Primary risks that may affect operational results, share prices, and the financial condition of the Companies are described below. Matters concerning the future with regard to the following information were those deemed relevant as of the end of this fiscal year.

1. Market and supply

The Companies engage in a wide range of businesses, including Basic Chemicals, Petrochemicals and Plastics, Fine Chemicals, IT-related Chemicals, Agricultural Chemicals, and Pharmaceuticals. Accordingly, the Companies face a wide variety of risks in conducting their businesses. Risks associated with market volatility and feedstock supply shortage concerning the Companies' businesses are mainly as follows.

1. (a) The Companies' businesses are exposed to price competition. It is expected that the product lines of the Companies will be exposed to severe price competition for various reasons, such as the participation of foreign enterprises in the domestic market, the inflow of imported products as a result of reductions in tariffs, and the increasing market entry of generic products. Although the Companies are seeking to reduce costs, failure to overcome the price competition may have an adverse effect on operational results and the financial conditions of the Companies.
2. (b) Overseas sales of the Companies account for more than 40% of total sales, and sales volume in the Basic Chemicals and the Petrochemicals and Plastics segments is large especially in the Asian market. Furthermore, a large proportion of sales in the IT-related Chemicals segment depends on specific customers in Korea and Taiwan, and some of the products in the Fine Chemicals segment are being supplied to specific customers under the custom manufacturing arrangement. Given this situation, in the event that the Companies are required to cut prices due to deteriorating economic conditions in the Asian market or changes in the business standings of client enterprises, such circumstances may have an adverse effect on the operational results and the financial conditions of the Companies.
3. (c) Naphtha, a main feedstock for the Petrochemical and Plastics segment, is sometimes subjected to radical price fluctuations that could take place for various reasons, including public security problems in the Middle East or economic situations in the world. If the price of naphtha radically increases, it may have an adverse effect on the operational results of the Companies due to a delay in the reflection of such cost increases in product selling prices.
4. (d) The supply of naphtha and some other raw materials is dependent on particular geographical areas or suppliers. Although the Companies are seeking to reduce the risk associated with their inability to procure major raw materials by developing multiple supply sources, there is no guarantee that supply shortages of such major raw materials will not occur. In the event that the Companies cannot procure necessary major raw materials on their own, such circumstances may have an adverse effect on the operational results of the Companies.
5. (e) Since the speed of technical innovation for products in the IT-related Chemicals segment is extremely fast, it is essential that the Companies develop and supply new products to their customers in a timely manner. In the event that the Companies are unable to effectively develop new products that satisfy customer needs, or if an important technical innovation is made by another company ahead of them, the business results and the financial conditions of the Companies may be adversely affected.
6. (f) With respect to agrochemicals and household insecticides in the Agricultural Chemicals segment, the shipments of these products are affected by the cultivation status of target crops, outbreak of crop diseases or infestation of pests, factors dependent on abnormal climate in various parts of the world, etc. With regard to feed additives, drastic price fluctuations may also occur. If the crop growth is not as good as expected, if disease occurrence or pest infestation does not develop as anticipated, or if drastic price fluctuations occur, such circumstances may have an adverse effect on the operational results and the financial conditions of the Companies.
7. (g) In the Pharmaceuticals segment, healthcare insurance reforms are in progress in Japan with a rapidly aging population combined with the declining birthrate. As a part of such reforms, there are ongoing arguments concerning a review of the system of medical treatment fees and reformation of the drug price system. The medical expenses reduction policy by the government, including revision of medical treatment fees, may have an adverse effect on the operational results and the financial conditions of the Companies.

2. Exchange rate fluctuations

The Company and its domestic consolidated subsidiaries import raw materials from overseas and export finished products manufactured in Japan; the export value of finished products is higher than the import value of raw materials. If the Japanese yen appreciates against foreign currencies, the products will be less competitive in price compared with products made in foreign countries; moreover, the reduction in the proceeds received from exports will become greater than the reduction in the payments for imports. In order to cope with these circumstances, the Companies are seeking to minimize the risks by entering into forward-exchange contracts or making export transactions in Japanese yen. However, since it is impossible to completely hedge risks due to the mid- or long-term fluctuations in the currency exchange rate, there is a possibility that the appreciation of the Japanese yen would exert an adverse effect on the operational results and the financial conditions of the Companies.

Furthermore, the operational results of the consolidated subsidiaries and equity method affiliates in foreign countries are converted into Japanese yen for the purpose of preparing the consolidated financial statement. Depending on the exchange rate at the time of conversion, the values after the conversion into Japanese yen may be potentially impacted and may negatively affect the operational results and the financial conditions of the Companies.

3. Interest volatility

With respect to the demand for finance, the Companies determine the amount, term, and method of fund procurement taking into consideration the demand for finance, financial position, and financial environment. In preparation for fluctuations in the interest rate in the future, the Companies raise funds by combining, as applicable, both fixed interest rates and floating interest rates; however, if the interest rate rises, the increase in interest expenses may have an adverse effect on the operational results and the financial conditions of the Companies.

4. Fluctuation in stock market prices

Since most of the securities held by the Companies are negotiable securities with market prices, if stock market prices decline drastically, the impairment loss may have an adverse effect on the operational results and the financial conditions of the Companies.

