Risks Related to Our Business

Our business depends on sales to the semiconductor device industry. If that industry experiences future downturns, our business, financial condition and results of operations could be materially and adversely affected.

Our business depends in large part upon the market demand for our customers' semiconductor devices. Historically, changes in the size of the worldwide market for silicon wafers have generally correlated closely with the worldwide market for semiconductor devices, in terms of the number of units, or square inches in the case of silicon wafers, shipped. Semiconductor devices are subject to rapid technological change and product obsolescence, and their demand is significantly affected by changes in end-product demand based on macroeconomic trends and other factors. As a result, the semiconductor device market has historically been highly cyclical and subject to significant downturns at various times, leading to similar trends in the silicon wafer market.

According to published industry data, annual worldwide sales revenue of semiconductor devices, while generally increasing over the long term, have fluctuated significantly over the past several years. According to World Semiconductor Trade Statistics, or WSTS, sales revenue increased in 1999, 2000, 2002, 2003 and 2004, but decreased in 1998 and 2001, in each case compared to the preceding year. For 2002, 2003 and 2004, the increase was approximately 1.3%, 18.3% and 28.0%, respectively, while in 1998 and 2001 the decrease was approximately 8.5% and 32.0%, respectively. The increase in the sale of semiconductor devices has been driven primarily by an increase in the number of units sold, while increasing manufacturing capacity for semiconductor devices continued to exert downward pressure on prices for individual types of devices. According to Gartner Dataquest, worldwide sales revenue of silicon wafers increased approximately 5.1%, 10.6% and 21.9% in 2002, 2003 and 2004, respectively, and decreased 21.9% and 30.8% in 1998 and 2001, respectively. Our sales and profitability have been materially and adversely affected in periods of downturns by decreased unit sales and reduced prices that we were not able to offset with cost reductions. Future downturns in the semiconductor device industry could be severe and prolonged and may have similar effects on our unit sales and prices. Our ability to reduce costs through enhancement of manufacturing efficiency and reductions in capital expenditures and research and development expenses may be limited because of the need to maintain our competitive position. As a result, we may not be able to reduce costs effectively to offset the adverse effects of any future market downturns on our results of operations.

Our business, financial condition and results of operations may be adversely affected if we are not able to match our manufacturing capacity to demand.

It is difficult to predict future growth in the silicon wafer market and plan our future manufacturing capacity. If the market does not grow as we have anticipated, we risk under-utilization of our facilities, which would reduce our profitability, or we may be required to write off excess inventory. Conversely, during periods of increased demand, we may not have sufficient capacity to meet customer orders, which would result in lost opportunities to enhance sales and which could adversely affect our relationships with customers or reduce our market share.

In the past we have responded to fluctuations in industry capacity and demand mainly by lowering production levels. In limited cases, we have reduced our manufacturing capacity by closing manufacturing lines and facilities. These measures have required us to incur substantial losses or have otherwise reduced our profitability, and any similar measures we may take in the future could have an adverse effect on our financial condition and results of operations. Even in periods when the silicon wafer market expands as a whole, we may decide to close facilities that manufacture products for which demand has declined or is expected to decline or to convert such facilities to manufacture other types of silicon wafers. Furthermore, we have expanded and are continuing to expand our manufacturing capacity by establishing new manufacturing lines and facilities in response to, or in anticipation of, growth in market demand for certain products. Such expansions require substantial investments and enhance the risks related to future market downturns.

We plan to make large investments in 300mm wafer manufacturing facilities, but we cannot assure you that we will realize the expected return on our investment or execute our expansion plan effectively.

Our current expansion plan includes substantial capital expenditures to expand our 300mm wafer manufacturing capacity based on our expectation of continued increases in demand for 300mm wafers. We expect that such capital expenditures will constitute a substantial portion of our expected capital expenditures for the next several years. Currently, only a portion of the semiconductor device industry's total manufacturing capacity is 300mm wafer-compatible, and substantial investments are required for semiconductor device manufacturers to establish 300mm wafer-compatible manufacturing capacity. We cannot assure you that the future increase in demand we currently expect for 300mm wafers will materialize. In addition, a number of our competitors have announced plans to increase their manufacturing capacity for 300mm wafers, and this could lead to an oversupply of 300mm wafers in the market. Insufficient demand for, or an oversupply of, 300mm wafers over the next few years could result in our inability to realize the expected return on our investments related to expansions of our 300mm wafer manufacturing capacity. Furthermore, factors such as our creditworthiness, economic conditions and the state of the silicon wafer industry, some of which are beyond our control, may affect our ability to secure the additional funding necessary to complete this capacity expansion or to obtain such funding on terms acceptable to us. If we fail to execute our expansion plan due to our inability to secure funding or otherwise, we will be unable to implement our main business strategy and could lose a significant opportunity to enhance sales and profitability.

