Risk Factors

Our risk factors are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 under Item 1.A. "Risk Factors." There have been no material changes to these risk factors since December 31, 2008 except for the "Potential for default on long-term debt; risk of insolvency" risk discussed below.

Potential for default on long-term debt; risk of insolvency

The Company has experienced a significant loss of revenue and has sustained significant losses of income during the global economic downturn that began to impact the Company in the fourth quarter of 2008 and is continuing as of the date of this report. As a result, the Company has sustained a significant weakening of its financial condition. Additionally, the Company is dependent on the continued provision of financing from its revolving credit lenders and its fixed rate lender in order to remain solvent. The lenders have set revised covenant levels that provide little flexibility in the case that the Company's projections are not met. Furthermore, our lenders have not yet set covenant levels for the quarter ending June 30, 2010 and these covenants will be set at the discretion of the lenders. There is a substantial risk that if projections are not achieved, the lenders may not amend the credit agreements, which would accelerate the due date of the loans, putting the Company in default. We believe that it is unlikely that new lenders could be found to replace the existing lenders in case of an uncured default. In such situation, the Company would be technically insolvent and would need to seek a recapitalization of the Company. If such transaction could not be successfully completed, the Company would most likely have to file for protection under bankruptcy laws in the U.S. and other jurisdictions. Although management believes that fundamental business prospects for the Company are positive, there can be no assurance that the current financial projections can be met or that recapitalization could be achieved.

Economic Impacts on the three and six month periods ended June 30, 2009

During the three and six month periods ended June 30, 2009, sales were at historically low levels. Excluding the effects of exchange rates, for the three and six month periods sales were down approximately 50% as compared to the three and six month periods ended June 30, 2008 and sales in both quarters of 2009 were approximately 25% lower than the sales in the fourth quarter of 2008. We believe that approximately two thirds of our reduction in sales during the first six months of 2009, compared to the first six months of 2008, was related to demand in the end markets we ultimately serve. In particular in the first half of 2009, our largest customer experienced year over year organic demand reduction of 25% in the divisions to which we sell.

We believe the remainder of the reduction in sales from first half 2008 to first half 2009, approximately one third, was due to reduction in overall inventory levels throughout the supply chain. In most cases, we are several tiers down the supply chain from the ultimate customer. Thus, we are affected by our customers' and their customers' order patterns. We believe those companies that are higher in the supply chain have reduced production and order levels to control their inventory balances. This supply chain inventory reduction has had further negative effect on our production and sales levels. We refer to this as the "de-stocking effect." We are not certain how long this current de-stocking process within the supply chain will last. Until the excess inventory in the supply chain is reduced, we believe our sales and production levels will be further depressed beyond any reductions in end market demand.

The reduction in sales volume was the main cause of the net losses of $13.5 million and $23.0 million, respectively, during the three and six month periods ended June 30, 2009. In response to the sales decrease, we focused more aggressively on reducing costs and expenses. However, a significant portion of our cost structure cannot be reduced in the short term. In particular, at our manufacturing locations in Western Europe it is very difficult to reduce employment levels in line with reductions in sales and production volumes. In these locations, we have limited production costs by scheduling the production facilities on rolling shutdowns and by temporarily allowing workers not to report to work under existing government programs. In addition to the reduction in sales volume, the net income of the three and six month periods ended June 30, 2009 was further impacted by a $5.5 million valuation allowance placed on all US based deferred tax assets and related current year tax benefits from incurred losses.

Results of Operations

Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008.

