continued


NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

12) Income Taxes

Income before provision for income taxes for the years ended December 31,
2004, 2003 and 2002 are as follows:



Year ended December 31,
2004 2003 2002
------------------- ------------------- -------------------

Income before provision for income taxes:
United States $ (182) $ 3,711 $ 7,491
Foreign 11,373 12,868 9,504
------------------- ------------------- -------------------
Total $ 11,191 $ 16,579 $ 16,995
=================== =================== ===================


Total income tax expense (benefit) for the years ended December 31, 2004,
2003, and 2002 are allocated as follows:




Year ended December 31,
2004 2003 2002
------------ ----------- -----------

Current:
U.S. Federal $(2,785) $ (388) $1,753
State 88 (3) 249
Non-U.S. 3,532 2,229 1,891
------------ ----------- -----------
Total current expense $ 835 $1,838 $3,893
------------ ----------- -----------
Deferred:
U.S. Federal $2,285 $1,272 $ 533
State (46) (13) 66
Non-U.S. 1,015 2,629 1,965
----------- ----------- -----------
Total deferred expense 3,254 3,888 2,564
----------- ----------- -----------
Total expense $4,089 $5,726 $6,457
=========== =========== ===========




57
Continued


NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)


A reconciliation of taxes based on the U.S. federal statutory rate of 34%
for the years ended December 31, 2004, 2003, and 2002 is summarized as
follows:


Year ended December 31,
2004 2003 2002
----------- ----------- -----------

Income taxes at the federal statutory rate $3,805 $5,637 $5,778
State income taxes, net of federal benefit 42 (15) 208
Non-US earnings taxed at different rates 562 483 624
Other, net (320) (379) (153)
----------- ----------- -----------
$4,089 $5,726 $6,457
=========== =========== ===========

The tax effects of the temporary differences are as follows:


Year ended December 31,
2004 2003
------------------- -------------------

Deferred income tax liability
Tax in excess of book depreciation $ 12,793 $ 9,355
Duty drawback receivable 69 68
Goodwill 3,372 3,053
Flow through loss from pass through entity 719 736
Other deferred tax liabilities 904 211
------------------- -------------------
Gross deferred income tax liability 17,857 13,423
------------------- -------------------
Deferred income tax assets
Inventories 646 564
Allowance for bad debts 130 167
Personnel accruals 643 131
Other working capital accruals 30 355
NN Europe net operating loss carryforward 1,104 212
Other deferred tax assets 228 172
------------------- -------------------
Gross deferred income tax assets 2,781 1,601
------------------- -------------------
Net deferred income tax liability $ 15,076 $ 11,822
=================== ===================



58
Continued


NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

Although realization of deferred tax assets is not assured, management
believes that it is more likely than not that all of the deferred tax
assets will be realized. However, the amount of the deferred tax assets
considered realizable could be reduced based on changing conditions.

The Company has not recognized a deferred tax liability for the
undistributed earnings of its non-U.S. subsidiaries. The Company expects to
reinvest these undistributed earnings indefinitely and does not expect such
earnings to become subject to U.S. taxation in the foreseeable future. A
deferred tax liability will be recognized when the Company expects that it
will recover these undistributed earnings in a taxable manner, such as
through the receipt of dividends or sale of the investments. It is not
practicable to determine the U.S. income tax liability, if any, that would
be payable if such earnings were not reinvested indefinitely.

As of December 31, 2004, the Company has not provided taxes on unremitted
foreign earnings from certain foreign affiliates that are intended to be
indefinitely reinvested in finance operations and expansion outside the
United States. If such earnings were distributed beyond the amount for
which taxes have been provided, foreign tax credits would substantially
offset any incremental U.S. tax liability. The Company is exploring a
one-time repatriation of earnings from certain foreign affiliates as a
result of the American Jobs Creation Act of 2004, but has not made a
decision regarding such repatriation. The deduction is subject to a number
of limitations and uncertainty remains as to how to interpret numerous
provisions in the American Jobs Creation Act of 2004. As such, the Company
is not yet in a position to decide on whether, and to what extent, it might
repatriate foreign earnings. 13) Reconciliation of Net Income Per Share



Year ended December 31,
2004 2003 2002
------------------ ------------------ ----------------

Net income $ 7,102 $ 10,178 $ 7,760
Weighted average shares outstanding 16,728 15,973 15,343
Effective of dilutive stock options 423 406 371
------------------ ------------------ ----------------
Dilutive shares outstanding 17,151 16,379 15,714
Basic net income per share $ 0.42 $ 0.64 $ 0.51
================== ================== ================
Diluted net income per share $ 0.41 $ 0.62 $ 0.49
================== ================== ================


Excluded from the shares outstanding for the years ended December 31, 2004,
and 2002 were 394 and 7 antidilutive options, respectively, which had an
exercise price of $12.62 per share during 2004, and $10.26 per share during
2002. No shares were excluded from shares outstanding for the year ended
December 31, 2003.

