UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549

FORM 20-F
   
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934

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

For the fiscal year ended March 31, 2005
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2003

OR
oSHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report ________________________

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o     No þ
Commission file number 1-7616

PIONEER KABUSHIKI KAISHA
(Exact name of Registrant as specified in its charter)

PIONEER CORPORATION
(Translation of Registrant’s name into English)

JAPAN
(Jurisdiction of incorporation or organization)

4-1, MEGURO 1-CHOME, MEGURO-KU, TOKYO 153-8654, JAPAN
(Address of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act.
   
Title of each class Name of each exchange on which registered

 
Common Stock, each represented by
one American Depositary Share
 New York Stock Exchange

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

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
  
Title of classOutstanding as of
March 31, 2005
(Japan time)
   
  Outstanding as of
March 31, 2003
Title of class(Japan time)


Common Stock 175,434,808174,428,646

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 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.

Yesxþ          Noo

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17xþ          Item 18o




TABLE OF CONTENTS

Certain Defined Terms
Cautionary Statement with Respect to Forward-Looking Statements
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on the Company
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other than Equity Securities
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
PART III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-1.01 THE ARTICLES OF INCORPORATION
EX-2(A).01 SHARE HANDLING REGULATIONS
EX-99.1 SECTION 906 CERTIFICATION


TABLE OF CONTENTS
     
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Item 8. Financial Information58
Item 9. The Offer and Listing60
Item 10. Additional Information  61 
62
64
65
  7685 
  8087 
     
    
     
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  8188 
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  8189
89
89
90
91
91 
     
    
     
  8292 
  8292 
  8292 
EX-1.01 REGULATIONS OF THE BOARD OF DIRECTORS, AS AMENDED AND CURRENTLY IN EFFECT
EX-1.02 REGULATIONS OF THE BOARD OF CORPORATE AUDITORS, AS AMENDED AND CURRENTLY IN EFFECT
EX-2.01 SHARE HANDLING REGULATIONS, AS AMENDED AND CURRENTLY IN EFFECT
EX-12.01 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EX-12.02 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EX-13.01 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

3


Certain Defined Terms

As used herein, the term “Pioneer” refers to Pioneer Corporation, the registrant, and “we” and “our” refer to Pioneer and its consolidated subsidiaries as a group, unless the context otherwise indicates.

References in this annual report to fiscal years refer to the 12-month periods ended March 31 of each calendar year.

Billion is used in the American sense of one thousand million.

Cautionary Statement with Respect to Forward-Looking Statements

Statements made in this annual report with respect to our current plans, estimates, strategies and beliefs, and other statements that are not historical facts are forward-looking statements about our future performance. Forward-looking statements include but are not limited to those statements using words such as “believe,” “expect,” “anticipate,“intend,“plans,“plan,“strategy,” “prospects,“aim,” “forecast,” “estimate,” “project,” “may”“anticipate,” “strategy,” “prospects,” “may,” “might” or “might”“will” and words of similar meaning in connection with a discussion of future operations, financial performance, events or financial performance.conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on our management’s assumptions and beliefs in light of the information currently available to it. We caution that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not rely on the beliefbelieve that it is our obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We disclaim any such obligation. Risks and uncertainties that might affect us include, but are not limited to, (i) general economic conditions in the markets in which we sell our markets,products, particularly levels of consumer spending; (ii) exchange rates, particularly between the yen and the U.S. dollar, euro, and other currencies in which we make significant sales or in which our assets and liabilities are denominated; (iii) our ability to continue to design and develop and win acceptance of our products and services, which are offered in highly competitive markets characterized by continual new product introductions, rapid developments in technology, severe price competition and subjective and changing consumer preferences; (iv) our ability to implement successfully our business strategies; (v) our ability to compete and develop and implement successful sales and distribution strategies in light of technological developments in and affecting our businesses; (vi) our continued ability to devote sufficient resources to research and development, and capital expenditure; (vii) our ability to continuously enhance our brand image; (viii) the success of our joint ventures and alliances; and (ix) the outcome of contingencies.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

     Not applicable

     Not applicable

Item 2. Offer Statistics and Expected Timetable

     Not applicable

     Not applicable

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Item 3. Key Information

A. Selected financial data

The following table presents selected consolidated financial informationdata as of the registrant at the dates and for the periods indicated. We derived the consolidated statements of operations data for each of the three years indicated,in the period ended March 31, 2005 and has been derivedthe consolidated balance sheet data as of March 31, 2004 and 2005 from our audited consolidated financial statements included elsewhere herein,herein. We derived the consolidated statement of operations data for each of the two years in the period ended March 31, 2002 and the consolidated balance sheets data as of March 31, 2001, 2002 and 2003 from our audited consolidated financial statements which are not included herein. Our audited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), except for segment data which is prepared in accordance with the regulations under the Securities and Exchange Law of Japan.
                      
   (In millions of yen, except per share data)
   
   Year ended March 31
   
   1999 2000 2001 2002 2003
   
 
 
 
 
Consolidated Statement of Income Data:
                    
Operating revenue (Note 5) (Note 6) ¥581,197  ¥610,673  ¥640,358  ¥662,125  ¥712,268 
Operating income (Note 5) (Note 6)  17,433   18,852   32,905   17,941   31,352 
Income before income taxes  12,533   27,808   34,193   15,343   28,630 
Net income  1,159   13,075   18,298   8,047   16,078 
Net income per share of common stock and per American Depositary Share (ADS) (Note 1) :                    
 Basic  6.45   72.81   101.76   44.70   90.24 
 Diluted  6.45   72.80   101.70   44.69   90.24 
                     
Consolidated Balance Sheet Data:
                    
Total assets ¥592,407  ¥601,137  ¥605,156  ¥645,129  ¥647,029 
Short-term borrowings  46,153   41,318   37,571   45,867   29,893 
Current portion of long-term debt  6,455   37,235   7,996   2,551   974 
Long-term debt, less current portion  82,958   47,060   38,304   35,677   32,196 
Shareholders’ equity  313,244   312,460   336,995   347,003   318,393 
Number of shares issued (in thousands)  179,573   179,588   179,894   180,064   180,064 

                     
  Year ended March 31 
  2001  2002  2003  2004  2005 
  (In millions of yen, except per share data) 
Consolidated Statements of Operations Data:
                    
Operating revenue (Note 4) (Note 5) ¥610,171  ¥629,777  ¥677,259  ¥700,885  ¥733,648 
Income (loss) from continuing operations before income taxes (Note 5)  34,216   14,472   28,079   41,848   (187)
Income (loss) from discontinued operations, net of tax (Note 5)  (53)  565   136   4,475    
Net income (loss)  18,298   8,047   16,078   24,838   (8,789)
Per share of common stock and per American Depositary Share (ADS):                    
Income (loss) from continuing operations:                    
Basic  102.06   41.56   89.48   116.07   (50.11)
Diluted  102.00   41.55   89.48   115.18   (50.11)
Net income (loss):                    
Basic  101.76   44.70   90.24   141.58   (50.11)
Diluted  101.70   44.69   90.24   140.52   (50.11)
                     
Consolidated Balance Sheets Data:
                    
Total assets ¥605,156  ¥645,129  ¥647,029  ¥722,542  ¥725,167 
Short-term borrowings  37,571   45,867   29,893   23,327   33,152 
Current portion of long-term debt  7,996   2,551   974   4,510   19,276 
Long-term debt, less current portion  38,304   35,677   32,196   89,691   81,219 
Shareholders’ equity  336,995   347,003   318,393   332,938   332,239 
Common stock  48,843   49,049   49,049   49,049   49,049 
Number of shares issued (in thousands)  179,894   180,064   180,064   180,064   180,064 

5


                       
        (In millions of yen, except per share data    
    and percentage amounts)
    
    Year ended March 31
    
    1999 2000 2001 2002 2003
    
 
 
 
 
Other Data:
                    
Capital expenditures ¥33,070  ¥25,458  ¥42,183  ¥46,996  ¥40,782 
Research and development (R&D) expenses  31,131   33,265   37,105   39,050   45,388 
Cash flows from operating activities  37,904   45,390   51,241   57,110   91,734 
Cash flows from investing activities  (38,157)  11,984   (41,581)  (51,148)  (35,453)
Cash flows from financing activities  13,112   (4,139)  (46,567)  (4,207)  (34,680)
Return on equity (Note 2)  0.36%  4.18%  5.63%  2.35%  4.83%
Return on assets (Note 3)  0.20%  2.19%  3.03%  1.29%  2.49%
Cash dividends declared per share of common stock and per ADS (Note 4):                    
 Interim (in yen)  5.00   5.00   7.50   7.50   7.50 
  (in U.S. dollars)  0.04   0.05   0.07   0.06   0.06 
 Year-end (in yen)  5.00   5.00   7.50   7.50   10.00 
  (in U.S. dollars)  0.04   0.05   0.06   0.06   0.08 
                     
  Year ended March 31 
  2001  2002  2003  2004  2005 
  (In millions of yen, except per share data and percentage amounts) 
Other Data:
                    
Capital expenditures (Note 5) ¥41,944  ¥46,909  ¥40,493  ¥57,978  ¥63,866 
Research and development (R&D) expenses  37,105   39,050   45,388   51,483   55,897 
Cash flows from operating activities (Note 5)  51,141   57,358   91,509   60,378   19,946 
Cash flows from investing activities (Note 5)  (41,481)  (51,396)  (35,228)  (52,754)  (93,516)
Cash flows from financing activities (Note 5)  (46,567)  (4,207)  (34,680)  51,827   (4,019)
                     
Return on equity (Note 1)  5.6%  2.4%  4.8%  7.6%  (2.6%)
Return on assets (Note 2)  3.0%  1.3%  2.5%  3.6%  (1.2%)
                     
Cash dividends declared per share of common stock and per ADS (Note 3):                    
Interim    (in yen)  7.50   7.50   7.50   12.50   12.50 
(in U.S. dollars)  0.07   0.06   0.06   0.12   0.12 
Year-end (in yen)  7.50   7.50   10.00   12.50   12.50 
(in U.S. dollars)  0.06   0.06   0.08   0.11   0.11 
       
Notes:  1.  Basic netNet income per share(loss) as a percentage of common stock and per American Depositary Share (“ADS”) has been computed based on the weighted average number of shares outstanding during each year. Diluted net income per share of common stock and ADS has been computed on the basis that all dilutive warrants and stock options were exercised. One ADS represents one share of common stock.shareholders’ equity.
   2.  Net income as a percentage of average shareholders’ equity.
3.Net income(loss) as a percentage of average total assets.
   4.
3.  Cash dividends in U.S. dollars are based on the noon buying rate in yen for cable transfers in New York City as certified for customs purposes by the Federal Reserve Bank of New York on the date of the dividend payment.
   5.  In fiscal 2000, we changed the reporting of income from patents and related expenses which had been previously presented in “Other income (expenses).” The gross patent revenue is presented as “Royalty revenue” and the related expenses are included in “Selling, general and administrative expenses.” Previously reported amounts have been reclassified to conform to this presentation.
   6.4.  In fiscal 2003, we adopted EITF (Emerging Issues Task Force) 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” The adoption resulted in a reduction in net sales and a corresponding decrease in selling, general and administrative expenses,expenses. Previously reported amounts have been reclassified accordingly.
5.As a result of the sale of subsidiaries in the audio/video software business in fiscal 2004, the gain on such sale, as well as the operating results of the discontinued operations, are presented as a separate line item in the consolidated statements of operations in accordance with no effect on operating income. Also, starting fiscal 2003, we classified losses on sale and disposalStatement of fixed assets, which were previously included in “Other—net” in “Other income (expense),” into “Selling, general and administrative expenses.Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Previously reported amounts have been reclassified accordingly.

6


Exchange rates (yen per U.S. dollar)

The exchange rate between the yen and the U.S. dollar, based upon the noon buying rate in yen for cable transfers in New York City as certified for customs purposes by the Federal Reserve Bank of New York, was ¥120.47¥xxx.xx = US$1.00 on August 4, 2003.
                  
Year ended March 31 Average High Low Period-end
 1999 ¥128.10  ¥108.83  ¥147.14  ¥118.43 
 2000  110.02   101.53   124.45   102.73 
 2001  111.65   104.19   125.54   125.54 
 2002  125.64   115.89   134.77   132.70 
 2003  121.10   115.71   133.40   118.07 
                 
2003
                
 January      117.80   120.18     
 February      117.14   121.30     
 March      116.47   121.42     
 April      118.25   120.55     
 May      115.94   119.50     
 June      117.46   119.87     
 July      117.24   120.55     

September XX, 2005.

                 
Year ended March 31 Average  High  Low  Period-end 
2001 ¥111.65  ¥104.19  ¥125.54  ¥125.54 
2002  125.64   115.89   134.77   132.70 
2003  121.10   115.71   133.40   118.07 
2004  112.75   104.18   120.55   104.18 
2005  107.28   102.26   114.30   107.22 
                 
2005
                
March      103.87   107.49     
April      104.64   108.67     
May      104.41   108.17     
June      106.64   110.91     
July      110.47   113.42     
August      109.37   112.12     
For purposes of preparing our financial statements, we use rates obtained from the Tokyo foreign exchange market, which differ from the rates listed above.

B. Capitalization and indebtedness

     Not applicable

     Not applicable
C. Reasons for the offer and use of proceeds

     Not applicable

     Not applicable
D. Risk factors

This section describes some of the risks that could affect our business. The factors listed below should be considered in connection with any forward-looking statements given in this annual report and should be read in conjunction with “Item 5. Operating and Financial Review and Prospects.” They are subject to theCautionary Statement with Respect to Forward-Looking Statements appearing elsewhere in this annual report. This list is necessarily incomplete, as some risks may be as yet unknown to us. Any risk factor has the potential to adversely affect our business results, share price and financial condition.

7


Economic conditions may adversely affect our business resultssales and financial conditionprofitability

Demand for consumer electronics products, which account for a significant proportion of our worldwide operating revenue, may be affected by general economic trends in the countries or regions in which our products are sold. Purchases of our products are, to a significant extent, discretionary. Similarly, demand for our business use products and for components we manufacture that go into products of third parties is affected by general economic trends in the various markets in which we sell our products. Economic downturns and resulting declines of demand in our major markets, including Japan, North America, Europe and Asia, may thus adversely affect our business resultssales and financial condition.profitability.

7


Additionally, our operations may be indirectly affected by the economic conditions of regions where our competitors manufacture their products. For example, if a competitor enjoys lower local labor costs, it may be able to offer similar products at a lower price. As a result, our sales may be adversely affected. Also, a decrease in the value of the local currency in a region that produces parts and raw materials may lead to a decrease in production costs (on a yen or a U.S. dollar basis) not only to us but to other manufacturers as well. Such a trend may in turn bring about vigorous export competition and price-cutting, both of which could adversely affect our business resultssales and financial condition.

profitability.

Fluctuations in foreign currency exchange rates may adversely affect our business results and financial condition

Our operations involve the global production and distribution of products. Revenue and expense items that are denominated in local currency, such as sales, expenses and assets in each region, are translated into yen in preparing our consolidated financial statements. Depending on the rate of exchange at the time of currency translation, the values of such items in yen may be affected, even if their value has not changed in their original currency. Also, fluctuations in exchange rates may affect the local prices of our products and negatively impact their competitiveness in local markets. Generally, an appreciation of the yen against other currencies, particularly the yen against the U.S. dollar and the euro, in which we make significant sales, may adversely affect our business results and financial condition. Conversely, a depreciation of the yen against other currencies would have the opposite effect.

An increase in the value of currencies in regions where we operate and produce may lead to an increase in the costs of manufacturing and procurement in those regions. Such an increase could accordingly adversely affect our profit margins and reduce our price competitiveness, thereby adversely affecting our business results. We engage in currency hedging transactions to attempt to minimize the negative effects of short-term fluctuations of foreign exchange rates among major currencies such as the U.S. dollar, euro and yen. However, as a result of mid-to-long-term exchange rate volatility, we cannot execute planned procurement, production, logistics, and sales activities with any certainty and, consequently, fluctuations in exchange rates may adversely affect our business results and financial condition.

If we are unable to innovate and to develop attractive new products, our future growth and profitability may be adversely affected

We derive a substantial portion of our revenues from sales of innovative new products. We expect that sales of our new products — currently including DVD-related products, plasma and organic electroluminescent (OEL)light-emitting diode (“OLED”) displays and car navigation systems — will continue to account for a substantial portion of our revenues, and we expect our future growth and profitability to rely primarily on the continued development and sale of innovative new products.

8


While we believe that we are capable of continuing to develop innovative and attractive new products, the industry in which we operate is characterized by rapid changes, including technological changes. The process of developing and marketing new products is inherently complex and uncertain, and there are a number of risks, including the following:

 We cannot assure you that we will havemay be unable to obtain adequate funding and resources necessary for investments in new products and technologies.
 
 We cannot assure you that ourOur long-term investments and commitment of significant resources willmay not result in successful new products or technologies. For example, we have invested substantial resources in the expansion of our production capacity for plasma display panels (“PDPs”) to meet anticipated demand, but such demand may not materialize.

8


 We cannot assure you that we canmay not be able to anticipate successfully the new products and technologies which will gain market acceptance and that such products can be successfully marketed.
 
 We cannot assure you that ourOur newly developed products or technologies canmay not be successfully protected as proprietary intellectual property rights.
 
 Our products may become obsolete earlier than expected due to rapid advancements in technology and changes in consumer preferences.
 
 A delay in commercializing new technologies now under development may prevent us from keeping up with market demand. For example, if we lag behind our competitors in the commercialization of active-matrix full-color OELOLED displays, which are now under development in our affiliated company, ELDis, Inc., we may not secure a significant portionsshare of this market.

Our failure to anticipate adequately changes in the industry and the market, and to develop attractive new products, including any of the risks described above, may reduce our future growth and profitability.
Our exposure to the plasma display market has increased significantly as a result of our recent substantial investments in the plasma display business
We are focusing on the plasma display business to establish it as the core of our business. In order to achieve this goal, we have recently built a new production line for plasma display panels and acquired a plasma display manufacturing company, which has significantly increased our plasma display production capacity. If the plasma display market does not grow as we expect, or our products do not acquire market acceptance, we may not be able to utilize this increased production capacity efficiently and our sales and profitability and maycould be adversely affect our business results and financial condition.

affected.

Competition generally, and especially on the basis of price and standardization of products, may adversely affect our business results and financial conditionof operations

The electronics industry, including the audio, video and car electronics industry, is intensely competitive. We expect to face increased competition in the various product and geographic markets in which we operate. Our competitors include manufacturers and distributors, some of which have greater capital resources available for research, development, production and marketing. In addition, as new technology develops and as new electronics products gain increased market acceptance, it is possible that new competitors or alliances among existing competitors may emerge and rapidly acquire significant market share. While we believe we are one of the leading global manufacturersinnovators of advanced, high-quality and value-added electronics products, we cannot assure you that we willmay not be able to compete effectively in the future. Pricing pressures or loss of potential customers resulting from our failure to compete effectively may adversely affect our business results and financial condition.

of operations.

For example, competitors in the plasma display market may substantially increase their production capabilities or introduce alternative products at a lower price and cause market competition to intensify further. Moreover, due to standardization and the relative ease of imitation of products such as DVD players, competition from manufacturers in emerging markets may also continue to intensify. Our research into the development of new products generally requires large costs that competitive imitators may not need to incur. In an aggressive price-cutting environment we may find it difficult to maintain or increase our market share or remain profitable against low-cost and low-budget competitors.

9


Failure of our DVD-recordernext generation optical disc format to gain broad market acceptance may adversely affect our business and results and financial conditionof operations

Currently, there are a number oftwo generally recognized competing recording formats for digital versatilethe next generation optical discs, (DVDs): the DVD-RW format commercialized by us, Sony, SharpBlu-ray Disc and others, the DVD-RAM format commercialized by Matsushita, Hitachi, Toshiba and others, and the DVD+RW format commercialized by Philips and others.HD DVD. Each of the recording disc formats makes use of its own distinct technology and is generally incompatible with other formats.

format.

We are focusing on the Blu-ray Disc format as the next generation optical discs and are developing products that are compatible with such format.
The question of which format will prevail as the industry standard is not yet settled. Should the DVD- RWour adopted format fail to be accepted as thede factoindustry standard, or otherwise failsfail to gain wide acceptance, our business strategy and results and financial condition wouldof operations may be adversely affected.

SubstantialA substantial decline in our royalty revenue as a result of the expiration of many of our existing patents relating to laser optical disc technologies may adversely affect our business results and financial conditionprofitability

Our

The licensing of our patent license and other intellectual property rights makemakes a significant contribution to our net income. Although less than 2%income since costs related to patent licensing are limited principally to amortization of our revenue in fiscal 2003 was generated by our worldwide patents relating to laser optical disc technologies, thesepatent rights were responsibleand expenses for approximately 35% of our operating income in fiscal 2003.licensing activities. The legal protections afforded to these rights have a limited duration under applicable laws, and the length of protection varies from country to country or region. A significant portion of such patentsour patent rights have expired in Europe and Japan at the end of fiscal 2003.Japan. As a result, our royalty revenue has startedwill continue to decline substantially.in the future. This decline in royalty revenue may in turn have an adverse impact on our business results. While we are working to acquire patents owned by third parties and licensing such patents, we also license patents for third parties as a licensing agent. We do not expect that the revenue, if any, from such new patents/agencies will be sufficient to offset the decrease in royalty revenue resulting from the expiration of our existing patents.profitability. Royalty revenue from patent licensing also depends to a material degree on the sales of patented products by our licensees, making it hard for us to predict actual royalty revenue amounts. For a discussion of our patent licensing business, see “Item 4.B. Business overview–overview—Nature of operations.”

If we are unable to successfully manage successfully the risks inherent in our international activities and our overseas expansion, our business results of operations and financial conditionproduction capacity could be adversely affected

A substantial portion of our manufacturing and marketing activity is conducted outside Japan, including in the United States, Europe, and in developing and emerging markets in Asia. There are a number of risks inherent in doing business in such overseas markets, including the following:

 Unexpected legal or regulatory changeschanges;
 
 Unfavorable political or economic factorsfactors;
 
 Difficulties in recruiting and retaining personnelpersonnel;
 
 Labor disputes including strikesstrikes;
 
 Less developed technological infrastructure, which can affect our production or other activities or result in lower customer acceptance of our products and services;
 
 Potentially adverse tax consequences; and
 
 Social, political or economic turmoil due to terrorism, war, or other factorsfactors.

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In order to produce our products competitively and to reduce costs, we aim to continue expanding our production and parts procurement in the Shanghai and DongguanGuang Dong areas of the People’s Republic of China (China)(“China”). Nevertheless, we may experience difficulties in managing a production facility and entering into business arrangements in China in light of unexpected events, including political or legal changes, labor shortages or strikes or changes in economic conditions in China. Furthermore, the current outbreakoutbreaks of SARS (Severe Acute Respiratory Syndrome) in Chinaepidemics may, depending on how this epidemic develops in the future,they develop, adversely impact our operations in China,

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including delays in production due to travel restrictions on employees, as well as disruptions in parts procurement and factory operations. Accordingly, such incidents could have an adverse impact on our business results and financial condition. For information on our China plants, see “Item 4.A. History and development of the Company–Principal capital expenditures, investments and divestitures.”

operations.

Our dependence on certain third-party manufacturers and suppliers for parts and components could adversely affect our businessproduction capacity and results and financial conditionof operations

While we strive to produce key components and parts such as laser pickups internally, we are dependent on a number of outside manufacturers and suppliers. Third parties manufacture some of our most important components and parts, including semiconductors. Our arrangements with third-party manufacturers and suppliers are generally on a renewable short-term basis. While we have sought to assuresecure supply where necessary through strategic alliances and other measures, we cannot assure you that we will notmay face shortages of key components, from time to time. See “Item 4.B. Business overview–Raw materials and sources of supply” for a discussion of our outside manufacturers and suppliers. If we are forced to change our contracted manufacturers and suppliers, this could result in a reductionreflecting changes in the availability of components and parts essential to us or in an increase of our costs. In addition, in periods of high demand for consumer electronics products and when new components such as next generation semiconductors are introduced, producers of components and parts may not be able to produce enough components to meet our demand on a timely basis.market trend. We may also experience shortages or other material disruptions in our supply of components and parts due to natural disasters or other events beyond our control. Shortages of key components could result in increases in their prices, insufficient supply and quality control problems, and could adversely affect our business results and financial condition, as well asmay prevent us from producing enough products on a timely basis, which would cause us to lose sales opportunities or lead to strained relationships with our original equipment manufacturing (OEM)(“OEM”) customers.

Such condition may adversely affect our sales and profitability. See “Item 4.B. Business overview—Raw materials and sources of supply” for a discussion of our outside manufacturers and suppliers.

Our performance in the OEM business is substantially dependent on the performance of our customers’ businessbusinesses

We caterprovide our OEM business to automobile manufacturers, electronics manufacturers, personal computer (PC)(“PC”) makers the broadcasting industry and other large-scale businesses worldwide. The products we supply include car stereo products, DVD-R/RWcar navigation systems, recordable DVD drives, DVD-ROM drives, set-top boxes for cable-TVplasma displays and digital satellite broadcast and OELOLED displays. Sales to business customers in these areas are significantly affected by the respective customers’ business results and by factors that are beyond our control. Further, price cuttingprice-cutting to meet customer demands may cause a reduction in our profit margin. The under-performance of a customers’ business, the unexpected termination of contracts, changes in the purchasing practices of our OEM customers or aggressive price cuttingprice-cutting to satisfy a large business customer’s demands may adversely affect our business results and financial condition.

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of operations.

Because our products and technologies are dependent on the service of capable engineers and other key personnel, difficulty in recruiting and developing key personnel could have an adverse impact on our future growth business results and financial condition

Our products and technologies are complex, and our future growth and success depend to a significant extent on the service of capable engineers and other key personnel, and hiring and training additional highly-skilled engineers and other competent personnel are important for our success.

Failure to recruit and develop key personnel may adversely affect our future growth, business results and financial condition.growth. On the other hand, aggressive hiring of, among others, capable engineers who are experienced with the latest technology, may increase, sometimes substantially, both recruiting and actual labor costs. In addition, continued re-training of currently employed personnel, which may introduce higher costs, might also be necessary to maintain a superior level of innovation and technological advance. Such increased costs could have an adverse impact on our business results and financial condition.profitability.

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Limits on intellectual property protection may make us vulnerable to competition from third parties that use our technology and expertise

While we have developed technology and expertise which differentiate our products from those of our competitors, some of our unique technology and expertise is either not fully capable of being protected by intellectual property rights or protected only to a limited extent pursuant to legal limitations in certain jurisdictions. Accordingly,Although we have the ability to diminish illegal imports of such products into certain jurisdictions through exercise of our legal rights, we may be unable to effectively to prevent third parties from using our intellectual property rights to produce products similar to ours. In addition, we may be unable to prevent third parties from developing technologies that are similar or superior to our technology, or from designing around or reverse engineering our patents and trade secrets. Moreover, our future products and technology might later be found to infringe upon a third party’s intellectual property rights.

Product defects resulting in a large-scale product recall or successful products liability claims against us could result in a significant cost or a negative impact on our reputation and adversely affect our business results and financial condition

We manufacture various products at our plants worldwide in accordance with internationally accepted quality-control standards. We cannot be certain, however, that all of our products are defect-free and may not be recalled at some later date. Furthermore, although we maintain insurance against product liability claims, we cannot be certain that such insurance can adequately satisfy the liabilities ultimately incurred. In addition, insurance may not continue to be available on terms acceptable to us. A large-scale product recall or a successful products liability claim against us could result in significant costs or have a negative impact on our reputation, which may in turn lead to a decrease in sales, adversely affecting our business results and financial condition.

of operations.

Failure to achieve the goals of collaborations, tie-ups, and joint ventures with third parties may adversely affect our business results of operations and financial conditionfuture growth

As part of our technological development process, we conduct many joint activities with other companies in the form of collaborations, technological tie-ups, or joint ventures intended to optimize management resources and utilize the synergy of combined technologies. We expect to continue to adopt an active approach to exploiting these opportunities. If differences arise among the participants of these joint activities due to managerial, financial or other reasons, we may not achieve the goals of these development projects, which may in turn adversely affect our business results of operations and financial condition.

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future growth.

Governmental regulation may limit our activities or increase our costs of operations

Pioneer’s

Our business and operations are subject to various forms of government regulation in countries in which we do business, including required business/investment approvals, as well as export regulations based on national security or other reasons and other export/import regulations such as tariffs. In addition, commercial, antitrust, patent, consumer, taxation, exchange control and environment/recycling laws and regulations also apply. If we are unable to comply with these regulations, they can serve to limit our activities. In addition, compliance with these regulations could result in increased costs. Accordingly, these regulations could adversely affect our business results and financial condition.of operations. See “Item 4.B. Business overview-Governmentaloverview—Governmental regulation” for a discussion of certain government regulations applicable to us.

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Damage to our production facilities as a result of disasters, power outages or similar events may significantly reduce our production capacity and adversely affect our business results and financial condition

We periodically carry out disaster prevention checks and facility maintenance at all of our facilities to minimize potential negative impact caused by disruptions on our manufacturing lines. We cannot assure you, however, thatHowever, we canmay not completely prevent or mitigate the effect of a disaster, outage or other disruption at our production facilities. For example, our plasma display products are currently manufactured mainly at our Shizuoka and KofuYamanashi plants, and we are in the process of expanding our manufacturing lines there. Accordingly, our plasma display panel production capacity could be significantly reduced in the event of a major earthquake or other disruption of operations at the Shizuoka and KofuYamanashi plants.

Employee retirement benefit costs and obligations may adversely affect our business results and financial conditionof operations

Pioneer is obligated to pay certain employee retirement benefit costs and obligations to qualifyingqualified employees upon their retirement. The amount of such employee retirement benefit costs and obligations are dependent on assumptions used in the relevant actuarial calculations. These assumptions include discount rates, future compensation levels, return on assets, retirement rates and mortality rates, which are based upon current statistical data, as well as long-term returns on pension plan assets and other factors. If actual results differ from the assumptions or assumptions are changed, the resulting effects are accumulated and systematically recognized over future periods and, therefore, generally affect recognized expense and recorded obligations in future periods. Our pension benefit costs have been increasing in recent fiscal years due to declining discount rates and negative returns on pension plan assets, and further declines of discount rates and lower returns on pension plan assets may adversely affect our business results and financial condition.of operations.

Item 4. Information on the Company

A. History and development of the Company

History

Pioneer was incorporated under the Japanese Commercial Code of Japan (the “Commercial Code”) as a joint stock company (Kabushiki Kaisha) in May 1947, with the name Fukuin Denki Kabushiki Kaisha, succeeding to the business founded in January 1938 by the late Mr. Nozomu Matsumoto. The present name, Pioneer Kabushiki Kaisha, was adopted in June 1961. Its English name was changed from “Pioneer Electronic Corporation” to “Pioneer Corporation” in June 1999.

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Our business dates from January 1938 when we began the manufacture of audio speakers. In June 1955 we commenced the manufacture of audio amplifiers. During the 1960s, we expanded our line of products to include hi-fi stereo sets and components, hi-fi car stereos, as well as telephone-related equipment. Since the early 1960s we have established business offices and subsidiaries in and outside Japan to support our expanding manufacturing and sales activities. During the 1970s we expanded our business to include equipment related to cable-TVcable TV systems. Pioneer’s shares of common stock were listed on the Tokyo Stock Exchange and Osaka Securities Exchange in October 1961 and April 1968, respectively. In addition, Pioneer’s ADSsAmerican Depositary Shares (“ADSs”) were listed on the New York Stock Exchange (“NYSE”) in December 1976.

In the 1980s, we began to expand our business base to include audio/video (AV)(“AV”) equipment. We started marketing laser disc (LD)(“LD”) players and LDs, and commenced our own music and video software business in Japan. Also, we introduced the world’s first car compact disc (CD)(“CD”) players. We also

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broadened our business base in commercial and industrial markets with such products as optical memory disc drives for use in computers, laser karaoke (sing-along) systems and multiscreen video systems.

In the 1990s, we released to the Japanese consumer market the world’s first car navigation system incorporating the Global Positioning System (GPS)(“GPS”). In addition, we introduced DVD players and thin-profile color plasma displays and began supplying digital direct-broadcast satellite (DBS)(“DBS”) decoders to a European pay-TV company. Our other recent industry firsts include four-color OELOLED displays and DVD recorders.

In fiscal 2001, we started supplying to PC makers DVD-R/RWrecordable DVD drives that can record up to seven times as much data as conventional CD-R/RW drives. In fiscal 2002, we introduced to the Japanese consumer market hard disk drive (HDD)(“HDD”) car navigation systems with faster search and display of routes to designated destinations. In fiscal 2003, we launched in Japan DVD recorders equipped with large-capacity HDDs, as well as car navigation systems incorporating a data communication module for access to the latest map data. Also, in June 2003, we began introducing recordable DVD drives for PC use, which are compatible with DVD-R, -RW, +R and +RW discs, to worldwide markets.

Effective April 1, 2003, Pioneer Video Corporation, a wholly-owned subsidiary of Pioneer, established Pioneer Micro Technology Corporation, by spinning off its semiconductor business. On the same day, Shizuoka Pioneer Corporation, a wholly-owned subsidiary of Pioneer, merged In fiscal 2004, we started supplying passive-matrix full-color OLED display panels in cellular phones. In fiscal 2005, we introduced recordable DVD drives for PC use, which are compatible with Pioneer Video Corporationdual layer DVD-R discs and changed its trade name to Pioneer Display Products Corporation.

DVD+R double layer discs.

Registered office

Pioneer’s registered office is located at 4-1, Meguro 1-chome, Meguro-ku, Tokyo 153-8654, Japan. ItsPioneer’s telephone number is 81-3-3494-1111.

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Principal capital expenditures, investments and divestitures

Capital

In fiscal 2003, 2004 and 2005, our capital expenditures consisted principally of facilities and molds for production and totaled ¥40,493 million, ¥57,978 million and ¥63,866 million, respectively. They were paid for principally out of our internally generated working capital. See the table in “Item 3.A. Selected financial data” for figures. The facilities for production comprised those for OELOLED displays and DVD pickups, and plants and machinery for plasma displays. See the table in “Item 4.D. Property, plants and equipment,” for a list of our principal plants.

To improve cost competitiveness and to reallocate a major portion of production to China, Pioneer established two production subsidiaries in China in fiscal 2001 and these plants began operation in the fall of 2001. We continue expanding parts procurement, designing products, and increasing the proportion of our production in China. Capital expenditures related to these two plants for fiscal 2002 and fiscal 2003 were ¥4.2 billion and ¥3.2 billion, respectively.

In fiscal 2004,2005, we plan to spend ¥3.5invested ¥27 billion to expand production capacity of these two plants further, which includes the construction of an additional production line for DVD-R/RW drives in the Guang Dong Plant. Upon completion of the new production line in the fall of 2003, the monthly production capacity for DVD-R/RW drives is expected to reach one million units.

In fiscal 2003, we started construction ofbuilding a new manufacturing line for plasma displays at our plant in Shizuoka, Japan, to meet potential demand for plasma displays. Moreover, we plan to add another line in our Kofuthe Yamanashi Plant, which is expected to startstarted its operation in September 2004. On September 30, 2004, we acquired 100% of the springissued common stock of 2005. This will bringNEC Plasma Display Corporation (“NPD”), a plasma display manufacturing subsidiary of NEC Corporation, and the intellectual property rights of NPD for cash in an aggregate amount of ¥35 billion. NPD changed its name to Pioneer Plasma Display Corporation on September 30, 2004. These investments resulted in increasing our annualplasma display production capacity to approximately 500 thousand units. The planned investment for these two lines aggregates to approximately ¥42 billion, including ¥5 billion paid by March 31, 2003.

In order to improve management efficiency by concentrating resources in strategic businesses, in July 2003 Pioneer reachedabout 1.1 million units a preliminary agreement to sell 100% of our shares in two of its wholly-owned subsidiaries, Pioneer LDC, Inc. and Pioneer Entertainment (USA) Inc., to Dentsu Inc., Japan’s largest comprehensive advertising agency. These subsidiaries are engaged in the audio/video software businesses in Tokyo, Japan and in California, U.S.A., respectively. The individual terms of these share transfers, including the transfer price, are yet to be determined. (See Note 21 in “Notes to Consolidated Financial Statements.”)

We intend to fund the capital requirement to fulfill these capital expenditure plans through internally generated cash.

year.

B. Business overview

Strategy

We aim to be a leading provider of advanced, high-quality, value-added electronics products worldwide for consumer and business use. Our corporate philosophy is to “Move the Heart and Touch the Soul,” with products that are designed to increase satisfaction, comfort and convenience in everyday life.

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To achieve our goals, we are pursuing the following strategies:

 Developdevelop innovative, technologically-advanced products that meet and stimulate market demanddemand;
 
 Enhanceenhance our brand recognition and promote customer satisfactionsatisfaction;
 
 Leverageleverage our leadership position in the car electronics businessbusiness;
 
 Focusfocus on our strategic products targeting global marketsmarkets; and
 
 Adoptadopt optimal production methods to maximize profitabilityprofitability.

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Develop innovative, technologically-advanced products that meet and stimulate market demand

We believe our core strength is our ability to innovate. Throughout our history, we have focused on the development of unique products, and have attempted to be the front-runner and market leader in our product areas. Such areas have included dynamic speakers, car audio, LD and car navigation systems. Consistent with our strategy, we have introduced into the market several cutting-edge products, such as plasma displays and digital broadcast set-top boxes.DVD products. In the DVD market, we were the first to commercialize a DVD recorder. We were also the first to introduce a four-color OELOLED display to the market. We intend to continue to take advantage of this strategy and attract customers by introducing differentiated products into the market ahead of our competitors.

Enhance our brand recognition and promote customer satisfaction

The cornerstone of our business foundation lies in the quality of our products and their ability to inspire consumer confidence. Accordingly, we focus on the enhancement of our brand image and customer satisfaction. In addition to the extensive quality control and assurance measures on the production side, we invest in various marketing campaigns to maintain and enhance the value of our brand. Combined with our worldwide brand slogan of “sound. vision. soul,” we aim to establish Pioneer as a brand driven by innovation and clearly differentiating ourselves from our competitors. We believe customer satisfaction is based not only on reliability and technology, but also on the impact of the quality of sound or vision delivered by our products.

Leverage our leadership position in the car electronics business

We believe one of our strengths lies in our core business segment, the car electronics business. We are one of the leading manufacturers in the world consumer market for car audio products.products and car navigation systems. We were the first in the industry to introduce car navigation systems to the Japanese consumer market in fiscal 1991 and have maintained a leading position by offering affordably priced and easy-to-operate DVD-ROM and advanced HDD-equipped models. In addition, in November 2002 we released in the consumer market the world’s first car navigation system that incorporates a data communication module for access to the latest map data. We intend to integrate functions for car navigation, audio/video control and information technologies. Sales in this category are gradually shifting from the consumer market to the OEM market as automobile manufacturers place greater emphasis on differentiation of their cars, and we intend to expand our market share by increasing OEM sales.