OVERALL RESULTS
                                                          Consolidated NN, Inc.
(In Thousands of Dollars)                    2009          2008                Change
Net sales                                  $  57,088     $ 122,240     $ (65,152 )
    Foreign exchange effects                                                            (3,970 )
    Volume                                                                             (61,086 )
    Price                                                                                 (194 )
    Mix                                                                                    340
    Material inflation pass-through                                                       (242 )

Cost of products sold (exclusive of
depreciation
 and amortization shown separately
below)                                        54,149        97,248       (43,099 )
    Foreign exchange effects                                                            (4,004 )
    Volume                                                                             (38,492 )
    Cost reduction                                                                      (2,609 )
    Mix                                                                                    388
    Inflation                                                                            1,618

Selling, general, and administrative           6,419        10,011        (3,592 )
    Foreign exchange effects                                                              (533 )
    Reductions in spending                                                              (3,059 )

Depreciation and amortization                  5,200         6,387        (1,187 )
    Foreign exchange effects                                                              (419 )
    Reduction in expense                                                                  (768 )

Restructuring and impairment charges              79            --            79
Interest expense, net                          1,848         1,268           580
Gain on disposal of assets                       (42 )      (4,018 )       3,976
Other income, net                                 (5 )        (284 )         279
Income (loss) before provision
(benefits) for
   income taxes                              (10,560 )      11,628       (22,188 )
Provision (benefit) for income taxes           2,906         2,455           451
Net (loss) income                          $ (13,466 )   $   9,173     $ (22,639 )

Net Sales. The two thirds of the volume losses were estimated to be due to reduction in end market demand in the markets we serve and an estimated one-third of the volume reduction was due to an overall inventory decrease within the supply chain. In addition, sales were lower as the values of Euro denominated sales have decreased approximately 13% relative to the U.S. Dollar from the second quarter of 2008. Changes related to price/mix and material pass through were all normal in nature although such changes had less of an impact given the depressed sales levels.

Cost of Products Sold (exclusive of depreciation and amortization). The majority of the decreases were due to the same sales volume reductions mentioned above. However, cost of products sold decreased by only 44% from the second quarter of 2008 versus the sales decrease of 53%. While many of our production costs adjust with reductions in sales and production, a portion of our production costs is fixed in nature or cannot be reduced without incurring additional significant restructuring costs. This issue was exacerbated by the $7.7 million reduction in inventory during the quarter which was achieved by keeping production levels lower than sales levels. Additionally, current production levels are much lower than capacity. Any costs from under utilization of capacity and fixed production costs are expensed in the period incurred.

The main driver of the fixed component of costs was labor costs at Western European locations. We actively reduced labor cost considering local and national labor rules and regulations of the countries in which we operate. In addition, the aforementioned devaluation of the Euro reduced Euro based production costs. Production costs were further reduced by the effects of planned cost reduction projects. Despite the lower sales and production levels, we continue to achieve results from planned cost reductions at levels consistent with management expectations. Finally, cost of product sold increased by the effects of inflation in material and other cost although the inflation levels are much lower than in prior quarters.

Selling, General and Administrative Expenses. The majority of the reduction was from wage cost reductions. The wage cost reductions were achieved through a combination of salary cuts ranging from 10% to 20%, elimination of bonuses opportunities for 2009 and employment reductions. In addition, discretionary expenses were reduced company wide.

Depreciation and Amortization. These costs were lower due to devaluation of Euro denominated cost relative to the U.S. Dollar which accounted for approximately one third of the decline. The remainder was due to lower depreciation and amortization from the effects of the year end 2008 impairments and accelerated depreciation of certain intangible assets and fixed assets and due to lower spending on capital expenditures in 2009.

Interest expense. Interest expense was higher due to increases in the interest rate spread charged on our LIBOR credit facility and our senior notes. The interest rate was increased upon amending our credit facilities on March 13, 2009. In addition, we are amortizing $0.3 million more of capitalized loan costs into interest expense each quarter related to the amended loan facilities.

Restructuring and impairment charges. During the three month period ended June 30, 2009, we incurred $0.1 million of restructuring cost related to the closures of the Kilkenny Plant. (See Footnote 2 of the Notes to Consolidated Financial Statements.)

Gain on disposal of assets: The second quarter of 2008 included a gain for sale of excess land at our Veenendaal, The Netherland facility totaling $4.0 million.