59
Continued


NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

Commitments and Contingencies

The Company has operating lease commitments for machinery, office
equipment, vehicles, manufacturing and office space which expire on varying
dates. Rent expense for 2004, 2003 and 2002 was $3,203, $2,359 and $1,855,
respectively. The following is a schedule by year of future minimum lease
payments as of December 31, 2004 under operating leases that have initial
or remaining noncancelable lease terms in excess of one year.

Year ended December 31,
-------------------------------------------------
2005 $ 2,306
2006 2,122
2007 1,879
2008 1,854
2009 1,789
Thereafter 15,315
-------------
Total minimum lease payments $ 25,265
=============

The Kilkenny operation of the NN Europe Segment has received certain grants
from the Ireland government. These grants are based upon the Kilkenny,
Ireland facility hiring and retention of certain employment levels by the
measurement date. At December 31, 2004, actual employment levels are less
than those required by certain grant covenants. During 2003, the grant
agreement measurement date was amended to extend the measurement date. The
Company anticipates that, if necessary, the grant agreement measurement
date and /or employment level thresholds would again be adjusted. Effects
of this not occurring are estimated not to be material to the consolidated
financial statements. As of December 31, 2004 and 2003 the grant obligation
is recorded as a component of other non-current liabilities in the amount
of $559 and $617, respectively.

The NN Europe Segment has entered into a supply contract with Ascometal
France ("Ascometal") for the purchase of steel for ball production. The
contract terms specify that Ascometal provide NN Europe 90%, 90%, 85% and
85% of its steel requirements for the years ending December 31, 2002, 2003,
2004 and 2005, respectively. The contract, among other things, stipulates
that Ascometal achieve certain performance targets related to quality,
reliability and service. The contract provisions include annual price
adjustments based upon published indexes in addition to annual productivity
improvement factor multiples. In 2004, NN Europe purchased approximately
$37,716 under the terms of this contract. The estimated commitment for 2005
is $44,710. The contract expires December 31, 2005, however, it is
automatically renewed for one year periods thereafter unless notice is
provided by either NN Europe or Ascometal.

On June 1, 2004, our wholly owned subsidiary, NN Precision Bearing Products
Company LTD, entered into a twenty year lease agreement with Kunshan Tian
Li Steel Structure Co. LTD for the lease of land and building
(approximately 110,000 square feet) in the Kunshan Economic and Technology
Development Zone, Jiangsu, The People's Republic of China. The building
will be newly constructed and we expect to begin usage of the leased
property during the second quarter or third quarter of 2005. The land and
building remain under the control of the lessor until such time as usage of
the leased property commences. The agreement satisfies the requirements of
a capital lease at June 1, 2004 and we anticipate recording the lease as a
capital lease in our consolidated financial statements when usage of the
leased property begins. Accordingly, as of December 31, 2004, no amount has
been recorded related to the asset and corresponding obligation associated
with the lease agreement in our consolidated financial statements. We
estimate the fair value of the land and building to be approximately $2,000
and undiscounted annual lease payments of approximately $208 (approximately
$4,150 aggregate non-discounted lease payments over the twenty year term).
The lease terms include fair value buy-out provisions and we maintain the
option to extend the lease term.

60
Continued

NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

15) Quarterly Results of Operations (Unaudited)

The following summarizes the unaudited quarterly results of operations for
the years ended December 31, 2004 and 2003.