Focus on our strategic products targeting global markets

We focus on our strategic products where we are more likely to secure the “first-mover advantage” as a means of establishing market leadership. As part of our efforts to secure these leading market positions, we strive to play a major role in setting product standards. For example, we are promoting the DVD-RW format in DVD recorders and DVD-R/RWrecordable DVD drives. This format has already gained support from other major consumer electronics companies such as Sony and Sharp.companies. We also aim to differentiate ourselves by introducing to targeted markets innovative plasma displays, OELOLED displays and HDD car navigation systems. We market

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these strategic products on a global basis. Although certain technological customization is required, most of our key products are currently sold in virtually all major economiesmarkets in the world.

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Adopt optimal production methods to maximize profitability

We strive to adopt ideal production methods catered to each type of product and market demand. While we focus on reducing manufacturing and operating costs, our goal is to achieve overall efficiency in production by for example, taking into account, for example, the proximity of the end-market, production facilities and labor costs. Consequently, to produce our strategic products we established two new plants in China and started production of DVD-related and car electronics products in fiscal 2002. We are continuing to expand parts procurement, design products, and increasehave increased the proportion of our production in China. Also, toTo meet the fast-growing demand for plasma displays, we began addinghave built a more efficient production linessystem at our plasma display panel manufacturing subsidiary. Moreover, the acquisition of NPD was completed in Shizuoka and KofuSeptember 2004. Following these measures, we established in Japan, and aim to expand annualfall 2004 an overall production capacity to approximately 500 thousand units by the springsystem capable of 2005.yielding more than one million panels annually. To enhance cost competitiveness and achieve economies of scale, we sell our key products on an OEM basis to other manufacturers. In addition, targeting optimally efficient control of inventory worldwide, we introduced supply chain management in April 2002 to certain departments within the Pioneer group.

optimize efficiency of inventory control worldwide.

Strategic Focus“Pioneer Group Vision”

Consistent with the strategies described above, in fiscal 1999 we announced “Pioneer Group Vision,” a medium-term initiative, with the intent of revitalizing Pioneer and its business through the achievement of two financial targets by the end of March 2006, as well as four business targets. They are as follows.

Financial targets for the fiscal year ending March 2006:

 ¥1.2 trillion of consolidated operating revenue
 
 ROE (Return on Equity) in excess of 10%

Business targets:

(i) No. 1 in DVD worldwide

We believe the DVD format will remain the dominant high-density, high-capacity medium for sound, video

No.1 in DVD worldwide
Establishing a business foundation for plasma displays and OLED displays
From stand-alone to network
Toward the key-device, key-technologies business
The midterm plan above has been guiding our management and data recording, storage and playback for the foreseeable future. As one of the leaders in this field, we have introduced attractive models of consumer-use DVD recorders, DVD home theater systems, DVD car navigation systems as well as DVD-R/RW drives for PC use. Pioneer believes that these DVD products have a competitive edge in design, function and price, contributingbusiness direction up to the expansionpresent. But we foresee that financial targets will be difficult to achieve due to the following factors: sales of its DVD business.

(ii) Establishing akaraoke business foundation for plasma displays and OEL displays

We believe large-screen plasma displays offer significant advantages over cathode ray tubes (CRTs). Among other advantages, plasma displays are thinneraudio/video software business, and lighterwithdrawal from cable TV set-top box business in North America, all of which dragged down the increase in our consolidated operating revenue, harsher competition and lower prices than CRTs. Thus, we expect that plasma display panels inprojected. Considering the future will capture a substantial portion of the larger-screen TV market, in which currently CRTs and projection TVs are dominant. Since introducing the first plasma displays in fiscal 1998, we have established a solid presence both in consumer and commercial markets worldwide as a result of our excellent reputation for the large-screen high-resolution images of our plasma displays. To meet increasing demand, we aim to continue expanding our production capacity of plasma display panels by establishing production lines at our Shizuoka and Kofu plants in Japan, enabling us to produce approximately 500 thousand units per year by the spring of 2005.

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OEL display is another type of display, whichsituation, we are promoting aggressively. In fiscal 1998,working hard to take action for early recovery, while we becameseek a new midterm business plan to get back on the first in the worldtrack to market car electronics products equipped with an OEL display, and in fiscal 2000 we were the first company to mass-produce four-color OEL displays. OELs are particularly well-suited for small size displays, and in fiscal 2001 we supplied OEL displays for use in cellular phones of a major U.S. cellular phone manufacturer. To strengthen our market position, Tohoku Pioneer Corporation, Pioneer’s majority-owned subsidiary, established a joint venture company, ELDis, Inc., in fiscal 2001 with Semiconductor Energy Laboratory Co., Ltd. and Sharp Corporation to develop and manufacture active-matrix full-color OEL displays.

(iii) From stand-alone to network

Our current approach is to develop network-related products drawing upon our strength as a consumer- and business-use electronics product manufacturer. We believe we have a competitive advantage in the interface function, where information is delivered to users. We believe we have an excellent brand image, as well as many years of experience in analog/digital cable-TV and digital broadcast markets through the sale of our set-top boxes. We are strengthening the synergy of digital home network-linkage of entertainment/information systems, such as audio/video components, DVD players, DVD recorders, plasma displays and set-top boxes.

(iv) Toward the key-device, key-technologies business

To keep up with the accelerated pace of change in the electronics industry, it is important for us to promote key technologies and key devices, collaborating with third parties when beneficial. We believe such collaboration generates synergies that can create new advances in our key technologies and optimizes the use of our resources.

We believe that a producer of key devices is better able to develop and offer broader product differentiation and to influence the direction of market trends than a company that merely assembles products. Our strategically important key devices are DVD pickups, plasma display panel modules, speaker units, CD mechanisms for car manufacturers and OEL display panels for mobile phone companies.

future growth.

Nature of operations

We develop, design, manufacture and sell electronics products such as audio, video and car electronics on a global scale. We are one of the leading innovators of differentiated DVD products and plasma displays. We are also haveone of the largest worldwide market shareleading manufactures of car electronicsaudio products such asand car navigation systems.

systems in the consumer market.

Our principal production activities are carried out in Asia, including Japan. Our products are generally sold under our own brand names, principally “Pioneer.” Our primary markets are Japan, North America,

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Europe and Asia. WeAsia and we sell our products to customers in consumer and business markets through sales offices in Japan, and through sales subsidiaries of Pioneer and independent distributors outside of Japan. In addition, on an OEM basis, we market certain products, such as car electronics products, DVD-R/RWrecordable DVD drives, digital broadcast set-top boxesplasma displays and OELOLED displays to other companies.

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In

As a result of the sale of subsidiaries in the audio/video software business in fiscal 2003,2004, the gain from such sale, as well as the operating results of the discontinued operations, are presented net of tax as a separate line item in the consolidated statement of operations in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
Also, in fiscal 2004, we reclassified reportable segments into four categories —changed our business segment classification for certain businesses. Results related to DVD drives for PCs have been moved from “Others” to “Home Electronics,” “ Car Electronics,” “Patent Licensing,” and results related to plasma displays for business use have been moved from “Home Electronics” to “Others.” PreviousCorresponding figures for the corresponding periodprevious fiscal years have been restated accordingly. (The consolidated financial statements included in this annual report and the financial information below are prepared in accordance with U.S. GAAP, except for segment data which is prepared in accordance with relevant regulations under the Securities and Exchange Law of Japan. Specifically, such segment information is required to be reported by reportable industrial segment, whereas segment information is required to be reported by reportable operating segment under U.S. GAAP.)

The profit margins in the “Patent Licensing” segment are substantially higher than those in the other three segments, since costs related to patent licensing are limited principally to amortization of patent rights and expenses for licensing activities.

The following table sets forth our operating revenue from unaffiliated customers by business segment for the respective periods indicated:

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Operating Revenue from Unaffiliated Customers by Business Segments
(In millions of yen, except for percentage amounts)
                            
     Year ended March 31
     
     2001 2002 2003
     
 
 
Home Electronics                        
   Domestic ¥55,201   8.6% ¥58,111   8.8% ¥72,487   10.2%
   Overseas  164,742   25.7   157,334   23.7   156,257   21.9 
     
 Total ¥219,943   34.3% ¥215,445   32.5% ¥228,744   32.1%
     
Car Electronics                        
   Domestic ¥94,175   14.7% ¥95,578   14.4% ¥105,736   14.8%
   Overseas  153,547   24.0   162,094   24.5   175,354   24.7 
     
 Total ¥247,722   38.7% ¥257,672   38.9% ¥281,090   39.5%
     
Others                        
   Domestic ¥79,995   12.5% ¥86,626   13.1% ¥103,233   14.5%
   Overseas  72,168   11.3   84,794   12.8   86,617   12.1 
     
 Total ¥152,163   23.8% ¥171,420   25.9% ¥189,850   26.6%
     
Patent Licensing ¥20,530   3.2% ¥17,588   2.7% ¥12,584   1.8%
     
Total Operating Revenue ¥640,358   100.0% ¥662,125   100.0% ¥712,268   100.0%
     

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  Year ended March 31 
  2003  2004  2005 
  (In millions of yen, except for percentage amounts) 
Home Electronics                        
Domestic ¥86,766   12.8% ¥78,798   11.2% ¥87,954   12.0%
Overseas  191,202   28.2   202,684   29.0   213,274   29.1 
       
Total ¥277,968   41.0% ¥281,482   40.2% ¥301,228   41.1%
       
                         
Car Electronics                        
Domestic ¥105,736   15.6% ¥121,708   17.4% ¥120,260   16.4%
Overseas  175,354   25.9   170,479   24.3   183,150   25.0 
       
Total ¥281,090   41.5% ¥292,187   41.7% ¥303,410   41.4%
       
                         
Others                        
Domestic ¥62,137   9.2% ¥62,792   9.0% ¥53,935   7.3%
Overseas  43,480   6.4   52,603   7.4   64,838   8.8 
       
Total ¥105,617   15.6% ¥115,395   16.4% ¥118,773   16.1%
       
                         
Patent Licensing ¥12,584   1.9% ¥11,821   1.7% ¥10,237   1.4%
       
                         
Total Operating Revenue ¥677,259   100.0% ¥700,885   100.0% ¥733,648   100.0%
       
Home Electronics:

This segment includes stereo systems, receivers, amplifiers, tuners, CD players, CD recorders, minidisc (MD) systems, cassette tape decks, speaker systems, DVD players, DVD recorders, laser disc (LD) players,recordable DVD drives, DVD-ROM drives, home-use plasma displays, projection TVs,stereo systems, individual stereo components, equipment for cable-TVcable TV systems digital broadcast set-top boxes and telephones.

Sales by product for fiscal 2003 in Home Electronics are as follows: DVD players and DVD recorders

Plasma displays worldwide accounted for the largest sales in this segment.segment for fiscal 2005. In Japan,addition, recordable DVD drives and DVD recorders particularly those equipped with a large capacity HDD that we launched in fall 2002, recorded a large increase in sales. Plasma displays for home use have rapidly grown, andalso contributed significantly to sales in this segment. Sales of stereo systems accounted for a significant portion of sales as well.

We believe the traditional home audio markets of Japan, North America and Europe have matured and accordingly, price competition in these markets is strong. We do not expect the traditional home audio markets in these regions to grow substantially. We believe growth will come from new products, such as DVD-related products and plasma displays. JEITA (Japan Electronics and Information Technology Industry Association) forecasts an approximately 50% increase in consumer DVD player and DVD recorder sales worldwide, from 45 million units in 2002 to 68 million in 2007. It also forecasts that sales of plasma displays worldwide will increase approximately 10 times, from 0.4 million units in 2002 to 4.4 million in 2007. In our DVD business, we are shifting the emphasis from price-competitive DVD players toemphasizing higher value-added DVD recorders with hard disk drives and DVD home theater systems. Moreover, our DVD-related products such as computer peripherals have shifted from DVD-ROM drives to recordable DVD drives. In our plasma display business, we continue to promote vigorously promote 50-40-inch and 43-inchlarger models of high-definition plasma displays in the worldwide market. We are also expanding our plasma display business on an OEM basis.

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Car Electronics:

This segment includes car stereos, car CD players, car MD players, car DVD players,AV systems, car speakers and car navigation systems.

Sales by product for fiscal 2003 in Car Electronics are as follows: Car CD players

Overall, car stereos accounted for the largest sales in this segment.segment for fiscal 2005. In Japan, our car navigation systems accounted for approximately half ofthe largest sales. In overseas, car stereos accounted for the largest sales, while car navigation systems also contributed to sales in this segment.

Sales based on OEM accounted for 35.7% in this segment.

Both in Japan and outside Japan, sales in this group are generally made in the consumer market and to automobile manufacturers on an OEM basis for installation in new cars on production lines or as optional parts. Sales in this category are gradually shifting from the consumer market to the OEM market, as automobile manufacturers place greater emphasis on differentiation of their cars. Our strong brand recognition in both markets is helping us maintain our leading market share of car electronics products onin a global basis.consumer market. We became the first manufacturer in the world to introduce car navigation systems for the consumer market when we launched our first car navigation systems to the Japanese market in fiscal 1991, and since then have maintained a leading position in the consumer market in Japan by offering affordably-priced and easy-to-operate DVD-ROM and advanced HDD-equipped models. JEITA forecasts that sales of car navigation systems worldwide will increase approximately 2.5 times, from 4.1 million unitsWe have started this business in 2002Europe and North America, where the markets are expanding recently, and plan to 11.4 millionexpand it in 2007. In November 2002, we released in the consumer market the world’s first car navigation system that incorporates a data communication module for access to the latest map data.China. In the car audio business, we also strive to widen our market share with new products and innovations, such as car CD players with OELOLED displays and in-car entertainment systems. As we keep introducing innovative car electronics products, we will continue to seek to distinguish our products from our competitors.

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Patent Licensing:

This segment includes the licensing of patents related primarily to laser optical disc technologies.

Most of the royalty revenue from this segment is obtained from licensing patents relating to laser optical disc technologies that are held by Discovision Associates (“DVA”), our wholly-owned U.S. partnership. The legal protections afforded these rights have a limited duration under applicable laws, and the length of protection varies from country to country or by region. Although a significant portion of these patents have expired in certain countries/regions such as Japan and Europe, some have not expired and remain valid. We are currently seekingDVA continues to develop new sources of revenue by acquiring patents held by third parties and licensing such patents, and also by licensing patents for third parties as a licensing agent.

Royalty revenue from Patent Licensing of digital playback/recording equipment, such as CD-ROM and CD-R drives, accounted for a substantial portion of revenue in this segment in fiscal 2002. In addition, patent licensing of digital discs contributed significantly tocollect royalty revenue. As world PC market sales continued to slump, our revenue from patent licensing was negatively affected in fiscal 2003. Additionally, a number of these patents in Europe and Japan expired at the end of fiscal 2003, further resulting in a substantial decrease in royalty revenue.

Revenue from the Patent Licensing segment is substantially less than from our other segments, constituting less than 2%approximately 1.4% of operating revenue for fiscal 2003.2005. However, the contribution of this segment to our operating income is substantialsignificant compared to its contribution to our operating revenue, constituting approximately 35% of our operating income in fiscal 2003.

revenue.

Others:

This segment includes products primarily for business use, such as DVD-R/RW drives, DVD-ROM drives,business-use plasma displays, business-use AV systems, OLED display panels, factory automation systems OEL display panels,and electronics devices and parts.
Electronics devices and parts, DVDs, LDs, prerecorded videocassettes, CDs,including devices for cellular phones and optical disc manufacturing systems.

Sales by product for fiscal 2003 in this segment are as follows: DVD-R/RW drivessemiconductors related to laser pickups, accounted for the largest sales in this group. DVDssegment for fiscal 2005. Factory automation systems also contributed materially to sales in this segment, due mainlysegment.

OLED displays, which are particularly well-suited for small size displays, such as cellular phone displays are expected to become the expansion of the DVD player market, especially in Japan.

Our computer peripheral sales have shifted from DVD-ROM to DVD-R/RW drives.next generation display. In fiscal 2001,2000, we began supplying DVD-R/RW driveswere the first in the world to PC makers on an OEM basis. The DVD-R/RW drives can record, both on a write-once DVD-R disc and a rewritable DVD-RW disc, up to seven times as much data as on a CD-R or CD-RW disc. In fiscal 2002, we launched a Pioneer-brand DVD-R/RW drive, the world’s first model that reads and writes data on all DVD-R, DVD-RW, CD-R and CD-RW discs. In fiscal 2003, we introduced new DVD-R/RW models which are capable of 4X recording for DVD-R discs and 2X recording for DVD-RW discs, respectively. JEITA forecasts strong growth in write-once/rewritable DVD drives including DVD-R/RW drives, from 5.5 million units in 2002 to 52 million units in 2005 worldwide.

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mass-produced four-color OLED displays. In fiscal 2004, we started supplying passive-matrix full-color OLED display panels in cellular phones.
Principal markets

The following table sets forth our operating revenue from unaffiliated customers by geographic market for the respective periods indicated:

Operating Revenue by Geographic Market
(In millions of yen, except for percentage amounts)
                          
   Year ended March 31
   
   2001 2002 2003
   
 
 
Japan ¥229,371   35.8% ¥240,315   36.3% ¥281,456   39.5%
North America  209,639   32.8   197,135   29.8   198,297   27.8 
Europe  125,071   19.5   131,065   19.8   132,979   18.7 
Other Regions  76,277   11.9   93,610   14.1   99,536   14.0 
   
   
   
   
   
   
 
 Total ¥640,358   100.0% ¥662,125   100.0% ¥712,268   100.0%
   
   
   
   
   
   
 

                         
  Year ended March 31 
  2003  2004  2005 
  (In millions of yen, except for percentage amounts) 
Japan ¥254,639   37.6% ¥263,298   37.6% ¥262,149   35.7%
North America  190,147   28.1   170,711   24.3   174,120   23.7 
Europe  132,977   19.6   146,250   20.9   150,770   20.6 
Other Regions  99,496   14.7   120,626   17.2   146,609   20.0 
                   
Total ¥677,259   100.0% ¥700,885   100.0% ¥733,648   100.0%
                   
Note: Operating revenue by geographic market represents revenue from unaffiliated customers, based on the geographic location of each unaffiliated customer.

Seasonality

Global sales of the consumer electronics products are seasonal. Sales for the third quarter (ending December 31) of each fiscal year are generally higher than those of other quarters of the same fiscal year, due to increased demand during the year-end holiday season. In Japan, sales of car electronics products generally increase in the summer months, due to increased car usage for summer vacations.

Marketing channels

We sell our products to a large number of retailers and distributors through our sales offices in Japan and through Pioneer’s sales subsidiaries and independent distributors outside Japan. In addition, we market certain products, such as car electronics products and DVD-R/RWrecordable DVD drives, on an OEM basis to other manufacturers for resale under their own brand names. Our business is not materially dependent upon any particular customer or group of customers. Most of our sales are made from inventory rather than against customer orders. Our products are generally are sold under our own brand names, principally “Pioneer.”

After-sales service

We maintain a policy of providing repair and other services in the countries where our products are sold. In Japan, after-sales service is provided through Pioneer’s wholly-owned service subsidiary, Pioneer Services Network Corporation (PSN)(“PSN”), and authorized servicing companies. Pioneer established PSN in April 2000 to enhance the efficiency of our operations for after-sales services and to offer such services with higher quality. In countries where Pioneer’s subsidiaries are located, such as the United States and certain European countries, after-sales services are provided by such subsidiaries or through their authorized independent servicing companies. In other countries, such services are generally performed by our local distributors.

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In line with general industry practice, most of the products we sell to consumers are provided with a warranty for free repair work, generally for a period of one year from the date of purchase. Parts are kept available for after-sales service for a period ranging generally from two to eight years after discontinuation of production, depending on the characteristics of the parts.

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Raw materials and sources of supply

We purchase a variety of raw materials and parts for use in the manufacture of our products. We generally maintain two or more suppliers in principle to prevent a shortage of raw materials and parts. InFurthermore, in accordance with corporate policy, however, we develop andand/or manufacture certain key parts internally for our products, including plasma display panels, laser pickups and certain integrated circuits (ICs)(“ICs”) and large-scale integrations (LSIs)(“LSIs”). We also purchase certain completed products, then sell them under our own brand names.

No single source accounted for more than 5%10% of total supply purchases in fiscal 2003.2005. We have not experienced any material difficulties in obtaining raw materials, parts and products and believe that we will continue to be able to obtain them to meet our needs.

Semiconductors account for the largest percentage of parts purchased in fiscal 20032005 (on a yen basis), representing approximately 40% of our total purchases. We purchase semiconductors from various suppliers, mainly pursuant to the terms of our basic supply agreement. Our basic supply agreement generally has a term of one year, with an automatic renewal clause. Where we do not have two or more suppliers,depend on a single supplier, we seek longer term contracts or bulk purchases and placeto strengthen our order 3 to 4 months earlier than our usual practicepartnership with such supplier to reduce the risk of being unable to obtainshortages of key parts.parts and, if necessary, other measures such as placing our order earlier than our usual practice. We purchase a portion (approximately 10%5%) of our semiconductor parts, which are custom-made for our needs in accordance with our designs and specifications, from STMicroelectronics N.V. While we do not currently have an alternative source for the type of semiconductors supplied by STMicroelectronics N.V., we have entered into a strategic alliance with STMicroelectronics N.V. to secure a stable source of supply.

To date,supply at favorable prices.

The rising price of crude oil has caused an increase in the pricesprice of parts and other principal rawplastic materials used by Pioneer to produce its products have remained relatively stable.

We plan to increasein our products. In addition, the percentagerapid economic growth in China has caused a shortage of rawsteel materials and partsnonferrous metals. Although these conditions have not made a significant impact on our current operations, we purchase through online network systems, including the Internet. We believe this will contributeare continuing our efforts to more timely manufacturingprocure a stable supply of these materials and a decrease in production costs.

maintain costs at appropriate levels.

Patents and licenses

We hold a variety of patents, including those relating to laser optical disc technology, in Japan and other countries, while we in turn are licensed to use a number of patents owned by third parties. We consider certain patents licensed from third parties to be important to our business. In particular, the patents licensed from Dolby Laboratories Licensing Corporation, U.S.A. for such devices as noise reduction, from Koninklijke Philips Electronics N.V., the Netherlands for CD products and LD products, from Thomson Licensing S.A., France for CD products and LD products, and from MPEG LA, L.L.C., U.S.A. for digital video products, from Fujitsu Limited, Japan for plasma display panels and Gemstar-TV Guide International, Inc., U.S.A. for electronic program guide are utilized in products accounting for a substantial portion of our net sales. Termination of such license agreements would have a material adverse effect on our business, although we have no reason to believe that such termination will occur.

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23


Competition

We believe that we compete successfully and that we have a leading market position with respect to car electronics,

Our products, especially plasma displays and DVD-related products. Our products, however, are exposed to intense competition in Japan and overseas. Our competitors, which vary in size, area of distribution, range of products and financial resources, are principally companies based in Japan, Europe and Europe,South Korea, some of which are large, integrated home electric or electronic appliance manufacturers having substantially larger capital resources than we do.us. The electronics industry in general has been subject to substantial price competition in lightas part of decreased demand.efforts by electronics manufacturers to increase their market share. In addition, electronics companies in Asia, particularly those from Korea and China, pose a severe threat through price competition. To counter this intense competition, we place great emphasis on extensive marketing to stimulate demand for innovative and value-added products. Furthermore, we concentrate our efforts on technological research, quality control, sales promotion and the lowering of production costs by increasing procurement of parts and products made outside Japan and other measures. See also “Item 3.D. Risk factors — factors—Competition generally, and especially on price and standardization of products, may adversely affect our business results and financial condition”of operations” and “Item 4.B. Business overview — overview—Strategy.”

Import restrictions

In certain areas of the world, our products encounter tariffs and other import restrictions. Tariffs applied to our products vary depending upon the classification of such products and the countries into which such products are imported. Import restrictions, such as prohibitions on imports of certain products, vary from nation to nation. To respond to this situation, we manufacture our products in certain locations outside Japan as well as commissioning their production to independent manufacturers.

Governmental regulation

Our business activities are subject to various governmental regulations in countries in which we operate, including regulations relating to business/investment approvals, export regulations including those related to national security considerations, tariffs, antitrust, intellectual property, consumer and business taxation, exchange controls, and environmental and recycling requirements.

22

24


C. Organizational structure

Our basic corporate structure, including some but not all of our operating subsidiaries, is shown in the following chart:
(FLOW CHART)

23

(ORGANIZTIONAL CHART)

Note:Effective April 1, 2003, Pioneer Video Corporation, a wholly-owned subsidiary of Pioneer, established Pioneer Micro Technology Corporation by spinning off its semiconductor business. On the same day, Shizuoka Pioneer Corporation, a wholly-owned subsidiary of Pioneer, merged with Pioneer Video Corporation and changed its trade name to Pioneer Display Products Corporation.

25


The following table sets forth the principal subsidiaries owned, directly or indirectly, by Pioneer.
         
    Ownership  
  Country of interest and voting  
Name of subsidiary incorporation voting interest Principal business

 
 
 
Tohoku Pioneer
Corporation
 Japan  66.967.0% Manufacture of car electronics products, factory automation systems and OELOLED display panels
         
Pioneer Micro
Technology Corporation*Display Products Corporation
 Japan  100.0% Manufacture and distribution of ICs and LSIsplasma displays
         
Pioneer Plasma Display
Products Corporation*Corporation
 Japan  100.0% Manufacture of plasma displays
         
Pioneer North America, Inc. U.S.A.  100.0% Coordination of the activities of Pioneer’s North American subsidiaries and affiliates
         
Pioneer Electronics (USA) Inc. U.S.A.  100.0% Distribution of electronics products and customer support of our products and strategic shared services of Pioneer’s U.S. subsidiaries
         
Pioneer Electronics Capital Inc. U.S.A.  100.0% Financing to Pioneer and its subsidiaries
         
Discovision Associates** U.S.A.  100.0% Licensing of worldwide patents relating to laser optical disc technologies
         
Pioneer Europe NV Belgium  100.0% Coordination of the activities of Pioneer’s European subsidiaries and affiliates, and distribution of electronics products
         
Pioneer Electronics Asiacentre, Pte. Ltd. Singapore  100.0% Coordination of the activities of Pioneer’s Asian subsidiaries and affiliates, and manufacture and distribution of electronics products
         
Pioneer China Holding Co., Ltd. China  100.0% Coordination of the activities of Pioneer’s Chinese subsidiaries and affiliates and distribution of electronics products

*Effective April 1, 2003, Pioneer Video Corporation, a wholly-owned subsidiary of Pioneer, established Pioneer Micro Technology Corporation by spinning off its semiconductor business. On the same day, Shizuoka Pioneer Corporation, a wholly-owned subsidiary of Pioneer, merged with Pioneer Video Corporation and changed its trade name to Pioneer Display Products Corporation.
** Discovision Associates (DVA) is a general partnership organized under the laws of the State of California in the United States.

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26


D. Property, plants and equipment

Our manufacturing operations are conducted principally in Japan, Southeast Asia and China. Of the total of 34 plants, 16 plants are in Japan and the remaining 18 are outside Japan. The following table sets forth information, as of March 31, 2003,2005, with respect to our principal plants.
         
Name of plant   Floor space  
(Name of company   (square feet)  
which owns the plant) Location [leased space] Principal products

 
 
 
Japan
        
         
Kagoshima Plant
(Pioneer Plasma
Display Corporation)
Izumi, Kagoshima1,197,000Plasma displays
Yamanashi Plant
(Pioneer Display
Products Corporation)
Nakakoma, Yamanashi874,000Plasma displays
Shizuoka Plant
(Shizuoka Pioneer Display
Products Corporation)
 Fukuroi, Shizuoka  558,000730,000  Plasma displays
Kawagoe Plant
(Pioneer Corporation)
Kawagoe, Saitama553,000Car stereos, Car navigation systems
Tokorozawa Plant
(Pioneer Corporation)
Tokorozawa, Saitama522,000DVD recorders
         
Tendo Plant
(Tohoku Pioneer
Corporation)
 Tendo, Yamagata  504,000479,000  Cassette carCar stereos, Car
CD/MD players, Car speakers,
Loudspeakers
Tokorozawa Plant
(Pioneer
Corporation)
Tokorozawa, Saitama490,000Stereo systems, Individual
stereo components, DVD
players, DVD-R/RW drives, DVD
recorders
Kofu Plant
(Pioneer Video
Corporation)
Nakakoma, Yamanashi428,000DVDs, DVD-R/RW discs, CDs,
Plasma display panels
Kawagoe Plant
(Pioneer
Corporation)
Kawagoe, Saitama414,000Cassette car stereos, Car
CD/MD players, Car navigation
systems
         
Yonezawa Plant
(Tohoku Pioneer
Corporation)
 Yonezawa, Yamagata  234,000243,000  OELOLED displays
         
Kokubo Plant
(Pioneer VideoMicro
Technology
Corporation)
 Kofu, Yamanashi  204,000
[77,000194,000

]
 ICs, LSIs
         
Tendo the 2nd Plant
(Tohoku Pioneer
Corporation)
 Tendo, Yamagata  139,000186,000  Factory automation systems
         
Towada the 2ndMogami Plant
(Towada ElectronicsMogami Denki
Corporation)
 Towada, AomoriMogami, Yamagata  134,000141,000  DVD-ROM pickups, Cassette car
stereosSpeaker cone

25


Name of plantFloor space
(Name of company(square feet)
which owns the plant)Location[leased space]Principal products
         
Niike Plant
(Shizuoka Pioneer
Corporation)
Fukuroi, Shizuoka134,000Plasma displays

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Name of plantFloor space
(Name of company(square feet)
which owns the plant)Location[leased space]Principal products




Outside Japan
        
         
Shanghai Plant
(Shanghai Pioneer Speakers Co., Ltd.)
Shanghai, China458,000Car speakers
Mexico Plant (Pioneer
(Pioneer Speakers, S.A. de C.V.)
 Baja California,
Mexico
  339,000397,000Car speakers
Shanghai Plant
(Pioneer Technology (Shanghai) Co., Ltd.)
Shanghai, China374,000DVD Recorders, Car AV systems, Car stereos
Thailand Plant
(Pioneer Manufacturing (Thailand) Co., Ltd.)
Ayutthaya, Thailand300,000Car stereos, Stereo systems
Guang Dong Plant
(Pioneer Technology (Dongguan) Co., Ltd.)
Guang Dong, China295,000Recordable DVD drives
Guang Dong Plant
(Dongguan Monetech Electronic Co., Ltd.)
Guang Dong, China237,000
[237,000]
  Speaker systems
         
Thailand Plant (Pioneer Manufacturing (Thailand) Co., Ltd.)Ayutthaya, Thailand300,000Cassette car stereos, Car CD
players, Stereo systems
Malaysia Plant (Pioneer
(Pioneer Technology (Malaysia) Sdn. Bhd.)
 Johor, Malaysia  262,000  Stereo systems, CD players,
Cassette car stereos, Car CD
players, Cable-TV systems
Shanghai Plant (Shanghai Pioneer Speakers, Co., Ltd.)Shanghai, China255,000Speaker systems
Guang Dong Plant (Dongguan Monetech Electronic Co., Ltd.)Guang Dong, China249,000
[249,000

]
Speaker systems
Shanghai Plant (Pioneer Technology (Shanghai) Co., Ltd.)Shanghai, China233,000DVD players, Car tuners,
Cassette car stereos
         
California Plant (Pioneer
(Pioneer Electronics Technology, Inc.)
 California, U.S.A.  185,000186,000  Projection TVs,Plasma displays, Speaker systems
         
U.K. Plant (Pioneer
(Pioneer Technology (UK)(U.K.) Ltd.)
 West Yorkshire,
United Kingdom
  184,000  Stereo systems, CD players,
Tuners, Digital DBS decoders

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Name of plantFloor space
(Name of company(square feet)
which owns the plant)Location[leased space]Principal products




Guang Dong Plant (Pioneer Technology (Dongguan) Co., Ltd.)Guang Dong, China182,000DVD-R/RW drivesPlasma displays
         
Ohio Plant (Pioneer Industrial Components,
(Pioneer Automotive Technologies, Inc.)
 Ohio, U.S.A.  157,000  Cassette car
stereos, Car CD
players
Others
(6 plants in Japan and 8 plants outside Japan)1,238,000
[45,000]

Total6,823,000
[371,000]

stereos

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Most of the buildings of these plants and the land on which they are located are owned by us.

As of March 31, 2003,2005, we owned our headquartersheadquarters’ buildings in Tokyo having an approximate aggregate floor space of 336,000 square feet. We lease approximately 34,000 square feet as additional head office space in Tokyo.

We also own an employee training center in Tokyo with an approximate floor space of 17,000 square feet, and R&D facilities with an approximate aggregate floor space of 282,000298,000 square feet.

Our sales office buildings in Japan and outside Japan are mainly leased. The head office buildings of some distribution subsidiaries outside Japan are owned by us. Land and buildings for the Ohio Plant and one of our headquartersheadquarters’ buildings with an aggregate book value of ¥6,176¥5,999 million were pledged as collateral for certain loans aton March 31, 2003.

To improve cost competitiveness and to reallocate a major portion of production to China, Pioneer established two production subsidiaries in China in fiscal 2001 and these plants began operation in the fall of 2001. We continue expanding parts procurement, designing products, and increasing the proportion of our production in China. Capital expenditures related to these two plants for fiscal 2002 and fiscal 2003 were ¥4.2 billion and ¥3.2 billion, respectively. 2005.

In fiscal 2004,2005, we plan to spend ¥3.5invested ¥27 billion to expand production capacity of these two plants further, which includes the construction of an additional production line for DVD-R/RW drives in the Guang Dong Plant. Upon completion of the new production line in the fall of 2003, the monthly production capacity for DVD-R/RW drives is expected to reach one million units.

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In fiscal 2003, we started construction ofbuilding a new manufacturing line for plasma displays at our plant in Shizuoka, Japan, to meet potential demand for plasma displays. Moreover, we plan to add another line in our Kofuthe Yamanashi Plant, which is expected to startstarted its operation in September 2004. On September 30, 2004, we acquired 100% of the springissued common stock of 2005. This will bringNPD and the intellectual property rights of NPD for cash in an aggregate amount of ¥35 billion. NPD changed its name to Pioneer Plasma Display Corporation on September 30, 2004. These investments resulted in increasing our annualplasma display production capacity to approximately 500 thousand units. The planned investment for these two lines aggregatesabout 1.1 million units a year.

We are reviewing our global production systems. For the past several years, we have been accelerating the shift to overseas production. We currently plan to shift from our emphasis on overseas manufacturing and focus more on an efficient response to fast-changing markets. We plan to consolidate our production sites and aim to reduce the number of production sites from 39 to approximately ¥42 billion, including ¥5 billion paid by March 31, 2003.

We intend to fund the capital requirement to fulfill these capital expenditure plans through internally generated cash.

30 worldwide.

We are constantly engaged in upgrading, modernizing and revamping the operations of our manufacturing facilities, based on our assessment of market needs and prospects. As a result, it would be unreasonably difficult to track the exact productive capacity and the extent of utilization of each of our manufacturing facilities. We believe that our manufacturing facilities are generally all operating in the aggregate within normal operating capacity and not substantially below capacity. Additionally, we believe that there does not exist any material environmental issues that may affect the utilization of our assets.

We believe that our properties are adequate to carry on our current business, though additional investment in plant and equipment is being made to promotesupport continued growth.

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Item 5. Operating and Financial Review and Prospects
Overview
We develop, design, manufacture and sell home electronics products such as audio, video and car electronics products on a global scale. We are one of the leading innovators of DVD products, plasma displays and car navigation systems. We are also one of the leading manufacturers in the world consumer market of car audio products and car navigation systems. In addition, we derive revenue from the manufacture and sale of industrial electronics, such as factory automation systems and parts and from the licensing of patents that we own.
During fiscal 2005, the global economy continued steady growth by strong consumer spending in the U.S. and expanding economic growth in China, despite uncertainties in political situations and rising crude oil prices. In Japan, where we have the largest sales, the economy showed favorable growth in the first half of fiscal 2005 due to increased consumer spending. However, in the second half, the economy exhibited signs of slowdown. In the consumer electronics market, the popularity of newer products, such as flat panel TVs and DVD recorders, rose, due to the Athens Olympics, while price competition for these products intensified worldwide. In foreign exchange markets, the average value of the yen during fiscal 2005 was approximately 5% higher against the U.S. dollar and approximately 2% lower against the euro compared with fiscal 2004. In these economic conditions, our operating revenue for fiscal 2005 was ¥733.6 billion, up 4.7% from fiscal 2004. However, we recorded a net loss of ¥8.8 billion, compared with net income ¥24.8 billion posted in fiscal 2004.
We classify our business groups into four segments: “Home Electronics,” “Car Electronics,” “Patent Licensing” and “Others.” Main products in each segment are as follows: “Home Electronics” includes the manufacture and sale of audio/video equipment for home use, home telephones, computer peripheral equipment, devices and others. “Car Electronics” includes the manufacture and sale of car audio products, car navigation systems, and others. “Patent Licensing” includes the licensing of patents related to optical disc recording and playback equipment, and others. “Others” includes manufacture and sale of factory automation system, parts, and others. The following are operating revenue and operating income by business segment for the three years ended March 31, 2005.

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Operating Revenue by Business Segments
                         
  Year ended March 31 
  2003  2004  2005 
  (In millions of yen, except for percentage amounts) 
                         
Operating Revenue:                        
Home Electronics ¥277,968   41.0% ¥281,482   40.2% ¥301,228   41.1%
Car Electronics  281,090   41.5   292,187   41.7   303,410   41.4 
Patent Licensing  12,584   1.9   11,821   1.7   10,237   1.4 
Others  105,617   15.6   115,395   16.4   118,773   16.1 
                   
Total ¥677,259   100.0% ¥700,885   100.0% ¥733,648   100.0%
                   
Note: Operating revenue represents revenue from unaffiliated customers.
Our products are generally sold under our own brand names, principally “Pioneer.” Our primary markets are Japan, North America, Europe and Asia. We sell our products to customers in consumer and business markets through sales offices in Japan, and through sales subsidiaries of Pioneer and independent distributors outside of Japan. In addition, on an OEM basis, we market certain products, such as car electronics products, recordable DVD drives, plasma displays and OLED displays to other companies. The following are operating revenue from unaffiliated customers by geographic market for the three years ended March 31, 2005.
Operating Revenue by Geographic Market
                         
  Year ended March 31 
  2003  2004  2005 
  (In millions of yen, except for percentage amounts) 
Japan ¥254,639   37.6% ¥263,298   37.6% ¥262,149   35.7%
North America  190,147   28.1   170,711   24.3   174,120   23.7 
Europe  132,977   19.6   146,250   20.9   150,770   20.6 
Other Regions  99,496   14.7   120,626   17.2   146,609   20.0 
                   
Total ¥677,259   100.0% ¥700,885   100.0% ¥733,648   100.0%
                   
Note:Operating revenue by geographic market represents revenue from unaffiliated customers, based on the geographic location of each unaffiliated customer.