Provision for income taxes For the three months ended June 30, 2009, the difference between the federal statutory tax rate of 34% and our effective tax rate of negative 28% was mainly due to the valuation allowance placed on deferred taxes at our U.S. locations of $5.5 million. The majority of the impact from this valuation allowance was recorded under "Other Reconciling Items" within our segment disclosure (See Footnotes 5 and 12 of the Notes to Consolidated Financial Statements.) In addition, we did not recognize realized tax benefits at four international locations in which we operate due to existing valuation reserves placed on the tax benefits of these locations. Finally, the effective rate was impacted by non-U.S. based earnings taxed at lower rates. The statutory and effective income tax rates in many of the foreign countries in which we operate are lower than the U.S. federal rate.

RESULTS BY SEGMENT

METAL BEARING COMPONENTS SEGMENT

                                                     Three months ended
(In Thousands of Dollars)                                 June 30,
                                        2009         2008               Change

Net sales                             $ 39,627     $ 94,248     $ (54,621 )
    Foreign exchange effects                                                     (3,970 )
    Volume                                                                      (50,565 )
    Price                                                                          (152 )
    Mix                                                                             241
    Material inflation pass-through                                                (175 )

Segment net income (loss)             $ (4,928 )   $ 10,537     $ (15,465 )

The majority of the sales decrease in dollar terms was at our European operations of the segment, although all geographic areas experienced sales reductions ranging from 20% to 62% compared to the second quarter of 2008. As discussed above, the segment was impact by both lower demand in the industries we serve as well as de-stocking through out the supply chain. The devaluation of the Euro relative to the U.S. Dollar of 13% further negatively impacted sales.

The segment net loss was impacted primarily by the large reduction in sales volume and the related production inefficiencies and under-utilization of fixed production costs. The impact of fixed costs and under utilization of production capacity is more pronounced in this segment given that a large portion of our installed capacity is in Western Europe, where it is more difficult to reduce labor cost in line with customer demand. Partially offsetting these negative effects were reductions in production costs from planned cost reduction projects and reductions in salaries, bonus opportunities, travel, and other discretionary costs.

PRECISION METAL COMPONENTS SEGMENT

                                          Three months ended
(In Thousands of Dollars)                      June 30,
                              2009         2008              Change

Net sales                   $ 11,290     $ 17,188     $ (5,898 )
Volume                                                             $ (5,895 )
Mix                                                                      99
Price                                                                  (102 )
Segment net income (loss)   $ (1,520 )   $    249     $ (1,769 )

The majority of the decrease was due to much lower U.S. automotive and industrial market demand in the second quarter of 2009. In addition, sales were negatively impacted by de-stocking within the supply chain.

The reduced sales volume and related production inefficiencies and under utilization of fixed production costs were the main causes of the segment loss in the first quarter 2009. Planned cost reduction projects, net of inflation, and reductions in selling and administration cost partially offset the volume impacts. Additionally, the segment net loss was higher as tax benefits from losses incurred in 2009 at this segment were not recognized due to valuation allowances being placed on the related deferred tax assets totaling $0.9 million.

PLASTIC AND RUBBER COMPONENTS SEGMENT

                                          Three months ended
(In Thousands of Dollars)                      June 30,
                              2009         2008              Change

Net sales                   $  6,171     $ 10,804     $ (4,633 )
   Volume                                                            (4,627 )
   Price/Mix                                                             (6 )

Segment net income (loss)   $ (1,412 )   $    241     $ (1,653 )

The volume reduction for this segment was also related to lower U.S. automotive and industrial end market demand and lower customer orders from supply chain de-stocking.

Segment net income was negatively affected by the volume decreases and related costs from under utilization of fixed production cost and manufacturing inefficiencies from such a large decrease in utilized production capacity. Additionally, the segment net loss was higher as tax benefits from losses incurred in 2009 at this segment were not recognized due to valuation allowances being placed on the related deferred tax assets totaling $0.7 million.