We face intense competition in the silicon wafer industry.

The silicon wafer market is highly competitive and has been characterized by high capital expenditures, intense pricing pressure from major customers, periods of oversupply and growing production and rapid development of technological capabilities. We compete globally with other major silicon wafer manufacturers, including Shin-Etsu Handotai Co., Ltd. ("Shin-Etsu Handotai"), Siltronic AG ("Siltronic") and MEMC Electronic Materials, Inc. ("MEMC"). Some of our competitors may have greater capital, human and other resources and manufacturing capacities, more efficient cost structures, higher brand recognition, larger customer bases and more diversified operations than us. Competitors with greater resources and more diversified operations may have long-term advantages, including the ability to better withstand future downturns in the silicon wafer market. We compete on the basis of product quality, price, product supply capabilities, product line-up, technical service and customer relationships. We expect that our competitors will continue to improve their products and to introduce new products with competitive price and performance characteristics. Increased competitive pressure and the relative weakening of our competitive position could require us to lower our prices or result in lower sales, which would have a material adverse effect on our business, financial condition and results of operations.

If we fail to provide products that meet our customers' requirements, our sales could suffer.

Each of our products is highly customized to meet our customers' individual technical specifications, including with respect to flatness, number of surface particles and levels of crystalline perfection, and we must continue to meet the increasingly demanding requirements of our customers on a cost-effective basis. As a result, we expect to continue to make substantial expenditures relating to research and development and manufacturing equipment to meet our customers' requirements. Our sales could suffer if we are unable to achieve the following:

successfully identify customer needs and market trends and develop in a timely and efficient manner new or enhanced products and processes that satisfy such needs

cost-effectively manufacture such new or enhanced products

maintain good working relationships with our customers

If we pursue new products that do not become commercially accepted, our revenue and profitability may decline.

The markets for our customers' products are characterized by rapidly changing technology, evolving technical standards, changes in customer preferences and the frequent introduction of new products. In some cases, this leads to changes in our customers' needs to require more advanced silicon wafers, which could make our existing products obsolete or unmarketable. We must therefore accurately anticipate our customers' changing needs and emerging technological trends and may need to make long-term investments and commit significant resources before knowing whether our plans will result in products that our customers will accept. For instance, because the leading semiconductor device manufacturers have moved to larger-diameter silicon wafers, we have focused on developing innovative products and process technologies related to 300mm wafers. Although we develop close relationships with our customers to align our business practices with their requirements, it is possible that the markets for our customers' products may become dominated by products using new silicon wafers which we are not successful in developing.

Products that do not meet customer specifications or that contain, or are perceived to contain, defects or errors or that are otherwise incompatible with their intended end uses could impose substantial costs on us or otherwise materially and adversely affect us.

The production processes for silicon wafers are highly complex. Despite our efforts, it is possible that we may produce products that do not meet customer specifications, that contain or are perceived to contain defects or errors, or that are otherwise incompatible with their intended end uses. We may incur substantial costs in remedying such defects or errors, and we could incur material inventory write-offs. Moreover, if problems with nonconforming, defective or incompatible products are not found before we ship the products, we could not only have direct liability for providing replacements or otherwise compensating customers but could also suffer from long-term damage to our relationship with customers or to our reputation in the industry generally. Furthermore, the occurrence of such problems could cause our customers to interrupt their production, which in turn could subject us to suspension of sales of our products and liability for damages caused by such interruption. If any of these occurs, our business, financial condition and results of operations could be materially and adversely affected.

We have a limited number of suppliers for raw materials and manufacturing equipment and could suffer shortages or incur increased costs if these suppliers were to interrupt supply or increase prices.

Our manufacturing operations depend upon obtaining deliveries of adequate supplies of raw materials on a timely basis. We generally only carry a limited amount of raw materials at any given time. From time to time, suppliers may extend lead times, limit supply to us or increase prices due to capacity constraints or other factors. Some raw materials are only available from a limited number of suppliers. Any shortages in the supply of raw materials could disrupt our manufacturing operations or increase our cost of raw materials. If we are unable to secure sufficient quantities of raw materials or reflect price increases of raw materials in the pricing of our products, our business or profitability will be adversely affected.