29


Home Electronics, Car Electronics and Others
In our home electronics business, we are exposed to significant price competition for DVD-related products and plasma displays, which adversely affects our profitability, although we continue to see strong growth in demand for DVD recorders, recordable DVD drives and plasma displays in worldwide markets.
In our car electronics business, severe worldwide competition has led to strong downward pressure on prices. However, the popularity of our car navigation systems, which we believe is a major area of our operations, continues to increase.
The electronics industry is characterized by rapid technological changes, and our ability to introduce attractive new products to the market significantly affects the operating results of our electronics businesses.
The electronics industry is also characterized by continuing sales price decreases in most product categories, making it important for us to continually improve the efficiency of our manufacturing, distribution, service and administrative functions.
Also, in fiscal 2004, we changed our business segment classification for certain businesses. Results related to DVD drives for PCs have been moved from “Others” to “Home Electronics,” and results related to plasma displays for business use have been moved from “Home Electronics” to “Others.” Corresponding figures for the previous fiscal year have been restated accordingly.
Patent Licensing
Our royalty revenue from Patent Licensing depends to a material extent on the sales of patented products by our licensees, making it difficult for us to predict actual royalty revenue each year. Therefore, trends in the PC market have an influence on our royalty revenue. In addition, a significant portion of our patent rights in Japan and Europe relating to laser optical disc technologies has expired. Accordingly, we have started to experience a substantial decrease in operating revenue and segment income from this segment.
Currency fluctuations
We are affected to some extent by fluctuations in foreign currency exchange rates. We are principally exposed to fluctuations in the value of the Japanese yen against the U.S. dollar, euro and, to a much lesser extent, other currencies of countries where we conduct our business. Our consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations through both translation risk and transaction risk.
Translation risk is the risk that our consolidated financial statements for a particular period or for a particular date will be affected by changes in the prevailing exchange rates of the currencies in which our subsidiaries prepare their financial statements against the Japanese yen. The functional currency for all of our significant foreign operations is the local currency. Generally, all asset and liability accounts of foreign operations are translated into Japanese yen using the exchange rates at the balance sheet date and all revenue and expense accounts are translated using the weighted average exchange rates for the periods. Even though the fluctuations of currencies against the Japanese yen can be substantial and, therefore, significantly impact comparisons with prior periods and among various geographic markets, the translation effect is a reporting consideration, included in the other comprehensive income, and does not reflect our underlying results of operations.

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Transaction risk is the risk that the currency structure of our costs and liabilities will deviate from the currency structure of sales proceeds and assets. Transaction risk mainly derives from the fact the currencies of the countries where we manufacture our products may be different from the currencies where we sell our products.
Derivative financial instruments are utilized by us to reduce the risks from fluctuations in foreign exchange rates but are not held or issued for trading purposes. To hedge certain purchase and sale commitments anticipated and not yet committed transactions denominated other than functional currencies, we enter into forward exchange contracts and purchases and writes currency options. Written options are entered into only with purchased options in order to reduce the hedging cost.
Critical accounting policies and estimates

The following analysis of financial conditions and results of operations discusses our consolidated financial statements, which have been prepared in accordance with U.S. GAAP,accounting principles generally accepted in the United States of America, except for segment data which is prepared in accordance with the regulations under the Securities and Exchange Law of Japan.

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-goingongoing basis, management evaluates its estimates and judgments, including those related to customer incentives, bad debts, inventories, investments, income taxes, financing operations, warranty obligations, retirement benefits, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amount of revenue and expenses that are not readily apparent from other sources. Actual results may differ from these estimates due to the inherent uncertainty involved in making estimates.

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition

Sales are generally recorded when merchandise is shipped or delivered to customers. Recognition of sales occurs when the title and risks and rewards of ownership are transferred to customers based on purchase orders orsales contracts. In circumstances where sales are recorded when services are renderedmerchandise is shipped to customers, the shipment date is equivalent to the third parties.delivery date because of a short delivery time. In certain cases, terms of the contract require the product to pass customer inspection after shipmentdelivery and we record the sale upon satisfactory customer acceptance. Royalty revenue is recognized based on royalty statements from licensees.
We normally do not accept returns except for warranty issues, noncompliance with purchase order specifications and returns from end-users to certain dealers. The financial impact of the future returns are estimated based on historical experience and adequately reserved.

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Estimated reductions toof revenue are recorded for customercost incurred by us in connection with sales incentive offerings such as volume incentive rebate,related to the customers’ purchase or promotion of our products. Such costs include the estimated cost of promotional discounts, dealer price protection, dealer rebates, consumer rebates, cash discounts, and co-operative advertising,support for dealers’ promotion of our products, although the terms of sales incentive programs may be different by product, market and terms of sales contracts. Sales incentives that are dependent on future customer performance are estimated and recorded at the later of when the original sale is recorded or when the incentive is offered. Estimates of future customer performance such as purchase volume, early payments and consumer rebate redemption rate are based on historical experience. Should a greater proportion of customers redeem

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incentives than we estimate, additional reductions toof revenue may be required.

Allowances

Promotional discounts are offered on specified products for doubtful accounts

specified periods. A price protection discount, which is the discount for the dealers’ inventory at the time of the announcement of the promotional discount, to compensate for the difference between the discounted prices and higher prices the dealers paid for their inventory, is often offered when the promotional discount program is announced. Costs for a price protection program are accrued when the program is announced by estimating discounts to be claimed by the dealers. Such estimates are based on forecasted order quantities during the promotional period and assumptions as to the amount of inventory that dealers have on hand. Dealer rebates include fixed-rate contractual rebates and volume-based rebates. Contractual rebates are recorded at the time of sale. Volume-based rebates, for which the rebate rate is dependent on the amount of the dealer’s purchase during the specified period, are accrued at the time of original sale, estimating the rebate rate the dealer will eventually achieve. We maintain allowancesoccasionally offer incentives directly to consumers in the form of mail-in rebates. Consumer rebates are accrued at the later of when the related sales are recognized or when the program is announced. The actual amounts of consumer rebates are dependent on consumers’ future actions, and our estimates are based on assumptions as to quantities to be purchased by consumers during the program period and consumer redemption rates, which is determined based on historical experience about consumer response to consumer rebate programs. Cash discounts are given for doubtful accountsearly payments in accordance with terms of the contract with customers and are recorded as a reduction of revenue at the time of original sale. The estimate of the cash discounts is based upon information about customers’ payment histories. Also, we provide reimbursements for estimated losses resulting from the inabilitypurpose of supporting dealers’ sales promotions of our customersproducts. The cost mainly includes subsidies for advertising, displays, cost of other sales promotion materials, and salaries of temporary floor sales personnel. We account for all the subsidy reimbursements to make required payments. Ifdealers as reductions from sales. Certain promotional allowances, such as co-op advertising, are determined as certain percentages of the financial conditionrespective sales amount and are recorded at the time of sale. Although reimbursement for such incentives requires dealers to perform sales promotions of our customers wereproducts, we assume, based on historical experience, that almost all dealers will eventually perform such sales promotions and submit claims for reimbursement. Other allowances, whose amounts are not determined by sales factors, are recorded when the subsidy is offered and the amount becomes reasonably determinable. Examples for this type of allowance are display allowances determined by the number of units displayed on the sales floor, and allowances based on agreements to deteriorate, resulting in an impairmentshare costs incurred by dealers for items such as new signboards, new display racks and salaries of their ability to make payments, additional allowances may be required.

temporary floor sales personnel.

Warranties

We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates and service costs including parts and labor that may be incurred in correcting a product failure. The estimate of warranty cost is based on historical information, and should actual product failure rates or service costs differ from our estimates, revisions to the estimated warranty liability may be required. Warranty reserve as of March 31, 2005 is ¥5.7 billion.

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Inventories

We write down

The majority of our products are produced for the consumer electronics market, and our inventory for estimated obsolescence equalis susceptible to the difference between the cost of inventoryquickly changing demands and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by the management, additional inventory write-downs may be required.

Impairment of investments

We hold minority interests in customers and financial institutions forselling prices. For the purpose of maintaining long-term relationships, someproperly valuing our inventory, we record inventory reserves for excess, slow-moving and obsolete inventory. Inventory with no potential for future sale or potential use by us is subject to write-off and, inventory which is considered to be obsolete or slow-moving, but salable at reduced prices, is written down to estimated net realizable value. Estimating net realizable value requires assumptions as to uncertain matters such as selling prices and salable quantities to be made based upon judgment about future market prices of competing products and customer demand, taking current market conditions into consideration. As of March 31, 2005, an inventory reserve of ¥10.3 billion included a ¥6.6 billion reserve for inventories to be written off and a ¥3.7 billion reserve for inventories written down to net realizable value.

The following table sets forth the changes in inventory reserve during fiscal 2005. Reversal was made in connection with sale or disposal of the related inventory.
                 
Beginning Provision  Reversal  Other  End 
 
(In billions of yen) 
8.3  7.4   (6.3)  0.9   10.3 
 
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. This review is performed using estimates of future cash flows. If the carrying amount of an asset group is considered impaired, an impairment loss is recorded for the amount by which are in publicly traded companies whose share prices are highly volatile and somethe carrying amount of which are in non-publicly traded companies whosethe asset group exceeds its estimated fair value. Fair value is difficult to determine. We record an investment impairment charge when we believe an investment has experienced a decline indetermined using the present value thatof estimated cash flows. A weighted average cost of capital, which is other than temporary. For investment in publicly traded stocks, we assume the declinederived from our capital structure, is other than temporary when market value is less than cost generally for a period of six to nine months. For investment in non-publicly traded companies, we record impairment loss when net assets of the investee declined generally by 30% to 50% due to losses incurred. During fiscal 2003, a ¥1.3 billion impairment loss was recognized in incomeused as a result of decline in prices of stocks in our portfolio. The unrealized losses indiscount rate for calculating the portfolio at the end of fiscal 2003 were immaterial. Future adverse changes in stock market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carryingpresent value of the investmentsestimated cash flows. In fiscal 2005, we recorded ¥4.5 billion impairment charges for plasma display production facilities of a domestic subsidiary, production facilities of a foreign subsidiary to be closed and assets used for manufacture of cable TV set-top boxes as the result of the review. While we believe that may not be reflectedthe estimates of future cash flows and fair value are reasonable, changes in an investment’s current carryingestimates resulting in lower future cash flows and fair value thereby possibly requiring an impairment charge inwould affect the future.

valuations of those long-lived assets.

Deferred tax assets

We record a valuation allowance to reduce deferred tax assets to the amount that we believe is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we determine that we will not be able to realize all or part of the net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination is made. Likewise, should we determine that we will be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.

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Pension benefit costs

Employee retirement benefit costs and obligations are dependent on assumptions used in the actuarial calculations. These assumptions include discount rates, future compensation levels, retirement rates and mortality rates which are based upon current statistical data, as well as long-term returns on plan assets and other factors.
For pension plans of the parent company and domestic subsidiaries, the discount rates are based on the market yield from Japanese Government Bonds adjusted for the assumed duration of the pension benefit payment for current employees. The discount rate for our domestic contributory welfare pension plan is further adjusted to reflect pension obligations that can be transferred to the Japanese government. Expecteddetermined by using information about rates of return on currently available high-quality fixed-income bonds. The expected long-term rate of return on pension plan assets areis based on weighted average of expected long-term returns on various categories of plan assets, reflecting the current and target allocations of pension plan assets. Expected long-term return on eachby asset class in which pension assets are invested.category is derived from historical studies by investment advisors. If actual results differ from the assumptions or assumptions are changed, the resulting effects are accumulated and systematically recognized over future periods and, therefore, generally affect recognized expense and the recorded obligations in future periods. Recent declines
As of March 31, 2005, the actual asset allocation was equity securities 53%, debt securities 34%, other 13%, compared with target asset allocation of equity securities 56%, debt securities 41%, other 3%.
The following table sets forth the effects of assumed changes in discount rates and negative returns on plan assets would adversely affect our pension benefit costs. Amortizationthe expected long-term rate of unrecognized net actuarial loss, which is a component of pension benefit costs and represents systematic expense recognition of effects of changes in assumptions and difference between assumptions and actual results, for our domestic pension plans increased to ¥2.9 billion in fiscal 2003 from ¥2.0 billion in fiscal 2002, and the same trend is expected to continue in fiscal 2004. Lowering the discount ratesreturn for pension plans in Japan by 0.5% would have increased the projected benefit obligation at the end of fiscal 2003 by approximately ¥14 billion and would increase the pension cost for fiscal 2004 by approximately ¥1.3 billion. Lowering the expected rate of return on plan assets by 0.5% would increase the pension cost for fiscal 2004 by approximately ¥0.4 billion.Japan.
         
  Effect on shareholders’ equity  Net periodic pension cost 
  as of March 31, 2005  for fiscal 2006 
 
  (In billions of yen) 
Discount rare:        
0.5% increase  5.0   (0.7)
0.5% decrease  (5.6)  0.7 
 
Expected long-term rate of return:        
0.5% increase     (0.3)
0.5% decrease     0.3 
 

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Overview

We classify our business groups into four segments: “Home Electronics,” “Car Electronics,” “Patent Licensing” and “Others.” “Car Electronics” is our largest segment by revenue, accounting for 39.5% of operating revenue (net sales plus royalty revenue) in fiscal 2003. In fiscal 2003, “Home Electronics,” “Patent Licensing” and “Others” accounted for 32.1%, 1.8% and 26.6%, respectively, of operating revenue. Our primary markets for our products based on operating revenues from unaffiliated customers for fiscal 2003 were Japan (40%), North America (28%) and Europe (19%).

Home Electronics, Car Electronics and Others

The electronics industry is characterized by rapid technological changes, and our ability to introduce attractive new products to the market significantly affects the operating results of this segment. Sales of new products such as DVD-related products, including DVD players, DVD recorders and DVD-R/RW drives for PC use, plasma displays, car navigation systems, digital cable-TV or broadcast set-top boxes and OEL displays have grown rapidly and in fiscal 2003 sales of such new products accounted for approximately 43% of our total sales. We expect to continue concentrating our resources on these strategic products in order to expand sales even further.

The electronics industry is also characterized by continuing sales price decreases in most product categories, making it important for us to continually improve the efficiency of our manufacturing, distribution, service and administrative functions. As an example of our effort, in the past five years, we have increased the percentage of our manufacturing outside Japan from 48% to 63% in terms of the yen value of cost of goods produced, mainly by expanding production facilities in Southeast Asia and China.

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Patent Licensing

Our royalty revenue from Patent Licensing depends to a material extent on the sales of patented products by our licensees, making it difficult for us to predict actual royalty revenue each year. Therefore, sluggishness in the PC market negatively impacts our royalty revenue. In addition, a significant portion of our patents in Japan and Europe relating to laser optical disc technologies expired at the end of fiscal 2003. Accordingly, we have started to experience a substantial decrease in operating revenue and operating income from this segment. While we are working to acquire patents held by third parties and licensing such patents, we also license patents for third parties as a licensing agent. Although these operations may generate additional revenue to help offset a portion of this expected decline, we do not expect that the revenue, if any, from such new patents/agencies will be sufficient to offset the decrease in royalty revenue resulting from the expiration of our existing patents.

A. Operating results

Fiscal 20032005 compared with fiscal 20022004

Summary

During fiscal 2003, which ended March 31, 2003, economic conditions continued to be generally unfavorable worldwide, with sluggish stock prices in the world’s major stock markets, growing tension in the Middle East, and resulting slow consumer spending worldwide. In the foreign exchange markets, the average value of the yen during fiscal 2003 was approximately 3% higher against the U.S. dollar and approximately 9% lower against the euro, compared with fiscal 2002. In these difficult economic conditions, operating revenue, the sum of net sales and royalty revenue, for fiscal 2003 was the highest ever, at ¥712.3 billion, up 7.6% from fiscal 2002. Operating income was ¥31.4 billion, a 74.8% increase from ¥17.9 billion recorded in fiscal 2002, and net income increased to ¥16.1 billion, almost double that of ¥8.0 billion posted in fiscal 2002.

Reclassifications

Effective fiscal 2003, we adopted EITF (Emerging Issues Task Force) 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products.)” The adoption resulted in a reduction in net sales and a corresponding decrease in selling, general and administrative (SGA) expenses, with no effect on operating income. For fiscal 2002, ¥6.8 billion was reclassified from SGA expenses to a sales reduction to conform to this presentation.

In addition, effective fiscal 2003, we classified losses on sale and disposal of fixed assets, which were previously included in “Other — net” in other income (expense), into SGA expenses. For fiscal 2002, ¥3.3 billion was reclassified from “Other — net” to SGA expenses.

Also, we reclassified reportable segments into four categories — “Home Electronics,” “Car Electronics,” “Patent Licensing” and “Others.” Previous figures for the corresponding periods have been restated accordingly.

Impact of foreign exchange fluctuations

The estimated effect of changes in yen exchange rates from fiscal 2002 was to increase operating revenue and operating income by ¥4.4 billion and ¥4.3 billion, respectively. Such estimates are obtained by applying the yen’s daily average exchange rates in the Tokyo foreign exchange market in fiscal 2002 to foreign currency-denominated operating revenue, cost of sales and SGA expenses, and do not account for the effect of changes to sales prices implemented in accordance with foreign exchange fluctuations.

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Net sales and royalty revenue

Net sales amounted to ¥699.7¥723.4 billion, an 8.6%a 5.0% increase over fiscal 2002.2004. Net sales in Japan came to ¥281.5¥262.1 billion, up 17.1%down 0.4% from fiscal 2002,2004, and overseas net sales increased 3.5%8.3% to ¥418.2¥461.3 billion.

Royalty revenue decreased 13.4% from fiscal 2004 to ¥10.2 billion.

Home Electronicsnet sales increased 6.2%7.0% over fiscal 2002,2004, amounting to ¥228.7¥301.2 billion, primarily as a result of increased sales of plasma displays and DVD recorders, and despite decreasedwhile sales of compact stereo systems worldwide. Net salesrecordable DVD drives for PCs, DVD players, cable TV set-top boxes and audio products decreased. Sales of plasma displays particularly for home use, grew both in Japan and overseas, to approximately twice the levels in fiscal 2002 both in terms of units sold and yen. In Japan sales of DVD recorders increased overseas. In Japan, sales rose 11.6% to ¥88.0 billion, primarily due to a large increase in sales of plasma displays. The increase was largely attributable to expansion of OEM product sales resulting from acquisition of a plasma display production subsidiary, Pioneer Plasma Display Corporation (“PPD”). Pioneer brand plasma display sales to consumer market increased as well. Sales of recordable DVD drives, DVD recorders and audio products decreased in Japan. Sales decrease of recordable DVD drives and DVD recorders were mainly attributable to the impact of a price decline resulting from intensified competition. Overseas sales also rose 5.2% to ¥213.3 billion, due to an increase in sales worldwide of plasma displays and DVD recorders, despite a decrease in sales of audio products and DVD players worldwide, recordable DVD drives in Europe and North America and DVD-ROM drives in Europe, as well as our decision to no longer sell cable TV set-top boxes in North America. In general, the market is shifting from DVD players to DVD recorders worldwide.
Car Electronicsnet sales rose 3.8% to ¥303.4 billion, primarily as a result of successful introductionsales growth of car navigation systems overseas. In Japan, net sales decreased 1.2% to ¥120.3 billion, mainly influenced by slow demand for car navigation systems in the consumer market, reflecting shifting demand from the consumer market to the OEM market, although car navigation systems for automobile manufacturers increased. Overseas net sales increased 7.4% to ¥183.2 billion, primarily due to increased sales of car audio products for the OEM market and car navigation systems, despite decreased sales of car audio products for the consumer market in Europe and North America. Sales of car navigation systems for the consumer market, particularly map-type DVD models grew in North America and Europe. Also, sales of car audio products for the consumer market increased in Russia and South and Central America.
Royalty revenue fromPatent Licensingdecreased 13.4% to ¥10.2 billion, compared to that of fiscal 2004. This was attributable to expiration of patents included in a larger portfolio of patents licensed to the optical disc industry.
Net sales forOthersincreased 2.9% over fiscal 2004 to ¥118.8 billion, reflecting primarily increased sales of factory automation (FA) systems and component parts for cellular phones. In Japan, net sales decreased 14.1% to ¥53.9 billion. This primarily resulted from decrease in sales of organic light-emitting diode (OLED) display panels, mainly for cellular phone manufacturers, and semiconductors for laser pickups, despite an increase in sales of FA systems. Decrease in sales of semiconductors for laser pickups is due to a sales shift from Japan to China. Overseas, net sales were up 23.3% over fiscal 2004 to ¥64.8 billion. The increase is primarily due to increased sales in China of devices for cellular phones and semiconductors for laser pickups, and in Asia of speaker devices for cellular phones, while sales of plasma displays for business use decreased in North America and Europe.

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Other revenues (Revenues excluding net sales and royalty revenue)
Other revenues include interest income and other income. Interest income increased from ¥1.4 billion to ¥1.9 billion due to increased return on short-term investment of proceeds from convertible bonds issued in March 2004. Other income increased from ¥0.5 billion to ¥3.4 billion, mainly due to a ¥2.3 billion gain on sale of available for sale securities.
Net loss from transfer of the modelssubstitutional portion of employee welfare pension plan
In fiscal 2005, we transferred the benefit obligation of the substitutional portion of employee welfare pension plan in Japan and related portion of the plan assets to the Japanese government. The transfer resulted in recording of a ¥48.7 billion gain as subsidy from the government. At the same time, we recognized an expense of ¥49.5 billion mainly for settlement loss of the substitutional portion, and allocated ¥25.3 billion to cost of sales and ¥24.2 billion to selling, general and administrative (SGA) expenses. Note 10 of the notes to consolidated financial statements provides detailed information.
Cost and expenses
Cost of salesincreased to ¥584.1 billion from fiscal 2004’s ¥487.3 billion. After excluding ¥25.3 billion of one-time pension cost recognized as a result of the transfer of the substitutional portion of employee welfare pension plan to the Japanese government, cost of sales represented 76.2% of operating revenue, up by 6.7 percentage points from fiscal 2004’s 69.5%. The increase is primarily due to the adverse effects of harsh price competition, particularly for Home Electronics products such as plasma displays, DVD recorders and recordable DVD drives. We estimate that the average selling prices for these products dropped 20—30% during fiscal 2005. Clearing out inventory for cable TV set-top boxes in North America at reduced prices also had an adverse effect on gross profit margin. Gross profit margin in the Car Electronics business also decreased. Gross profit margin decreased for car navigation systems in the consumer market in Japan, and the decline in sales prices of car CD players worldwide decreased gross profit margin as well. Increased provision for inventory reserve, mainly for excess stock of Home Electronics products, was another reason for the higher cost of sales.
SGA expensesincreased to ¥195.7 billion from fiscal 2004’s ¥166.4 billion. The difference was ¥5.1 billion after excluding ¥24.2 billion one-time pension cost resulting from the transfer of the substitutional portion of employee welfare pension plan. Increase in shipping and handling cost and warranty cost accounted for the majority of the increase. Shipping and handling cost increased by ¥1.5 billion in line with the increase in shipment of the number of plasma display units. Provision for warranty reserve increased by ¥2.0 billion due to extension of warranty period for plasma displays as a large-capacity HDDpart of a sales promotion measure.
R&D expenditures, which are included in cost of sales and SGA expenses, increased 8.6% to ¥55.9 billion, representing 7.6% of operating revenue. The increase reflected R&D activities to enhance our technological advantage in our strategic products such as car navigation systems, plasma displays, DVD recorders and OLED displays.
Loss on sale and disposal of fixed assetsdecreased by ¥3.4 billion. The decrease was attributable mainly to losses recorded in fiscal 2004 for relocation and replacement of production facilities for the purpose of improving production efficiencies, mainly in DVD products and plasma display panels.

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Other deductionsincreased from ¥1.6 billion to ¥6.3 billion. The difference is mainly due to ¥4.5 billion impairment losses recognized in fiscal 2005. An impairment loss of ¥3.4 billion was recorded for production facilities of PPD due to the downward revision of sales forecast for PPD’s products after the acquisition. This downward revision resulted from decreased orders from our main OEM customers in the second half of fiscal 2003. 2005, reflecting changes in business circumstances. We also recorded a ¥0.6 billion impairment loss on assets used in manufacturing cable TV set-top boxes as a result of our decision to no longer sell cable TV set-top boxes in North America. Also, an impairment loss of ¥0.5 billion was recorded for production facilities of a foreign subsidiary, for which closure is planned as a part of reorganization of overseas production sites. Another reason for the difference was the losses incurred in connection with our decision not to sell cable TV set-top boxes in North America any longer. ¥1.8 billion was recorded for asset disposal, employee termination benefits and contract termination costs, in addition to the impairment loss discussed above.
Income (loss) before income taxes
As a result of factors discussed above, we posted ¥0.2 billion loss before income taxes in fiscal 2005, compared with income of ¥41.8 billion in fiscal 2004.
Income taxes
In fiscal 2005, the provision for income taxes was ¥4.8 billion against ¥0.2 billion loss before taxes. The relationship between loss before taxes and tax expense was distorted mainly due to valuation allowance set up for deferred tax assets of the subsidiaries which posted losses. In fiscal 2004, income taxes as a percentage of pre-tax income was 44.4%, which was 2.4% higher than the normal statutory tax rate of 42.0% in Japan.
Equity in losses of affiliated companies
Equity in losses of affiliated companies was ¥3.1 billion in fiscal 2005, compared with ¥2.2 billion in fiscal 2004. The increase in loss is mainly attributable to the increase in loss incurred by ELDis, Inc., which manufactures and markets thin film transistor substrates for active-matrix OLED display panels.
Net income (loss)
Net loss in fiscal 2005 was ¥8.8 billion, compared with net income of ¥24.8 billion posted in fiscal 2004. Basic net loss per share of common stock in fiscal 2005 was ¥50.11, compared with net income per share of ¥141.58 in fiscal 2004.

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Fiscal 2004 compared with fiscal 2003
Operating revenue
Net sales amounted to ¥689.1 billion, a 3.7% increase over fiscal 2003. Net sales in Japan came to ¥263.3 billion, up 3.4% from fiscal 2003, and overseas net sales increased 3.8% to ¥425.8 billion.
Home Electronicsnet sales increased 1.3% over fiscal 2003, amounting to ¥281.5 billion, primarily as a result of increased sales of plasma displays, DVD recorders and recordable DVD drives for PCs, while sales of DVD players, set-top boxes and audio products decreased. Sales of plasma displays grew overseas while sales in Japan decreased. Sales of DVD recorders, particularly models with a hard disk drive, increased both in Japan and overseas to more than twice the levels in fiscal 2003 in terms of units sold, while the amount of net sales did not grow so fast because of declining average selling prices. Sales of recordable DVD drives increased overseas. In Japan, Home Electronics sales decreased by 9.2% to ¥78.8 billion as a result of decreased sales of plasma displays and DVD players, although sales of DVD recorders and plasma displays with growth of home telephonesincreased. Overseas, sales total Home Electronics sales in Japan increased by 24.7%6.0% to ¥72.5 billion despite decreased sales of compact stereo systems. Overseas, sales were almost the same as fiscal 2002 at ¥156.3¥202.7 billion. This primarily reflects a large increase in the sale of plasma displays for home usein each overseas market, DVD recorders in North America and a favorable effect of the yen’s depreciation against the euro, which increased sales in terms of yenEurope, and recordable DVD drives in Europe and Asia, offsetting falling sales declines of digital cable TV set-top boxes in North America, digital broadcast set-top boxes in Europe and compact stereo systemsaudio products in North America and Europe.

Car Electronicsnet sales rose 9.1%3.9% to ¥281.1¥292.2 billion, growing both in Japan and overseas.primarily as a result of sales growth of car navigation systems. In Japan, net sales increased 10.6%15.1% to ¥105.7¥121.7 billion, mainly due to continuing strongincreased sales of car navigation systems in the consumer market of two types of car navigation systems, advanced HDD models and affordable, easy-to-operate DVD models. Overseas net sales also increased 8.2% to ¥175.4 billion, primarily due to growing sales of car CD players in consumer markets, particularly in North America, reflecting changes in consumer demands from cassette car stereos to car CD players.automobile manufacturers. Sales of car audio products to automobile manufacturers increased as well, mainlywell. Overseas net sales decreased 2.8% to ¥170.5 billion, primarily due to decreased sales of car audio products to automobile manufacturers in North America.

Sales of car navigation systems rose in North America and Europe, and sales of car audio products increased in other regions.

Royalty revenue fromPatent Licensingdecreased 28.5%6.1% to ¥12.6¥11.8 billion, compared to that of fiscal 2002.2003. This was attributable to a decline in royalty revenue from digital recording products such as CD-R drives, resulting from lower PC demand, and expiration of our optical disc-related patents in some areas.

certain regions.

Net sales forOthersrose 10.8%9.3% over fiscal 20022003 to ¥189.9 billion. Sales¥115.4 billion, reflecting primarily increased sales of DVD-R/RW drives to PC makers increased both in JapanFA systems, OLED display panels and overseas despite generally lower PC demand, primarily reflecting a shift in demand from DVD-ROM drives toward DVD-R/RW drives.other component parts. In Japan, net sales increased 19.2%slightly by 1.1% to ¥103.2¥62.8 billion. In addition toThis primarily resulted from increased sales of DVD-R/RW drives, sales growth of DVD software and cellular phone-related devices, including OEL displays primarily contributed tomainly OLED display panels, partially offset by a decrease in sales of commercial karaoke products resulting from the increase.sale of karaoke business subsidiaries in fiscal 2003. Overseas, net sales were up 2.1%21.0% over fiscal 20022003 to ¥86.6¥52.6 billion, primarily due to increased sales of DVD-R/RW drives,FA systems, mainly optical disc manufacturing systems in Asia, and DVD software in North America, although salesAsia. The increasing popularity of speaker devices for cellular phones and DVD-ROM drives decreased. The shift of our sales and manufacturing resources toward DVD-R/RW drives wasDVDs as recording media is a major factor leadingof increased orders for the optical disc manufacturing systems. Sales of semiconductors related to laser pickups in China and business-use plasma displays worldwide increased as well.
Other revenues (Revenues excluding net sales and royalty revenue)
Interest income decreased salesfrom ¥2.2 billion to ¥1.4 billion reflecting lower interest rates on short-term investment, mainly in the United States of DVD-ROM drives overseas.America. Also, other revenues in fiscal 2003 included a ¥0.8 billion gain on sale of subsidiaries’ stock resulting from the sale of karaoke business subsidiaries in fiscal 2003.

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Cost and expenses
Cost of sales and selling, general and administrative expenses

Cost of sales increased to ¥498.5¥487.3 billion from fiscal 2002’s ¥465.32003’s ¥473.2 billion, associatedconsistent with anthe increase ofin net sales. However, cost of sales as a percentage of operating revenue declined 0.30.4 percentage points to 70.0%.69.5%, despite the adverse effects of keen price competition, particularly for Home Electronics products such as plasma displays and DVD recorders. Gross profit margin in the Car Electronics Businessbusiness improved as a result of cost reductions in car navigation systems and favorable effects of higher sales of car electronics products, absorbing factory overhead.systems. For recordable DVD drives, gross profit margin improved as well. Also, exchange rate fluctuations favorably affected gross profit margin. A weaker yen against the euro favorably affected gross profit margin, as well.

34


increased net sales in terms of yen, and a stronger yen against currencies in Asian countries, where our major production facilities are located, reduced production costs in terms of yen.

SGA expenses increaseddecreased by 2.0%1.4% or ¥3.6¥2.3 billion over fiscal 20022003 to ¥182.4 billion. Personnel-related expenses increased by ¥6.3¥166.4 billion. This primarily reflected increaseddecreases in personnel-related expenses, special retirement allowances and various operating expenses. Personnel-related expenses decreased by ¥1.9 billion, reflecting the sale of karaoke business subsidiaries in fiscal 2003. The decrease of special retirement allowances was due to ¥1.4 billion special termination benefits recorded by Tohoku Pioneer Corporation for its voluntary early retirement plan implemented in June 2002. Such benefits were not incurred in fiscal 2004. In addition to these decreases, reductions in various operating expenses caused an overall decrease of SGA expenses, offsetting the unfavorable impact of a $14 million one-time payment to Gemstar-TV Guide International, Inc. to resolve pending litigation, ¥2.0 billion provided for estimated costs for pension plans in Japanfree inspection and overseas due to declinesrepair of discount rates used in calculation of pension obligations and lower returns from pension assets as a result of poor conditions in the stock markets worldwide. Also, losses on sale and disposal of fixed assets increased by ¥1.2 billion. The increased losses were mainly attributable to losses incurred in conversion of optical disc production facilities at the Kofu Plant in Yamanashi, Japan into plasma display panel production facilities to satisfy growing demand for plasma displays. This conversion is in line with our policy to concentrate business resources in strategically selected business areas. On the other hand, advertising and sales promotion expense decreased compared with fiscal 2002, when we vigorously promoted the Pioneer brand name and our strategic products such ascertain plasma displays, worldwide.and a ¥1.7 billion increase in advertising expenses. The ratio of SGA expenses to operating revenue decreased 1.4by 1.2 percentage points to 25.6%23.7%.

R&D expenditures, which are included in cost of sales and SGA expenses, increased 16.2%13.4% to ¥45.4¥51.5 billion, representing 6.4%7.3% of operating revenue. The increase primarily reflected R&D activities to enhance our technological advantage in our strategic products such as car navigation systems, plasma displays, DVD recorders and digital cable-TV set-top boxes.

OLED displays.

Operating incomeLoss on sale and disposal of fixed assets

Operating incomedecreased by ¥1.1 billion. The decrease was mainly attributable to losses recorded in fiscal 2003 was ¥31.4 billion, a 74.8% increase from ¥17.9 billion recorded in fiscal 2002, mainly resulting from increased net sales and improved gross profit margin. Operating income for theHome Electronics segment was ¥0.4 billion in fiscal 2003 compared with a loss of ¥10.8 billion in fiscal 2002, reflecting increased profit from plasma displays, primarily as a result of expanded production and improved production efficiency. A successful introduction of DVD recorders with HDD was another reason for the turnaroundconversion of optical disc production facilities at the profitability of this segment. Operating income for theYamanashi Plant, Japan into plasma display panel production facilities.

Car ElectronicsOther deductionssegment in fiscal 2003 amounteddecreased from ¥3.4 billion to ¥26.1¥1.6 billion. Foreign exchange loss decreased by ¥0.8 billion up 62.6% from fiscal 2002. Increases of sales both in Japan and overseas, and improved production efficiency as well as cost reductions in car navigation systems are the main reasons. In thePatent Licensingsegment, operating income decreased to ¥10.7 billion from ¥16.8 billion, mainly due to a decline of royalty revenue. Others segment in fiscal 2003 posted ¥4.1¥1.2 billion operating income, compared with ¥0.6 billion posted in fiscal 2002. This primarily reflects increased sales and cost reduction of DVD-R/RW drives for PC use, and increased sales of DVD software and cellular phone-related devices. Another reason for the improvement in operating income was that the costs incurred in fiscal 2002 in connection with withdrawalloss from certain businesses were no longer incurred in fiscal 2003.

Other income (expense)

Other expense, on a net basis, increased from an expense of ¥2.6 billion to ¥2.7 billion. Net interest (interest income, less interest expense) was an expense of ¥0.7 billion, compared with an expense of ¥0.4 billion in fiscal 2002, mainly due to decreased interest income, which reflected declining interest rates in the U.S. financial market. Gain on sale of subsidiaries’ stock was ¥0.8 billion in fiscal 2003, while there was no gain on the sale of subsidiaries in fiscal 2002. The sale of subsidiaries, mainly in karaoke-related business, is also in line with our policy to concentrate business resources in strategically selected business areas. Foreign exchange gain (loss) swung from ¥0.3 billion gain recorded in fiscal 2002 to ¥2.0 billion loss in fiscal 2003. The losses in fiscal 20032004 primarily arose from conversion of U.S. dollar deposit and receivables into yen due to the yen’s appreciation against the U.S. dollar during fiscal 2004, although such losses decreased when compared with losses incurred in fiscal 2003. Other—net decreased from expense of ¥2.5 billion to expense of ¥0.8 billion. Losses on write-downWrite-down of investments decreased by ¥1.2 billion to ¥1.4¥0.2 billion in fiscal 2003, compared with ¥2.3from ¥1.4 billion losses recorded in fiscal 2002, as2003. During fiscal 2004, the declineprices of stock in market value of our investments in marketable equity securities was smaller in fiscal 2003.

35


portfolio recovered, and significant write-downs were not recorded.

Income before income taxes

Income before income taxes in fiscal 20032004 increased 86.6%49.0% to ¥28.6¥41.8 billion from ¥15.3¥28.1 billion in fiscal 20022003, mainly due to the increase inincreased operating income.

39


Income taxes

Income taxes as a percentage of pre-tax income (the effective tax rate) was 33.0%44.4%, decreased by 10.8%an increase of 12.2 percentage points compared with 43.8%32.2% in fiscal 20022003 and lower by 9.0% compared withwas 2.4% higher than the normal statutory tax rate of 42.0% in Japan. The main reason for the differences was the reversal ofIn fiscal 2003, valuation allowances, which had been provided for a tax benefit, the realization of which had been judged as unlikely, were reversed as profitability of subsidiaries particularly in Japan improved. Profits posted in our overseas subsidiaries, for which income tax rates are lower than in Japan, were anotherThe reversal was the main reason for the difference withlower effective tax rate for fiscal 2003. The 2.4% deviation from the normal statutory tax rate was due mainly to ¥0.7 billion in Japan.charges resulting from the settlement of a proposed assessment from U.S. tax authorities, and losses incurred at certain subsidiaries. Meanwhile, a 1.0% reduction of the tax rate in Japan effective from fiscal 2005 had thean effect of increasing deferred income taxes by ¥0.8 billion.

Minority interest in losses (earnings) of subsidiaries

Minority interest in losses (earnings) of subsidiaries, which primarily consists of the earnings of Tohoku Pioneer Corporation¥0.4 billion and its subsidiaries attributable to its minority shareholders, amounted to ¥0.02by ¥0.8 billion in fiscal 2004 and 2003, compared with ¥0.5 billion in fiscal 2002.

respectively.

Equity in earnings (losses)losses of affiliated companies

Equity in earnings (losses)losses of affiliated companies was a loss of¥2.2 billion in fiscal 2004 compared with ¥3.1 billion in fiscal 2003 compared with a loss of ¥0.1 billion2003. The decrease in fiscal 2002. The increased loss is mainly attributable to the decrease of research and development costcosts incurred inby ELDis, Inc., where active-matrix full-color OEL displays are still at
Income from continuing operations
Income from continuing operations in fiscal 2004 increased 27.7% to ¥20.4 billion from ¥15.9 billion in fiscal 2003 mainly due to the development stage.

increase in operating income.