Year ended December 31, 2004

March 31 June 30 Sept. 30 Dec. 31
----------------- ----------------- ----------------- -----------------

Net sales $ 77,632 $ 75,265 $ 72,917 $ 78,275
Income from operations 6,108 4,304 4,510 (555)
Net income 3,218 1,986 2,152 (254)
Basic net income per share 0.19 0.12 0.13 (0.02)
Dilutive net income per share 0.19 0.12 0.13 (0.01)
Weighted average shares
outstanding:
Basic number of shares 16,712 16,721 16,767 16,773
Effect of dilutive stock options 477 456 368 453
----------------- ----------------- ----------------- -----------------
Diluted number of shares 17,189 17,177 17,135 17,226
================= ================= ================= =================


Fourth quarter results in 2004 include a pre-tax charge of $2,290 ($1,420
after-tax) related to severance costs and other related charges resulting
from a reduction in staffing at the Company's Eltmann, Germany ball
production facility. Additionally, fourth quarter results include a loss on
disposal of assets of $856 ($548 after-tax) related to the sale of the
Company's Walterboro, South Carolina land and building assets. These
charges have been recorded as components of income from operations.


Year ended December 31, 2003
March 31 June 30 Sept. 30 Dec. 31
---------------- ----------------- ------------------ ----------------

Net sales $57,609 $64,194 $64,612 $67,047
Income from operations 7,185 2,527 5,693 4,665
Net income 3,643 697 3,164 2,674
Basic net income per share 0.24 0.04 0.19 0.16
Dilutive net income per share 0.23 0.04 0.18 0.16
Weighted average shares outstanding:
Basic number of shares 15,378 16,015 16,660 16,711
Effect of dilutive stock options 196 450 507 470
---------------- ----------------- ------------------ ----------------
Diluted number of shares 15,574 16,465 17,167 17,181
================ ================= ================== ================

Second quarter and third quarter results in 2003 include a pre-tax charge
of $3,047 ($1,950 after-tax) and $(449) (($267) after-tax), respectively,
related to asset write downs due to the closure of our NN Arte operation in
Guadalajara, Mexico. These charges have been recorded as a component of
income from operations.

16) Fair Value of Financial Instruments

Management believes the fair value of financial instruments approximate
their carrying value due to the short maturity of these instruments or in
the case of the Company's notes receivable and debt, due to the variable
interest rates. The fair value of the Company's fixed rate long-term
borrowings are estimated using discounted cash flow analysis based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements.

61
Continued

NN, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(In thousands, except per share data)

The carrying amounts and fair values of the Company's long-term debt and
derivative financial instrument are as follows:



December 31, 2004 December 31, 2003
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ----------------- ------------------ -----------------

Variable rate long-term debt $ 34,670 $ 34,670 $ 82,477 $ 82,477
Fixed rate long-term debt 40,000 40,421 -- --
Interest rate swap agreement 167 167 360 360


17) Accumulated Other Comprehensive Income

At December 31, 2004 the Company has included in accumulated other
comprehensive income (loss) unrealized income due to foreign currency
translation of $16,258, and at December 31, 2003 the Company has included
in accumulated other comprehensive income (loss) unrealized income due to
foreign currency translation of $9,667. Income taxes on the foreign
currency translation adjustment in other comprehensive income were not
recognized because the earnings are intended to be indefinitely reinvested
in those operations. Also included in accumulated other comprehensive loss
as of December 31, 2004, and 2003 were additional minimum pension
liability, net of tax of ($458) and ($258), respectively, and unrealized
holding gain on securities net of tax of $73 and $0, respectively.

18) Sale of Common Stock

During May 2003, we completed a public offering of 3.6 million shares of
our stock by a group of selling shareholders. We did not receive any
proceeds from the sale of the shares previously held by the group of
selling shareholders, however, the underwriters did exercise their
over-allotment option of 533,600 shares, which were offered by us. Net
proceeds received by us in connection with the exercise of the
over-allotment option were approximately $5,100, net of issue costs. Per
the terms of our credit facility, we repaid a portion of our credit
facility with these proceeds.

62


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

The information required by this Item was previously reported by the Company in
Current Reports on Form 8-K and 8-K/A, dated August 25, 2003 and August 26,
2003.

Item 9A. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company's management,
including its Chief Executive Officer and Corporate Controller, the Company
conducted an evaluation of its disclosure controls and procedures, as such term
is defined under Rule l3a-15(e) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Based on this evaluation, Chief Executive
Officer and the Corporate Controller concluded that the Company's disclosure
controls and procedures were effective as of December 31, 2004, the end of the
period covered by this annual report.