The main raw material in the silicon wafer production process is polysilicon. The number of suppliers capable of supplying suitable polysilicon is limited, and a number of them are subsidiaries or affiliates of our competitors. We currently obtain a significant majority of our requirements for polysilicon from four outside suppliers. Three of these four main suppliers are affiliates of Mitsubishi Materials or Sumitomo Metals. We have a long-term supply contract with one of our main suppliers, and have agreed on the basic terms regarding a new long-term supply contract with another one of our main suppliers, which will secure a portion of our growing requirements for polysilicon for the next several years. Due mainly to significant increases in demand for polysilicon from manufacturers of wafers for use in solar energy cells, polysilicon market prices began increasing significantly in 2004. While many major polysilicon manufacturers are currently in the process of increasing their manufacturing capacity, we believe the upward pricing pressure due to further increases in demand will continue in the near term, resulting in significant increases in our purchase price of polysilicon in the current fiscal year, and this could continue further into the future. As a result, we may experience difficulties in sourcing our polysilicon needs or experience significant increases in polysilicon costs in the future. In addition, if our production levels do not grow as we anticipate, we may be required to purchase and carry a significant amount of excess polysilicon, and this would reduce the efficiency of our operations.

We also rely on a limited number of suppliers for our manufacturing equipment. In particular, we develop double-sided mirror polishing machines jointly with a subsidiary of Sumitomo Metals, which is our sole supplier of such equipment. We may not be able to find an alternative supplier for such equipment in a timely manner. Any future problems in our supply of manufacturing equipment could disrupt our manufacturing operations.

Any disruptions to our manufacturing operations due to problems relating to the availability of raw materials or manufacturing equipment could have a material adverse effect on our business, financial condition and results of operations.

Because we depend on a small number of customers for a significant portion of our sales, we may suffer if any one of our major customers significantly reduces its purchases of wafers from us or defaults on payments to us.

We depend on a limited number of customers for a significant portion of our sales. In the fiscal year ended January 31, 2005 and the six months ended July 31, 2005, our top five customers (or end users if sales agents are used) accounted for 37% and 42% of our total net sales, respectively, and two of those customers, Samsung and Intel Corporation, each accounted for over 10% of our total net sales in the six months ended July 31, 2005. We cannot assure you that these key customers will continue to purchase from us at the same levels as in the past. If any of these major customers significantly reduces its purchases of silicon wafers from us or fails to meet its payment obligations, our business, financial condition and results of operations could be materially and adversely affected.

Future demand for wafers for use in solar energy cells may not be as strong as we expect.

We plan to make investments to increase significantly our manufacturing capacity for wafers for use in solar energy cells over the next few years based on our expectation that the strong growth in demand for such wafers in recent years will continue, driven by increasing demand for solar energy cells. Through our increased manufacturing capacity, we plan to increase significantly our sales to a limited number of customers for wafers for use in solar energy cells. However, we cannot assure you that demand for such wafers will continue to increase as we currently expect or that we will be able to expand our production levels of such wafers successfully. Furthermore, one or more of our main customers for such wafers may decide not to increase their purchases from us, and we may be unable to find alternative buyers. In any of these events, we may be unable to realize the expected return on our investments in manufacturing capacity for wafers for use in solar energy cells.

Our past financial information may not be representative of our future results of operations.

The nature and scale of our operations has changed significantly since our incorporation in July 1999. We initially focused on the development and production of 300mm wafers for our principal shareholders. In February 2002, our principal shareholders transferred all of their remaining silicon wafer-related operations to us, after which we began implementing restructuring measures such as personnel reductions and closing of inefficient manufacturing facilities. Mainly as a result of these measures, we recorded substantial net losses for the fiscal years ended January 31, 2003 and 2004. We had generally completed implementing the restructuring measures by January 31, 2005. In addition, we plan to increase our manufacturing capacity of 300mm wafers significantly through April 2009. Due to these developments, our historical financial statements may be of limited use in evaluating trends in our operations and our future prospects.

We may suffer losses from damage to our manufacturing facilities from natural disasters, accidents or other events, particularly if the damage is to our sole 300mm wafer processing facility.