Income from discontinued operations, net of tax
Income from discontinued operations, net of tax, of ¥4.5 billion in fiscal 2004 is comprised mainly of a ¥1.8 billion gain on the sale of discontinued operations and ¥2.3 billion tax benefit primarily in connection with loss on investments in stocks of subsidiaries sold. ¥0.1 billion in fiscal 2003 solely represented net income of the subsidiaries sold.
Net income

Net income in fiscal 20032004 was ¥16.1¥24.8 billion, almost double that ofa 54.5% increase compared with fiscal 2002’s ¥8.02003’s ¥16.1 billion. Basic net income per share of common stock in fiscal 20032004 was ¥90.24,¥141.58, compared with ¥44.70¥90.24 in fiscal 2002.2003. Diluted net income per share in fiscal 20032004 was ¥90.24¥140.52 compared with ¥44.69¥90.24 in fiscal 2002.2003.

40

Fiscal 2002 compared with fiscal 2001

Reclassifications

Effective fiscal 2003, we adopted EITF 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products.)” The adoption resulted in a reduction in net sales and a corresponding decrease in SGA expenses, with no effect on operating income. For fiscal 2001 and 2002, ¥6.7 billion and ¥6.8 billion were reclassified from SGA expenses to sales reductions, respectively, to conform to this presentation.

In addition, effective fiscal 2003, we classified losses on sale and disposal of fixed assets, which were previously included in “Other — net” in other income (expense), into SGA expenses. For fiscal 2001 and 2002, ¥0.9 billion and ¥3.3 billion were reclassified from “Other — net” to SGA expenses.

Also, we changed reportable segments into four categories — “Home Electronics,” “Car Electronics,” “Patent Licensing” and “Others.” Previous figures for the corresponding periods have been restated accordingly.

36


Summary

During fiscal 2002 which ended March 31, 2002, and, especially after the terrorist attacks on September 11, 2001, economic conditions continued to slow worldwide, with demand for information technology-related products weakening. As for foreign exchange markets, the average value of the yen during fiscal 2002 was approximately 12% lower against the U.S. dollar, and approximately 9% lower against the euro, compared to fiscal 2001. Under such circumstances, operating revenue, the sum of net sales and royalty revenue, for fiscal 2002 was ¥662.1 billion, up 3.4% from fiscal 2001. Operating income was ¥17.9 billion, a 45.5% decrease from ¥32.9 billion recorded in fiscal 2001, and net income came to ¥8.0 billion, down 56.0% from ¥18.3 billion posted in fiscal 2001.

Impact of foreign exchange fluctuations

The estimated effect of changes in yen exchange rates from fiscal 2001 was to increase operating revenue and operating income by ¥43.5 billion and ¥14.4 billion, respectively. Such estimates were obtained by applying the yen’s daily average exchange rates in the Tokyo foreign exchange market in fiscal 2001 to foreign currency-denominated operating revenue, cost of sales and SGA expenses, and do not account for the effect of changes to sales prices implemented in accordance with foreign exchange fluctuations.

Net sales and royalty revenue

Net sales amounted to ¥644.5 billion, a 4.0% increase over fiscal 2001. Sales in Japan came to ¥240.3 billion, up 4.8% from fiscal 2001, and overseas net sales increased 3.5% to ¥404.2 billion.

Home Electronicssales decreased 2.0% over fiscal 2001, amounting to ¥215.4 billion, primarily as a result of a sales decrease of digital cable-TV set-top boxes although sales of plasma displays for home use, DVD players and DVD recorders increased. Plasma display sales grew 16% in terms of yen, and from 35 thousand to 50 thousand in terms of units. Sales in Japan increased 5.3% to ¥58.1 billion, thanks to a large increase in the sale of plasma displays for home use and a rise in sales of DVD recorders, despite a large decrease in compact stereo system sales. Overseas, sales decreased by 4.5% to ¥157.3 billion primarily as a result of a sharp sales decline of digital cable-TV set-top boxes in North America, despite the yen’s depreciation and encouraging sales of plasma displays for home use and DVD home theater systems in North America and Europe.

Car Electronicssales rose 4.0% to ¥257.7 billion, mainly as a result of increased sales to consumer markets. In Japan, sales increased 1.5% to ¥95.6 billion, although car audio product sales to automobile manufacturers fell. The increase was attributed to successful consumer market sales of advanced HDD and affordable, easy-to-operate DVD car navigation systems. Revenue from car navigation systems grew more than 80%. Overseas, sales also increased 5.6% to ¥162.1 billion, despite a sales drop in Europe due to intensified competition. This increase was due to the yen’s depreciation and a sales rise in North America, especially of car audio products incorporating a radio tuner for digital satellite broadcasting, which started in the U.S. in 2001.

Royalty revenue from thePatent Licensingsegment decreased 14.3% to ¥17.6 billion, compared to that of fiscal 2001. This was attributable to a reduction in royalty revenue from digital playback/recording products such as CD-ROM and CD-R drives, as PC market sales slumped.

37


Otherssales grew 12.7% to ¥171.4 billion, mainly as a result of a sales increase of DVD-R/RW drives both in Japan and overseas. In Japan, sales increased 8.3% to ¥86.6 billion as sales of DVD-R/RW drives to PC makers increased. Overseas, sales grew 17.5% to ¥84.8 billion, reflecting the yen’s depreciation and a large increase in sales of DVD-R/RW drives to PC makers, although sales of speaker devices for cellular phones fell.

Cost of sales and selling, general and administrative expenses

Cost of sales increased to ¥465.3 billion from fiscal 2001’s ¥447.4 billion and cost of sales as a percentage of operating revenue also increased 0.4 percentage points to 70.3%. However, cost of sales as a percentage of net sales remained the same as in fiscal 2001 at 72.2%. The favorable effects of a weaker yen against the U.S. dollar and the euro on gross profit margin were offset by the unfavorable impact of declining product prices in our major product categories, including DVD players.

SGA expenses increased by 11.7% or by ¥18.8 billion over fiscal 2001 to ¥178.8 billion. Advertising and sales promotion expense increased as a result of vigorous marketing activities worldwide to promote the Pioneer brand name and our strategic products such as plasma displays. Royalty expenses related to digital technologies increased as well. Also, expenses incurred in connection with restructuring of some production sites and withdrawal from certain businesses facing unfavorable prospects account for a part of the increase in SGA expenses. Losses on sale and disposal of fixed assets increased by ¥2.4 billion. The increased losses were attributable to two factors: losses on disposal of production facilities idled as a result of shifts in production capacities contrasted with gains realized on the sale of property in fiscal 2001. In addition, personnel-related expenses increased as costs for pension plans in Japan and overseas increased. The ratio of SGA expenses to operating revenue increased 2.0 percentage points to 27.0%.

R&D expenditures, which are included in cost of sales and SGA expenses, increased 5.2% to ¥39.1 billion, representing 5.9% of operating revenue. The increase primarily reflected R&D activities in developing a next-generation large-capacity optical disc system and new home network control system.

Operating income

Operating income was ¥17.9 billion, a 45.5% decrease from ¥32.9 billion recorded in fiscal 2001, reflecting decreased royalty revenue and increased SGA expenses. TheHome Electronicssegment posted a loss of ¥10.8 billion compared with a loss of ¥4.0 billion in fiscal 2001, reflecting deteriorated profitability resulting from intense price competition for DVD players particularly in North America. Start-up costs incurred in fiscal 2002 for additional plasma display production facilities were the other reason for the increased loss. Operating income for theCar Electronicssegment amounted to ¥16.1 billion, a decrease from ¥18.1 billion posted in fiscal 2001. Cost in connection with withdrawal from the cellular phone market incurred in fiscal 2002 was the main reason for the difference. In thePatent Licensingsegment, operating income decreased to ¥16.8 billion from ¥19.7 billion, mainly due to a decline of royalty revenue from digital playback/recording products such as CD-ROM and CD-R drives, reflecting a sluggish PC market and declining unit prices.Otherssegment posted ¥0.6 billion operating income, compared with a loss of ¥2.0 billion posted in fiscal 2001. Increased sales and reduced costs of DVD-R/RW drives for PC use and increased sales of DVD software were main reasons for the reduced loss.

38


Other income (expense)

Other income (expense), on a net basis, decreased from an income of ¥1.3 billion to an expense of ¥2.6 billion. The reasons included a decrease in gain on sale of investment securities. A ¥1.6 billion gain on sale of investment securities was realized in fiscal 2001, while there was no material sale of investment securities in fiscal 2002. The reasons also included a ¥1.0 billion net increase in loss on write-down of investments, reflecting the sharp decline of stock prices in Japan. Foreign exchange losses swung from net losses of ¥1.2 billion to net gains of ¥0.3 billion. A decrease in the loss related to the revaluation of derivative financial instruments intended to minimize foreign currency risk accounted for the improvement. The net interest (interest income, less interest expense) was an expense of ¥0.4 billion, compared with an income of ¥0.6 billion in fiscal 2001. A decrease in interest income resulting from declining interest rates in the U.S. financial market was the main reason for the difference.

Income before income taxes

Income before income taxes decreased 55.1% to ¥15.3 billion from ¥34.2 billion for fiscal 2001.

Income taxes

Income taxes as a percentage of pre-tax income (the effective tax rate) was 43.8%, almost the same level as 41.9% in fiscal 2001 and the normal statutory tax rate of 42.0% in Japan.

Minority interest in losses (earnings) of subsidiaries

Minority interest in losses (earnings) of subsidiaries, which primarily consists of the earnings of Tohoku Pioneer Corporation and its subsidiaries attributable to its minority shareholders, amounted to ¥0.5 billion compared with ¥1.4 billion in fiscal 2001.

Equity in earnings (losses) of affiliated companies

Equity in earnings (losses) of affiliated companies was a loss of ¥0.1 billion, substantially unchanged from fiscal 2001.

Net income

Net income was ¥8.0 billion, a 56.0% decrease from fiscal 2001’s ¥18.3 billion. Basic net income per share of common stock was ¥44.70, compared with fiscal 2001’s ¥101.76. Diluted net income per share was ¥44.69 compared with fiscal 2001’s ¥101.70.

39


Segment Informationinformation

The following segment information was prepared pursuant to relevant regulations under the Securities and Exchange Law of Japan, which has been disclosed in Japan, and is not in accordance with U.S. GAAP.

Business Segments
                           
    Millions of yen
    
    Year ended March 31, 2003
    
                    Corporate and    
    Home Electronics Car Electronics Patent Licensing Others Eliminations Consolidated
  
Operating revenue:                        
 Unaffiliated customers  ¥228,744   ¥281,090   ¥12,584   ¥189,850      ¥712,268 
 Inter-segment  1,576   1,271   2,014   41,922   (¥46,783)   
  
  Total  ¥230,320   ¥282,361   ¥14,598   ¥231,772   (¥46,783)  ¥712,268 
Operating income  ¥384   ¥26,126   ¥10,736   ¥4,089   (¥9,983)  ¥31,352 
Identifiable assets  ¥142,428   ¥153,644   ¥4,357   ¥160,163   ¥186,437   ¥647,029 
Depreciation and amortization  ¥9,704   ¥13,370   ¥1,550   ¥9,863   ¥1,900   ¥36,387 
Capital expenditures
(additions to fixed assets)
  ¥13,960   ¥13,997   ¥398   ¥9,830   ¥3,004   ¥41,189 
                           
    Millions of yen
    
    Year ended March 31, 2002
    
                    Corporate and    
    Home Electronics Car Electronics Patent Licensing Others Eliminations Consolidated
  
Operating revenue:                        
 Unaffiliated customers  ¥215,445   ¥257,672   ¥17,588   ¥171,420      ¥662,125 
 Inter-segment  909   1,439   2,208   45,650   (¥50,206)   
  
  Total  ¥216,354   ¥259,111   ¥19,796   ¥217,070   (¥50,206)  ¥662,125 
Operating income  (¥10,811)  ¥16,071   ¥16,837   ¥585   (¥4,741)  ¥17,941 
Identifiable assets  ¥134,777   ¥154,783   ¥2,959   ¥191,851   ¥160,759   ¥645,129 
Depreciation and amortization  ¥8,857   ¥13,047   ¥419   ¥12,333   ¥2,126   ¥36,782 
Capital expenditures
(additions to fixed assets)
  ¥17,381   ¥13,286   ¥58   ¥14,095   ¥2,248   ¥47,068 
                         
  Year ended March 31, 2005 
                  Corporate and    
  Home Electronics  Car Electronics  Patent Licensing  Others  Eliminations  Consolidated 
   
  (In millions of yen) 
Operating revenue:                        
Unaffiliated customers ¥301,228  ¥303,410  ¥10,237  ¥118,773     ¥733,648 
Inter-segment  1,960   1,321   1,362   39,725  ¥(44,368)   
   
Total ¥303,188  ¥304,731  ¥11,599  ¥158,498  ¥(44,368) ¥733,648 
                         
Segment income (loss) ¥(22,127) ¥18,591  ¥9,389  ¥(272) ¥(2,989) ¥2,592 
Identifiable assets ¥227,567  ¥167,346  ¥2,852  ¥106,101  ¥221,301  ¥725,167 
Depreciation and amortization ¥21,388  ¥12,514  ¥311  ¥9,299  ¥3,478  ¥46,990 
Capital expenditures (additions to fixed assets) ¥32,261  ¥12,358     ¥10,299  ¥9,568  ¥64,486 
                         
  Year ended March 31, 2004 
                  Corporate and    
  Home Electronics  Car Electronics  Patent Licensing  Others  Eliminations  Consolidated 
   
  (In millions of yen) 
Operating revenue:                        
Unaffiliated customers ¥281,482  ¥292,187  ¥11,821  ¥115,395     ¥700,885 
Inter-segment  1,399   2,460   2,057   36,860  ¥(42,776)   
   
Total ¥282,881  ¥294,647  ¥13,878  ¥152,255  ¥(42,776) ¥700,885 
                         
Segment income ¥3,247  ¥29,963  ¥11,398  ¥2,273  ¥292  ¥47,173 
Identifiable assets ¥182,001  ¥158,913  ¥3,447  ¥109,582  ¥268,599  ¥722,542 
Depreciation and amortization ¥15,858  ¥13,798  ¥362  ¥8,272  ¥2,621  ¥40,911 
Capital expenditures (additions to fixed assets) ¥32,783  ¥13,648  ¥248  ¥7,340  ¥4,434  ¥58,453 
Note: Effective from fiscal 2005, the Company presented segment income (loss) as operating revenue less cost of sales, selling, general and administrative expenses and subsidy from the government recognized in fiscal 2005 in connection with transfer of substitutional portion of employee welfare pension plan to Japanese government. Previously reported amounts for fiscal 2004 have been reclassified accordingly.

41


Income (loss) by business segments
Home Electronicssegment recorded a loss of ¥22.1 billion, compared to income of ¥3.2 billion in fiscal 2004. Despite increased sales, mainly for plasma displays and DVD recorders, lowered prices for DVD products, AV systems and plasma displays worsened gross profit margins. Clearing out inventory for cable TV set-top boxes in North America at reduced prices also had an adverse effect to gross profit margin.
Car Electronicssegment recorded a profit of ¥18.6 billion, down 38.0% from ¥30.0 billion in fiscal 2004. Worsened gross profit margin was the main reason. Gross profit margin decreased for car navigation systems in the consumer market in Japan, and prices of car CD players fell worldwide.
Patent licensingposted ¥9.4 billion profit, down 17.6% from ¥11.4 billion in fiscal 2004. Decrease in royalty revenue is the reason for the drop in profit.
Othersrecorded a loss of ¥0.3 billion, compared with ¥2.3 billion profit in fiscal 2004. Although profit for factory automation systems increased due to increased sales, profitability for business-use plasma displays and organic light-emitting diode display panels suffered from decreased sales.

42


Geographic Segments
                         
  Year ended March 31, 2005
                  Corporate and    
  Japan  North America  Europe  Other Regions  Eliminations  Consolidated 
   
  (In millions of yen) 
Operating revenue:                        
Unaffiliated customers ¥300,722  ¥171,961  ¥149,117  ¥111,848     ¥733,648 
Inter-area  294,922   5,405   805   176,198  ¥(477,330)   
   
Total ¥595,644  ¥177,366  ¥149,922  ¥288,046  ¥(477,330) ¥733,648 
                         
Segment income (loss) ¥(9,010) ¥(1,716) ¥(308) ¥7,029  ¥6,597  ¥2,592 
Identifiable assets ¥315,252  ¥60,799  ¥60,463  ¥112,312  ¥176,341  ¥725,167 
Depreciation and amortization ¥31,880  ¥2,394  ¥2,444  ¥6,794  ¥3,478  ¥46,990 
Capital expenditures (additions to fixed assets) ¥44,730  ¥1,953  ¥1,005  ¥7,230  ¥9,568  ¥64,486 
                         
  Year ended March 31, 2004
                  Corporate and    
  Japan  North America  Europe  Other Regions  Eliminations  Consolidated 
   
  (In millions of yen) 
Operating revenue:                        
Unaffiliated customers ¥294,198  ¥168,194  ¥145,390  ¥93,103     ¥700,885 
Inter-area  278,071   8,082   967   182,929  ¥(470,049)   
   
Total ¥572,269  ¥176,276  ¥146,357  ¥276,032  ¥(470,049) ¥700,885 
                         
Segment income ¥22,003  ¥11,487  ¥2,015  ¥9,511  ¥2,157  ¥47,173 
Identifiable assets ¥233,601  ¥46,034  ¥61,754  ¥99,237  ¥281,916  ¥722,542 
Depreciation and amortization ¥26,014  ¥2,450  ¥2,130  ¥7,696  ¥2,621  ¥40,911 
Capital expenditures (additions to fixed assets) ¥40,314  ¥2,650  ¥2,113  ¥8,942  ¥4,434  ¥58,453 
   
Note:Notes:Effective fiscal 2003, we changed reportable segments into four categories—“Home Electronics,” “Car Electronics,” “Patent Licensing,” and “Others.” Previous figures for the corresponding period have been restated accordingly.
  Main products in each segment are as follows:
1. “Home Electronics” includes the manufacture and sale of Audio/Video equipment for home use, equipment for cable-TV systems, digital broadcast set-top boxes, home telephones and others.
“Car Electronics” includes the manufacture and sale of car audio products, car navigation systems, and others.
“Patent Licensing” includes the licensing of patents related to optical disc recording and playback equipment, and others.
“Others” includes manufacture and sale of computer peripheral equipment, devices and parts, factory automation system, AV software, and others.

40


Geographic Segments

                           
    Millions of yen
    
    Year ended March 31, 2003
    
                    Corporate and    
    Japan North America Europe Other Regions Eliminations Consolidated
  
Operating revenue:                        
 Unaffiliated customers  ¥298,107   ¥196,008   ¥132,776   ¥85,377      ¥712,268 
 Inter-area  272,393   7,594   700   168,128   (¥448,815)   
  
  Total  ¥570,500   ¥203,602   ¥133,476   ¥253,505   (¥448,815)  ¥712,268 
Operating income (loss)  ¥16,392   ¥11,749   (¥462)  ¥7,415   (¥3,742)  ¥31,352 
Identifiable assets  ¥222,372   ¥55,940   ¥57,092   ¥91,695   ¥219,930   ¥647,029 
Depreciation and amortization  ¥22,617   ¥3,519   ¥1,843   ¥6,508   ¥1,900   ¥36,387 
Capital expenditures
(additions to fixed assets)
  ¥24,247   ¥3,133   ¥2,019   ¥8,786   ¥3,004   ¥41,189 
                           
    Millions of yen
    
    Year ended March 31, 2002
    
                    Corporate and    
    Japan North America Europe Other Regions Eliminations Consolidated
  
Operating revenue:                        
 Unaffiliated customers  ¥253,245   ¥195,766   ¥130,801   ¥82,313      ¥662,125 
 Inter-area  266,487   7,403   416   157,780   (¥432,086)   
  
  Total  ¥519,732   ¥203,169   ¥131,217   ¥240,093   (¥432,086)  ¥662,125 
Operating income (loss)  ¥5,713   ¥11,266   (¥122)  ¥6,323   (¥5,239)  ¥17,941 
Identifiable assets  ¥232,541   ¥58,145   ¥58,782   ¥92,353   ¥203,308   ¥645,129 
Depreciation and amortization  ¥24,014   ¥2,238   ¥2,262   ¥6,142   ¥2,126   ¥36,782 
Capital expenditures
(additions to fixed assets)
  ¥29,411   ¥1,735   ¥1,428   ¥12,246   ¥2,248   ¥47,068 
Note: Operating revenue reported in geographic segment information above represents that of the parent companyPioneer and its domestic subsidiaries in Japan, and each subsidiary in North America, Europe, and Other Regions.
2.Effective from fiscal 2005, the Company presented segment income (loss) as operating revenue less cost of sales, selling, general and administrative expenses and subsidy from the government recognized in fiscal 2005 in connection with transfer of substitutional portion of employee welfare pension plan to Japanese government. Previously reported amounts for fiscal 2004 have been reclassified accordingly.

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B. Liquidity and capital resources

Cash flows
Summarized Consolidated Statements of Cash Flows

Fiscal 2003 compared with fiscal 2002

         
  Year ended March 31 
  2004  2005 
  (In millions of yen) 
Net cash provided by operating activities ¥60,378  ¥19,946 
Net cash used in investing activities  (52,754)  (93,516)
Net cash provided by (used in) financing activities  51,827   (4,019)
       
Effect of exchange rate changes on cash and cash equivalents  (9,512)  1,851 
       
Net increase (decrease) in cash and cash equivalents ¥49,939  ¥(75,738)
       
Net cash provided by operating activities in fiscal 20032005 was ¥91.7¥19.9 billion, an increasea decrease of ¥34.6¥40.4 billion compared to fiscal 2002.2004. Net income increased although non-cash expenses such as equity in losses of affiliated companiesloss and provision for pension cost increased. Changeschanges in operating assets and liabilities also contributed to increasedwere the primary cause for the decreased cash flows from operating activities. Trade receivable decreased, despite an increaseAmong operating assets and liabilities, trade receivables increased due to increases in net sales, reflecting reduced past due accountssales. Inventories decreased primarily for plasma displays, AV systems, recordable DVD drives for PCs and reduction of notes receivables. Trade payables continued to increase, reflecting increased purchase of materials particularly for DVD-R/RW drives and car electronics products, although overall inventory continued to decrease,factory automation systems, reflecting our continued effortseffort to control and reduce inventories.

Net cash used in investing activities was ¥35.5¥93.5 billion for fiscal 2003, a decrease2005, an increase of ¥15.6¥40.8 billion compared to ¥51.1¥52.8 billion in fiscal 2002.2004. The difference was partlymainly the result of a decrease in payments for the purchasean acquisition of fixed assets in fiscal 2003 compared to fiscal 2002, when investments ina plasma display production facilitiessubsidiary, and two new plantsan increase in China were higher. Investment in affiliated companies accountedthe investments for by the equity method also decreased. Increased proceeds from saleexpansion of fixed assets and available-for-sale securities also accounted for part of the decrease in net cash used in investing activities.

plasma display production facilities.

Net cash used in financing activities was ¥34.7¥4.0 billion, compared with ¥51.8 billion cash provided in fiscal 2003, compared2004. Financing activities in fiscal 2004 included issuance of zero coupon convertible bonds (bonds with ¥4.2 billion cash used for fiscal 2002.stock acquisition rights) due 2011 with net proceeds of ¥60.5 billion. In fiscal 2003,2005, cash was used primarily in reduction of borrowings to solidify financial conditions, paymentsfor reducing long-term debt, payment of dividends and repurchase of shares of Pioneer’s common stock. ¥21.1 billion wasOn the other hand, short-term borrowings increased. Cash used in reducing short-term and long-term borrowings primarily in Japan, Europe and Southeast Asia.debt including capital lease obligations was ¥6.2 billion. Cash used in dividends payment was ¥2.7dividend payments amounted to ¥4.4 billion, almost the same level of fiscal 2002. As2004. Also, ¥2.0 billion was used for repurchase of shares of Pioneer’s stock, we purchased 5.1 million shares from the market for ¥11.5 billion.

common stock.

As a result of these activities and the effect of changes in exchange rate changes on cash and cash equivalents of overseas subsidiaries, cash and cash equivalents increaseddecreased by ¥15.4¥75.7 billion to ¥142.5¥116.7 billion at the end of fiscal 2003,2005, from ¥127.1¥192.4 billion at the end of fiscal 2002.2004.

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Fiscal 2002 compared with fiscal 2001

Net cash provided by operating activities was ¥57.1 billion, a ¥5.9 billion increase compared to fiscal 2001, despite decreased net income. This mainly reflected changes in operating assets and liabilities. Trade payables increased as a result of increased purchase of materials particularly for DVD-R/RW drives and car navigation systems, although overall inventory decreased, reflecting our continued efforts to control and reduce inventories. Increased notes and accounts receivable reflected strong sales in the last few months of fiscal 2002, compared to the equivalent period of fiscal 2001.

Net cash used in investing activities was ¥51.1 billion for fiscal 2002, a ¥9.6 billion increase compared to fiscal 2001. The difference was partly the result of an increase in payment for purchase of fixed assets, reflecting investments to complete expansion of plasma display production facilities and two new plants in China. Decreased proceeds from sale of fixed assets and available-for-sale securities also accounted for part of the increase in net cash used in investing activities.

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Net cash used in financing activities was ¥4.2 billion in fiscal 2002, compared with ¥46.6 billion cash used for fiscal 2001. Financing activities for fiscal 2001 included redemption of ¥30.0 billion in unsecured bonds at maturity and reduction of other short-term and long-term borrowings.

As a result of these activities and the effect of exchange rate changes on cash and cash equivalents of overseas subsidiaries, cash and cash equivalents increased by ¥6.0 billion to ¥127.1 billion at the end of fiscal 2002, from ¥121.1 billion at the end of fiscal 2001.

Capital requirements

Our requirements for operating capital primarily are for the purchase of raw materials and parts for use in the manufacture ofmanufacturing our products. Also, operating expenses, including manufacturing expenses and SGAselling, general and administrative expenses, require a substantial amount of operating capital. Payroll and payroll-benefits, and marketing expenses, such as those for advertising and sales promotion, account for a materialprimary portion of operating expenses. Our expenditure for R&D is recorded as a part of various operating expenses, and payroll for R&D-related personnel accounts for a material portion of R&D expenses.

Contractual obligations

We believe that our ability to generate positive operating cash flows and commercial commitments

Theliquidity discussed in the following summarizes our contractual obligations at March 31, 2003.

                      
(Billions of yen)

       Payment Due by Period
       
       Less than            
   Total 1 year 1-3 years 3-5 years More than 5 years

Contractual obligations:                    
 Short-term debt  29.9   29.9             
 Long-term debt  33.2   1.0   20.4   0.5   11.3 
 Operating leases  9.6   3.4   3.9   1.3   1.0 
 Purchase commitment  7.6   7.6             

The ¥7.6 billion purchase commitment outstanding as of March 31, 2003 was for property, plantfinancial management section provide sufficient resources to fund future operating capital requirements and equipment and advertising. This included a part of our ¥60 billion capital expenditure plan in fiscal 2004. The planned increase in capital expenditure in fiscal 2004 from ¥40.8 billion in fiscal 2003 mainly reflects expansion of plasma display production facilities.

We provide guarantees to third parties who provide loans to affiliated companies and others. For each guarantee, we would have to pay the guaranteed amount, if they were to default on a payment within contract periods of 1 year to 10 years. The maximum potential amount of undiscounted future payments we could be required to make under the guarantee is ¥27.3 billion at March 31, 2003.

We provide for the estimated cost of product warranties against product defects at the time revenue is recognized. Estimates for the cost of product warranties are primarily based on historical information about failure rates and service costs including parts and labor. Warranty reserve at March 31, 2003 is ¥6.5 billion.

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expenditures.

Financial Managementmanagement

At present, funds required for operating capital and capital expenditure are generally financed through internally generated cash and debt or debtequity financing. With regard to debt financing, short-term debt financing with maturity of one year or less is utilized to fund operating capital requirements. Short-term borrowing is generally arranged locally in the currency in whichby each consolidated company carries outsubsidiary based on its operation.capital requirements. As of March 31, 2003,2005, short-term borrowings of ¥29.9¥33.2 billion comprised bank loanswere principally in nine different currencies, principally Japanese yen.yen, U.S. dollar, and euro. On the other hand, long-term borrowing to finance long-term funding requirements such as investment in production facilities, is generallyfinancing through debt and equity securities markets are arranged in Japan, on a fixed interest rate basis.and long-term borrowing from financial institutions is arranged locally by each consolidated subsidiary. As of March 31, 2003,2005, substantially all of the long-term debt of ¥33.2¥100.5 billion, including the portion due within one year, was fixed-rate yen borrowings and was comprised of ¥7.5¥61.8 billion loans principally from banks,zero coupon convertible bonds due 2011 including ¥1.8 billion unamortized issue premium, ¥15.0 billion unsecured bonds due 2005, ¥10.0 billion unsecured bonds due 2008, and capital lease obligations and other loans arranged locally.

During fiscal 2003,2004, we issued zero coupon convertible bonds due 2011 in aggregate principal amount of ¥60.0 billion to finance capital requirements for expansion of plasma display business and enhancement of distribution channels.
During fiscal 2005, we repurchased 5.1 million1,000,000 shares of PioneerPioneer’s common stock fromin the market for ¥11.5¥2.0 billion pursuant to the approval at the general shareholders’ meeting held in June 2002. Also, at the general shareholders’ meeting held on June 27, 2003, repurchasing of own shares of up to 5 million shares or up to ¥20 billion was approved up to the timeresolution of the conclusionboard of the next ordinary general meeting of shareholders to be helddirectors in June 2004, although the actual size of the repurchase will depend on our cash position and share price.

March 2005.

We believe that our sound financial position and ability to generate positive operating cash flows, together with uncommitted and unused credit lines of ¥236.8¥235.1 billion, provide sufficient resources to fund future requirements for operating capital and for capital expenditures to sustain the growth of Pioneer. Also, the parent company and its four subsidiaries in Japan and China have entered a three-year global credit facility agreement for the amount of ¥70.0 billion effective from May 2005. This will ensure that these companies in Japan and China have an efficient and stable financing for their operational funding needs.

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C. Research and development, patents and licenses, etc.

Our R&D activities have played a crucial role in the development of our business. Our R&D program currently centers on optical recording/playback,high-density recording, flat-panel displays, digital signal processing, information/communications, and core LSIs. In fiscal 2001, 20022003, 2004 and 2003,2005, our R&D expenses were ¥37,105¥45,388 million, ¥39,050¥51,483 million and ¥45,388¥55,897 million, respectively, or 5.8%6.7%, 5.9%7.3% and 6.4%7.6%, respectively, of our operating revenue. We currently plan to continue to spend more than 5%6% of operating revenue on R&D each year.

As of March 31, 2003, approximately 3,800 employees worldwide were engaged in research, product development, and production technique improvement.

Our research and development of new technologies is carried out mainly in Japan at the Corporate Research & Development Laboratories, as well as the AVOptical Disc & NetworkSystems Development Center, Information & Communication Development Center, PDP Development Center and PDPMobile Systems Development Center. At Pioneer Research Center USA, Inc. (“PRA”), one of our overseas wholly-owned subsidiaries: Pioneer Research Center USA, Inc.,subsidiaries, we are also actively engaged in research of new technologies, and development of system software related to digital TV and of digital network technologies. At another wholly-owned overseas subsidiary in the United Kingdom, Pioneer Digital Design Centre, Ltd., we are researching cutting-edge technologies related to digital TV for use in Europe. Product development and production improvement activities are the responsibility of each business unit, and are carried out in our various manufacturing facilities both in Japan and overseas.

Blu-ray DiscVenturing to Innovate Flexible Displays

In February 2002,

The Integrative Industry-Academia Partnership, including Mitsubishi Chemical Corporation, Rohm Co., Ltd. and Pioneer Corporation, with Kyoto University at the core, has developed two components for flexible displays: an organic light-emitting transistor (OLET) and the world’s first transparent substrate made of Bio Nanofiber with a nine-company consortium including Pioneer jointly announcedlow thermal expansion coefficient. Pioneer’s expertise in organic electronics devices has greatly contributed to this development.
The OLET has an electroluminescence (EL) function built into an organic transistor. Due to its embedded driver transistors and light-emitting devices, a next-generation large-capacity rewritable optical disc format, “Blu-ray Disc.” Using blue-violet laser beams, this format enables 23.3-, 25-display device comprised of OLETs requires substantially fewer components than a conventional organic EL display. The substrate, Bio Nanofiber Composite, reinforces transparent polymer with microscopic nanofibers derived from bacteria. It features a low thermal expansion to prevent circuit breakage or 27-gigabyte recording, rewritingdamage in the circuit mounting process. These innovations not only hold great promise to make display devices more light, flexible and playback on a one-sided 5-inch (12cm)-diameter disc, which is enough to hold more than two hours of digital high-definition video recording. In June 2002, the consortium published specificationsdurable; they also come at an opportune time for the Blu-ray Disc rewritable format,next digital generation of new mobile devices, e-books, e-newspapers, e-posters and began licensing itother display products coming through the commercial pipeline to gain traction in February 2003. In another collaboration, together with TDK Corporation, Pioneer has developed a write-once disc with a recording layer free of materials which may harm the environment, and highly compatible with the Blu-ray Disc rewritable format. This new write-once disc was presented in July 2002 at ISOM/ODS 2002 (Joint International Symposium on Optical Memory and Optical Data Storage), and in December 2002 at Eco-Products 2002, a Tokyo exhibition showcasing environment-friendly products and services.

Streaming Video Delivery in Broadband

Pioneer is developing technology for delivering video content through optical fiber in broadband communication environments. During fiscal 2003, five companies, including Nippon Telegraph and Telephone Corporation (NTT) and Pioneer, succeeded in interconnectivity tests among prototypes that employ the video-on-demand (VOD) control protocol, which enables viewers to watch requested video programs on demand. This is believed to be a major contribution to the standardization of streaming video delivery technologies, which is expected to enhance both the quantity and quality of online content and interactive services. Together with NTT, Pioneer has developed a technology for transferring digital high-definition video content at speeds as high as 25 Mbps, utilizing MPEG-2, an international standard for compression of video data, which is also used as a basic technology for DVDs. This is expected to enrich Internet video streaming with high-quality pictures and sound.

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global marketplace.

D. Trend information

The following is a description of the most significant recent trends in each of our business segments.

Home Electronics

Global demand for

Traditional audio/video products has been sluggish recently, which we believe has resulted incontinue to be exposed to downward price pressure and slower sales. This, in turn, has negatively impacted our production levels and our inventory. We have responded and expect to continue to respond to such downward pressure in sales and production through the introduction of new value-added products and models in Home Electronics, including home theater systems, DVD-related products and plasma displays.

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DVD products.recorders.As a result of the dramatic expansion of the market for DVD players, they have become commodity products and suffer from significant price competition. DVD has been one of our fastest growing product areas during the past several fiscal years, and we believe we are well-positioned to face the competition because of our accumulated expertise through LD development, our expected reduction of costs as a result of shifting production to China and our efforts to introduce new innovative, value-added products such as DVD recorders. Recently,Although the DVD recorder market has undergone rapid expansion,is expanding and our sales in it are increasing, we, exposed to falling prices, increasing competitors and evolving product functionality, have found it difficult to maintain a competitive advantage in this business. In order to regain competitiveness, we plan to shorten the development time by 30% by renovating IT infrastructure and enhancing software development efficiency. We aim for twice-a-year launches of new models simultaneously worldwide. We plan to cut manufacturing lead time and reduce inventory through a new production system which integrates all stages of DVD product has startedmanufacturing, from laser pickups to replace VCRs. Therefinished products, at our Dongguan facilities in China. We will thereby reduce costs and timely release attractive products that meet customer demands.
Recordable DVD drives.Our recordable DVD drives for PCs generate sales. However, competitors in Taiwan and South Korea are however,dropping prices aggressively on increasingly competitive products, so we cannot expect a numberreturn to earlier levels of competing digital recording disc formats:high profitability. We plan to increase our share and maintain profit margins for these products, as we will focus on slim drives for notebook computers and sell more drives to both the DVD-RW format commercialized by us, Sony, Sharp and others, the DVD-RAM format commercialized by Matsushita, Hitachi, Toshiba and others,OEM market and the DVD+RW format commercialized by Philipsconsumer market worldwide. We will also take advantage of the strong synergy between our recordable DVD drive business and others.

our home-use DVD recorder business.

Plasma displays.The large-screen display market for plasma displays has been expanding in recent years, and there are several manufacturers have started mass production of plasma displays that compete with our products. Each companyin Japan and South Korea. As competition for market shares is increasing investment and expanding production. Ashigher, the number of companies entering this market increases, it is expected that the unit price willproduct prices continue to decrease due to intensifying competition.rapidly. In particular, in the market for displays under the 40-inch size, plasma displays are also subject to increasingly intense competition from liquid crystal displays. Currently, demand for plasma displays consists of those for standard models and high-definition models. We expect that shifting from analog TV broadcasting to digital will increase demand for high-definition plasma displays. As a result of this trend, we plan to expand production of our plasma display line, while limitingfocus on new products to 50-such as 40-inch and 43-inchlarger models, withwhich have higher resolution.

Set-top boxes. Recently, digital terrestrial

Japan Electronics and satellite broadcasts have become increasingly popularInformation Technology Industries Association (“JEITA”) forecasts an approximately 28% increase in consumer DVD player and DVD recorder sales worldwide, from 85 million units in 2004 to 109 million in 2009, and strong growth in recordable DVD drives from 54 million units in 2004 to 127 million units in 2007 worldwide. In responseIt also forecasts that sales of plasma displays worldwide will increase 5 times, from 2.3 million units in 2004 to this trend, we put greater emphasis on developing and marketing digital set-top box models. In fiscal 2000, we started shipping digital cable-TV set-top boxes11.6 million in the U.S. We have also been providing digital DBS set-top boxes in Europe since fiscal 1998, and in fiscal 2001 we started distributing digital DBS set-top boxes and digital cable-TV set-top boxes in Japan. Since we supply set-top boxes to business customers, our sales in these areas may fluctuate depending on the demand from those customers.

2009.

Car Electronics

Severe competition in the car electronics business worldwide has led to strong downward pressure on prices. However, the popularity of car navigation products,systems, which we believe is a major area of our operations, continues to increase. For example, salesIn Japan, the increase in demand for car navigation systems has been conspicuous and the markets in North America and Europe show signs of our advanced HDD models and our affordable, easy-to-operate DVD models remain strong. These new models have been well received by consumers due to their attractive and convenient features. With its outstanding technologies, Pioneer remains a leaderexpansion. In both markets we introduced in the car navigation market; however, our competitors have started commercializing models that are similar to our products. In November 2002, we released in the consumer market the world’s firstspring of 2004 compact 1-DIN-sized units featuring all car navigation system functions as well as those for CD/MP3/DVD-Video playback. We plan to integrate functions for car navigation, audio/video control and information gathering inside and outside the vehicle, creating systems that incorporates a data communication module for access to the latest map data. Also inare compatible with both home and mobile environments. In the car audio business, we plan to widenwill strengthen our market share with new products and innovations,activity in growing markets such as car CD players with OEL displays.