Management's Report on Internal Control Over Financial Reporting

The management of NN, Inc. is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f). Under the supervision and with the participation of
management, including the Company's Chief Executive Officer and Corporate
Controller, an evaluation of the effectiveness of the Company's internal control
over financial reporting was conducted based on the framework in Internal
Control- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Based on that evaluation
under the framework in Internal Control- Integrated Framework issued by the
COSO, the Company's management concluded that the Company's internal control
over financial reporting was effective as of December 31, 2004.

Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.

Item 9B. Other Information

None






63

Part III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item of Form 10-K concerning the Company's
directors is contained in the sections entitled "Election of Directors --
Information about the Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance"of the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days after December 31,
2004, in accordance with General Instruction G to Form 10-K, is hereby
incorporated herein by reference.

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

Item 11. Executive Compensation

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





















64



Security Ownership of Certain Beneficial Owners and Management

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

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

Table of Equity Compensation Plan Information



In thousands
- ----------------------- -------------------------- -------------------------------- ------------------------------------
Plan Category Number of securities to Weighted -average exercise Number of securities remaining
be issued upon exercise price of outstanding options, available for future issuance under
of outstanding options, warrants and rights equity compensation plans
warrants and rights (excluding securities reflected in
column (a))

(a) (b) (c)
- ----------------------- -------------------------- -------------------------------- ------------------------------------
Equity compensation
plans approved by
security holders 1,559 $8.82 --
- ----------------------- -------------------------- -------------------------------- ------------------------------------
Equity compensation
plans not approved by
security holders -- -- --
- ---------------------- -------------------------- -------------------------------- -------------------------------------
Total 1,559 $8.82 --
- ----------------------- -------------------------- -------------------------------- ------------------------------------


Item 13. Related Party Relationships

None.

Item 14. Principal Accountant Fees and Services


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



65



Part IV

Item 15. Exhibits and Financial Statement Schedules

(a) List of Documents Filed as Part of this Report

1. Financial Statements
The financial statements of the Company filed as part of this Annual
Report on Form 10-K begin on the following pages hereof:
Page

Report of Independent Registered Public Accounting Firm for the
years ended December 31, 2004 and 2003......................................30

Report of Independent Registered Public Accounting Firm for the
year ended December 31, 2002................................................32

Consolidated Balance Sheets at December 31, 2004 and 2003.....................33

Consolidated Statements of Income and Comprehensive Income for the
years ended December 31, 2004, 2003 and 2002........ .......................34


Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2004, 2003 and 2002................................35

Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002............................................36

Notes to Consolidated Financial Statements....................................37

2. Financial Statement Schedules

Not applicable.

3. See Index to Exhibits (attached hereto)

(b) Reports on Form 8-K

The Company furnished a Form 8-K, in response to items 12 and 7, on
November 5, 2004 announcing its third quarter earnings.

The Company filed a Form 8-K, in response to items 5 and 7, on December 21,
2004 announcing the resignation of its Chief Financial Officer, Dave
Dyckman.

(c) Exhibits: See Index to Exhibits (attached hereto).

The Company will provide without charge to any person, upon the written
request of such person, a copy of any of the Exhibits to this Form 10-K.


66


SIGNATURES

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


By: /S/ RODERICK R. BATY
-----------------------------------
Roderick R. Baty
Chairman and Director

Dated: March 16, 2005

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



Name and Signature Title Date
- --------------------------- ----------------- ----------------


/S/ RODERICK R. BATY Chairman, Chief Executive Officer, March 16, 2005
- --------------------------- President and Director (Principal
Roderick R. Baty Executive Officer)

/S/ STEVEN W. FRAY Corporate Controller (Principal March 16, 2005
- --------------------------- Accounting Officer
Steven W. Fray

/S/ G. RONALD MORRIS Director March 16, 2005
- ---------------------------
G. Ronald Morris

/S/ MICHAEL E. WERNER Director March 16, 2005
- ---------------------------
Michael E. Werner

/S/ STEVEN T. WARSHAW Director March 16, 2005
- ---------------------------
Steven T. Warshaw

/S/ JAMES L. EARSLEY Director March 16, 2005
- ---------------------------
James L. Earsley

/S/ ROBERT M. AIKEN, JR.. Director March 16, 2005
- ----------------------------
Robert M. Aiken, Jr.