If a large earthquake, storm, fire or other natural disaster, accident or other event were to directly damage, destroy or disrupt our manufacturing facilities, it could disrupt our operations, delay new production and shipments of existing inventory or result in costly repairs, replacements or other costs, all of which could result in significant losses. For example, Japan has historically experienced numerous earthquakes and other natural disasters, including typhoons, tidal waves and volcanic eruptions that have caused extensive damage to property and disruption to commerce. In particular, because all of our current and planned 300mm wafer processing capacity is concentrated in our Imari facility in Saga Prefecture in Japan, an earthquake or other natural disaster affecting this area could significantly disrupt our 300mm wafer manufacturing capabilities. Even if our manufacturing facilities are not significantly damaged, a large earthquake, typhoon or other natural disasters, accidents or other events in Japan or elsewhere could result in significant disruptions in our supply of water or electricity or in our distribution channels or supply chains, any of which could lead to delays in new production or shipments of existing inventory. Not all potential losses are insured. Even if losses are covered by insurance, the coverage may not be adequate or the claim may be subject to challenges or other delays in payment. In addition, we do not maintain any insurance coverage for direct or indirect damage resulting from earthquakes.

We may not be able to protect our proprietary intellectual property or maintain or obtain technology licenses from third parties.

We hold a substantial number of patents worldwide relating to our products and processes, some of which are pending patent applications. We also have trademark rights to the SUMCO name and the SUMCO logo. We cannot assure you that our pending patent applications will be granted on a timely basis or at all or that the patents and trademarks we currently hold will be sufficient to protect our intellectual property. Enforcement of our intellectual property rights could be expensive and time-consuming, and we cannot assure you that such rights will give us meaningful protection from infringement. In addition, some of the intellectual property that we use in our operations is licensed from third parties, and we may need to license other intellectual property from third parties in the future. We may not be able to maintain or obtain these licenses in a cost-effective manner or at all, and we cannot assure you that these technologies will lead to the desired commercial advantages.

We may be accused of infringing the intellectual property rights of others.

Due to the existence of a large number of patents in our field and the rapid rate of issuance of new patents, we may be unknowingly using technology that is the subject of a patent application that has not yet been publicly disclosed. We are currently a defendant in a patent infringement suit by one of our main competitors, and we cannot assure you that third parties will not assert other infringement claims against us or that such claims will not be successful. Even if such claims are not successful, a filing of an infringement claim against us could result in a significant investment of time and effort on the part of our management, increased legal expenses, damage to our reputation and other costs, any or all of which could have a material adverse effect on our business, financial condition and results of operations.

Our business is and will continue to be subject to the risks generally associated with international business operations.

We have sales and marketing operations and manufacturing facilities worldwide. At July 31, 2005, 32% of our employees were employed outside Japan. We have sales and marketing operations in the United States, Asia and Europe, in addition to Japan. Our customers are located in many locations around the world, and we market our products in various major global markets. Sales to customers outside Japan comprised 57.2% and 55.7% of our net sales in the fiscal year ended January 31, 2005 and the six months ended July 31, 2005, respectively. A portion of our manufacturing facilities is located in the United States, Indonesia and France. Our business is therefore subject to risks involved in international business, including, without limitation, the following:

transportation delays

restrictions on currency convertibility

changes in local labor conditions

negative economic or political developments

changes in laws and policies affecting trade and investment

governmental regulations applicable to manufacturing operations

varying standards and practices of regulatory, tax, judicial and administrative bodies

power and other utility shutdowns and shortages

wars and acts of terrorism

epidemics or outbreaks

Our results of operations could also be adversely affected by changes in political or economic conditions in regions where our customers market their own products.

If our manufacturing process is delayed or disrupted, our business, financial condition and results of operations could be materially and adversely affected.

The technology and processes we use for the manufacture of silicon wafers are highly sophisticated, and our manufacturing yields and product performance characteristics can be negatively affected by contamination from particles of foreign matter or by other causes. There is always a risk that, from time to time, there will be production difficulties that will result in delivery delays or limits on our production levels. Such delays or limits could also be caused by problems in supplying polysilicon in the required quantities and quality. If production at our manufacturing facilities is significantly delayed or disrupted, we may not be able to adequately compensate for the decrease in production levels. Furthermore, if facility-wide production difficulties arise in our Imari facility, in which all of our 300mm wafer processing capacity is concentrated, then the delivery of all of our 300mm wafers could be significantly delayed or disrupted. In the event of such delays or disruptions, our customers could decide to purchase products from our competitors, resulting in a reduction in net sales and a deterioration of our customer relationships, all of which could materially and adversely affect our business, financial condition and results of operations.

The interests of our principal shareholders may not be the same as those of our other shareholders.