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Brazil, Russia, India and China.

There is also a trend in the car electronics industry of increasedthat OEM sales to car manufacturers. Pioneer intendsmanufacturers are increasing. We intend to increase itsour efforts to market itselfourselves towards such car manufacturers and strengthen itsour foothold in OEM sales as well.
JEITA forecasts that sales of car navigation systems worldwide will increase approximately 2 times, from 6 million units in 2004 to 11 million in 2009.

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Patent Licensing

In the current patent business environment, nearly every company follows a policy of actively protecting their patent rights, and the number of patent lawsuits has increased considerably. The value of patents is increasingly recognized, and companies are seeking to maximize the utility of their patents through the transfer or licensing of patent rights. While poor economic conditions favor purchasers of patent rights, purchase prices generally are increasing because of the growing importance of such intellectual property.

Our royalty revenue from the worldwide licensing of worldwide patents relating to laser optical disc technologies has started to declinedeclined substantially from previous years, as a significant portion of our patents in Japan and Europe expired by the end of fiscal 2003. We intend to attempt to reduce the decline in royalty revenue by acquiring patents from third parties and licensing such patents, and also by licensing patents for third parties as a licensing agent. We do not, however, expect that the revenue, if any, from such new patents/agencies will be sufficient to offset the decrease in royalty revenue resulting from the expiration of our existing patents.has expired. See “Item 4.B. Business overview–overview—Nature of operations–operations—Patent licensing” for more information on our patent licensing business.

Others

DVD-R/RW drives.The computer industry is currently experiencing severe pricing pressure, strong demand for higher-performance products and short product life. To counter these trends, we are focusing on high-value added products such as DVD-R/RW drives, both for PC makers and for the consumer market. DVD-R/RW drives can record, both on a write-once DVD-R disc and a rewritable DVD-RW disc, up to seven times as much data as on a CD-R or CD-RW disc. In fiscal 2003, we introduced new DVD-R/RW models which are capable of 4X recording for DVD-R discs and 2X recording for DVD-RW discs, respectively. There are two other competing formats, the DVD-RAM format and the DVD+RW format, in the DVD drive market. Also, in June 2003 we began introducing recordable DVD drives for PC use, which are compatible with DVD-R, -RW, +R and +RW discs, to worldwide markets.

OELOLED displays. With the entry of other companies, market competition in OELOLED displays is becoming even more intense, while each company in this market is proceeding with the development of full-color OELOLED displays. To meet

E. Off-balance sheet arrangements
We provide guarantees to third parties who provide loans to our affiliated companies. For each guarantee, we would have to pay the competition,guaranteed amount, if our affiliated companies were to default on a payment within contract periods of one year to eight years. The maximum potential amount of undiscounted future payments we entered into strategic alliances with Semiconductor Energy Laboratory Co., Ltd.could be required to make under the guarantee is ¥25.4 billion as of March 31, 2005. Out of this ¥25.4 billion, ¥25.0 billion is a guarantee for ELDis, Inc. which manufactures and Sharpmarkets thin film transistor substrates for active-matrix OLED, which is one of our new products. ELDis, Inc. is 47.5% owned by Tohoku Pioneer Corporation, in fiscal 2001,a 67% owned subsidiary and developed active-matrix full-color OEL displays.is accounted for by the equity method of accounting.

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F. Tabular disclosure of contractual obligation
The following summarizes our contractual obligations at March 31, 2005.
                     
      Payment Due by Period
      Less than          More than 
  Total  1 year  1-3 years  3-5 years  5 years 
  (In billions of yen) 
Contractual obligations:                    
Long-term debt  98.7   19.3   6.0   11.4   62.0 
Operating leases  19.7   6.3   8.5   2.3   2.6 
Purchase commitment  4.0   4.0             
Interest payments  1.9   0.7   0.9   0.2   0.1 
Contribution to defined benefit plans  6.5   6.5             
   
Notes:1.Total long-term debt of ¥98.7 billion does not include ¥1.8 billion unamortized issue premium on convertible bonds.
2.Long-term debt includes capital lease obligations.
3.Contractual obligations do not include ¥0.7 billion deferred income which is presented as other long-term liabilities on the consolidated balance sheet.
4.The amount that the Company will contribute under its defined pension plans are based on a number of factors, primarily rate of salary increase and the number of employees. As such, the Company has estimated the amount of such contribution for the year ending March 31, 2006 and not the contribution for the years thereafter.
The ¥4.0 billion purchase commitment outstanding as of March 31, 2005 was for property, plant and equipment and advertising. This included a part of our ¥47.0 billion capital expenditure plan in fiscal 2006. The planned decrease in capital expenditures from ¥63.9 billion in fiscal 2005 mainly reflects decrease of investment in production facilities for plasma displays.
New Accounting Standards
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the language used in Accounting Research Bulletin No. 43 with respect to accounting for abnormal amounts of idle facility expenses, freight, handling costs and spoilage. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005, and is required to be adopted by the Company effective April 1, 2006. The adoption of this standard is not expected to have any material impact on the Company’s consolidated statements of operations or financial position.
Exchanges of Nonmonetary Assets
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of Accounting Principles Board (“APB”) Opinion No. 29,” which will become effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. APB Opinion No. 29 generally requires that exchanges of nonmonetary assets be measured based on fair value of the assets exchanged but provided an exception for nonmonetary exchanges of similar productive assets, which did not result in a change in carrying value for the new asset acquired even if the cash flows

49


resulting from the exchange would change significantly. SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Nonmonetary exchanges lack commercial substance if the cash flows to the entity will not change significantly as a result of the exchange. The adoption of this standard is not expected to have any material impact on the Company’s consolidated statements of operations or financial position.
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” The revised SFAS No. 123 supersedes APB Opinion No. 25, which requires recognition of an expense when goods or services are provided, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS No. 123. The adoption of this standard is not expected to have any material impact on the Company’s consolidated statements of operations or financial position because the Company accounts for its stock-based compensation agreements using the fair value based method, not the intrinsic value method prescribed by APB Opinion No. 25.
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
In March 2004, the EITF confirmed as a consensus EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). The objective of this issue is to provide guidance on determining when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. In September 2004, the FASB issued FASB Staff Position EITF 03-1-1 that delays the effective date for the measurement and recognition guidance included in EITF 03-1. The disclosures required by EITF 03-1 have not been deferred and are effective for the annual periods ending after June 15, 2004.
Accounting for Conditional Asset Retirement Obligations
In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143” FIN No.47 clarifies that the term “conditional asset retirement obligation” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. SFAS No. 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company has not completed the study of what effect FIN No. 47 will have on its financial position and results of operations.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 replaces APB No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial

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Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle. SFAS No. 154 also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with earlier adoption permitted. Accordingly, the Company can not reasonably estimate the ultimate impact of SFAS No. 154.

Item 6. Directors, Senior Management and Employees

A. Directors and senior management

Pioneer’s Directors, Executive Officers and Corporate Auditors as of JulySeptember 1, 2003,2005, and their pertinent information, such as position and business experience, are as follows:

Directors
     
Name Current Position  
(Date of birth) (Month and year of expiration) Prior Position



Kanya Matsumoto
(June 12, 1930)
 Chairman and Representative Director
(June 2004)2006)
 
June 1996:
Vice Chairman and Representative Director
     
Kaneo Ito
(Apr. 30, 1936)
 President and Representative Director;
Chief Executive Officer
(June 2004)2006)
 
June 1991:
Senior Managing Director and Representative Director; General Manager of International Business Group; and in charge of overseas operations and Public Relations Division
     
Yoshimichi InadaTamihiko Sudo
(Sept. 8, 1936)Apr. 28, 1947)
 Executive Vice President and Representative Director; Chief Financial Officer; and in charge of technologies, productionCorporate Strategy Planning Group, Corporate Management Group, Export Management and quality controlQuality Control in general
(June 2004)2006)
 
June 2002:2004:
Executive Vice President and Representative Director; in charge of technologies, production and quality control in general; and in charge of Components Business Division and Strategic IT Division
Katsuhiro Abe
(Nov. 16, 1936)
Executive Vice President and Representative Director;
Chief Financial Officer;
in charge of administration in general
(June 2004)
June 2001:
Senior Managing Director and Representative Director;
Chief Financial Officer;
in charge President of administration in general; and General Manager of Corporate Planning DivisionPioneer’s Mobile Entertainment Company
     
Akira Niijima
(Mar. 9, 1944)
 Senior Managing Director and Representative Director; Presidentin charge of Pioneer’s Home Entertainment CompanyJapanese domestic subsidiaries
(June 2004)2006)
 June 2004:
Jan. 2001:
Senior Managing Director and Representative Director; PresidentChief Financial Officer; and in charge of Pioneer’s Home Entertainment Companyadministration and export management in general

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Name Current Position  
(Date of birth) (Month and year of expiration) Prior Position

Hajime Ishizuka
(May 3, 1947)
 
Senior Managing Director and Representative Director; President of Pioneer��s Home Entertainment Business Company and AV Business Company; and in charge of Procurement Group
(June 2006)
 
June 2003:
Director; President of Pioneer’s Components Business Company; and in charge of International Business Division
Takashi Kobayashi
Osamu Yamada
(Sept. 27, 1940)Mar. 16, 1944)
 Senior Managing Director; in chargeGeneral Manager of Research & Development Group and Corporate Communications Division, Customer Satisfaction Planning and Coordination Division, Intellectual Property Division, and BusinessResearch & Development DivisionLaboratories
(June 2004)2006)
 June 2003:
Apr. 2000:
Managing Director; in chargeGeneral Manager of Research & Development Group and Corporate Communications Division, Customer Satisfaction Planning and Coordination Division, Intellectual Property Division, Division of Environmental Preservation, and BusinessResearch & Development Division
Laboratories
     
Tadahiro Yamaguchi
(Mar. 24, 1946)
 Managing Director; Executive Vice President of Pioneer’s Home EntertainmentPlasma Display Business Company (in charge of technologies production and quality control)production); in charge of Cable & Satellite Systems Division of Pioneer’s Home Entertainment Company; and Plant Manager of TokorozawaOhmori Plant of Pioneer’s Home Entertainment Company
(June 2004)
2006)
 June 2002:
Nov. 2001:
Managing Director; Executive Vice President of Pioneer’s Home Entertainment Company (in charge of technologies, production and quality control); in charge of Cable & Satellite Systems Division of Pioneer’s Home Entertainment Company;Division; and Plant Manager of Tokorozawa Plant of Pioneer’s Home Entertainment Company
     
Satoshi Matsumoto
(Apr. 15, 1954)
 Managing Director; General Manager of Division of Environmental Preservation Group and Environmental Preservation Division
(June 2004)2006)
 
June 1998:
Director; General Manager of Division of Environmental Preservation
Tamihiko Sudo
(Apr. 28, 1947)
Managing Director; President of Pioneer’s Mobile Entertainment Company
(June 2004)
June 2002:
Senior Executive Officer; President of Pioneer’s Mobile Entertainment Company
Osamu Yamada
(Mar. 16, 1944)
Managing Director; General Manager of Research and Development Group; and General Manager of Corporate Research and Development Laboratories
(June 2004)
June 2002:
Senior Executive Officer; General Manager of Research and Development GroupEnvironmental Preservation Division
     
Koichi Shimizu
(Feb. 3, 1944)
 Managing Director; General ManagerChairman of Production ManagementPioneer China Holding Co., Ltd.
(June 2006)
June 2004:
Managing Director; in charge of technologies, production and Coordination Division;quality control in general; General Manager of Procurement Center; and in charge of Strategic IT Division of Pioneer
(June 2004)
 
Yoichi Sato
(Jan. 15, 1950)
Managing Director; Deputy General Manager of Research & Development Group and General Manager of PDP Development Center
(June 2001:2006)
July 2004:
Senior
Executive Officer; Managing DirectorDeputy General Manager of Pioneer Electronics Asiacentre Pte. Ltd.Research & Development Group and General Manager of PDP Development Center

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49


     
Name Current Position  
(Date of birth) (Month and year of expiration) Prior Position

Akira Haeno
(Feb. 14, 1949)
 

Hajime Ishizuka
(May 3, 1947)
Managing Director; President of Pioneer’s Components Business Company; and in charge of International Business DivisionMobile Entertainment Company
(June 2004)2006)
 
June 2002:2004:
Senior
Executive Officer; Plant Manager of Kawagoe Plant; and General Manager of Components Business Division; and in chargeProduction Division of International Business DivisionKawagoe Plant of Pioneer’s Mobile Entertainment Company
     
Tatsuhiro Ishikawa
(Apr. 4, 1939)
 Director
(June 2004)2006)
 
Dec. 2001 to present:
Attorney-at-Law
Shunichi Sato
(Feb. 10, 1941)
Director
(June 2006)
Apr. 2000:
Japanese Ambassador Extraordinary and Plenipotentiary to Belgium

Executive Officers
     
Name Current Position  
(Date of birth) (Month and year of expiration) Prior Position



Masaru Saotome
(Aug. 20, 1944)
 Senior Managing Executive Officer; President of Pioneer’s Plasma Display Business Company
(June 2006)
June 2003:
Senior Managing Executive Officer; Executive Vice President of Pioneer’s Home Entertainment Company (in charge of sales and marketing); and General Manager of Display Business Division of Pioneer’s Home Entertainment Company
(June 2004)
July 2002:
Senior Executive Officer; Executive Vice President of Pioneer’s Home Entertainment Company (in charge of sales and marketing); and General Manager of Display Business Division of Pioneer’s Home Entertainment Company
     
Kazunori Yamamoto
(Oct. 21, 1942)
 Senior Managing Executive Officer; General Manager of International Business Group
(June 2006)
June 2001:
Senior Executive Officer; President of Pioneer North America, Inc.
(June 2004)
June 1999:
Executive Officer; President of Pioneer North America, Inc.
Shungo Minato
(Apr. 11, 1943)
Senior Executive Officer; in charge of Corporate Planning Division, General Administration Division and Personnel Division
(June 2004)
June 2001:
Senior Executive Officer; Chairman and Managing Director of Pioneer Europe NV
Kiyoshi Uchida
(Mar. 28, 1951)
Senior Executive Officer; President of Pioneer’s Industrial Solutions and Entertainment Company; and Plant Manager of Ohmori Plant
(June 2004)
Feb. 2003:
Senior Executive Officer; in charge of Business Systems Division
     
Seiichiro Kurihara
(Mar. 15, 1943)
 Senior Executive Officer; General Manager of Intellectual Property Division of Research & Development Group
(June 2004)2006)
 
June 2001:
Executive Officer; General Manager of Intellectual Property Division

50


NameCurrent Position
(Date of birth)(Month and year of expiration)Prior Position



Koki Aizawa
(Dec. 19, 1944)
Executive Officer; General Manager of External Relations Division
(June 2004)
June 2001:
Executive Officer; Deputy General Manager of Research and Development Group; and General Manager of Corporate Research and Development Laboratories
     
Toshihiko NorizukiMasao Kawabata
(May 23, 1945)Aug. 10, 1948)
 Executive Officer; Managing Director of Pioneer China Holding Co., Ltd.
(June 2004)
June 2001:
Senior Executive Officer; General Manager of Business SystemsCorporate Branding and Communications Division and Plant
(June 2006)
June 2001:
Executive Officer; General Manager of Ohmori PlantCorporate Communications Division

53


NameCurrent Position
(Date of birth)(Month and year of expiration)Prior Position
Yoshio Taniyama
(Nov. 9, 1948)
Senior Executive Officer; General Manager of Corporate Planning Division
(June 2006)
June 2001:
Executive Officer; General Manager of Finance Division
Hideki Okayasu
(May 12, 1950)
Senior Executive Officer; General Manager of Finance and Accounting Division
(June 2006)
June 2001:
Executive Officer; General Manager of Accounting Division
     
Buntarou Nishikawa
(Mar. 24, 1946)
 Executive Officer; Executive Vice President of Pioneer’s Mobile Entertainment Company; and General Manager of OEM Sales Division of Pioneer’s Mobile Entertainment Company
(June 2004)2006)
 
June 2001:
Executive Officer; General Manager of Domestic Sales Division of Pioneer’s Mobile Entertainment Company
     
Osamu Takada
(July 27, 1948)
 Executive Officer; General Manager of Personnel Division
(June 2004)2006)
 
June 1998:
General Manager of Personnel Division
Masao Kawabata
(Aug. 10, 1948)
Executive Officer; General Manager of Corporate Communications Division
(June 2004)
Apr. 2000:
General Manager of Corporate Communications Division
     
Sumitaka Matsumura
(Oct. 10, 1948)
 Executive Officer; Deputy General Manager of Research and& Development Group; and General Managerin charge of AVOptical Disc & NetworkSystems Development Center
(June 2004)2006)
 
Jan. 2001:
Deputy General Manager of Research and& Development Group; and General Manager of AV & Network Development Center
     
Yoshio Taniyama
(Nov. 9, 1948)
Executive Officer; General Manager of Finance Division
(June 2004)
Sept. 1999:
General Manager of Finance Division
Hideki Okayasu
(May 12, 1950)
Executive Officer; General Manager of Accounting Division
(June 2004)
July 2000:
General Manager of Accounting Division

51


NameCurrent Position
(Date of birth)(Month and year of expiration)Prior Position



Chojuro Yamamitsu
(Mar. 26, 1946)
 Executive Officer; Deputy General Manager of Environmental Preservation Group (in charge of Eco Products)
(June 2006)
Sept. 2002:
Executive Officer; Deputy General Manager of Research and& Development Group; General Manager of Engineering; and in charge of Information & Communication Development Center and PDP Development Center
(June 2004)
Apr. 2002:
Deputy General Manager of Research and Development Group; and General Manager of Engineering
Masaharu Yoshino
(Nov. 22, 1945)
Executive Officer; Plant Manager of Kawagoe Plant of Pioneer’s Mobile Entertainment Company
(June 2004)
July 2000:
Plant Manager of Kawagoe Plant of Pioneer’s Mobile Entertainment Company
     
Kenji Sato
(Aug. 29, 1947)
 Executive Officer; General Manager of General Administration Division
(June 2004)2006)
 
June 1998:
General Manager of General Administration Division
Yoichi Sato
(Jan. 15, 1950)
Executive Officer; General Manager of Engineering Division of Display Business Division of Pioneer’s Home Entertainment Company
(June 2004)
July 2002:
General Manager of Engineering Division of Display Business Division of Pioneer’s Home Entertainment Company
Toshiyuki Ito
(Oct. 17, 1950)
Executive Officer; Managing Director of Pioneer Electronics Asiacentre, Pte. Ltd.
(June 2004)
July 2002:
Managing Director of Pioneer Electronics Asiacentre, Pte. Ltd.
     
Susumu Kotani
(Apr. 12, 1950)
 Executive Officer; Chairman & Managing Director of Pioneer Europe NV
(June 2004)2006)
 
Sept. 2002:
Managing Director of Pioneer Europe NV

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52


Corporate Auditors

     
Name Current Position  
(Date of birth) (Month and year of expiration) Prior Position

Tsutomu Haga
(June 2, 1948)
 
Executive Officer; President & Chief Operating Officer of Pioneer North America, Inc.
(June 2006)
 
July 2003:
President & Chief Operating Officer of Pioneer Electronics (USA) Inc.
Kenji Tokuyama
(Dec. 16, 1945)
Executive Officer; Executive Vice President of Plasma Display Business Company (in charge of OEM); and President of Pioneer Plasma Display Corporation
(June 2006)
Jan. 2003:
President of NEC Plasma Display Corporation
Kaoru Sato
(July 27, 1948)
Executive Officer; Vice President of Home Entertainment Business Company; and Plant Manager of Tokorozawa Plant
(June 2006)
June 2004:
President of Components Business Company of Home Entertainment Business Company
Keiichi Yamauchi
(Apr. 12, 1952)
Executive Officer; General Manager of Mobile Systems Development Center of Research & Development Group
(June 2006)
Nov. 2003:
General Manager of Mobile Systems Development Center of Research & Development Group
Kazumi Kuriyama
(Sept. 12, 1953)
Executive Officer; Deputy General Manager of Corporate Research & Development Laboratories of Research & Development Group
(June 2006)
Sept. 2002:
General Manager of Nano Process Technology Department of Corporate Research & Development Laboratories of Research & Development Group
Corporate Auditors
NameCurrent Position
(Date of birth)(Month and year of expiration)Prior Position
Makoto Koshiba
(Nov. 21, 1943)
 Corporate Auditor (full time)
(June 2007)
 
Sept. 1999:
Director; General Manager of Accounting Division; in charge of Finance Division
     
Shinji Yasuda
(June 10, 1945)
 Corporate Auditor (full time)
(June 2007)
 
July 2001:
Director; Managing Director of Pioneer China Holding Co., Ltd.

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NameCurrent Position
(Date of birth)(Month and year of expiration)Prior Position
Terumichi Tsuchida
(Aug. 22, 1921)
 Corporate Auditor
(June 2004)2008)
 
July 1998 to present:
Advisor of Meiji Yasuda Life Insurance Company
     
Isao Moriya
(Sept. 5, 1937)
 Corporate Auditor
(June 2007)
 
Mar. 1968 to present:
Certified Public Accountant
     
Keiichi Nishikido
(May 2, 1953)
 Corporate Auditor
(June 2007)
 
Jan. 1994 to present:
Attorney-at Law;
Attorney-at-Law; Managing Partner of Kohwa Sohgoh Law Offices, Japan

All of the above persons, with the exception of Messrs. Tatsuhiro Ishikawa, Shunichi Sato, Terumichi Tsuchida, Isao Moriya and Keiichi Nishikido devote themselves full time to our business.

There is no

None of the persons listed above was selected as a director, corporate auditor or member of senior management pursuant to an arrangement or understanding between any Director, Executive Officerwith our major shareholders, customers, suppliers or Corporate Auditor and any other person pursuant to which he or she was elected as Director, Executive Officer or Corporate Auditor.

Mr. Kanya Matsumoto is the uncle of Mr. Satoshi Matsumoto. others.

Mr. Kaneo Ito is married to a first cousin of Mr. Kanya Matsumoto. Mr. Satoshi Matsumoto is a nephew of Mr. Kanya Matsumoto. Mr. Yoshio Taniyama is a first cousin of Mr. Kanya Matsumoto and a brother-in-law of Mr. Kaneo Ito.

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B. Compensation

The aggregate amount of compensation (including bonuses and stock-based compensation) paid by Pioneer to all Directors, Executive Officers and Corporate Auditors of Pioneer as a group for fiscal 20032005 totaled ¥965¥1,136 million. Also, as part of Pioneer’s incentive compensation, arrangements for Directors and Executive Officers, Pioneer has issued bonds with detachable warrants in Japan for the periods from fiscal 1999 to 2002. Upon the issuance of bonds with detachable warrants by Pioneer, it distributed the warrants at fair market value to both Directors and Executive Officers of Pioneer, and certain other executive employees as a part of their remuneration. In fiscal 2003, Pioneer changed its incentive compensation arrangements and issued share acquisition rights for its shares of common stock to Directors, Executive Officers, and certain employees, and certain directors/officers of certain of its subsidiaries.subsidiaries from fiscal 2003. See “Item 6.E. Share ownership” for further information.

The aggregate amount set aside as lump-sum severance indemnities by Pioneer during fiscal 20032005 for Directors, Executive Officers and Corporate Auditors of Pioneer totaled ¥100¥790 million. The aggregate amount is calculated by the formula as defined in the regulations of Pioneer concerning the retirement allowance. Provision is made for lump-sum severance payments for Directors, Executive Officers and Corporate Auditors of Pioneer on a basis considered adequate for such future payments as may be approved by the shareholders. (See Note 810 in “Notes to Consolidated Financial Statements.”)

C. Board practices

Pioneer’s Articles of Incorporation provide for a Board of Directors of three or more members and for three or more Corporate Auditors. All Directors and Corporate Auditors are elected at general meetings of shareholders. In general, under the Articles of Incorporation of Pioneer, the term of office of Directors expires at the conclusion of the ordinary general meeting of shareholders held with respect to the last closing of accounts within one year (with regard to the term of office of Directors elected at the ordinary general meeting of shareholders with respect to the business year ended March 31, 2002, two years) after their assumption of office and in the case of Corporate Auditors, within four years (with regard to the term of office of Corporate Auditors elected at or prior to the ordinary general meeting of shareholders with respect to the business year ended March 31, 2002, three years) after their assumption of office; however, Directors and Corporate Auditors may serve any number of consecutive terms. With respect to eachFor information regarding the expiration of the term of office for each of the Directors and Corporate Auditors, see “Item 6.A. Directors and senior management.”

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The Directors constitute the Board of Directors, which has the ultimate responsibility for administration of our affairs. The Board of Directors may elect from among its members a Chairman and Director, a Vice Chairman and Director, a President and Director, one or more Executive Vice Presidents and Directors, Senior Managing Directors and Managing Directors. From among the Directors referred to above, the Board of Directors elects one or more Representative Directors. Each of the Representative Directors has the authority to individually to represent Pioneer in the conduct of its affairs.

Pioneer introduced a Corporate Executive Officer (shikko yakuin) system in June 1999 to improve management efficiency and speed up decision-making. Executive Officers are basically elected at the meeting of the Board of Directors held immediately after the ordinary general meeting of shareholders. In general, the term of office of Executive Officers expires at the conclusion of the ordinary general meeting of shareholders held with respect to the last closing of accounts within one year after their assumption of office. With respect to eachFor information regarding the expiration of the term of office of each of the Executive Officers, see “Item 6.A. Directors and senior management.” The Board of Directors may elect from among Executive Officers one or more Senior Managing Executive Officers and Senior Executive Officers. Each of the Executive Officers has the authority to individually to operate businesses of which he or she is in charge under the control of the Board of Directors and Representative Directors.

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The Corporate Auditors of Pioneer are not required to be certified public accountants. However, at least one of the Corporate Auditors is required to be a person who has not been a Director, Executive Officer,director, executive officer, general manager or employee of Pioneer or any of its subsidiaries during the five-year period prior to his or her election as a Corporate Auditor. After the conclusion of the ordinary general meeting of shareholders to be held with respect to the first fiscal year ending on and after May 1, 2005, at least half of the Corporate Auditors will be required to be persons who have not been a Director, Executive Officer,director, executive officer, general manager or employee of Pioneer or any of its subsidiaries at any time prior to their election as Corporate Auditors. The Corporate Auditors may not at the same time be Directors, Executive Officers,directors, executive officers, general managers or employees of Pioneer or any of its subsidiaries.

Each Corporate Auditor has the statutory duty to supervise the administration by the Directors of Pioneer’s affairs and also to examine the consolidated and non-consolidated financial statements and business reportsreport to be submitted by the Board of Directorsa Representative Director at the general meeting of shareholders. They shall attend meetings of the Board of Directors but are not entitled to vote. In addition to Corporate Auditors, independent certified public accountants or an audit corporation must be appointed by general meetings of shareholders. Such independent certified public accountants or audit corporation have, as their primary statutory duties, the duties to examine the consolidated and non-consolidated financial statements proposed to be submitted by the Board of Directorsa Representative Director at general meetings of shareholders and to report their opinion thereon to the Board of Corporate Auditors and the Directors.

Representative Director.

The Corporate Auditors constitute the Board of Corporate Auditors. The Board of Corporate Auditors has a statutory duty to prepare and submit its audit report to the Board of Directorsa Representative Director each year. A Corporate Auditor may note his or her opinion in the audit report if his or her opinion is different from the opinion expressed in the audit report. The Board of Corporate Auditors is empowered to establish audit principles, method of examination by Corporate Auditors of Pioneer’s affairs, and financial position and other matters concerning the performance of the Corporate Auditors’ duties.

There are no contractual arrangements providing for benefits to Directors upon termination of service. Also see “Item 10.B. Memorandum and articles of association–association—Directors.”

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Significant Differences in Corporate Governance Practices Between Pioneer Corporation and U.S. Companies Listed on the NYSE
Companies listed on the NYSE must comply with certain listing standards regarding corporate governance (“NYSE Corporate Governance”). Listed companies that are foreign private issuers, such as Pioneer, however, are permitted to follow home country practices in lieu of NYSE Corporate Governance. Pioneer’s corporate governance practices which comply with Japanese laws, regulations and stock exchange rules, and NYSE Corporate Governance followed by U.S. listed companies have the following significant differences:
Directors
Pioneer currently has two (2) non-executive directors on its board of directors who satisfy the requirements of “outside directors” under the Commercial Code of Japan. “Outside director” is defined as a director who does not engage in the execution of business operations of a company and who (i) has not been a director responsible for the execution of business operations, executive officer, manager or employee of the company or any of its subsidiaries, and (ii) is not a director responsible for the execution of business operations or executive officer of any subsidiary of the company, and (iii) is not a manager or other employee of the company or any of its subsidiaries. The Commercial Code of Japan and related legislation (including the Law concerning Exceptional Measures to the Commercial Code with respect to Auditing, etc. of Joint Stock Corporations (the “Special Exception Law”), and collectively, the “Code”) do not require Japanese companies with boards of corporate auditors, such as Pioneer, to have any independent (in the meaning given by the NYSE listing standards) or outside (in the meaning given by the Code) directors on their boards of directors. Consistent with most Japanese companies, but unlike NYSE Corporate Governance, Pioneer’s non-management directors do not hold regularly scheduled sessions without management. Moreover, the Code does not require, and accordingly Pioneer does not have, an internal corporate body or committee comprised of only independent or outside directors.
Committees
Under the Code, Pioneer has elected to structure its corporate governance system as a company with a board of corporate auditors, which has a statutory duty to monitor, review and report on the administration of the affairs as well as accounts of Pioneer. Pioneer, consistent with other Japanese companies with boards of corporate auditors, but unlike NYSE Corporate Governance, does not have specified committees, including those that are responsible for director nomination, corporate governance and executive compensation.
Pursuant to the Code, Pioneer’s board of directors nominates and submits a proposal for election of directors for shareholder approval. The shareholders elect directors by a simple majority of votes at Pioneer’s general meeting of shareholders. The Code requires that the total amount of remuneration to be paid to all directors and the total amount of remuneration to be paid to all corporate auditors must be determined by a resolution of the general meeting of shareholders, unless their remuneration is provided for in the Articles of Incorporation. The distribution of remuneration among directors is broadly delegated to the board of directors and the distribution of remuneration among corporate auditors is determined by consultation among the corporate auditors.
Audit Committee
Pioneer avails itself of paragraph (c) (3) of Rule 10A-3 of the U.S. Securities Exchange Act of 1934 as amended, which provides a general exemption from the audit committee requirements for foreign

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private issuers with a board of corporate auditors, subject to certain requirements which continue to be applicable under Rule 10A-3.
Consistent with the requirements of the Code, Pioneer elects its corporate auditors by a resolution at a general meeting of shareholders. Pioneer currently has five (5) corporate auditors, which exceeds a minimum of three (3) corporate auditors required by the Code.
Unlike NYSE Corporate Governance, the Code, among others, does not require corporate auditors to have expertise in accounting or other special knowledge and experience. Under the Code, the board of corporate auditors may determine the auditing policies, method of investigating the conditions of the business and the assets of a company, and may resolve other matters concerning the execution of the corporate auditor’s duties, prepare corporate auditors’ reports and give consent to proposals of the nomination of corporate auditors and accounting auditors. Corporate auditors may not at the same time be directors, executive officers, managers or employees of Pioneer or any of its subsidiaries.
Unlike NYSE Corporate Governance, the Special Exception Law currently requires at least one of the corporate auditors of a company must be a person who has not been a director, executive officer, manager or employee of the company or any of its subsidiaries during the five-year period prior to such corporate auditor’s election. However, after the conclusion of the ordinary general meeting of shareholders to be held with respect to the first fiscal year ending on and after May 1, 2005, at least half of the corporate auditors must be persons who have not been directors, executive officers, managers or employees of the company or any of its subsidiaries at any time prior to such corporate auditors’ election. Pioneer already has, out of a total of five (5) corporate auditors, three (3) “outside auditors” who satisfy such new requirements.
Corporate Governance Guidelines
Unlike NYSE Corporate Governance, under Japanese laws and regulations, including the Code and the Securities and Exchange Law and stock exchange rules, Pioneer is not required to adopt or disclose corporate governance guidelines. However, Pioneer is required to disclose policies and the present status of its corporate governance in its annual securities report and certain other disclosure documents in accordance with the Securities and Exchange Law of Japan and regulations thereunder, and stock exchange rules in respect of timely disclosure.
Code of Business Conduct and Ethics
Unlike NYSE Corporate Governance, under Japanese laws and regulations, including the Code and the Securities and Exchange Law and stock exchange rules, Pioneer is not required to adopt or disclose a code of business conduct and ethics for directors, officers and employees. However, Pioneer maintains a “Pioneer Group Code of Conduct” which Pioneer believes is consistent with the code of ethics described under Section 406 of the U.S. Sarbanes-Oxley Act of 2002. See “Item 16B. Code of Ethics.”
Shareholder Approval of Equity Compensation Plans
Unlike NYSE Corporate Governance, in which material revisions to equity-compensation plans of the listed companies are subject to shareholder approval, pursuant to the Code, if Pioneer desires to adopt an equity-compensation plan in which stock acquisition rights are granted on specially favorable terms to the plan’s recipients, then Pioneer must obtain shareholder approval by a “special resolution” of a general meeting of shareholders, where the quorum is one-third of the total number of voting rights and the approval of at least two-thirds of the voting rights represented at the meeting is required.

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D. Employees

The following table sets forth the number of our employees at the end of the period indicated.
             
  Year ended March 31 
  2003  2004  2005 
Number of employees  34,656   36,360   39,362 
          
             
  Year ended March 31
  
  2001 2002 2003
  
 
 
Number of employees  28,871   31,220   34,656 
   
   
   
 

Pioneer and sixnine of its subsidiaries in Japan have their respective labor unions for the employees of each company. Each such labor union is affiliated with the Japanese Electrical Electronic & Information Union. All employees except management, supervisory and certain other employees must become union members. We have not been materially affected by any work stoppages or difficulties in connection with labor negotiations or disputes and consider our labor relations to be good.

55


E. Share ownership

The total number of shares of Pioneer’s common stock owned by our Directors, Executive Officers and Corporate Auditors as a group as of March 31, 2003June 30, 2005 is as follows:
         
Title of class Identity of person or group Number of shares owned Percent of class




Common Stock Directors, Executive Officers and Corporate Auditors as a group 4,751,2733,448,892 shares*  2.701.91%

* Except for Mr. Kanya Matsumoto, Chairman of Pioneer, who owns 3,878,3592,935,359 shares of common stock, which constitutes 2.21%1.63% of all outstanding shares as of March 31, 2003,June 30, 2005, none of Pioneer’s Directors, Executive Officers and Corporate Auditors is the owner of more than one percent of Pioneer’s common stock.

Pioneer has granted the following outstanding warrants to subscribe for shares of common stock to its Directors, Executive Officers and certain executive employees, and certain directors/officers of certain of its subsidiaries as part of their compensation.
                 
      Total number of        
      shares covered by   Current exercise Number of shares
      warrants   price exercised
Fiscal year granted (in thousands) Exercise period per share (in thousands)

 
 
 
 
2000  320  From July 3, 2000 to September 12, 2002 ¥2,188  222 
                 
2001  191  From July 2, 2001 to September 11, 2003 ¥4,674   
                 
2001  93  From July 2, 2001 to September 25, 2003 ¥4,839   
                 
2002  413  From July 1, 2002 to August 26, 2004 ¥3,266   

Pioneer has also granted the following share subscription rights for its shares of common stock to certain of its employees.

                 
      Total number of        
      shares covered by   Current exercise Number of shares
      option   price exercised
Fiscal year granted (in thousands) Exercise period per share (in thousands)

 
 
 
 
2001  191  From July 1, 2002 to June 30, 2005 ¥4,400   
               
2002  191  From July 1, 2003 to June 30, 2006 ¥3,791   
             
  Total number of        
  shares covered by   Current exercise  Number of shares 
  option   price  exercised 
Fiscal year granted (in thousands) Exercise period per share  (in thousands) 
2001 191 From July 1, 2002 to
June 30, 2005
 ¥4,400    
2002 191 From July 1, 2003 to
June 30, 2006
 ¥3,791    

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Pioneer has granted the following share acquisition rights for its shares of common stock to its Directors, Executive Officers and certain employees, and certain directors/officers of certain of its subsidiaries.
                   
      Total number of          
      shares covered by   Current exercise Number of shares
      option   price exercised
Fiscal year granted (in thousands) Exercise period per share (in thousands)

 
 
 
 
2003  564  From July 1, 2004 to June 29, 2007 ¥2,477  
                   
2004  313  From July 1, 2005 to June 30, 2008  ¥2,931  

             
  Total number of        
  shares covered by   Current exercise  Number of shares 
  option   price  exercised 
Fiscal year granted (in thousands) Exercise period per share  (in thousands) 
2003 564 From July 1, 2004 to
June 29, 2007
 ¥2,477   4 
2004 313 From July 1, 2005 to
June 30, 2008
 ¥2,951    
2005 316 From July 3, 2006 to
June 30, 2009
 ¥2,944    
2006 315 From July 2, 2007 to
June 30, 2010
 ¥1,828    
As of March 31, 2003,2005, Pioneer holds 4,629,0285,635,190 shares as treasury stock with the purchase of 5,110,0001,007,095 shares and disposal of 518,4004,867 shares both in the market in fiscal 2003.2005.

Item 7. Major Shareholders and Related Party Transactions

A. Major shareholders

Major shareholders that owned 5% or more of Pioneer’s voting securities as of March 31, 20032005 on the register of shareholders were as follows:
           
    Number of shares Percentage of
Title of class Name (in thousands) outstanding shares

 
 
 
Common Stock Japan Trustee Services Bank, Ltd.
(Trust Account)
  15,242   8.68%
           
Common Stock The Master Trust Bank of Japan,Ltd.
(Trust Account)
  11,549   6.58%

Japan Trustee Services Bank, Ltd. and

           
    Number of shares  Percentage of 
Title of class Name (in thousands)  outstanding shares 
Common Stock The Master Trust Bank of Japan, Ltd.
(Trust Account)
  13,804   7.66%
Common Stock Japan Trustee Services Bank, Ltd.
(Trust Account)
  11,666   6.47%
Common Stock Societe Generale Paris
SGOP/DAI Paris 6Z
  10,403   5.77%
The Master Trust Bank of Japan, Ltd. and Japan Trustee Services Bank, Ltd. are securities processing services companies. Societe Generale Paris SGOP/DAI Paris 6Z is one of the trust accounts of Societe Generale Paris. We understand that these shareholders are not the beneficial owner of our voting securities, but we do not have available further information concerning such beneficial ownership.

To our knowledge, there are no major shareholders that were beneficial owners of 5% or more of Pioneer’s voting securities during the past three years.

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All shareholders of Pioneer have the same voting rights, subject to the limitation on exercise as set forth in “Item 10.B. Memorandum and articles of association–association—Common stock–stock—Voting rights.”