Results of Operations

Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008.

OVERALL RESULTS
                                                           Consolidated NN, Inc.
(In Thousands of Dollars)                    2009          2008                 Change
Net sales                                  $ 115,009     $ 243,781     $ (128,772 )
    Foreign exchange effects                                                              (8,158 )
    Volume                                                                              (122,119 )
    Price                                                                                    100
    Mix                                                                                      635
    Material inflation pass-through                                                          770

Cost of products sold (exclusive of
depreciation
 and amortization shown separately
below)                                       110,203       193,741        (83,538 )
    Foreign exchange effects                                                              (8,389 )
    Volume                                                                               (74,572 )
    Cost reduction                                                                        (3,990 )
    Mix                                                                                      349
    Inflation                                                                              3,064

Selling, general, and administrative          13,313        20,220         (6,907 )
    Foreign exchange effects                                                              (1,001 )
    Reductions in spending                                                                (5,906 )

Depreciation and amortization                 10,518        12,650         (2,132 )
    Foreign exchange effects                                                                (855 )
    Reduction in expense                                                                  (1,277 )

Restructuring and impairment charges             672            --            672
Interest expense, net                          2,886         2,810             76
(Gain) loss on disposal of assets                (27 )      (4,159 )        4,132
Reduction of unamortized debt issue cost         604            --            604
Other income, net                               (125 )        (419 )          294
Income (loss) before provision
(benefits) for
   income taxes                              (23,035 )      18,938        (41,973 )
Provision (benefit) for income taxes             (45 )       4,665         (4,710 )
Net (loss) income                          $ (22,990 )   $  14,273     $  (37,263 )

Net Sales. The sales levels experienced in the second quarter of 2009 are very similar to those experienced in the first quarter of 2009. Thus, the estimated two thirds reduction in end market demand and estimated one third de-stocking were the main drivers of the lower sales levels year to date. Excluding currency effects, second quarter 2009 sales were 3% lower than first quarter 2009 sales due to lower sales volumes into the European and U.S. industrial end markets during the first two months of the quarter.

Cost of Products Sold (exclusive of depreciation and amortization). The majority of the decrease was due to the same sales volume reductions mentioned above partially offset by planned cost reduction projects, net of inflation. The cost of products sold as a percentage of sales was slightly less in the second quarter of 2009 versus the first quarter of 2009 due to better second quarter utilization of fixed cost from higher production levels and increased levels of savings on planned cost reduction projects.

Selling, General and Administrative Expenses. The majority of the reduction was from wage cost reductions. The wage cost reductions were achieved through a combination of salary cuts ranging from 10% to 20%, elimination of bonuses opportunities for 2009, and headcount reductions. In addition, discretionary expenses were reduced company wide.

Depreciation and Amortization. These costs were lower due to devaluation of Euro denominated cost relative to the U.S. Dollar which accounted for approximately 40% of the decline. The remainder was due to lower depreciation and amortization from the effects of the year end 2008 impairments and accelerated depreciation of certain intangible assets and fixed assets and due to lower spending on capital expenditures in 2009.

Restructuring and impairment charges. During the three and six month periods ended June 30, 2009, we incurred $0.1 and $0.7 million of restructuring cost related to the closures of the Kilkenny Plant and the Hamilton Plant. (See Footnote 2 of the Notes to Consolidated Financial Statements.)

Provision for income taxes. For the six months ended June 30, 2009, the difference between the federal statutory tax rate of 34% and our effective tax rate of 0% was mainly due to the valuation allowance placed on deferred taxes at our U.S. locations totaling $5.5 million. (See Footnote 12 of the Notes to Consolidated Financial Statements.) In addition, we did not recognize realized tax benefits at four international locations in which we operate due to existing valuation reserves on the tax benefits of these locations. Finally, the 2009 effective rate was impacted by non-U.S. based earnings taxed at lower rates. The statutory and effective income tax rates in many of the foreign countries in which we operate are lower than the U.S. federal rate. The 2008 effective rate was impacted by the one-time benefit of reducing certain deferred tax liabilities at our Italian subsidiary.