Immediately following this offering, our principal shareholders will hold 59.9% in aggregate of our issued and outstanding common stock, assuming the over-allotment option is exercised in full. As long as our principal shareholders together retain a majority of our shares, they jointly have the power to appoint our directors and determine or influence fundamental decisions, including the amount of dividends. Also, we expect that Sumitomo Metals and Mitsubishi Materials will, for the foreseeable future, each have one officer serving as a member of our board of directors. Although we conduct our day-to-day operations independently from our principal shareholders, we expect to provide them with certain information from time to time as their equity-method affiliate. We also maintain significant business relationships with our principal shareholders and their affiliates. As their interests may differ from our interests and the interests of our other shareholders, our principal shareholders could exercise influence that may not be in the interests of us or our other shareholders.

Environmental laws and regulations may expose us to liability and increase our costs.

Our operations are subject to many environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal and the investigation and remediation of soil and groundwater contamination. We face inherent risks of environmental liability in our manufacturing activities which we conduct both in and outside Japan. Japanese regulations in these areas have been strengthened in recent years, and we operate a number of facilities in the United States where potential liability related to environmental problems can be significant. If we were to discover or incur any environmental liabilities, the value of our assets could decrease, and we may be required to incur substantial costs to remedy the underlying hazard. In addition, the promulgation of any new environmental legislation may require us to obtain expensive equipment or materials, or incur substantial expenses to ensure that our manufacturing processes and disposal systems remain in compliance with all relevant requirements. As a result of new Japanese environmental regulations, substances such as trichloroethylene, which historically were not regulated for soil contamination, are currently subject to regulation, and one of our properties has contamination from trichloroethylene and other chloroethylenes above the standard set forth in the regulation. Costs associated with future additional environmental compliance or remediation obligations could materially and adversely affect our business, financial condition and results of operations.

Currency fluctuations will affect our operating results and could result in exchange losses.

There has been considerable volatility in foreign exchange rates in recent years, including rates between the Japanese yen and the U.S. dollar. While our sales from customers outside of Japan are denominated mostly in U.S. dollars, the amount of our costs denominated in U.S. dollars is less than our U.S. dollar sales, and the rest of our costs are denominated mostly in Japanese yen. As a result, changes in yen-dollar exchange rates will affect our operating results and could lead to exchange losses. From time to time, we have engaged in, and may continue to engage in, exchange rate hedging activities. However, we cannot assure you that such hedging activities will be sufficient to eliminate exchange rate risk.

If we overestimate the amount of wafers that specific customers will ultimately purchase, we may be required to incur inventory write-offs that could adversely affect our results of operations.

Our silicon wafers are custom-made for each customer based on individual technical specifications. Therefore, silicon wafers made for one customer are generally not interchangeable with those made for another customer. We generally determine the amount of silicon wafers to produce for each customer based on non-binding forecasts of volume requirements received from customers. If the volume of silicon wafers that individual customers ultimately purchase from us is significantly below the volume that we produce, we may be required to incur inventory write-offs or dispose of the silicon wafers at a price that is significantly below market prices. Our results of operations could be adversely affected as a result.

Losses relating to our pension and retirement benefit plans and a decline in returns on our plan assets may negatively affect our financial condition and results of operations.

Costs related to our pension and retirement benefit plans may increase if the fair value of our pension plan assets declines or if there is a change in the actuarial assumptions on which the calculations of the projected benefit obligation are based, such as a decline in the expected rate of return on plan assets. In addition, we may be required to recognize expenses related to the recognition of previously unrecognized prior service costs as a result of plan amendments. Changes in the interest rate environment and other factors may also adversely affect the amount of unfunded pension obligations and the resulting annual amortization expense.

Our financial statements are prepared in accordance with Japanese GAAP, which differs in certain material respects from U.S. GAAP and generally accepted accounting principles and financial reporting standards in other jurisdictions.

Our consolidated and non-consolidated financial statements are prepared and presented in accordance with Japanese GAAP, which differs in certain material respects from U.S. GAAP and generally accepted accounting principles and financial reporting standards in other jurisdictions. Thus, our financial statements may differ from those prepared for companies outside of Japan in these and other respects. This offering memorandum does not include a reconciliation of our financial statements to U.S. GAAP or to any other generally accepted accounting principles or reporting standards, and we cannot assure you that such a reconciliation would not identify material quantitative differences between Japanese GAAP and U.S. GAAP or between Japanese GAAP and such other generally accepted accounting principles or reporting standards.