As of March 31, 2003,2005, there were 175,434,808174,428,646 shares of common stock outstanding, of which 762,6302,218,904 shares (0.43%(1.27%) were held in the form of American Depositary Receipts (ADRs)(“ADRs”) and 17,405,83310,571,645 shares (9.92%(6.06%) were held of record in the form of common stock by residents in the United States (based solely on their addresses). The number of registered ADR holders of record (including DTC) was 89,92, and the number of registered holders of record in the United States (based solely on their addresses) of shares of common stock, including those who held shares through a Japanese securities clearing system, was 80.

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68.

To our knowledge, Pioneer is not directly or indirectly owned or controlled by any other corporation or by the Japanese or any foreign government.

To our knowledge, there is no arrangement, the operation of which may at a subsequent date result in a change in control of Pioneer.

B. Related party transactions

     None

C. Interests of experts and counsel

     Not applicable

Item 8. Financial Information

A. Consolidated statements and other financial information

Consolidated financial statements

See the Consolidated Financial Statements beginning on page F-1.

Legal proceedings

In common with numerous other industrial companies conducting a global business, we are party to various lawsuits and administrative proceedings in the ordinary course of our business. Based on the advice of counsel in the respective matters, except as described below, we do not expect such lawsuits or administrative proceedings, individually or in the aggregate, to have a material effect on our financial condition and business results.

During the year ended March 31, 2001, we received a notice of proposed assessment from the German tax authorities for approximately EUR21 million (¥2,7212,916 million translated at the current foreign exchange rate at March 31, 2003)2005) relating to a tax position taken in prior years concerning intercompany purchase prices. We officially challenged the proposed assessment by arbitration procedures. There was no progress in this matter during the year ended March 31, 2003.2005. In the opinion of management, it is not possible at this time to determine the ultimate resolution of this matter.

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In August 2002, we


On April 15, 2005, Pioneer Speakers, Inc. (“PSI”), a wholly-owned U.S. subsidiary of Tohoku Pioneer Corporation, a 67% owned subsidiary received notices of proposed assessmentnotice from the United States Internal Revenue ServiceCustoms and Border Protection (“IRS”CBP”) forassessing additional taxescustoms duties and penalties of approximately US$66$26 million (¥7,9332,792 million translated at the foreign exchange rate at March 31, 2003) relating to an adjustment to transfer prices between affiliated companies2005) for alleged erroneous claims for preferential treatment of duties on products imported by PSI for the years endedperiod from June 23, 1997 through December 31, 1999. In addition, on June 21, 2005, PSI received CBP’s notice that it may assess further penalties of approximately $16 million (¥1,718 million translated at the foreign exchange rate at March 31, 19972005) for alleged record-keeping violations for products imported by PSI for the period from June 12, 1998 through December 23, 1999. In October 2002, we filed protests withPSI has requested CBP on July 19, 2005 to consider settling both of these assessments for $7.8 million (¥837 million translated at the IRS against the assessments and requested that the case be forwarded to the IRS’ Appeals Office.foreign exchange rate at March 31, 2005). In the opinion of management, it is not possible at this time to determine the ultimate outcome of this matter.

We are also a defendant and counterclaimant in a lawsuit in No provision was made for the United States Federal District Court in which the plaintiff, Gemstar-TV Guide International Inc. (“Gemstar”), alleges that we have infringed two patents, both of which have expired. During August 2002, the Federal District Court granted summary judgment in our favor and against Gemstar ruling that we did not infringe those two patents. We continue to prosecute our counterclaim against the plaintiff and another company.

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In addition, the same plaintiff alleged in separate proceedings that we infringed four other patents. The plaintiff filed both a complaint before the International Trade Commission (“ITC”) alleging patent infringement relating to the importation and sale of the pertinent products in the United States and a complaint for unspecified damages in the United States Federal District Court in multi-district litigation in Atlanta, Georgia. During August 2002, the ITC adopted the findings and conclusions of the ITC’s administrative law judge that we did not infringe the patents at issue held by Gemstar. Gemstar has filed an appeal to the Federal Circuit. The related complaint filed in the District Court is stayed pending a ruling on the appeal of the ITC’s determination.

year ended March 31, 2005.

Dividend policy

Pioneer normally pays cash dividends twice per year. Pioneer’s Board of Directors recommends year-end dividends to be paid following the end of each fiscal year. This recommended year-end dividend must then be approved by shareholders at the ordinary general meeting of shareholders usually held in June of each year. Immediately following approval of the dividend at the shareholders’ meeting, Pioneer pays the dividend to holdersshareholders and pledges of record at the preceding March 31. In addition to these year-end dividends, Pioneer may pay interim dividends in the form of cash distributions from its retained earnings to its shareholders of record as of September 30 in each year by resolution of its Board of Directors and without shareholder approval. Pioneer normally pays interim dividends in December. See “Item 10.B. Memorandum and articles of association – association—Common stock –stock—Dividends.

The following table sets forth the dividends paid by Pioneer for each of the periods shown. The U.S. dollar equivalents for the dividends shown are based on the noon buying rate for cable transfers in New York City as certified for customs purposes by the Federal Reserve Bank of New York for yen on the date of the dividend payment:
         
  Dividend per share
  
Record date Yen Dollars

 
 
March 31, 1999  ¥5.00  $0.04 
September 30, 1999  ¥5.00  $0.05 
March 31, 2000  ¥5.00  $0.05 
September 30, 2000  ¥7.50  $0.07 
March 31, 2001  ¥7.50  $0.06 
September 30, 2001  ¥7.50  $0.06 
March 31, 2002  ¥7.50  $0.06 
September 30, 2002  ¥7.50  $0.06 
March 31, 2003  ¥10.00  $0.08 

         
  Dividend per share 
Record date Yen  Dollars 
March 31, 2001  7.50   0.06 
September 30, 2001  7.50   0.06 
March 31, 2002  7.50   0.06 
September 30, 2002  7.50   0.06 
March 31, 2003  10.00   0.08 
September 30, 2003  12.50   0.12 
March 31, 2004  12.50   0.11 
September 30, 2004  12.50   0.12 
March 31, 2005  12.50   0.11 
Pioneer’s policy on dividends allows for continued and stable dividend continuance and stability.payment. In addition, Pioneer determines the appropriate dividend amount taking into consideration its financial condition, consolidated business results and other factors.

B. Significant changes

There were no significant changes nor have any relevant facts occurred after the date of the financial statements included in this annual report other than disclosed therein.

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Item 9. The Offer and Listing

A. Offer and listing details

The following table sets forth for the period indicated the reported high and low sales prices per share of Pioneer’s Common Stock on the Tokyo Stock Exchange and per share of Pioneer’s American Depositary Shares (ADSs)ADSs on the New York Stock Exchange. See “Item 9.C. Markets,” regarding the markets for Pioneer’s shares.
                  
   Tokyo Stock Exchange New York Stock Exchange
   Price per share of Common Stock Price per share of ADS
   (yen) (U.S. dollars)
   
 
Annual highs and lows High Low High Low

 
 
 
 
Year ended March 31,                
 1999  ¥2,920   ¥1,720  $21.13  $14.88 
 2000  3,690   1,711   34.75   16.13 
 2001  4,940   2,085   45.38   20.50 
 2002  4,250   2,150   34.70   16.75 
 2003  2,860   1,805   21.98   14.83 
Quarterly highs and lows                
Fiscal 2002                
 1st quarter  4,250   3,020   34.70   25.18 
 2nd quarter  3,920   2,155   31.05   16.85 
 3rd quarter  3,290   2,210   26.20   19.01 
 4th quarter  3,330   2,150   25.06   16.75 
Fiscal 2003                
 1st quarter  2,860   1,981   21.65   16.75 
 2nd quarter  2,260   1,900   18.60   16.00 
 3rd quarter  2,490   1,805   19.50   14.83 
 4th quarter  2,620   2,070   21.98   17.95 
Fiscal 2004                
 1st quarter 2,840 2,225 23.75 18.90 
Monthly highs and lows                
2003                
 January  2,405   2,070   19.65   17.95 
 February  2,600   2,260   21.54   19.01 
 March  2,620   2,390   21.98   20.25 
 April  2,460   2,225   20.50   18.90 
 May  2,555   2,290   22.27   19.78 
 June  2,840   2,490   23.75   21.00 
 July 2,970 2,635 25.48 22.50 
                 
  Tokyo Stock Exchange  New York Stock Exchange 
  Price per share of Common Stock  Price per share of ADS 
  (yen)  (U.S. dollars) 
  High  Low  High  Low 
Annual highs and lows
                
Year ended March 31,                
2001 ¥4,940  ¥2,085  $45.38  $20.50 
2002  4,250   2,150   34.70   16.75 
2003  2,860   1,805   21.98   14.83 
2004  3,370   2,225   31.25   18.90 
2005  3,390   1,820   30.85   17.11 
                 
Quarterly highs and lows
                
Fiscal 2004                
1st quarter  2,840   2,225   23.75   18.90 
2nd quarter  3,030   2,515   25.75   20.85 
3rd quarter  2,995   2,505   28.31   23.30 
4th quarter  3,370   2,875   31.25   27.01 
                 
Fiscal 2005                
1st quarter  3,390   2,635   30.85   23.75 
2nd quarter  2,850   2,215   25.90   20.30 
3rd quarter  2,430   1,820   21.85   18.05 
4th quarter  2,055   1,827   19.90   17.11 
                 
Fiscal 2006                
1st quarter  2,040   1,655   18.82   15.15 
                 
Monthly highs and lows
                
2005                
March  2,015   1,827   19.18   17.60 
April  2,040   1,760   18.82   16.60 
May  1,815   1,703   17.34   16.00 
June  1,783   1,655   16.64   15.15 
July  1,687   1,604   15.23   14.35 
August  1,785   1,634   16.10   14.55 
B. Plan of distribution
     Not applicable

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B. Plan of distribution

     Not applicable

C. Markets

The primary market for shares of Pioneer’s common stock is the Tokyo Stock Exchange (TSE)(“TSE”). Pioneer’s shares of common stock have been listed on the TSE since October 1961 and on the Osaka Securities Exchange since April 1968.

Since December 1976, Pioneer’s ADSs have been listed and traded on the New York Stock Exchange (NYSE)(“NYSE”), having been traded on the United States over-the-counter market since February 1970. Pioneer’s ADSs, each representing one share of common stock, are evidenced by ADRs issued by Citibank, N.A., New York, as Depositary.

In addition, Curaçao Depositary Shares of Pioneer, evidenced by Curaçao Depositary Receipts, have been listed and traded on the Euronext Amsterdam since February 1969.

D. Selling shareholders

     Not applicable

E. Dilution

     Not applicable

F. Expenses of the issue

     Not applicable

Item 10. Additional Information

A. Share capital

     Not applicable

B. Memorandum and articles of association

Organization

Pioneer is a joint stock corporation(kabushiki kaisha)incorporated in Japan under the Commercial Code(shoho)of Japan. It is registered in the Commercial Register(shogyo tokibo)maintained by the Meguro Branch Office of the Tokyo Legal Affairs Bureau.

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Objects and purposes

Article 2 of the Articles of Incorporation of Pioneer provides that its purpose is to engage in the following lines of business:

 manufacture and sale of electronic and electrical machinery and appliances,appliances;
manufacture and sale of optical instruments, medical instruments, and other machinery and appliances;
 
 planning, production, manufacture and sale of audio, video and computer software;
 
 manufacture and sale of woodworks, agricultural products and plant for their cultivation;woodwork;
 
 manufacture and sale of foodsagricultural products and plants for their cultivation;

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sale of food and beverages, including liquor, and operation of restaurants and amusement facilities;
 
 sale and purchase, rental and lease, and management of real estate and real estate agency business;
 
 publishing and printing business, advertising agency business, construction business and non-life insurance agency business;
 
 acquisition, management and transfer of industrial property rights, copyrights and other intellectual property rights; and
 
 all business incidental and related to each and every one of the businesses in the preceding businesses.paragraphs.

Directors

Each Director has executive powers and duties to manage the affairs of Pioneer and each Representative Director, who is elected from among the Directors by the Board of Directors, has the statutory authority to represent Pioneer in all respects. Under the Commercial Code, the Directors must refrain from engaging in any business competing with Pioneer unless approved by the Board of Directors and any Director who has a material interest in the subject matter of a resolution to be taken by the Board of Directors cannot vote on such resolution. The total amount of remuneration to Directors and that to Corporate Auditors are subject to the approval of the general meeting of shareholders.

Except as stated below, neither the Commercial Code nor Pioneer’s Articles of Incorporation make special provisions as to the Directors’ or Corporate Auditors’ power to vote in connection with their compensation; the borrowing power exercisable by a Representative Director (or a Director who is given power by a Representative Director to exercise such power), theirthe Directors’ or Corporate Auditors’ retirement age or requirement to hold any shares of capital stock of Pioneer. The Commercial Code specifically requires the resolution of the Board of Directors for a company to acquire or dispose of material assets; to borrow a substantial amount of money; to employ or discharge from employment important employees, such as general managers; and to establish, change or abolish material corporate organization such as a branch office.offices. The Regulations of the Board of Directors of Pioneer require a resolution of the Board of Directors for Pioneer to borrow a largesubstantial amount of money or to give guarantees in a guarantee for a large amount of money.substantial amount. There is no written rule as to what constitutes a “large”“substantial” amount in these contexts. However, it has been the general practice of Pioneer’s Board of Directors to adopt a resolution for a borrowing or guaranteeing in an amount not less than ¥100 million or its equivalent.

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Common stock

General

Set

Except as otherwise stated, set forth below is information relating to Pioneer’s Common Stock, including brief summaries of the relevant provisions of Pioneer’s Articles of Incorporation and Share Handling Regulations, as currently in effect, and of the Commercial Code of Japan and related legislation.

A bill to modernize and make overall amendments to the Commercial Code by replacing the current provisions with regard to corporations with a new company law (the “New Company Law”) was promulgated on July 26, 2005. The New Company Law will come into effect within one year and half after its promulgation, and currently, it is expected that it will take effect in May 2006.
In order to assert shareholders’ rights against Pioneer, a shareholder must have its name and address registered on Pioneer’s register of shareholders, in accordance with Pioneer’s Share Handling Regulations. The registered holder of deposited shares underlying the ADSs is the Depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly to assert shareholders’ rights to Pioneer.

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A holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan. Participating shareholders must deposit certificates representing all of the shares to be included in this clearing system with the Japan Securities Depository Center, Inc. (“JASDEC”). If a holder is not a participating institution in JASDEC, it must participate through a participating institution, such as a securities company or a commercial bank having a clearing account with JASDEC. All shares deposited with JASDEC will be registered in the name of JASDEC on Pioneer’s register of shareholders. Each participating shareholder will in turn be registered on Pioneer’s register of beneficial shareholders and be treated in the same way as shareholders registered on Pioneer’s register of shareholders. For the purpose of transferring deposited shares, delivery of share certificates is not required. Entry of the share transfer in the booksbook maintained by JASDEC for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The registered beneficial shareholders may exercise the rights attached to the shares, such as voting rights, and will receive dividends (if any) and notices to shareholders directly from Pioneer. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial shareholder are aggregated for these purposes. Beneficial shareholders may at any time withdraw their shares from deposit and receive share certificates.

A new law to establish a new central clearing system for shares of listed companies and to eliminate the issuance and use of certificates for such shares was promulgated in June 2004 and the relevant part of the law will come into effect within five years of the date of the promulgation. On the effective date, a new central clearing system will be established and the shares of all Japanese companies listed on any Japanese stock exchange, including the shares of Common Stock of Pioneer, will be subject to the new central clearing system. On the same day, all existing share certificates will become null and void and the companies are not required to withdraw those share certificates from shareholders. The transfer of such shares will be effected through entry in the books maintained under the new central clearing system.
Authorized capital

Article 5 of the Articles of Incorporation of Pioneer provides that the total number of shares authorized to be issued by Pioneer is four hundred million (400,000,000) shares.

As of March 31, 2003,2005, 180,063,836 shares of common stock were issued (including 4,629,0285,635,190 shares held as treasury stock).

All shares of common stock of Pioneer have no par value.

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Dividends

Dividends — General
The Articles of Incorporation of Pioneer provide that the accounts shall be closed on March 31 of each year. Year-end cash dividends, if any, shall be paid to shareholders, beneficial shareholders and pledgees of record as of the end of such day. After the close of the fiscal period, the Board of Directors prepares, among other things, a proposed allocation of profits for dividends and other purposes; this proposal is submitted to the Board of Corporate Auditors of Pioneer and to independent certified public accountants and then submitted for approval to the ordinary general meeting of shareholders, which is normally held in June each year. In addition to provisions for dividends, if any, and for the legal reserve and other reserves, the allocation of profits customarily includes a bonus to Directors and Corporate Auditors.

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Under the New Company Law, subject to certain limitations on the distributable surplus as described below, dividends, if any, may be paid to shareholders, beneficial shareholders, and pledgees of record as of a record date as set forth either by the Articles of Incorporation of Pioneer or as determined by the Board of Directors from time to time. Dividends shall be paid by way of distribution of surplus. Dividends may be distributed in cash or in kind. In distributing dividends, Pioneer may determine the kind of assets to be distributed, the book value of such assets, matters regarding allocation of such assets, and the effective date of such dividends, by a resolution of a general meeting of shareholders. However, Pioneer may generally determine such matters by a resolution of the Board of Directors if (a) the Articles of Incorporation of Pioneer so provide, (b) the term of its Directors is set to be until the conclusion of the ordinary general meeting of shareholders held with respect to the last closing of accounts within one year after such Director’s assumption of office, and (c) certain requirements regarding the financial statements and certain documents of Pioneer as set forth in an ordinance of the Ministry of Justice are met; provided, however, that when Pioneer is to make in-kind dividends without giving shareholders the right to request payment of cash dividends in lieu of in-kind dividends, it shall determine such matters by a special shareholders resolution (as defined in “Voting Rights”). When Pioneer makes payment of dividends, it shall allocate such dividends in proportion to the number of shares of any specific class held by each shareholder.
Dividends — Interim cash dividends
In addition to year-end cash dividends, the Board of Directors may by its resolution declare a cash distribution pursuant to Article 293-5 of the Commercial Code (an “interim dividend”) to shareholders, beneficial shareholders and pledgees of record as of the end of each September 30 of each year, without shareholders’ approval, but subject to the limitations described below.

Under the New Company Law, notwithstanding the necessity of obtaining approval of a general meeting of shareholders in general under the New Company Law as described above, Pioneer is allowed to make payment of interim dividends during a fiscal year by way of distribution of surplus by resolution of the Board of Directors; provided, however, that such payment of interim dividends shall be limited to cash dividends and also limited to once per fiscal year.
Dividends — Legal reserve
The Commercial Code provides that a company may not make any distribution of profit by way of dividends or interim dividends for any fiscal period unless it has set aside in its legal reserve an amount equal to at least one-tenth of the amount paid by way of appropriation of retained earnings for such fiscal period or equal to one-tenth of the amount of such interim dividends, until the aggregate amount of additional paid-in capital and legal reserve equalsis at least one-quarter of its stated capital on a non-consolidated basis.
The New Company Law provides that when a joint stock company such as Pioneer makes a distribution of surplus, it shall set aside in its legal reserve an amount equal to 10% of the amount of the surplus to be decreased as a result of such distribution of surplus in accordance with the provisions set forth in an ordinance of the Ministry of Justice.

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Dividends — Distributable amount
Under the Commercial Code, Pioneer is permitted to distribute profits by way of year-end or interim dividends out of the excess of its net assets, on a non-consolidated basis, over the aggregate of:

(i) its stated capital;
 
(ii) its additional paid-in capital;
 
(iii) its accumulated legal reserve;
 
(iv) the legal reserve to be set aside in respect of the fiscal period concerned; and
 
(v) such other amounts as provided for byare set out in an ordinance of the Ministry of Justice.

In the case of interim dividends, the net assets are calculated by reference to the non-consolidated balance sheet as at the last closing date of Pioneer’s accounts,the preceding fiscal year, but adjusted to reflect; (x)(a) the legal reserve to be set aside in respect of interim dividends; (b) any subsequent payment by way of appropriation of retained earnings and transfer to legal reserve in respect thereof; (y)(c) any subsequent transfer of retained earnings to stated capital; and (z)(d) if Pioneer has been authorized, pursuant to a resolution of an ordinary general meeting of shareholders, a resolution of the Board of Directors or both, to purchase shares of its common stock (see “Acquisition by Pioneer of its common stock” below), the total amount of the purchase price of such shares so authorized by such resolution that may be paid by Pioneer,Pioneer; and (e) such other amounts as are set out in an ordinance of the Ministry of Justice, provided that (x) if Pioneer reduces its stated capital, additional paid-in capital or accumulated legal reserve after the end of the preceding fiscal year, the amount so reduced, less the amount paid to shareholders upon such reduction and certain other amounts, and (y) such other amounts as are set out in an ordinance of the Ministry of Justice, shall be added to the amount distributable as interim dividends as described above. Interim dividends may not be paid where thereif it is a riskanticipated that at the end of the fiscal year there might not be any excess of net assets, overon a non-consolidated basis, will be less than the aggregate of the amounts referred to in (i) through (v) above.
Under the New Company Law, Pioneer is permitted to make a distribution of surplus to the extent that the aggregate book value of the assets to be distributed to shareholders does not exceed the Distributable Amount (as defined below) as at the effective date of such distribution of surplus.
The amount of surplus at any given time shall be the amount of Pioneer’s assets and the book value of Pioneer’s treasury stock after subtracting the amounts of the following items (1) through (4) as they appear on Pioneer’s non-consolidated balance sheet as at the end of Pioneer’s last fiscal year, and after reflecting the changes in Pioneer’s surplus after the end of Pioneer’s last fiscal year, by adding the amounts of the following items (5), (6) and (7) and/or subtracting the amounts of the following items (8), (9) and (10):
(1)its liabilities;
(2)its stated capital;
(3)its additional paid-in capital and accumulated legal reserve;
(4)other amounts as provided for by an ordinance of the Ministry of Justice;
(5)(if Pioneer transferred its treasury stock after the end of the last fiscal year) the transfer price of its treasury stock after subtracting the book value thereof;
(6)(if Pioneer decreased its stated capital after the end of the last fiscal year) the amount of decrease in its stated capital (excluding the amount transferred to the additional paid-in capital or legal reserve);
(7)(if Pioneer decreased its additional paid-in capital or legal reserve after the end of the last fiscal year) the amount of decrease in its additional paid-in capital or legal reserve (excluding the amount transferred to the stated capital);
(8)(if Pioneer cancelled its treasury stock after the end of the last fiscal year) the book value of its treasury stock so cancelled;

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(9)(if Pioneer distributed surplus to shareholders after the end of the last fiscal year) the assets distributed to shareholders by way of such distribution of surplus; and
(10)other amounts as provided for by an ordinance of the Ministry of Justice.
The Distributable Amount of Pioneer at any given time shall be the aggregate amount of (a) the surplus, (b) the amount of profit as recorded for the period after the end of Pioneer’s last fiscal year until the date of an extraordinary settlement of account (if any) as provided for in an ordinance of the Ministry of Justice and (c) the transfer price of its treasury stock in the same period, after subtracting the amounts of the following items:
(1)the book value of its treasury stock;
(2)(if Pioneer transferred its treasury stock after the end of the last fiscal year) the transfer price of its treasury stock;
(3)the losses as recorded for the period after the end of Pioneer’s last fiscal year until the date of an extraordinary settlement of account (if any) as provided for in an ordinance of the Ministry of Justice; and
(4)other amounts as provided for by an ordinance of the Ministry of Justice.
Dividends — Prescription
Under its Articles of Incorporation, Pioneer is not obligated to pay any dividends which are left unclaimed for a period of three years after the date on which they first became payable.
Dividends — Liabilities
Under the Commercial Code, if Pioneer makes interim dividends and at the end of the fiscal year there is no excess of net assets over the aggregate of the amounts referred to in (i) through (v) in “Dividends — Distributable amount” above, Directors who have made such interim dividends shall be jointly and severally liable to Pioneer for the smaller of the amount of such deficit or such dividends unless such Directors prove that they did not fail to exercise due care in determining such interim dividends.
Under the New Company Law, in cases where the distribution of surplus was made, if the aggregate amount of the following items (1), (2) and (3) as at the end of the relevant fiscal year exceeds the amount of surplus, the Directors who have distributed such dividends, shall be liable to Pioneer for the smaller of such amount in excess or the amount of money or book value of such distributed surplus unless such Directors prove that they did not fail to exercise due care in determining such distribution:
(1)the book value of Pioneer’s treasury stock;
(2)(if Pioneer transferred its treasury stock after the end of the last fiscal year) the transfer price of its treasury stock after the end of Pioneer’s last fiscal year; and
(3)other amounts as provided for by an ordinance of the Ministry of Justice.
However, the Directors shall not be liable to Pioneer for the distributions of surplus made pursuant to the resolution of the ordinary general meeting of shareholders.

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Stock splits

Pioneer may at any time split shares in issue into a greater number of shares by resolution of the Board of Directors, and may amend its Articles of Incorporation to increase the number of the authorized shares to be issued to allow such stock split pursuant to a resolution of the Board of Directors, rather than relying on a special resolution of a general meeting of shareholders, which is otherwise required for amending the Articles of Incorporation.

In the event of a stock split, generally, shareholders will not be required to exchange share certificates for new share certificates, but certificates representing the additional shares resulting from the stock split will be issued to shareholders. When a stock split is to be made, Pioneer must give public notice of the stock split, specifying the record date therefor, at least two weeks prior to such record date. In addition, promptly after the stock split takes effect, Pioneer must give notice to each shareholder specifying the number of shares to which such shareholder is entitled by virtue of the stock split.

After the New Company Law becomes effective, no such notice to each shareholder is required.

Consolidation of Shares
Pioneer may at any time consolidate shares in issue into a smaller number of shares by a special shareholders resolution (as defined in “Voting Rights”). When a consolidation of shares is to be made, Pioneer must give public notice and notice to each shareholder that, within a period of not less than one month specified in the notice, share certificates must be submitted to Pioneer for exchange. A representative director of Pioneer must disclose the reason for the consolidation of shares at the general meeting of shareholders.
General meeting of shareholders

The ordinary general meeting of shareholders of Pioneer for each fiscal year is normally held in June in each year in or near Meguro-ku or in Minato-ku, Tokyo, Japan. In addition, Pioneer may hold an extraordinary general meeting of shareholders whenever necessary by giving notice of convocation thereof at least two weeks prior to the date set for the meeting.

Notice of convocation of a shareholders’ meeting, setting forth the place, time and purpose thereof, must be mailed to each shareholder having voting rights (or, in the case of a non-resident shareholder, to his or her standing proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Such notice may be given to shareholders by electronic means, subject to the consent of the relevant shareholders. The record date for an ordinary general meeting of shareholders is March 31 of each year.

Any shareholder or group of shareholders holding at least 3% (or, when the New Company Law becomes effective and in the event that Pioneer’s Articles of Incorporation provide for a percentage lower than 3%, such lower percentage) of the total number of voting rights for a period of six months (or, when the New Company Law becomes effective and in the event that Pioneer’s Articles of Incorporation provide for a period shorter than six months, such period) or more may require the convocation of a general meeting of shareholders for a particular purpose. Unless such shareholders’ meeting is convened promptly or a convocation notice of a meeting which is to be held not later than eight weeks (or, when the New Company Law becomes effective and in the event that Pioneer’s Articles of Incorporation provide for a period shorter than eight weeks, such a period) from the day of such demand is dispatched, the requiring shareholder may, upon obtaining a court approval, convene such shareholders’ meeting.

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Any shareholder or group of shareholders holding at least 300 (or, when the New Company Law becomes effective and in the event that Pioneer’s Articles of Incorporation provide for a number less than 300, such number) voting rights or 1% (or, when the New Company Law becomes effective and in the event that Pioneer’s Articles of Incorporation provide for a percentage lower than 1%, such lower percentage) of the total number of voting rights for a period of six months (or, when the New Company Law becomes effective and in the event that Pioneer’s Articles of Incorporation provide for a period shorter than six months, such shorter period) or more may propose a matter to be considered at a general meeting of shareholders by submitting a written request to a Representative Director at least eight weeks (or, when the New Company Law becomes effective and in the event that Pioneer’s Articles of Incorporation provide for a period shorter than eight weeks, such shorter period) prior to the date set for such meeting.

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Voting rights

So long as Pioneer maintains the unit share system (see “‘Unit’ share system” below; currently 100 shares constitute one unit) a holder of shares constituting one or more full units is entitled to one voting right per unit of shares subject to the limitations on voting rights set forth in the following two sentences. A corporate shareholder more than one-quarter of whose total voting rights are directly or indirectly owned by Pioneer (or, when the New Company Law becomes effective, management of which is being controlled in substance by Pioneer as provided for by an ordinance of the Ministry of Justice) may not exercise its voting rights with respect to shares of common stock of Pioneer that it owns. In addition, Pioneer may not exercise its voting rights with respect to its shares that it owns. If Pioneer eliminates from its Articles of Incorporation the provisions relating to the unit of shares, holders of common stock will have one voting right for each share they hold. Except as otherwise provided by law or by the Articles of Incorporation, a resolution can be adopted at a general meeting of shareholders by a majority of the number of voting rights of all the shareholders present at the meeting. The Commercial Code (or, when the New Company Law becomes effective, the New Company Law) and Pioneer’s Articles of Incorporation provide, however, that the quorum for the election of Directors and Corporate Auditors shall not be less than one-third of the total number of voting rights of all the shareholders. Pioneer’s shareholders are not entitled to cumulative voting in the election of Directors. Shareholders may exercise their voting rights through proxies, provided that the proxies are also shareholders holding voting rights. Pioneer’s shareholders also may cast their votes in writing, or exercise their voting rights by electronic means pursuant to the method thereof determined by the Board of Directors.

The Commercial Code (or, when the New Company Law becomes effective, the New Company Law) and Pioneer’s Articles of Incorporation provide thatrequire a special shareholders resolution (as defined below) in order to amend the Articles of Incorporation and in certain other instances, including, a reduction of stated capital, the removal of a Director or Corporate Auditor, dissolution, merger or consolidation pursuant to a certain exception under which a shareholders’instances. A special shareholders resolution is not required, the transfer of the whole or an important part of the business, the taking over of the whole of the business of any other corporation pursuant to a certain exception underresolution for which a shareholders’ resolution is not required, share exchange or share transfer for the purpose of establishing 100% parent-subsidiary relationships pursuant to a certain exception under which a shareholders’ resolution is not required, splitting of the corporation into two or more corporations pursuant to a certain exception under which a shareholders’ resolution is not required, or any offering of new shares at a “substantially favorable” price (or any offering of share acquisition rights to subscribe for or acquire shares of capital stock (“share acquisition rights”) or bonds with share acquisition rights at a “substantially favorable” terms) to any persons other than shareholders, the quorum shall be one-third of the total voting rights of all the shareholders, and the approval by at least two-thirds (or, when the New Company Law becomes effective and in the event that Pioneer’s Articles of Incorporation provide for a percentage greater than two-thirds, such greater percentage) of the voting rights of all the shareholders represented at the meeting is required (the “special(in addition, when the New Company Law becomes effective and in the event that Pioneer’s Articles of Incorporation provide that the approval by certain number of shareholders resolutions”)is required, such approval is also required). The instances requiring a Special Shareholders Resolution include:
(1)acquisition of its own shares from a specific party;
(2)consolidation of shares;
(3)any offering of new shares at a “specially favorable” price (or any offering of stock acquisition rights to subscribe for or acquire shares of capital stock, or bonds with stock acquisition rights at “specially favorable” conditions) to any persons other than shareholders;
(4)the removal of a Director or Corporate Auditor (when the New Company Law becomes effective, the removal of a Director who is elected by cumulative voting);

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(5)the exemption of liability of a Director or Corporate Auditor with certain exceptions;
(6)a reduction of stated capital (when the New Company Law becomes effective, with certain exceptions in which a shareholders’ resolution is not required);
(7)(when the New Company Law becomes effective ) a distribution of in-kind dividends which meets certain requirements;
(8)dissolution, merger, or consolidation with certain exceptions in which a shareholders’ resolution is not required;
(9)the transfer of the whole or a material part of the business;
(10)the taking over of the whole of the business of any other corporation with certain exceptions in which a shareholders’ resolution is not required;
(11)share exchange or share transfer for the purpose of establishing 100 percent parent-subsidiary relationships with certain exceptions in which a shareholders’ resolution is not required; or
(12)separating of the corporation into two or more corporations with certain exceptions in which a shareholders’ resolution is not required.
Issue of additional shares and pre-emptive rights

Holders of Pioneer’s shares of common stock have no pre-emptive rights under its Articles of Incorporation. Authorized but unissued shares may be issued at such times and upon such terms as the Board of Directors determines, subject to the limitations as to the offeringissue of new shares at a “substantially“specially favorable” price mentioned under “Voting rights” above. The Board of Directors may, however, determine that shareholders shall be given subscription rights regarding a particular issue of new shares, in which case such rights must be given on uniform terms to all shareholders as at a record date of which not less than two weeks’ prior public notice must be given. Each of the shareholders to whom such rights are given must also be given notice of the expiry thereof at least two weeks prior to the date on which such rights expire.

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Rights to subscribe for new shares may be made generally transferable by the Board of Directors. Whether Pioneer will make subscription rights generally transferable in future rights offerings will depend upon the circumstances at the time of such offerings. If subscription rights are not made generally transferable, transfers by a non-resident of Japan or a corporation organized under the laws of a foreign country or whose principal office is located in a foreign country will be enforceable against Pioneer and third parties only if Pioneer’s prior written consent to each such transfer is obtained. When such consent is necessary in the future for the transfer of subscription rights, Pioneer intends to consent, on request, to all such transfers by such a non-resident or foreign corporation.

Subject to certain conditions, Pioneer may issue share acquisition rights or bonds with share acquisition rights by a resolution of the Board of Directors. Holders of share acquisition rights or bonds with share acquisition rights may exercise their rights to acquire a certain number of shares within the exercise period as prescribed in the terms of their share acquisition rights and bonds with share acquisition rights. Upon exercise of share acquisition rights, Pioneer will be obliged to issue the necessary number of new shares or alternatively to transfer the relevant number of treasury stockshares held by it.

it as treasury stock.

In cases where a particular issue of new shares or stock acquisition rights (i) violates laws and regulations or Pioneer’s Articles of Incorporation, or (ii) will be performed in a manner materially unfair, and shareholders may suffer disadvantages therefrom, such shareholder may file an injunction to enjoin such issue with a court.
Liquidation rights

In the event of a liquidation of Pioneer, the assets remaining after payment of all debts, and liquidation expenses and taxes will be distributed among shareholders in proportion to the respective numbers of shares of common stock held.held by them.

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Record date

March 31 is the record date for Pioneer’s year-end dividends. So long as Pioneer maintains the unit share system, the shareholders and beneficial shareholders who are registered as the holders of one or more full unitunits of shares in Pioneer’s registersregister of shareholders and/or that of beneficial shareholders at the end of each March 31 are also entitled to exercise shareholders’ rights at the ordinary general meeting of shareholders with respect to the fiscal year ending on such March 31. September 30 is the record date for interim dividends. In addition, Pioneer may set a record date for determining the shareholders and/or beneficial shareholders entitled to other rights pertaining to the shares of Common Stock of Pioneer, and for other purposes, by a resolution of the Board of Directors and giving at least two weeks’ prior public notice.

The price of shares generally goes ex-dividendsex-dividend or ex-rights on Japanese stock exchanges on the third business day prior to a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings.

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Acquisition by Pioneer of its common stock

Pioneer may acquire its own shares (a) through a stock exchange on which such shares are listed (pursuant to an ordinary resolution of an ordinary general meeting of shareholders),shareholders or a resolution of the Board of Directors) or by way of tender offer (pursuant to an ordinary resolution of an ordinary general meeting of shareholders),shareholders or a resolution of the Board of Directors); (b) by purchase from a specific party other than a subsidiary of Pioneer (pursuant to a special resolution of an ordinary general meeting of shareholders); or (c) by purchase from a subsidiary of Pioneer (pursuant to a resolution of the Board of Directors). Under the New Company Law, not only ordinary general meetings of shareholders but also extraordinary general meetings of shareholders will be able to approve the acquisition by Pioneer of its own shares in the cases of (a) and (b) above. If shares are purchased by Pioneer pursuant to a resolution of the Board of Directors, then the reason for the purchase, as well as the kind, number and aggregate purchase price of such shares must be reported to the shareholders at the ordinary general meeting of shareholders to be held immediately after such purchase of shares. When such acquisition is made by Pioneer from a specific party other than a subsidiary of Pioneer, any other shareholder may make a request to a Representative Director, more than five calendar days prior to the relevant shareholders’ meeting, to include him or her as thea seller in the proposed purchase. Under the New Company Law, however, the acquisition of its own shares at a price not exceeding the then market price to be provided under an ordinance of the Ministry of Justice will not trigger the right of any shareholder to include him or her as the seller of his or her shares in such proposed purchase. Any such acquisition of shares must satisfy certainthe requirements including that, inunder the Commercial Code. In cases other than the acquisition by Pioneer of its own shares frompursuant to a subsidiaryresolution of Pioneer,the Board of Directors, the total amount of the purchase price may not exceed the amount of the retained earnings available for dividend payments after taking into account any reduction, if any, of the stated capital, additional paid-in capital or legal reserve (if such reduction of the stated capital, additional paid-in capital or legal reserve has been authorized pursuant to a resolution of the relevant ordinary general meeting of shareholders), minus the amount to be paid by way of appropriation of retained earnings for the relevant fiscal year and the amount to be transferred from retained earnings to stated capital. If Pioneer purchases shares from its subsidiaries,pursuant to a resolution of the Board of Directors, the total amount of the purchase price may not exceed the amount of the retained earnings available for an interim dividend payment minus the amount of any interim dividend Pioneer actually paid. However, if it is anticipated that the net assets on the non-consolidated balance sheet as at the end of the relevant fiscal year will be less than the aggregate amount of the stated capital, additional paid-in capital and other items as described in (i) through (v) toinDividends — Distributable amount” above, Pioneer may not acquire such shares. Under the New Company Law, the restriction on the source of funds for

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the acquisition by Pioneer of its own shares will be integrated into those for the distribution of surplus to the shareholders. See “Dividends.”
Shares acquired by Pioneer may be held by it for any period or may be cancelled by a resolution of the Board of Directors. Pioneer may also transfer to any person the shares held by it, subject to a resolution of the Board of Directors, and subject also to other requirements similar to those applicable to the issuance of new shares, as described in “Issue of additional shares and pre-emptive rights” above. Pioneer may also utilize its treasury stock for the purpose of transfer to any person upon exercise of share acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through exchange of treasury stock for shares or assets of the acquired company.

“Unit” share system

The Articles of Incorporation of Pioneer provide that 100 shares constitute one unit of shares of stock. Although the number of shares constituting one unit is included in the Articles of Incorporation, any amendment to the Articles of Incorporation reducing (but not increasing) the number of shares constituting one unit or eliminating the provisions for the unit of shares may be made by the resolution of the Board of Directors rather than by the special shareholders resolution, which is otherwise required for amending the Articles of Incorporation. The number of shares constituting one new unit, however, cannot exceed 1,000 or one two-hundredth (1/200) of all issued shares.