RESULTS BY SEGMENT

METAL BEARING COMPONENTS SEGMENT

                                                        Six months ended
(In Thousands of Dollars)                                   June 30,
                                        2009          2008                 Change

Net sales                             $  78,956     $ 184,688     $ (105,732 )
    Foreign exchange effects                                                         (8,158 )
    Volume                                                                         (100,824 )
    Price                                                                                 5
    Mix                                                                               2,359
    Material inflation pass-through                                                     886

Segment net income (loss)             $ (11,468 )   $  16,510     $  (27,978 )

Similar to the second quarter 2009 comparison to second quarter 2008, the majority of the sales decrease in dollar terms, during the first half of 2009, was in our European operations of the segment, although all geographic areas experienced sales reductions ranging from 29% to 62% compared to the first half of 2008. Additionally, it is estimated that one third of this segment's sales were reduced due to de-stocking with in the supply chain of our customers The devaluation of the Euro relative to the U.S. Dollar of 14% further negatively impacted sales. The reductions were partially offset by favorable sales mix of higher priced precision ball and roller products and passing through material inflation.

The segment net loss was impacted primarily by the large reduction in sales volume and the related production inefficiencies and under-utilization of fixed production costs. During the second quarter of 2009, the cost impacts from the production inefficiencies and under-utilization of production capacity were not as pronounced given higher levels of savings from planned cost reduction projects and increased production experienced during this quarter. Additionally, these negative effects were partially offset by reductions in salaries, bonus opportunities, travel, and other discretionary costs.

PRECISION METAL COMPONENTS SEGMENT

                                            Six months ended
(In Thousands of Dollars)                       June 30,
                              2009         2008               Change

Net sales                   $ 22,797     $ 36,287     $ (13,490 )
   Volume                                                           $ (11,624 )
   Mix                                                                 (1,764 )
  Price                                                                  (102 )

Segment net income (loss)   $ (2,358 )   $    927     $  (3,285 )

The majority of the decrease was due to much lower U.S. automotive and industrial market demand in the first half of 2009. In addition, sales were negatively impacted by de-stocking within the supply chain. Finally, the segment sales were impacted by a greater portion of lower-priced products.

The reduced sales volume and related production inefficiencies and under utilization of fixed production costs were the main causes of the segment loss in the first half of 2009. Planned cost reduction projects, net of inflation, and reductions in selling and administration cost partially offset the volume impacts. Additionally, the segment net loss was higher as tax benefits from losses incurred in 2009 at this segment were not recognized due to valuation allowances being placed on the related deferred tax assets totaling $0.9 million.

PLASTIC AND RUBBER COMPONENTS SEGMENT

                                           Six months ended
(In Thousands of Dollars)                      June 30,
                              2009         2008              Change

Net sales                   $ 13,256     $ 22,806     $ (9,550 )
   Volume                                                            (9,670 )
   Price/Mix                                                            120

Segment net income (loss)   $ (2,029 )   $    515     $ (2,544 )

The volume reduction for this segment was also related to lower U.S. automotive and industrial end market demand and lower customer orders from supply chain de-stocking.

Segment net income was negatively affected by the volume decreases and related costs from under utilization of fixed production cost and manufacturing inefficiencies. Additionally, the segment net loss was higher as tax benefits from losses incurred in 2009 at this segment were not recognized due to valuation allowances being placed on the related deferred tax assets totaling $0.7 million.

Changes in Financial Condition

From December 31, 2008 to June 30, 2009, our total assets and current assets decreased $34.6 million and $27.9 million, respectively. The appreciation in the value of Euro denominated account balances relative to the U.S. Dollar caused total assets and current assets to increase approximately $1.7 million and $0.5 . . .