67


Index to Exhibits

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

3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement No. 333-89950 on Form S-3 filed June 6, 2002)

3.2 Restated By-Laws of the Company (incorporated by reference to Exhibit
3.2 of the Company's Registration Statement No. 333-89950 on Form
S-3 filed June 6, 2002)

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

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

4.3 Article II (Sections 7 and 12), Article III (Sections 2 and 15) and
Article VI of the Restated By-Laws of the Company (included in Exhibit
3.2)

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

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

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

10.4 Form of Non-Competition and Confidentiality Agreement for Executive
Officers of the Company (incorporated by reference to Exhibit 10.4
of the Company's Registration Statement No. 333-89950 on Form S-3/A
filed July 15, 2002)*

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

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

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

10.8 Employment Agreement, dated August 1, 1997, between the Company
and Roderick R. Baty (incorporated by reference to Exhibit
10.14 of the Company's Form 10-Q filed November 14, 1997)*

10.9 Amendment No. 1 to Employment Agreement between the Company and
Roderick R. Baty, dated January 21, 2002 (incorporated by reference to
Exhibit 10.18 of the Company's Annual Report on Form 10-K filed
March 29, 2002)*

10.10 Change of Control and Noncompetition Agreement dated January 21,
2002 between the Company and Roderick R. Baty (incorporated by
reference to Exhibit 10.19 of the Company's Annual Report on Form
10-K filed March 29, 2002)*

10.11 Employment Agreement, dated May 7, 1998, between the Company and
Frank T. Gentry (incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-K filed March 31, 1999)*

68




10.12 Amendment No. 1 to Employment Agreement between the Company and Frank
T. Gentry, dated January 21, 2002 (incorporated by reference to
Exhibit 10.16 of the Company's Annual Report on Form 10-K filed March
29, 2002)*

10.13 Change of Control and Noncompetition Agreement dated January 21, 2002
between the Company and Frank T. Gentry (incorporated by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-K filed March
29, 2002)*

10.14 Employment Agreement, dated January 21, 2002, between the Company and
Robert R. Sams (incorporated by reference to Exhibit 10.20 of the
Company's Annual Report on Form 10-K filed March 29, 2002)*

10.15 Change of Control and Noncompetition Agreement dated January 21, 2002
between the Company and Robert R. Sams (incorporated by reference to
Exhibit 10.21 of the Company's Annual Report on Form 10-K filed March
29, 2002)*

10.16 Employment Agreement dated January 21, 2002, between the Company and
William C. Kelly, Jr. (incorporated by reference to Exhibit 10.22 of
the Company's Annual Report on Form 10-K filed March 29, 2002)*

10.17 Change of Control and Noncompetition Agreement, dated January 21,
2002, between the Company and William C. Kelly, Jr. (incorporated by
reference to Exhibit 10.23 of the Company's Annual Report on Form 10-K
filed March 29, 2002)*

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

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

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

10.24 Credit Agreement dated as of May 1, 2003 among NN, Inc., and NN
Euroball as the Borrowers, the Subsidiaries as Guarantors, the Lenders
as identifies therein, AmSouth Bank as Administrative Agent, and
SunTrust Bank as Documentation Agent and Euro Loan Agent (incorporated
by reference to Exhibit 10.2 of the Company's Quarterly Report on Form
10-Q filed August 14, 2003)

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

10.26 Global Supply Agreement among NN, Inc., NN Netherlands B.V. and SKF
Holding Maatschappij Holland B.V. dated April 14, 2003. (We have
omitted certain information from the Agreement and filed it separately
with the Securities and Exchange Commission pursuant to our request
for confidential

69



treatment under Rule 24b-2. We have identified the omitted
confidential information by the following statement, "Confidential
portions of material have been omitted and filed separately with the
Securities and Exchange Commission, " as indicated throughout the
document with a n asterisk in brackets([*])(incorporated by reference
to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q filed
August 14, 2003)

10.27 Amendment No. 4 dated November 12, 2004, to the Credit Agreement dated
May 1, 2003, among NN, Inc. and NN Europe ApS as the Borrowers, the
subsidiaries as Guarantors, the Lenders as identified therein, Am
South Bank as Administrative Agent and SunTrust Bank as Documentation
Agent and Euro Loan Agent.

10.28 Note Purchase Agreement dated April 22, 2004 among NN, Inc. as the
Borrower and its Subsidiary Guarantors and the Prudential Insurance
Company of America as Agent for the Purchase.

21.1 List of Subsidiaries of the Company.

23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm

23.2 Consent of KPMG, LLP, Independent Registered Public Accounting Firm

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

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

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

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

- --------------
* Management contract or compensatory plan or arrangement.




70