Shareholders shall have one voting right for each unit of shares that they hold. Any number of shares less than a full unit will carry no voting rights.

Unless Pioneer’s shareholders amend the Articles of Incorporation by a special shareholders resolution to eliminate the provision not to issue share certificates for less than a unit of shares, a share certificate for any number of shares less than one full unit will in general not be issued. As the transfer of shares normally requires the delivery of the share certificates therefor, any fraction of a unit for which no share certificates are issued is not transferable.

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A holder of shares constituting less than one unit may require Pioneer to purchase such shares at their market value in accordance with the provisions of the Share Handling Regulations of Pioneer. In addition, the Articles of Incorporation of Pioneer provide that a holder of shares constituting less than one full unit may request Pioneer to sell to such holder such amount of shares which will, when added together with the shares constituting less than one full unit held by such holder, constitute one full unit of stock, in accordance with the provisions of the Share Handling Regulations of Pioneer.

A holder who owns ADRs evidencing less than 100 ADSs will indirectly own less than one full unit of shares of common stock. Although, as discussed above, under the unit share system holders of less than one full unit have the right to require Pioneer to purchase their shares or sell shares held by Pioneer to such holders, holders of ADRs evidencing ADSs that represent other than integral multiples of a unit are unable to withdraw the underlying shares of common stock representing less than one full unit and, therefore, are unable, as a practical matter, to exercise the rights to require Pioneer to purchase such underlying shares or sell shares held by Pioneer to such holders unless Pioneer’s Articles of Incorporation are amended to eliminate the provision not to issue share certificates for the numbers of shares less than a unit. As a result, access to the Japanese markets by holders of ADRs through the withdrawal mechanism will not be available for dispositions of shares of common stock in lots less than one full unit. The unit share system does not affect the transferability of ADSs, which may be transferred in lots of any size.

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Sale by Pioneer of shares held by shareholders whose addresslocation is unknown

Pioneer is not required to send a notice to a shareholder if a notice to such shareholder fails to arrive at the registered address of the shareholder in Pioneer’s register of shareholders or at the address otherwise notified to Pioneer continuously for five years or more.

In addition, Pioneer may sell or otherwise dispose of shares of common stock for which the location of the shareholder is unknown. Generally, if (i) notices to a shareholder fail to arrive continuously for five years or more at the shareholder’s registered address in Pioneer’s register of shareholders or at the address otherwise notified to Pioneer, and (ii) the shareholder fails to receive dividends on the shares continuously for five years or more at the address registered in Pioneer’s register of shareholders or at the address otherwise notified to Pioneer, Pioneer may sell or otherwise dispose of the shareholder’s shares at the then market price of the shares by a resolution of the Board of Directors and after giving at least three months’ prior public and individual notice, and holdingmay hold or depositingdeposit the proceeds of such sale or disposal of shares at the then market price of the shares for the shareholder, the location of which is unknown.

such shareholder.

Reporting of substantial shareholdings

The Securities and Exchange Law of Japan and regulations thereunder require any person, regardless of residence, who has become, beneficially and solely or jointly, a holder(s) of more than 5% of the total issued shares of capital stock of a company listed on any Japanese stock exchange or whose shares are traded on the over-the-counter market in Japan to file with the Director–Director—General of a competent Local Finance Bureau of the Ministry of Finance within five business days a report concerning such shareholdings.

A similar report must also be filed in respect of any subsequent change of 1% or more in any such holding or any change in material matters set out in reports previously filed, with certain exceptions. For this purpose, shares issuable to such person upon conversion of convertible securities or exercise of share subscription warrants or share acquisition rights are taken into account in determining both the number of shares held by such holder and the issuer’s total issued share capital. Copies of such report must also be furnished to the issuer of such shares and all Japanese stock exchanges on which the shares are listed or (in the case of shares traded over-the-counter) the Japan Securities Dealers Association.

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listed.

Except for the general limitationlimitations under Japanese anti-trust and anti-monopoly regulations against holding of shares of capital stock of a Japanese corporation which leads or may lead to a restraint of trade or monopoly, and except for general limitations under the Commercial Code or Pioneer’s Articles of Incorporation on the rights of shareholders applicable regardless of residence or nationality, there is no limitation under Japanese laws and regulations applicable to Pioneer or under its Articles of Incorporation on the rights of non-resident or foreign shareholders to hold the shares of common stock of Pioneer or exercise voting rights thereon.

There is no provision in Pioneer’s Articles of Incorporation that would have an effect of delaying, deferring or preventing a change in control of Pioneer and that would operate only with respect to merger, consolidation, acquisition or corporate restructuring involving Pioneer.

C. Material contracts
     None

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               Not applicable


D. Exchange controls

The Foreign Exchange and Foreign Trade Law of Japan and its related cabinet orders and ministerial ordinances (the “Foreign Exchange Regulations”) govern the acquisition and holding of shares of common stock of Pioneer by “exchange non-residents” and by “foreign investors.” The Foreign Exchange Regulations currently in effect do not, however, affect transactions between exchange non-residents to purchase or sell shares outside Japan using currencies other than Japanese yen.

Exchange non-residents are:

 individuals who doare not resideresident in Japan; and
 
 corporations whose principal offices are located outside Japan.

Generally, branches and other offices of non-resident corporations that are located within Japan are regarded as exchange residents of Japan. Conversely, branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents.

Foreign investors are:

 individuals who are exchange non residents;non-residents;
 
 corporations that are organized under the laws of foreign countries or whose principal offices are located outside Japan; and
 
 corporations (1) of which 50% or more of their shares are held by individuals who are exchange non-residents and/or corporations (a) that are organized under the laws of foreign countries or (b) whose principal offices are located outside Japan or (2) a majority of whose officers, or officers having the power of representation, are individuals who are exchange non-residents.

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In general, the acquisition of shares of a Japanese company (such as the shares of common stock of Pioneer) by an exchange non-resident from aan exchange resident of Japan is not subject to any prior filing requirements. In certain limited circumstances, however, the Minister of Finance may require prior approval of an acquisition of this type. While prior approval, as described above, is not required, in the case where aan exchange resident of Japan transfers shares of a Japanese company (such as the shares of common stock of Pioneer) for consideration exceeding ¥100 million to an exchange non-resident, the exchange resident of Japan who transfers the shares is required to report the transfer to the Minister of Finance within 20 days from the date of the transfer, unless the transfer was made through a bank, securities company or financial futures trader licensed under Japanese law.

If a foreign investor acquires shares of a Japanese company that is listed on a Japanese stock exchange (such as the shares of common stock of Pioneer) or that is traded on an over-the-counter market in Japan and, as a result of the acquisition, the foreign investor, in combination with any existing holdings, directly or indirectly holds 10% or more of the issued shares of the relevant company, the foreign investor must file a report of the acquisition with the Minister of Finance and any other competent Ministers having jurisdiction over that Japanese company within 15 days from and including the date of the acquisition, except where the offering of the company’s shares was made overseas. In limited circumstances, such as where the foreign investor is in a country that is not listed on an exemption schedule in the Foreign Exchange Regulations, a prior notification of the acquisition must be filed with the Minister of Finance and any other competent Ministers, who may then modify or prohibit the proposed acquisition.

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Under the Foreign Exchange Regulations, dividends paid on and the proceeds from sales in Japan of shares of common stock of Pioneer held by exchange non-residents of Japan may generally be converted into any foreign currency and repatriated abroad.

E. Taxation

The discussion below is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of shares of common stock and ADSs. Prospective purchasers and holders of the shares of common stock or ADSs should consult their own tax advisors concerning the tax consequences of their particular situations.

The following discussion is a summary of the principal Japanese national and U.S. federal income tax consequences of the acquisition, ownership and disposition of shares of common stock or ADSs by a U.S. Holder (as defined below) that holds those shares or ADSs as capital assets (generally, property held for investment).ADSs. This summary does not purport to address all material tax consequences that may be relevant to holders of shares of common stock or ADSs, and does not take into account the specific circumstances of any particular investors, some of which (such as tax-exempt entities, banks, insurance companies, broker-dealers, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, regulated investment companies, real estate investment trusts, investors liable for alternative minimum tax, investors that own or are treated as owning 10% or more of Pioneer’s voting stock, investors that hold shares of common stock or ADSs as part of a straddle, hedge, conversion or constructive sale transaction or other integrated transaction, persons that hold shares of common stock or ADSs through a partnership or other pass-through entity and U.S. Holders (as defined below) whose functional currency is not the U.S. dollar) may be subject to special tax rules. This summary is based on the national or federal income tax laws and regulations of Japan and of the United States, judicial decisions, published rulings and administrative pronouncements as in effect at the date hereof, as well as on the current income tax convention between the United States and Japan (the “Treaty”), all of which are subject to change (possibly with retroactive effect) andand/or to differing interpretations. U.S. Holders should note that the United States and Japan have reached an agreement in principle on the text of a new income tax convention, which after a formal signature process, will be subject to ratification according to the procedures of each of the two countries. In addition, this
This summary is based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement for ADSs and in any related agreement will be performed in accordance with its terms.

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For purposes of this discussion, a “U.S. Holder” is any beneficial owner of shares of common stock or ADSs that, for U.S. federal income tax purposes, is:

 a citizen or individual resident of the United States,
 
 a corporation or other entity taxable as a corporation for U.S. federal income tax purposes organized in or under the laws of the United States, any State, or the District of Columbia,
 
 an estate the income of which is subject to U.S. federal income tax without regard to its source, or
 
 a trust that is (i) subject to the primary supervision of a U.S. court and the control of one or more U.S. persons, or (ii) that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.

An “Eligible U.S. Holder” is a U.S. Holder that:

 is a resident of the United States for purposes of the Treaty,
 
 does not maintain a permanent establishment or fixed base in Japan to(i) with which shares of common stock or ADSs are attributable and througheffectively connected or (ii) of which shares of common stock or ADSs form part of the U.S. Holder carries on or has carried on business (or, in the case of an individual, performs or has performed independent personal services),property, and
 
 is otherwise eligible for benefits under the Treaty with respect to income and gain derived in connection with the shares of common stock or ADSs.

A “Non-U.S. Holder” is any beneficial owner

The U.S. federal income tax consequences of a partner in a partnership holding shares of common stock or ADSs that, for U.S. federal incomegenerally will depend on the status of the partner and the activities of the partnership. Partners in a partnership holding shares of common stock or ADSs should consult their own tax purposes, is:advisors. This

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an individual who is classified as a non-resident;
a foreign corporation or other foreign entity taxable as a corporation; or
an estate or trust that is not a U.S. Holder.


This

summary does not address any aspects of U.S. federal tax law other than income taxation, and does not discuss any aspects of Japanese tax law other than national income taxation, inheritance and gift taxation. This summary also does not cover any state or local, or non-U.S., non-Japanese tax considerations. Investors are urged to consult their tax advisors regarding the U.S. federal, state and local and Japanese and other tax consequences of acquiring, owning and disposing of shares of common stock or ADSs. In particular, where relevant, investors are urged to confirm their status as Eligible U.S. Holders with their tax advisors and to discuss with their tax advisors any possible consequences of their failure to qualify as Eligible U.S. Holders.
In general, taking into account the earlier assumptions,assumption, for purposes of the Treaty and for U.S. federal income and Japanese income tax purposes, beneficial owners of ADRs evidencing ADSs will be treated as the owners of the shares of common stock represented by those ADSs, and exchanges of shares of common stock for ADSs, and exchanges of ADSs for shares of common stock, will not be subject to U.S. federal income tax or Japanese income tax.

The discussion below is intended for general information only and does not constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of shares of common stock or the ADSs. Investors in shares of common stock or the ADSs should consult their own tax advisors concerning the tax consequences of their particular situations.
Japanese taxation

The following is a summary of the principal Japanese tax consequences (limited to national taxes) to Eligible U.S. Holders that holdholders of shares of common stock of Pioneer or ADRs evidencing ADSs representing shares of common stock of Pioneer.

Pioneer who are either individuals who are not residents of Japan or non-Japanese corporations, without a permanent establishment in Japan (“non-resident Holders”).

Generally, an individual who is a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by a Japanese corporation. Pioneer withholds taxes from dividends it pays as required by Japanese law. Stock splits in themselves are not subject to Japanese income tax.

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Under

In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of Japanese withholding tax law,or allowing exemption from Japanese withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to individuals who are non-residents of Japan or non-Japanese corporations is generally 20%. However, with respect to dividends paid on listed shares issued by a Japanese corporation (such as the shares of common stock of Pioneer) to any corporate or individual shareholders (including those shareholders who are Eligible U.S.non-Japanese corporations or Japanese non-resident individuals, such as non-resident Holders), except for any individual shareholder who holds 5% or more of the outstanding total of theissued shares issued byof the relevant Japanese corporation, the aforementioned 20% withholding tax rate is reduced to (i) 10% for dividends due and payable on or after April 1, 2003 but on or before December 31, 2003, (ii) 7% for dividends due and payable on or after January 1, 2004 but on or before March 31, 2008, and (iii)(ii) 15% for dividends due and payable on or after April 1, 2008. At the date of this annual report, Japan has income tax treaties, conventions or agreements whereby the above-mentioned withholding tax rate is reduced, in most cases to 15 percent for portfolio investors with, among other countries, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, and the U.K.
Under the Treaty, as currently in force, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to Eligible U.S. Holders that are portfolio investors is generally is limited to 15% or, if certain conditions (as provided in the Treaty) are fulfilled, 10% of the gross amount actually distributed.

Andistributed, and dividends paid by a Japanese corporation to Eligible U.S. Holders that are pension funds is exempt from Japanese taxation by way of withholding or otherwise

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unless such dividends are derived from the carrying on of a business, directly or indirectly, by such pension funds.
If the maximum tax rate provided for in the income tax treaty applicable to dividends paid by Pioneer to any particular non-resident Holder who is entitled, underlower than the Treaty, to a reduced rate of Japanese withholding tax below the rate otherwise applicable under Japanese tax law or any particular non-resident Holder is exempt from Japanese income tax with respect to such dividends under the income tax treaty applicable to such particular non-resident Holder, such non-resident Holder who is entitled to a reduced rate of or exemption from Japanese withholding tax on payment of dividends on Pioneer’s shares of common stock is required to submit an Application Form for Income Tax Convention Regarding Relief from Japanese Income Tax on Dividends in advance through Pioneer to the relevant tax authority before such payment of dividends. A standing proxy for non-resident Holders of a Japanese corporation may provide this application service. With respect to ADRs,ADSs, this reduced rate or exemption is applicable if the Depositary or its agent will apply for this reduced treaty rate, if it is below the rate otherwise applicable under Japanese tax law, on behalf of Eligible U.S. Holders by submittingsubmits two Application Forms (one before payment of dividends, the other within eight months after Pioneer’s fiscal year-end or semi-fiscal year-end) to the Japanese tax authorities. To claim this reduced rate or exemption, any relevant Eligible U.S.non-resident Holder of ADRsADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the Depositary. An Eligible U.S.A non-resident Holder who is entitled, under the Treaty,an applicable tax treaty, to a reduced treaty rate of Japaneselower than the withholding tax below the rate otherwise applicable under Japanese tax law or an exemption from the withholding tax, but failsfailed to submit the required application in advance will be entitled to claim the refund of withholding taxes withheld in excess of the rate under an applicable tax treaty (if such non-resident Holder is entitled to a reduced treaty rate under the Treatyapplicable income tax treaty) or the whole of the withholding tax withheld (if such non-resident Holder is entitled to an exemption under the applicable income tax treaty) from the relevant Japanese tax authority. Pioneer does not assume any responsibility to ensure withholding at the reduced treaty rate or not withholding for shareholders who would be eligible under the Treatyan applicable tax treaty but do not follow the required procedures as stated above.

Gains derived from the sale of shares of common stock or ADRsADSs outside Japan by an Eligible U.S.a non-resident Holder holding such shares or ADRsADSs as a portfolio investor are, in general, not subject to Japanese income or corporation tax. Eligible U.S. Holders are not subject to Japanese income or corporation tax with respect to such gains under the Treaty.

Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired shares of common stock or ADRsADSs as a legatee, heir or donee even though neither the individual nor the deceased nor donor is a Japanese resident.

U.S.

Holders of shares of common stock of Pioneer or ADRsADSs should consult their tax advisors regarding the effect of these taxes as well asand, in the case of U.S. Holders, the possible application of the Estate and Gift Tax Treaty between the U.S. and Japan.

U.S. federal income taxation

U.S. Holders
The following discussion is a summary of the principal U.S. federal income tax consequences to holders of shares of common stock and ADSs that are U.S. Holders and that hold those shares of common stock or ADSs as capital assets (generally, for investment purposes).

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Taxation of Dividends
Subject to the passive foreign investment company rules discussed below, under U.S. federal income tax law, the gross amount of any distribution made by us in respect of shares of common stock or ADSs (without reduction for Japanese withholding taxes) will constitute a taxable dividend to the extent paid out of current or accumulated earnings and profits, as determined forunder U.S. federal income tax purposes. Aprinciples. The U.S. dollar amount of such a dividend generally will be included in the gross income of a U.S. Holder, as ordinary income, when the

73


dividend is actually or constructively received by the U.S. Holder, in the case of shares of common stock, or by the depositary, in the case of ADSs. The dividendDividends paid by us will not be eligible for the dividends received deduction generally allowed to U.S. corporations. However, pursuant to recently enacted legislation, dividendscorporations in respect of ourdividends received from other U.S. corporations.

Subject to certain exceptions for short-term and hedged positions, and provided that we are not a passive foreign investment company (as discussed below), dividends received by certain U.S. Holders (including individuals) prior to January 1, 2009 with respect to the shares of common stock or ADSs paidwill be subject to certain U.S. Holders (including individuals) mayfederal income taxation at a maximum rate of 15%. Investors should be aware that the U.S. Treasury Department has announced its intention to promulgate rules pursuant to which shareholders (and intermediaries) will be permitted to rely on certifications from issuers to establish that dividends qualify for preferential ratesthe reduced rate of U.S. federal income tax. Ataxation. Because such procedures have not yet been issued, we are not certain that we will be able to comply with them. U.S. Holders of ADSs or shares of common stock should consult their own tax advisors regarding the availability of the reduced rate in the light of their own particular circumstances.
The U.S. dollar amount of a dividend paid in Japanese yen will be included in gross income in a U.S. dollar amountdetermined based on the Japanese yen/U.S. dollar exchange rate in effect on the date that dividend is included in the gross income of the U.S. Holder, regardless of whether the payment is converted into dollars.dollars on such date. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is included in the gross income of a U.S. Holder through the date that payment is converted into U.S. dollars (or the U.S. Holder otherwise disposed of)the Japanese yen) will be treated as U.S. source ordinary income or loss.

U.S. Holders should consult their own tax advisors regarding the calculation and U.S. federal income tax treatment of foreign currency gain or loss.

To the extent, if any, that the amount of any distribution received by a U.S. Holder in respect of shares of common stock or ADSs exceeds our current and accumulated earnings and profits as determined under U.S. federal income tax principles, the distribution first will be treated as a tax-free return of capital to the extent the U.S. Holder’s adjusted tax basis in those shares or ADSs, and any balance in excess of that adjusted tax basis will be treatedthereafter as U.S. source capital gain. We do not expect to compute our earnings and profits under U.S. federal income tax principles, and therefore holders should assume that our distributions generally will be treated as paid out of our earnings and profits for U.S. federal income tax purposes.

Distributions of additional shares of common stock that are made to U.S. Holders with respect to their shares of common stock or ADSs and that are part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.

For U.S. foreign tax credit purposes, dividends included in gross income by a U.S. Holder in respect of shares of common stock or ADSs will constitute income from sources outside the United States and generally will be treated separately, together withsubject to various classifications and other items of “passive income” (or, in the case of some holders, “financial services income”) in computing foreign tax credit limitations. Subject to generally applicable limitations under U.S. federal income tax law and the Treaty, any Japanese withholding tax imposed in respect of a dividend paid by us in respect of shares of common stock or ADSs may be claimed either as a credit against the U.S. federal income tax liability of a U.S. Holder or, if the U.S. Holder does not elect to take a credit for any foreign taxes paid that year, as a deduction from that holder’sU.S. Holder’s taxable income. In general, special rules will apply to the calculation of foreign tax credits in respect of dividend income that is subject to preferential rates of U.S. federal income tax pursuant to recently enacted legislation.tax. Additionally, special rules apply to individuals

81


whose foreign source income during the taxable year consists entirely of “qualified passive income” and whose creditable foreign taxes paid or accrued during the taxable year do not exceed $300 ($600 in the case of a joint return). Further, under some circumstances, a U.S. Holder that:

 has held shares of common stock or ADSs for less than a specified minimum period, or
 
 is obligated to make payments related to our dividends,

will not be allowed a foreign tax credit for foreign taxes imposed on our dividends. Finally, foreign tax credits may not be allowed in respect of arrangements in which a U.S. Holder’s expected economic return, after non-U.S. taxes, is insubstantial. U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.

Upon The Internal Revenue Service (the “IRS”) has expressed concern that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. Accordingly, investors should be aware that the discussion above regarding the creditability of Japanese withholding tax on dividends could be affected by future actions that may be taken by the IRS.

Taxation of Capital Gains
In general upon a sale or other taxable disposition of shares of common stock or ADSs, a U.S. Holder will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other taxable disposition and the U.S. Holder’s adjusted tax basis in those shares of common stock or ADSs (which is generally the U.S. dollar cost thereof). In general, subjectSubject to the passive foreign investment company rules discussed below, such gain

74


or loss recognized on the sale or other taxable disposition generally will be capital gain or loss and, if the U.S. Holder’s holding period for those shares or ADSs exceeds one year, will be long-term capital gain or loss. SomeCertain U.S. Holders, including individuals, are eligible for preferential rates of U.S. federal income tax in respect of net long-term capital gain. Under U.S. federal tax law, the deduction of capital losses is subject to limitations. Any gain or loss recognized by a U.S. Holder in respect of the sale or other taxable disposition of shares of common stock or ADSs generally will be treated as derived from U.S. source income or losssources for U.S. foreign tax credit purposes.

We

Passive Foreign Investment Companies
Based on current estimates of our income and asset, we do not believe that we are a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes, and we intend to continue our operations in such a manner that it is highly unlikely that we would become a PFIC in the future although no assurances can be made regarding determination of our PFIC status in the current or any future taxable year. The PFIC determination is made annually and generally is based on either the portion of our assets (including goodwill) or the portion of our income being characterized as passive under the PFIC rules.
If we become a PFIC, unless a U.S. Holder elects to be taxed annually on a mark-to-market basis with respect to its shares of common stock or ADSs, any gain realized on a sale or other taxable disposition of shares of common stock or ADSs and certain “excess distributions” (generally distributions in excess of 125% of the average distribution over a three-year period, or shorter holding period for the shares of common stock or ADSs) would be treated as realized ratably over the U.S. Holder’s holding period for the shares of common stock or ADSs; amounts allocated to prior years during which we were a PFIC would be taxed at the highest ordinary income tax rate in effect for each such year, and an additional interest charge would be added in respectmay apply to the portion of the U.S. federal income tax attributableliability on such gains or distributions treated under the PFIC rules as having been deferred by the U.S. Holder. Moreover, dividends that a U.S. Holder receives from us will not be eligible for the reduced U.S. federal income tax rates described above if we are a PFIC either in the taxable year of the dividend or the preceding taxable year (and instead will be taxable at rates applicable to each such year. ordinary income).

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If a mark-to-market election were made, a U.S. Holder would take into account each year the appreciation or depreciation in value of its shares of common stock or ADSs, which would be treated as ordinary income or (subject to limitations) ordinary loss, as would gains or losses on actual dispositions of shares of common stock or ADSs.
Any U.S. Holder who owns shares of common stock or ADSs during any taxable year that we are a PFIC would be required to file Internal Revenue Service Form 8621. U.S. Holders are urged to consult their tax advisors concerning the U.S. federal income tax consequences of holding our shares of common stock or ADSs if we were considered a PFIC in any year.

Non-U.S. Holders

Distributions

The following discussion is a summary of the principal U.S. federal income tax consequences to beneficial holders of shares of common stock or ADSs that are neither U.S. Holders nor partnerships for U.S. federal income tax purposes (“Non-U.S. Holders”).
Subject to the discussion below on “Backup withholding and information reporting,” distributions received by a Non-U.S. Holder in respect of shares of common stock or ADSs generally will not be subject to any U.S. federal income or withholding tax, unless the Non-U.S. Holder conducts trade or business within the United States, and the distributions are effectively connected with that trade or business.

A

Subject to the discussion below on “Backup withholding and information reporting,” a Non-U.S. Holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a sale or other disposition of shares of common stock or ADSs, unless the gain is effectively connected with a trade or business conducted by the Non-U.S. Holder within the United States, or the Non-U.S. Holder is an individual who was present in the United States for 183 or more days in the taxable year of the disposition and other conditions are met.

If an income tax treaty applies to a Non-U.S. Holder, it may require, as a condition for the Non-U.S. Holder to be subject to U.S. federal income taxation on dividends or capital gains that are effectively connected with trade or business conducted by a Non-U.S. Holder in the United States, that the dividends or capital gains be attributable to a permanent establishment or fixed base that the Non-U.S. Holder maintains in the United States.

Income that is effectively connected with a U.S. trade or business of a Non-U.S. Holder, and, if an income tax treaty applies and so requires, is attributable to a U.S. permanent establishment or fixed base of the Non-U.S. Holder, generally will be taxed in the same manner as the income of a U.S. Holder. In addition, however, under certain circumstances, any such effectively connected income that is realized by a corporate Non-U.S. Holder may be subject to an additional “branch profits tax” at the rate of 30% or at

75


a lower rate that may be prescribed by an applicable income tax treaty.

Backup withholding and information reporting

In general, except in the case of certain exempt recipients (such as corporations) information reporting requirements will apply to dividends on shares of common stock or ADSs paid to U.S. Holders in the United States or through certain U.S. related financial intermediaries and to the proceeds received upon the sale, exchange or redemption of shares of common stock or ADSs by U.S. Holders within the United States or through certain U.S. related financial intermediaries. Furthermore, backup withholding currently at a rate of 28% may apply to those amounts if a U.S. Holder fails to provide an accurate tax

83


identification number or to report interest and dividends required to be shown on its U.S. federal income tax returns. The amount of backup withholding imposed on a payment to a U.S. Holder will be allowed as a credit againstreturns or makes other appropriate certifications in the holder’s U.S. federal income tax liability.

required manner.

Dividends on shares of common stock or ADSs paid to Non-U.S. Holders and proceeds received upon the sale, exchange or redemption of shares of common stock or ADSs by non-U.S.Non-U.S. Holders generally are exempt from information reporting and backup withholding. However, a holderNon-U.S. Holder may be required to provide certification of non-U.S. status in order to obtain that exemption.

Persons required to establish their exempt status generally must provide such certification, under penalty of perjury, on IRS Form W-9, entitled Request for Taxpayer Identification Number and Certification, in the case of U.S. persons, and on IRS Form W-8BEN, entitled Certificate of Foreign Status (or other appropriate IRS Form W-8), in the case of non-U.S. persons. Backup withholding is not an additional tax. The amount of backup withholding imposed on a payment generally may be claimed as a credit against the holder’s U.S. federal income tax liability provided that the required information is properly furnished to the IRS.
THE SUMMARY OF U.S. FEDERAL INCOME AND JAPANESE TAX CONSEQUENCES SET OUT ABOVE IS INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. INVESTORS IN THE COMMON STOCK OR ADSs ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING OR DISPOSING OF COMMON STOCK OR ADSs, BASED ON THEIR PARTICULAR CIRCUMSTANCES.
F. Dividends and paying agents

     Not applicable

G. Statement by experts

     Not applicable

H. Documents on display

It is possible to read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth100 F Street, NW,N.E., Washington, D.C. 20549. You can also access the documents at the SEC’s website (http://www.sec.gov/).

I. Subsidiary information

     Not applicable

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Item 11. Quantitative and Qualitative Disclosures About Market Risk

We operate internationally, giving rise to exposure to market risks from changes in foreign exchange rates and interest rates. In an effort to manage potential adverse effects caused by market fluctuations in foreign exchange rates and interest rates, we hedge these market risks by selectively using derivative financial instruments. However, we do not hedge all of our exposure, and the extent of hedge as well as type of hedging instruments to be used depends on factors including, but not limited to, type of risks exposed, market conditions and hedging cost. We do not hold or issue derivative financial instruments for trading purposes. To minimize credit risks from derivative financial instruments, we limit counterparties to reputable international financial institutions.

Marketable securities held by us are exposed to risk from changes in equity prices and consist entirely of available-for-sale securities. We do not take hedging measures against the market exposures on those securities.

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Foreign exchange risk

To hedge certain purchase and sale commitments and anticipated but not yet committed transactions denominated in other than functional currencies, we enter into forward exchange contracts and purchasepurchase- and write currencywrite-currency options. WrittenIn order to minimize the risk, written options are entered into only with purchased options.

The following table provides information about our derivative financial instruments related to foreign currency exchange transactions as of March 31, 2003 and 2002,2005, which have been translated into yen at the rate as of such date, together with the related weighted average contractual exchange rates at March 31, 2003 and 2002.2005. All of the contracts mature within one year. The amount of forward exchange contract selling euro buying yenThere are no option contracts outstanding as of Mach 31, 2003 increased compared with the amount at March 31, 2002, due to increased coverage against anticipated intercompany export transaction from Japan to Europe.

2005.

March 31, 2003
                         
Forward exchange contract         Millions of yen except average rates

  Yen EUR A$ THB S$    
Functional currency 
 
 
 
 
    
Sell/Buy US$/Yen EUR/Yen A$/US$ THB/US$ US$/S$ Total

 
 
 
 
 
 
Contract amounts  ¥721   ¥4,674   ¥2,694   ¥46   ¥361   ¥8,496 
Average contractual exchange rates  120.97   127.64   0.5573   42.851   1.771     
Fair value  ¥12   (¥58)  (¥192)  ¥0   ¥1   (¥237)

             
Currency option Millions of yen except average rates

  Yen    
Functional currency 
    
Sell/Buy EUR/Yen Yen/EUR Total

 
 
 
Notional amount  ¥1,558   ¥1,558   ¥3,116 
Average execution rates  120.00   0.00833     
Fair value  ¥1   (¥8)  (¥7)

2005
Forward exchange contract
                                 
Functional Yen  Yen  EUR  A$  THB  THB  NT$  Total 
currency US$/  Yen/  EUR/  A$/  THB/  US$/  US$/     
Sell/Buy Yen  US$  Yen  US$  US$  THB  NT$     
   
  (In millions of yen except average rates) 
Contract amounts ¥12,456  ¥490  ¥18,949  ¥1,440  ¥181  ¥1,063  ¥371  ¥34,950 
average contractual exchange rates  104.50   102.00   135.93   0.7741   39.1100   38.9461   31.2325     
Fair value ¥(243) ¥23  ¥(293) ¥16  ¥0  ¥(5) ¥(3) ¥(505)
 

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March 31, 2002

                             
Forward exchange contract         Millions of yen except average rates

  Yen THB A$ S$    
Functional currency 
 
 
 
    
Sell/Buy US$/Yen THB/US$ A$/Yen A$/US$ A$/GBP US$/S$ Total

 
 
 
 
 
 
 
Contract amounts  ¥266   ¥149   ¥100   ¥1,395   ¥54   ¥1,067   ¥3,031 
Average contractual exchange rates  131.50   43.407   69.85   0.5156   0.3640   1.829     
Fair value  (¥1)  ¥0   ¥1   (¥26)  (¥1)  (¥6)  (¥33)

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Currency option Millions of yen except average rates

  Yen    
Functional currency 
    
Sell/Buy EUR/Yen Yen/EUR Total

 
 
 
Notional amount  ¥1,440   ¥1,440   ¥2,880 
Average execution rates  110.00   0.00909     
Fair value  ¥2   (¥10)  (¥8)

To change the currency and interest rate features of intercompany finance transactions, we have entered into currency swap contracts with banks. Currency swap contracts effectively changed, in substance, U.S. dollars floating interest rate intercompany borrowings into yen fixed interest rate borrowings and Euro floating interest rate borrowings. The contract amounts decreased during the year ended March 31, 2003, reflecting decreased intercompany borrowing balances. The foreign exchange risk inherent in our currency swap as of March 31, 2003 and 20022005 are summarized as follows:
                              
Currency swap as of March 31, 2003                 Millions except average rates

          Expected maturity date    
  Contract amounts (year ending March 31)    
  
 
    
  Sell Buy 2004 2005 2006 Total Fair value

Functional currency: Yen  ¥24,860  US$200  ¥6,195             ¥18,665   ¥24,860   (¥586)
 Average contractual exchange rate          123.90       124.43         
Functional currency: Euro EUR57 US$50  ¥7,395           ¥7,395   (¥1,490)
 Average contractual exchange rate          0.88                 

                              
Currency swap as of March 31, 2002             Millions except average rates

          Expected maturity date    
  Contract amounts (year ending March 31)    
  
 
    
  Sell Buy 2003 2004 2005 Total Fair value

Functional currency: Yen  ¥24,678  US$200  ¥5,893   ¥6,195   ¥12,590   ¥24,678   ¥2,048 
 Average contractual exchange rate          117.85   123.90   125.90          
Functional currency: Euro EUR116 US$100  ¥13,487           ¥13,487   (¥222)
 Average contractual exchange rate          0.86                 
Functional currency: Singapore dollar  S$65  US$36  ¥4,717           ¥4,717   ¥20 
 Average contractual exchange rate          1.84                 

Currency swap as of March 31, 2005
                             
           Expected maturity date    
  Contract amounts   (year ending March 31)    
  Buy  Sell  2006  2007  2008  Total  Fair value 
 
  (In millions except average rates) 
Functional currency: Yen ¥24,540   US$200  ¥18,665  ¥5,875      ¥24,540  ¥(3,009)
Average contractual exchange rate          124.43   117.50             
Functional currency: Euro  EUR76   US$100  ¥10,506          ¥10,506  ¥189 
Average contractual exchange rate          1.3218                 
Functional currency: Euro  EUR3   GBP2  ¥443           443  ¥1 
Average contractual exchange rate          0.6901                 
 
With respect to interest rate risk inherent in our currency swaps as of March 31, 2003 and 2002,2005, see “Interest rate risk” below.

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Interest rate risk

Interest

The following table provides information about interest rate risk inherent in the aforementioned currency swaps as of March 31, 2003 and 20022005. Variable interest rates are summarizeddetermined using formulas such as follows:LIBOR+a
                               
Currency swap as of March 31, 2003                 Millions except average rates

            Expected maturity date    
    Contract amounts (year ending March 31)    
    
 
    
    Sell Buy 2004 2005 2006 Total Fair value

Functional currency: Yen                            
 Variable (US$) to Fixed (Yen)  ¥24,860  US$200  ¥6,195                ¥18,665   ¥24,860   (¥586)
  Average pay rate          0.14%      0.06%        
  Average receive rate          1.34%      2.13%        
Functional currency: Euro                            
 Variable (US$) to Variable (Euro) EUR57 US$50  ¥7,395           ¥7,395   (¥1,490)
  Average pay rate          3.94%                
  Average receive rate          1.38%                

                               
Currency swap as of March 31, 2002                 Millions except average rates

            Expected maturity date    
    Contract amounts (year ending March 31)    
    
 
    
    Sell Buy 2003 2004 2005 Total Fair value

Functional currency: Yen                            
 Variable (US$) to Fixed (Yen)  ¥24,678  US$200  ¥5,893   ¥6,195   ¥12,590   ¥24,678   ¥2,048 
  Average pay rate          0.43%  0.14%  0.41%        
  Average receive rate          2.02%  1.91%  2.53%        
Functional currency: Euro                            
 Variable (US$) to Variable (Euro) EUR116 US$100  ¥13,487           ¥13,487   (¥222)
  Average pay rate          3.85%                
  Average receive rate          1.89%                
Functional currency: Euro                            
 Variable (US$) to Fixed (S$)  S$65  US$36  ¥4,717           ¥4,717   ¥20 
  Average pay rate          1.14%                
  Average receive rate          1.95%                

.
Currency swap as of March 31, 2005
                             
           Expected maturity date   
  Contract amounts   (year ending March 31)   
  Buy  Sell  2006  2007  2008  Total  Fair value 
 
  (In millions except average rates) 
Functional currency: Yen                            
Variable (US$) to Fixed (Yen) ¥12,590   US$100  ¥12,590          ¥12,590  ¥(1,761)
Average pay rate          0.41%                
Average receive rate          2.17%                
Fixed (US$) to Fixed (Yen) ¥11,950   US$100  ¥6,075  ¥5,875      ¥11,950  ¥(1,248)
Average pay rate          (0.65)%  (1.35)%            
Average receive rate          2.88%  1.21%            
Functional currency: Euro                            
Variable (US$) to Fixed (Euro)  EUR76   US$100  ¥10,506          ¥10,506  ¥189 
Average pay rate          2.22%                
Average receive rate          2.96%                
Functional currency: Euro                            
Fixed (GBP) to Fixed (Euro)  EUR3   GBP2  ¥443          ¥443  ¥1 
Average pay rate          2.20%                
Average receive rate          4.61%                
 

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Principal

The following table provides information about principal cash flows by expected maturity dates, weighted average interest rates, and fair value of our debt obligations as of March 31, 2003 and 2002 are2005. The interest rate on the variable rate debt is determined based on prevailing market rates for tax-exempt municipal bonds in the U.S.
Long-term debt (including due within one year) as follows:
                                        
Long-term debt (including due within one year) as of March 31, 2003         Millions of yen except average rates

         Expected maturity date (year ending March 31)    
     Functional 
    
     Currency 2004 2005 2006 2007 2008 Thereafter Total Fair value

Fixed rate (Yen) Yen  ¥973   4,513   15,318   251   244   11,228   ¥32,527   ¥34,087 
 Average interest rate      2.48%  3.87%  2.37%  3.74%  3.80%  2.91%  2.79%    
Variable rate (US$) US$          601               601   601 
 Average interest rate              1.59%              1.59%    
Variable rate (EUR) EUR      7   7   7   6   12   39   39 
  Average interest          3.52%  3.52%  3.52%  3.52%  3.52%  3.52%    

   Total      ¥973   4,520   15,926   258   250   11,240   ¥33,167   ¥34,727 

                                       
Long-term debt (including due within one year) as of March 31, 2002            Millions of yen except average rates

        Expected maturity date (year ending March 31)    
    Functional 
    
    Currency 2003 2004 2005 2006 2007 Thereafter Total Fair value

Fixed rate (Yen) Yen  ¥2,446   1,591   5,831   15,326   256   12,007   ¥37,457   ¥38,254 
 Average interest rate      2.17%  3.06%  3.89%  2.38%  3.80%  2.97%  2.83%    
Variable rate (US$) US$              666           666   666 
 Average interest rate                  2.41%          2.41%    
Interest free loan (PTE) PTE  43                       43   43 

  Total      ¥2,489   1,591   5,831   15,992   256   12,007   ¥38,166   ¥38,963 

of March 31, 2005

                                     
  Functional  Expected maturity date (year ending March 31)    
  Currency  2006  2007  2008  2009  2010  Thereafter  Total  Fair value 
 
  (In millions of yen except average rates) 
Fixed rate (Yen) Yen ¥15,294   244   244   10,244   244   62,519  ¥88,789  ¥83,724 
Average interest rate      2.36%  2.90%  2.90%  2.80%  2.90%  0.03%  0.78%    
Variable rate (US$) US$  537                       537   537 
Average interest rate      1.70%                      1.70%    
Interest free loan (EUR) EUR  4   7   7   22           40   40 
 
Total     ¥15,835   251   251   10,266   244   62,519  ¥89,366  ¥84,301 
 
Market price risks on available-for-sale securities

We do not own any marketable securities for trading purposes. Our equity investment portfolio consists almost entirely of securities issued by Japanese companies. The following table sets forth maturity dates and cost and fair values of debt securities in our investment portfolio, and the cost and fair values of equity securities therein, at March 31, 2003 and 2002.
                  