5. Liability for retirement benefits

The expenses and obligations with regard to retirement benefits for employees of the Companies are calculated on the basis of the investment earning rate and discount factors for pension assets. However, in the event of any deterioration in the environment of pension assets management that disrupts assumption and performance, the retirement benefit expenses in future may increase, which may have an adverse effect on the operational results and the financial conditions of the Companies.

6. Impairment loss

The Companies have adopted accounting standards for impairment of fixed assets. If the business environment deteriorates significantly or the market value of land and other fixed assets decline drastically, impairment loss may have an adverse effect on the operational results and financial conditions of the Companies.

7. Deferred tax assets

The Companies recognize deferred tax assets based on projections for future taxable income. In case projections for future taxable income change, all or a part of deferred tax assets may be reduced, which is determined unrecoverable, and it may have an adverse effect on the operational results and financial conditions of the Companies.

8. Overall management

1. (a)Overseas business expansion

   The Companies intend to expand their business operations in overseas markets including the Middle East and Asia in the future. In conducting business activities in foreign countries, the Companies need to address the potential risks of changes in laws and restrictions, disputes stemming from differences in working conditions, difficulties in hiring and procuring human resources, social disorder caused by terrorism, war, and other factors. In the event that these risks materialize, there is a possibility that such events might adversely affect the business results and the financial conditions of the Companies.

   In the case of the Rabigh Project, funds for US$5.8 billion out of the total project cost are raised by Rabigh Refining and Petrochemical Company through bank loans based on the execution of the Project Financing Agreement with the banking syndicate that includes the Japan Bank for International Cooperation. The Company guarantees the payment of 50% of these raised funds upon completion of the plant, and in the event that the plant cannot satisfy the prescribed performance conditions following the plant start-up, the execution of such guarantee might adversely affect the operational results and the financial conditions of the Company. In case the Company should become liable for damage resulting from contingent circumstances, it has obtained overseas investment insurance covering the total investment, including the said guaranteed amount, in accordance with the rules and maximum insurance amount of Independent Administrative Institute Nippon Export and Investment Insurance.

2. (b)Research and development

   The Companies are vigorously carrying out research and development to rapidly commercialize new technologies and new products that will meet customer needs. The research and development conducted by the Companies may sometimes extend over a long period of time particularly when it includes discovery research in order to create next-generation businesses. In the event that the subject of such research and development is not put to practical use or if the development of new products is extremely delayed or abandoned, the competitiveness of the Companies will be diminished, which may have an adverse effect on operational results and the financial conditions of the Companies.

3. (c)Intellectual property rights

   The Companies have been strengthening competitiveness by developing and accumulating proprietary technology and know-how that will differentiate themselves from competitors. Although such technology and know-how are under strict control by the Companies, there is a possibility that some of the proprietary technologies, products, and know-how of the Companies may be leaked out to others under unexpected circumstances. These intellectual properties may not be completely protected in particular geographical areas, especially where there is a possibility that the Companies are unable to effectively prevent a third party from manufacturing similar products that are covered by the Companies' intellectual property rights. Furthermore, the Companies may be involved in a dispute about intellectual property rights in the future, which might result in an outcome against the interests of the Companies.

4. (d)Quality of products

   Although the Companies manufacture a wide variety of products in accordance with globally recognized strict quality control standards, there is no assurance that all the products are free from defects or that no product recall problems will occur in future. Large-scale product liability lawsuits will be extremely costly and have a significant influence on the appraisal of the Companies, which in turn may adversely affect the operational results and the financial conditions of the Companies.

   Although our Agricultural Chemicals and Pharmaceuticals which are on the market have been approved in accordance with strict quality examinations in each country, new quality problems or side effects may be identified as a result of progress in science and technology, as well as from accumulated clinical experiences. If such unexpected quality problems or side effects are discovered after products have been placed on the market, there is a possibility that such circumstances may adversely affect the operation results and the financial conditions of the Companies.

5. (e)Accidents and disasters

   In order to minimize the potential risks of the shutdown of production facilities or accidents involving the production facilities which will adversely affect the Companies, the Companies conduct periodic inspections for all manufacturing facilities. However, there is no guarantee that such accidents arising out of production facilities or negative effects caused by natural disasters will be completely prevented or reduced. Also, the business activities of the Companies are increasing their dependence on the computer network system year by year, and although the Companies are working to protect their systems or data by means of sophisticated security systems, there is still the possibility that system network failures may occur owing to electric power interruptions, natural disasters, or criminal attacks on the system, including computer viruses and hackers.

   In the event of an accident that causes property damage and/or human injury near the plant or a system network failure, such circumstances may, in addition to undermining the business activities, involve major costs and have a significant impact on the appraisal of the Companies, which in turn may adversely affect the operational results and the financial conditions of the Companies.

6. (f)Change in regulations

   The Companies are carrying out their businesses in accordance with the laws and regulations of each country in which they operate. Changes in laws, regulations, government policies, business customs, interpretations or other changes, and the situations resulting therefrom may have adverse effects on the operational results and the financial conditions of the Companies. Moreover, there is a possibility that legal restrictions on environment and safety for chemicals may be tightened in the future and additional cost may become necessary to take new measures against the tightened situation.

7. (g)Lawsuits

   As the Companies' businesses develop in Japan and elsewhere in the world, they remain exposed to the risks of becoming the target of lawsuits, disputes, or other legal procedures, and in the event of any significant lawsuits filed against the Companies in future, there is a possibility that they may adversely affect the operational results and the financial conditions of the Companies.

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