           Millions of yen

   2003 2002
   
 
   Cost Fair value Cost Fair value
   
 
 
 
Debt securities (by contractual maturities)                
 Maturing within one year        ¥3,485   ¥3,447 
 Maturing over one year  ¥85   ¥71   111   78 
Equity securities  ¥6,636   ¥14,760   ¥7,973   ¥18,290 

2005.
         
  2005 
  Cost  Fair value 
  (In millions of yen) 
Debt securities (by contractual maturities)        
Maturing over one year ¥94  ¥98 
Equity securities ¥5,734  ¥22,170 
 

Item 12. Description of Securities Other than Equity Securities

     Not applicable

87

80


PART II

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

     None

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     Not applicable

Item 15. Controls and Procedures

(a)Within 90 days prior to the date of this annual report, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures.
Pioneer performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the fiscal 2005. Disclosure controls and procedures are designed to ensure that the material financial and non-financial information required to be disclosed in the reports that Pioneer files under the Exchange Act is accumulated and communicated to its management including the chief executive officer and the principal accounting and financial officer to allow timely decisions regarding required disclosure. The disclosure controls and procedures also ensures that the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. The evaluation was performed under the supervision of Kaneo Ito, Pioneer’s Chief Executive Officer and Tamihiko Sudo, Pioneer’s Chief Financial Officer. Pioneer’s disclosure and controls and procedures are designed to provide reasonable assurance of achieving its objectives. Managerial judgment was necessary to evaluate the cost-benefit relationship of possible controls and procedures. Mr. Ito and Mr. Sudo have concluded that Pioneer’s disclosure controls and procedures are effective at the reasonable assurance level.
There have been no changes in Pioneer internal control over financial reporting during fiscal period ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, Pioneer’s internal control over financial reporting.

88


Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Pioneer maintains a corporate auditor system, in accordance with the Japanese Commercial Code (the “Code”) and the Law concerning Exceptional Measures to the Commercial Code with respect to Auditing, etc. of Joint Stock Corporations (the “Special Exception Law”). Pioneer’s Board of Corporate Auditors is comprised of five Corporate Auditors, three of whom are outside Corporate Auditors. Each Corporate Auditor has been appointed at its shareholders’ meetings and has certain statutory powers under the Code and the Special Exception Law, including auditing the business affairs and accounts of Pioneer.
Pioneer’s Board of Corporate Auditors has determined that it does not have an audit committee financial expert serving on the Board of Corporate Auditors. The qualifications for, and powers of, the Corporate Auditor specified in the Code and the Special Exception Law are different from those anticipated for audit committee financial expert. Corporate Auditors have the authority to be given reports from a certified public accountant or an accounting firm concerning audits, including technical accounting matters. At the same time, each Corporate Auditor has the authority to consult internal and external experts on accounting matters. Pioneer’s Board of Corporate Auditors has confirmed that each Corporate Auditor should fulfill the requirements under Japanese laws and regulations and otherwise follow Japanese corporate governance practices. In addition, its Board of Corporate Auditors has a former General Manager of Accounting Division of Pioneer, Mr. Makoto Koshiba, as a full time Corporate Auditor, and a certified public accountant of Japan, Mr. Isao Moriya, as an outside Corporate Auditor. Accordingly, it is not necessarily fundamental for Pioneer to nominate as Corporate Auditor a person who meets the definition of audit committee financial experts. Although Pioneer does not have an audit committee financial expert on its Board of Corporate Auditors, Pioneer believes that Pioneer’s current corporate governance system, taken as a whole, including the Corporate Auditors’ ability to consult internal and external experts, is functionally equivalent to a system having an audit committee financial expert on its Board of Corporate Auditors.
Item 16B. Code of Ethics
We have adopted the Pioneer Group Code of Conduct (the “Code of Conduct”) for all officers and employees of the Pioneer Group. The Code of Conduct is publicly available on our website at www.pioneer.co.jp. If we make any substantive amendments to the Code of Conduct or grant any waivers, including any implicit waiver, from a provision of this code to our chief executive officer, principal financial officer or corporate controller, we will disclose the nature of such amendment or waiver on our website.

89


Item 16C. Principal Accountant Fees and Services
Aggregate fees billed to the Company for the fiscal years ended March 31, 2004 and 2005 by our principal accounting firm, Deloitte Touche Tohmatsu (a Japanese member firm of Deloitte Touche Tohmatsu, Swiss Verein), the other member firms of Deloitte Touche Tohmatsu (Swiss Verein), and their respective affiliates (collectively, “Deloitte Touche Tohmatsu”), were as follows.
         
  Year ended March 31 
  2004  2005 
  (In millions of yen) 
Audit Fees (1) ¥339  ¥343 
Audit-Related Fees (2)  42   48 
Tax Fees (3)  43   58 
All Other Fees (4)  7   42 
       
Total ¥431  ¥491 
       
(1)Includes fees for the audit of our annual financial statements included in our Form 20-F and filedfor services provided in connection with the Securitiesstatutory and Exchange Commission is recorded, processed, summarizedregulatory filings or engagements. This also includes fees billed for issuance of comfort letters and reported in a timely manner. The evaluation was performed under the supervision of Kaneo Ito, Pioneer’s Chief Executive Officer, and Katsuhiro Abe, Pioneer’s Chief Financial Officer. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives. Managerial judgment was necessary to evaluate the cost-benefit relationship of possible controls and procedures. Based on the foregoing, Pioneer’s Chief Executive Officer and Chief Financial Officer have concluded that Pioneer’s disclosure controls and procedures were effective.consent letters.
 
(b)(2) There have been no significant changesIncludes fees for assurance and related services that are performed by the independent accountant which include employee benefit plan audits, accounting consultations and audits in Pioneer’sconnection with internal controlscontrol reviews, attest services that are not required by statute or regulation and consultation concerning financial accounting and reporting standards.
(3)Includes fees for services related to tax compliance, including the preparation of tax returns and claims for refund, tax planning and tax advice.
(4)Includes fees for other than the services reported in paragraphs (1) through (3). All other factors that could significantly affect internal controls subsequentfees for fiscal 2005 include consulting services relating to the date of our most recent evaluation of such internal controls. Therefore, no corrective actions were taken.compliance control.
Policy and procedures of the Board of Corporate Auditors for pre-approval
In accordance with the regulations of the SEC, the Board of Corporate Auditors has adopted the policy and procedures for the pre-approval regarding the engagements of the independent audit firm and its affiliates (the “auditor”). The following is a summary of the policy and procedures.
All audit and permissible non-audit services provided by the auditor to Pioneer and its consolidated subsidiaries must be pre-approved by the Board of Corporate Auditors, prior to the engagement of the auditor. In the case that pre-approvals are requested, the description of the services including types of the service, periods of the service, and estimated fees, must be submitted to the Board of Corporate Auditors. Our pre-approval procedures have two different forms, “Comprehensive pre-approval” and “Individual pre-approval.” Under the “Comprehensive pre-approval” procedure, all audit and permissible non-audit services scheduled for the following fiscal year are pre-approved by resolution of the Board of Corporate Auditors meeting. All audit and permissible non-audit services regarding the specific projects which are not included in the “Comprehensive pre-approval” must be subject to the “Individual pre-approval.” For the purpose of providing such pre-approval in a timely manner, the Board of Corporate Auditors may delegate “Individual pre-approval” authority to full time Corporate Auditors. Full-time Corporate Auditors shall report any “Individual pre-approval” decisions to the Board of Corporate Auditors meeting to be held immediately after such pre-approval.

90

Item 16. [Reserved]

81


None of the services provided by the auditor in fiscal 2004 and 2005 were waived from the pre-approval requirement pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

PART III

Item 16D. Exemptions from the Listing Standards for Audit Committees
     Not applicable
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth the information with respect to any purchase made by Pioneer of its common stock during fiscal 2005 ended March 31, 2005.
                 
          (c) Total Number  (d) Maximum Number 
          of Shares Purchased  of Shares that 
  (a) Total  (b) Average  as Part of Publicly  May Yet Be 
  Number of  Price Paid  Announced  Purchased Under the 
Period Shares Purchased  per Share  Plans or Programs  Plans or Programs 
April 1 to April 30, 2004  649  ¥3,158.43       
May 1 to May 31, 2004  302  ¥2,824.09       
June 1 to June 30, 2004  162  ¥2,761.36       
July 1 to July��31, 2004  598  ¥2,660.23       
August 1 to August 31, 2004  315  ¥2,369.78       
September 1 to September 30, 2004  544  ¥2,373.78       
October 1 to October 31, 2004  683  ¥2,252.31       
November 1 to November 30, 2004  741  ¥1,953.67       
December 1 to December 31, 2004  1,533  ¥1,958.55       
January 1 to January 31, 2005  509  ¥1,999.15       
February 1 to February 28, 2005  479  ¥1,880.48       
March 1 to March 31, 2005  1,000,580  ¥1,963.14   1,000,000   0 
             
Total  1,007,095  ¥1,965.22   1,000,000     
Notes: 1. A holder of shares constituting less than one unit may require Pioneer to purchase such shares at their market value in accordance with the provision of the Share Handling Regulations of Pioneer, under the Commercial Code of Japan. All shares other than purchases publicly announced were made by such requests.
2.On March 11, 2005, share repurchase approved by the Board of Directors pursuant to the Articles of Incorporation of Pioneer was announced publicly.
Total number of shares approved to be purchased was up to 1,000,000 shares of common stock.
Period during which shares may be purchased was from March 14, 2005 to May 11, 2005. Pioneer finished the purchase on March 23, 2005 prior to expiration.

91


PART III

Item 17. Financial Statements

     See Consolidated Financial Statements. Reference is made to Item 19 for a list of all financial statements filed as part of this annual report.

Item 18. Financial Statements

     We have responded to Item 17 in lieu of responding to this Item.

Item 19. Exhibits
     
  Page
 
Consolidated financial statements
    
 
Index to Consolidated Financial Statements  F-1 
Report of Independent Auditors’ ReportRegistered Public Accounting Firm  F-2 
Consolidated Balance Sheets as of March 31, 20022004 and 20032005  F-3 
Consolidated Statements of IncomeOperations for the years ended March 31, 2001, 20022003, 2004 and 20032005  F-5 
Consolidated Statements of Shareholders’ Equity for the years ended March 31, 2001, 20022003, 2004 and 20032005  F-6 
Consolidated Statements of Cash Flows for the years ended March 31, 2001, 20022003, 2004 and 20032005  F-7 
Notes to Consolidated Financial Statements  F-8 

Exhibits
   
1.01 The ArticlesRegulations of Incorporation,the Board of Directors, as amended and currently in effect (English translation)
   
2(a).011.02Regulations of the Board of Corporate Auditors, as amended and currently in effect (English translation)
2.01 Share Handling Regulations, as amended and currently in effect (English translation)
   
99.112.01 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.02Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.01Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 Certificationof the Sarbanes-Oxley Act of 2002

92

82


SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
PIONEER CORPORATION
(Registrant)
Date: September 8, 2005 By  /s/ Tamihiko Sudo  
Tamihiko Sudo 
Chief Financial Officer 

93


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
     
  PIONEER CORPORATION

(Registrant)
Page 
Date: August 6, 2003By/s/ Katsuhiro Abe

Katsuhiro Abe
Chief Financial Officer

83


CERTIFICATIONS

I, Kaneo Ito, certify that:

1.I have reviewed this annual report on Form 20-F of Pioneer Corporation;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a.designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c.presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a.all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: August 6, 2003/s/ Kaneo Ito

Kaneo Ito
Chief Executive Officer
Pioneer Corporation

84


CERTIFICATIONS

I, Katsuhiro Abe, certify that:

1.I have reviewed this annual report on Form 20-F of Pioneer Corporation;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a.designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c.presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a.all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: August 6, 2003/s/ Katsuhiro Abe

Katsuhiro Abe
Chief Financial Officer
Pioneer Corporation

85


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Page

Consolidated financial statements
    
 
Report of Independent Auditors’ ReportRegistered Public Accounting Firm  F-2 
Consolidated Balance Sheets as of March 31, 20022004 and 20032005  F-3 
Consolidated Statements of IncomeOperations for the years ended March 31, 2001, 20022003, 2004 and 20032005  F-5 
Consolidated Statements of Shareholders’ Equity for the years ended March 31, 2001, 20022003, 2004 and 20032005  F-6 
Consolidated Statements of Cash Flows for the years ended March 31, 2001, 20022003, 2004 and 20032005  F-7 
Notes to Consolidated Financial Statements  F-8 

F-1


Report of Independent Auditors’ Report

Registered Public Accounting Firm

To the Board of Directors and Shareholders of Pioneer Corporation:

We have audited the accompanying consolidated balance sheets of Pioneer Corporation and subsidiaries as of March 31, 20022004 and 2003,2005, and the related consolidated statements of income,operations, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 20032005 (all expressed in Japanese yen). 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 in accordance with auditingthe standards generally accepted inof the United States of America.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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying consolidated financial statements do not present segment information concerning the Company’s operations which, in our opinion, is required for a complete presentation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

In our opinion, except for the omission of segment information disclosures, such consolidated financial statements present fairly, in all material respects, the financial position of Pioneer Corporation and subsidiaries as of March 31, 20022004 and 2003,2005, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 20032005, in conformity with accounting principles generally accepted in the United States of America.

Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 1. Such U.S. dollar amounts are presented solely for the convenience of readers outside Japan.
   
/s/ Deloitte Touche Tohmatsu
Deloitte Touche Tohmatsu
Tokyo, Japan
  

June 9, 2003, except for Note 21, as to which the date is July 17, 2003

May 6, 2005

F-2


Consolidated Balance Sheets
Pioneer Corporation and Subsidiaries
March 31
                
             Thousands of
U.S. Dollars
 
     Millions of Yen  (Note 1) 
     
  
 
Assets 2002  2003  2003 

Current assets:
            
 Cash and cash equivalents—            
   Cash, including time deposits of ¥44,413 million— $370,108 thousand (¥55,915 million in 2002) ¥127,113  ¥142,480  $1,187,333 
 Available-for-sale securities (Note 3)  3,455       
 Trade receivables—            
  Notes  10,240   5,252   43,766 
  Accounts  120,456   113,135   942,792 
  Allowance for doubtful notes and accounts (Note 18)  (5,133)  (4,519)  (37,658)
 Inventories (Note 4)  96,910   93,620   780,167 
 Deferred income taxes (Note 9)  26,270   29,958   249,650 
 Prepaid expenses and other current assets  32,509   36,056   300,467 

   Total current assets  411,820   415,982   3,466,517 

Investments and long-term receivables:
            
 Available-for-sale securities (Note 3)  18,360   14,831   123,592 
 Investments in and advances to affiliated companies (Note 5)  11,067   7,841   65,342 
 Sundry investments (Note 16)  3,203   2,907   24,225 
 Long-term receivables, less allowance for doubtful accounts of ¥112 million—$934 thousand (¥186 million in 2002) (Note 18)  374   292   2,433 

   Total investments and long-term receivables  33,004   25,871   215,592 

Property, plant and equipment (Note 7):
            
 Land  26,525   25,548   212,900 
 Buildings  110,869   107,309   894,242 
 Machinery and equipment  242,600   237,086   1,975,716 
 Construction in progress  2,163   6,132   51,100 

   Total  382,157   376,075   3,133,958 
 Accumulated depreciation  (231,397)  (230,376)  (1,919,800)

   Net property, plant and equipment  150,760   145,699   1,214,158 

Other assets:
            
 Intangible assets (Note 6)  15,561   15,619   130,158 
 Deferred income taxes (Note 9)  25,151   35,734   297,783 
 Other  8,833   8,124   67,700 

   Total other assets  49,545   59,477   495,641 

   Total assets ¥645,129  ¥647,029  $5,391,908 

             
          Thousands of 
          U.S. Dollars 
  Millions of Yen  (Note 1) 
Assets 2004  2005  2005 
 
Current assets:
            
Cash and cash equivalents—            
Cash, including time deposits of ¥52,275 million—$488,551 thousand (¥88,425 million in 2004) ¥192,419  ¥116,681  $1,090,477 
Trade receivables—            
Notes  2,988   2,516   23,514 
Accounts  112,411   132,110   1,234,673 
Allowance for doubtful notes and accounts (Note 20)  (3,344)  (2,450)  (22,897)
Inventories (Note 6)  107,806   109,015   1,018,831 
Deferred income taxes (Note 11)  28,886   25,519   238,495 
Prepaid expenses and other current assets  38,622   43,505   406,589 
 
Total current assets  479,788   426,896   3,989,682 
 
             
Investments and long-term receivables:
            
Available-for-sale securities (Note 5)  24,516   22,268   208,112 
Investments in and advances to affiliated companies (Note 7)  5,573   2,987   27,916 
Sundry investments (Notes 5 and 18)  3,383   3,388   31,664 
Long-term receivables, less allowance for doubtful accounts of ¥160 million—$1,495 thousand (¥190 million in 2004) (Note 20)  253   185   1,729 
 
Total investments and long-term receivables  33,725   28,828   269,421 
 
             
Property, plant and equipment(Note 9):
            
Land  25,050   32,965   308,084 
Buildings  113,863   136,372   1,274,505 
Machinery and equipment  239,081   293,359   2,741,673 
Construction in progress  7,568   1,056   9,869 
 
Total  385,562   463,752   4,334,131 
Accumulated depreciation  (229,361)  (253,607)  (2,370,159)
 
Net property, plant and equipment  156,201   210,145   1,963,972 
 
             
Other assets:
            
Intangible assets (Note 8)  18,966   24,052   224,785 
Deferred income taxes (Note 11)  24,276   25,420   237,570 
Other  9,586   9,826   91,832 
 
Total other assets  52,828   59,298   554,187 
 
             
Total assets ¥722,542  ¥725,167  $6,777,262 
 
See notes to consolidated financial statements.

F-3


                
             Thousands of 
             U.S. Dollars 
     Millions of Yen  (Note 1) 
     
  
 
Liabilities and Shareholders’ Equity 2002  2003  2003 

Current liabilities:
            
 Short-term borrowings (Note 7) ¥45,867  ¥29,893  $249,108 
 Current portion of long-term debt (Note 7)  2,551   974   8,117 
 Trade payables  57,231   67,173   559,775 
 Accrued liabilities—            
  Taxes on income  4,642   8,653   72,108 
  Payroll  15,662   17,616   146,800 
  Royalty  13,312   14,111   117,592 
  Other  32,509   36,784   306,533 
 Warranty reserve (Note 18)  6,481   6,493   54,108 
 Dividends payable  1,350   1,754   14,617 
 Other current liabilities  14,705   23,079   192,325 

   Total current liabilities  194,310   206,530   1,721,083 

Long-term liabilities:
            
 Long-term debt (Note 7)  35,677   32,196   268,300 
 Accrued pension and severance cost (Note 8)  46,270   70,800   590,000 
 Deferred income taxes (Note 9)  918   496   4,133 
 Other long-term liabilities  1,707   335   2,792 

   Total long-term liabilities  84,572   103,827   865,225 


Commitments and contingent liabilities (Note 19)

Minority interests
19,244   18,279   152,325 

 
Shareholders’ equity(Note 10):
            
 Common stock, No par value            
  Authorized— 400,000,000 shares            
  Issued—180,063,836 shares—2002 and 2003  49,049   49,049   408,742 
 Capital surplus  82,010   82,159   684,658 
 Retained earnings  240,692   253,266   2,110,550 
 Accumulated other comprehensive income (loss) (Note 12)  (24,736)  (55,629)  (463,575)
 Treasury stock, at cost 4,272 shares—2002 and 4,629,028 shares—2003  (12)  (10,452)  (87,100)

   Total shareholders’ equity  347,003   318,393   2,653,275 

 
   Total liabilities and shareholders’ equity ¥645,129  ¥647,029  $5,391,908 

             
          Thousands of 
          U.S. Dollars 
  Millions of Yen  (Note 1) 
Liabilities and Shareholders’ Equity 2004  2005  2005 
 
Current liabilities:
            
Short-term borrowings (Note 9) ¥23,327  ¥33,152  $309,832 
Current portion of long-term debt (Note 9)  4,510   19,276   180,150 
Trade payables  79,439   96,335   900,327 
Accrued liabilities—            
Taxes on income  9,341   4,938   46,150 
Payroll  17,604   17,203   160,776 
Royalty  18,688   14,811   138,420 
Other  35,626   36,843   344,327 
Warranty reserve (Note 20)  5,419   5,722   53,477 
Dividends payable  2,193   2,180   20,374 
Other current liabilities  27,151   20,710   193,551 
 
Total current liabilities  223,298   251,170   2,347,384 
 
             
Long-term liabilities:
            
Long-term debt (Note 9)  89,691   81,219   759,056 
Accrued pension and severance cost (Note 10)  57,143   40,022   374,037 
Deferred income taxes (Note 11)  1,327   1,630   15,234 
Other long-term liabilities  301   719   6,720 
 
Total long-term liabilities  148,462   123,590   1,155,047 
 
             
Commitments and contingent liabilities(Note 21)
            
             
Minority interests
  17,844   18,168   169,794 
 
             
Shareholders’ equity(Note 12):
            
Common stock, no par value            
Authorized— 400,000,000 shares            
Issued—180,063,836 shares—2004 and 2005  49,049   49,049   458,402 
Capital surplus  82,464   82,735   773,224 
Retained earnings  273,718   260,556   2,435,103 
Accumulated other comprehensive loss (Note 14)  (61,829)  (47,669)  (445,505)
Treasury stock, at cost 4,632,962 shares—2004 and 5,635,190 shares—2005  (10,464)  (12,432)  (116,187)
 
Total shareholders’ equity  332,938   332,239   3,105,037 
 
             
Total liabilities and shareholders’ equity ¥722,542  ¥725,167  $6,777,262 
 
See notes to consolidated financial statements.

F-4


Consolidated Statements of IncomeOperations

Pioneer Corporation and Subsidiaries
Year ended March 31
                   
                Thousands of 
                U.S. Dollars 
    Millions of Yen  (Note 1) 
    
  
 
    2001  2002  2003  2003 

Operating revenue:
                
 Net sales ¥ 619,828  ¥ 644,537  ¥699,684  $5,830,700 
 Royalty revenue  20,530   17,588   12,584   104,867 

  Total operating revenue  640,358   662,125   712,268   5,935,567 

Operating costs and expenses:
                
 Cost of sales  447,389   465,336   498,492   4,154,100 
 Selling, general and administrative  160,064   178,848   182,424   1,520,200 

  Total operating costs and expenses  607,453   644,184   680,916   5,674,300 

Operating income
  32,905   17,941   31,352   261,267 
Other income (expenses):
                
 Interest income  4,920   3,039   2,192   18,267 
 Gain on sale of subsidiaries’ stock        768   6,400 
 Foreign exchange gain (loss)  (1,192)  297   (2,042)  (17,017)
 Interest expense  (4,301)  (3,445)  (2,887)  (24,059)
 Other—net (Note 13)  1,861   (2,489)  (753)  (6,275)

  Total other income (expenses)  1,288   (2,598)  (2,722)  (22,684)

Income before income taxes
  34,193   15,343   28,630   238,583 
Income taxes (Note 9):
                
 Current  15,011   11,107   14,762   123,017 
 Deferred  (691)  (4,385)  (5,315)  (44,292)

  Total income taxes  14,320   6,722   9,447   78,725 

Income before minority interest and equity in losses
  19,873   8,621   19,183   159,858 
Minority interest in losses (earnings) of subsidiaries
  (1,445)  (504)  21   175 
Equity in losses of affiliated companies (Note 5)
  (130)  (70)  (3,126)  (26,050)

Net income
 ¥18,298  ¥8,047  ¥16,078  $133,983 

                   
    Yen  U.S. Dollars 
    
  
 
    2001  2002  2003  2003 

Per share of common stock and per American Depositary Share:
                
 Net income (Note 6 and 17)                
  Basic ¥ 101.76  ¥ 44.70  ¥ 90.24  $0.75 
  Diluted  101.70   44.69   90.24   0.75 

                 
              Thousands of 
              U.S. Dollars 
  Millions of Yen  (Note 1)
  2003  2004  2005  2005 
 
Revenues:
                
Operating revenue:                
Net sales ¥664,675  ¥689,064  ¥723,411  $6,760,850 
Royalty revenue  12,584   11,821   10,237   95,673 
 
Total operating revenue  677,259   700,885   733,648   6,856,523 
Interest income  2,153   1,420   1,930   18,037 
Gain on sale of subsidiaries’ stock  768          
Other income (Note 15)  641   504   3,415   31,916 
 
Total revenues  680,821   702,809   738,993   6,906,476 
 
Cost and expenses:
                
Cost of sales  473,239   487,297   584,060   5,458,504 
Selling, general and administrative expenses  168,736   166,415   195,693   1,828,906 
Subsidy from the government (Note 10)        (48,697)  (455,112)
Interest expense  2,814   2,154   1,746   16,318 
Loss on sale and disposal of fixed assets  4,519   3,454   40   374 
Other deductions (Note 15)  3,434   1,641   6,338   59,234 
 
Total cost and expenses  652,742   660,961   739,180   6,908,224 
 
Income (loss) from continuing operations before income taxes
  28,079   41,848   (187)  (1,748)
Income taxes(Note 11):
                
Current  14,477   17,829   7,688   71,850 
Deferred  (5,445)  758   (2,846)  (26,598)
 
Total income taxes  9,032   18,587   4,842   45,252 
 
Income (loss) from continuing operations before minority interest and equity in losses
  19,047   23,261   (5,029)  (47,000)
Minority interest in losses (earnings) of subsidiaries
  21   (654)  (692)  (6,467)
Equity in losses of affiliated companies(Note 7)
  (3,126)  (2,244)  (3,068)  (28,673)
 
Income (loss) from continuing operations  15,942   20,363   (8,789)  (82,140)
Income from discontinued operations, net of tax (Note 4)  136   4,475       
 
Net income (loss)
 ¥16,078  ¥24,838  ¥(8,789) $(82,140)
 
                 
  Yen  U.S. Dollars
  2003  2004  2005  2005 
 
Per share of common stock and per American Depositary Share(Note 19):
                
Basic:                
Continuing operations ¥89.48  ¥116.07  ¥(50.11) $(0.47)
Discontinued operations  0.76   25.51       
 
Net income (loss) ¥90.24  ¥141.58  ¥(50.11) $(0.47)
 
Diluted:                
Continuing operations ¥89.48  ¥115.18  ¥(50.11) $(0.47)
Discontinued operations  0.76   25.34       
 
Net income (loss) ¥90.24  ¥140.52  ¥(50.11) $(0.47)
 
See notes to consolidated financial statements.

F-5


Consolidated Statements of Shareholders’ Equity

Pioneer Corporation and Subsidiaries
Year ended March 31
                              
       Millions of Yen 
       
 
                   Accumulated         
   Number of              Other      Total 
   Shares Issued  Common  Capital  Retained  Comprehensive  Treasury  Shareholders’ 
   (Thousands)  Stock  Surplus  Earnings  Income (Loss)  Stock  Equity 

Balance at March 31, 2000  179,588  ¥ 48,452  ¥ 80,705  ¥ 219,745  36,442)     ¥312,460 
Comprehensive income                            
 Net income              18,298           18,298 
 Other comprehensive income                  7,791       7,791 
                          
 
Comprehensive income                          26,089 
Exercise of warrants  306   391   391               782 
Value ascribed to warrants and stock options (Note 11)          362               362 
Cash dividends (¥15.00 per share)              (2,698)          (2,698)

Balance at March 31, 2001  179,894   48,843   81,458   235,345   (28,651)      336,995 
Comprehensive income                            
 Net income              8,047           8,047 
 Other comprehensive income                  3,915       3,915 
                          
 
Comprehensive income                          11,962 
Exercise of warrants  170   206   206               412 
Value ascribed to warrants and stock options (Note 11)          346               346 
Purchase and sale of treasury stock, net                     12)  (12)
Cash dividends (¥15.00 per share)              (2,700)          (2,700)

Balance at March 31, 2002  180,064   49,049   82,010   240,692   (24,736)  (12)  347,003 
Comprehensive income (loss)                            
 Net income              16,078           16,078 
 Other comprehensive income (loss)                  (30,893)      (30,893)
                          
 
Comprehensive income (loss)                          (14,815)
Value ascribed to stock options (Note 11)          149               149 
Repurchase of common stock (Note 10)                      (11,566)  (11,566)
Sales of treasury stock              (412)      1,126   714 
Cash dividends (¥17.50 per share)              (3,092)          (3,092)

Balance at March 31, 2003  180,064  ¥49,049  ¥82,159  ¥253,266  55,629) 10,452) ¥318,393 

                                      
   Thousands of U.S. Dollars (Note 1) 
   
 
              Accumulated         
              Other      Total 
   Common  Capital  Retained Comprehensive  Treasury  Shareholders’ 
   Stock  Surplus  Earnings Income (Loss)  Stock  Equity 

Balance at March 31, 2002 $408,742  $683,416  $2,005,767  ($206,133) ($100) $2,891,692 
Comprehensive income (loss)                        
 Net income          133,983           133,983 
 Other comprehensive income (loss)              (257,442)      (257,442)
                      
 
Comprehensive income (loss)                      (123,459)
Value ascribed to stock options (Note 11)      1,242               1,242 
Repurchase of common stock (Note 10)                  (96,383)  (96,383)
Sales of treasury stock          (3,433)      9,383   5,950 
Cash dividends ($0.15 per share)          (25,767)          (25,767)

Balance at March 31, 2003 $408,742  $684,658  $2,110,550  ($463,575) ($87,100) $2,653,275 

                             
      Millions of Yen 
  Number of              Accumulated        
  Shares              Other      Total 
  Issued  Common  Capital  Retained  Comprehensive  Treasury  Shareholders’ 
  (Thousands)  Stock  Surplus  Earnings  Loss  Stock  Equity 
  
Balance at March 31, 2002  180,064  ¥49,049  ¥82,010  ¥240,692  ¥(24,736) ¥(12) ¥347,003 
Comprehensive income (loss):                            
Net income              16,078           16,078 
Other comprehensive loss                  (30,893)      (30,893)
                            
Comprehensive loss                          (14,815)
Value ascribed to stock options (Note 13)          149               149 
Purchase of treasury stock (Note 12)                      (11,566)  (11,566)
Sales of treasury stock              (412)      1,126   714 
Cash dividends (¥17.50 per share)              (3,092)          (3,092)
 
Balance at March 31, 2003  180,064   49,049   82,159   253,266   (55,629)  (10,452)  318,393 
Comprehensive income (loss):                            
Net income              24,838           24,838 
Other comprehensive loss                  (6,200)      (6,200)
                            
Comprehensive income                          18,638 
Value ascribed to stock options (Note 13)          305               305 
Purchase of treasury stock (Note 12)                      (14)  (14)
Sales of treasury stock                      2   2 
Cash dividends (¥25.00 per share)              (4,386)          (4,386)
 
Balance at March 31, 2004  180,064   49,049   82,464   273,718   (61,829)  (10,464)  332,938 
Comprehensive income (loss):                            
Net loss              (8,789)          (8,789)
Other comprehensive income                  14,160       14,160 
                            
Comprehensive income                          5,371 
Value ascribed to stock options (Note 13)          270               270 
Purchase of treasury stock (Note 12)                      (1,979)  (1,979)
Sales of treasury stock          1           11   12 
Cash dividends (¥25.00 per share)              (4,373)          (4,373)
 
Balance at March 31, 2005  180,064  ¥49,049  ¥82,735  ¥260,556  ¥(47,669) ¥(12,432) ¥332,239 
 
                         
  Thousands of U.S. Dollars (Note 1) 
              Accumulated        
              Other      Total 
  Common  Capital  Retained  Comprehensive  Treasury  Shareholders’ 
  Stock  Surplus  Earnings  Loss  Stock  Equity 
 
Balance at March 31, 2004 $458,402  $770,692  $2,558,112  $(577,841) $(97,795) $3,111,570 
Comprehensive income (loss):                        
Net loss          (82,140)          (82,140)
Other comprehensive income              132,336       132,336 
                        
Comprehensive income                      50,196 
Value ascribed to stock options (Note 13)      2,523               2,523 
Purchase of treasury stock (Note 12)                  (18,495)  (18,495)
Sales of treasury stock      9           103   112 
Cash dividends ($0.23 per share)          (40,869)          (40,869)
 
Balance at March 31, 2005 $458,402  $773,224  $2,435,103  $(445,505) $(116,187) $3,105,037 
 
See notes to consolidated financial statements.

F-6


Consolidated Statements of Cash Flows

Pioneer Corporation and Subsidiaries
Year ended March 31
                    
                 Thousands of 
                 U.S. Dollars 
     Millions of Yen  (Note 1) 
     
  
 
     2001  2002  2003  2003 

Operating activities:
                
 Net income ¥ 18,298  ¥ 8,047  ¥ 16,078  $133,983 
 Adjustments to reconcile net income to net cash provided by operating activities:                
  Depreciation and amortization  32,405   36,782   36,387   303,225 
  Minority interest in losses (earnings) of subsidiaries  1,445   504   (21)  (175)
  Equity in losses of affiliated companies, less dividends  136   79   3,184   26,533 
  Deferred income taxes  (691)  (4,385)  (5,315)  (44,292)
  Provision for pension and severance cost, less payments  (1,993)  392   3,815   31,792 
  Loss on sale and disposal of fixed assets  914   3,340   4,521   37,675 
  (Gain) loss on sale and write-down of investments and securities  (254)  2,287   1,393   11,608 
  Impairment losses of fixed assets  1,163          
  Gain on sale of subsidiaries’ stock        (768)  (6,400)
  Decrease (increase) in trade notes and accounts receivable  (6,729)  (2,225)  9,668   80,567 
  Decrease in inventories  5,786   3,288   715   5,959 
  Increase in prepaid expenses and other current assets  (2,430)  (2,706)  (1,603)  (13,358)
  Increase in trade payables  177   9,304   11,856   98,800 
  Increase (decrease) in accrued taxes on income  (1,204)  (1,473)  5,533   46,108 
  Increase in other accrued liabilities  1,184   2,716   8,363   69,692 
  Other  3,034   1,160   (2,072)  (17,267)

   Net cash provided by operating activities  51,241   57,110   91,734   764,450 

Investing activities:
                
 Payment for purchase of fixed assets  (42,183)  (46,996)  (40,782)  (339,850)
 Payment for investment securities  (5,798)  (4,566)  (1,543)  (12,858)
 Payment for available-for-sale securities  (1,233)  (2,031)  (10)  (83)
 Proceeds from sale of fixed assets and investment securities  5,631   2,203   3,086   25,716 
 Proceeds from sale of available-for-sale securities  1,789   177   3,502   29,183 
 Decrease in loans receivable  410   1,071   169   1,408 
 Other  (197)  (1,006)  125   1,042 

   Net cash used in investing activities  (41,581)  (51,148)  (35,453)  (295,442)

Financing activities:
                
 Payment of long-term debt  (37,760)  (7,560)  (4,914)  (40,950)
 Increase (decrease) in short-term borrowings  (7,078)  5,866   (16,214)  (135,117)
 Repurchase of common stock (Note 10)     (159)  (11,566)  (96,383)
 Proceeds from sale of treasury stock     147   714   5,950 
 Dividends paid  (2,247)  (2,699)  (2,688)  (22,400)
 Other  518   198   (12)  (100)

   Net cash used in financing activities  (46,567)  (4,207)  (34,680)  (289,000)

Effect of exchange rate changes on cash and cash equivalents  6,229   4,231   (6,234)  (51,950)

Net increase (decrease) in cash and cash equivalents
  (30,678)  5,986   15,367   128,058 
Cash and cash equivalents, beginning of year  151,805   121,127   127,113   1,059,275 

Cash and cash equivalents, end of year
 ¥ 121,127  ¥ 127,113  ¥ 142,480  $1,187,333 

                 
              Thousands of 
              U.S. Dollars 
  Millions of Yen  (Note 1)
  2003  2004  2005  2005 
 
Operating activities:
                
Net income (loss) ¥16,078  ¥24,838  ¥(8,789) $(82,140)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:                
Income from discontinued operations, net of tax  (136)  (4,475)      
Depreciation and amortization  36,238   40,911   46,990   439,159 
Minority interest in (losses) earnings of subsidiaries  (21)  654   692   6,467 
Equity in losses of affiliated companies, less dividends  3,184   2,248   3,072   28,710 
Deferred income taxes  (5,445)  758   (2,846)  (26,598)
Provision for pension and severance cost, less payments  3,812   3,579   2,463   23,019 
Loss on sale and disposal of fixed assets  4,519   3,454   40   374 
Impairment of long-lived assets        4,460   41,682 
Write-down of available-for-sale securities and sundry investments  1,369   245   51   477 
(Gains) losses on sale of available-for-sale securities and sundry investments  20   (37)  (2,309)  (21,579)
Gain on sale of subsidiaries’ stock  (768)         
Stock-based compensation expenses  149   305   270   2,523 
Decrease (increase) in trade notes and accounts receivable  8,481   (10,186)  (12,322)  (115,159)
Decrease (increase) in inventories  838   (20,707)  6,317   59,037 
Increase in prepaid expenses and other current assets  (1,122)  (12,413)  (5,051)  (47,206)
Increase in trade payables  13,221   18,989   4,405   41,168 
Increase (decrease) in accrued taxes on income  5,450   3,782   (4,473)  (41,804)
Increase (decrease) in other accrued liabilities  8,172   7,654   (5,898)  (55,121)
Other  (2,530)  779   (7,126)  (66,598)
 
Net cash provided by operating activities  91,509   60,378   19,946   186,411 
 
Investing activities:
                
Payment for purchase of fixed assets  (40,493)  (57,978)  (63,866)  (596,879)
Payment for purchase of investment securities  (1,543)  (595)  (510)  (4,766)
Payment for purchase of available-for-sale securities  (10)  (53)      
Payment for purchase of a subsidiary, net of cash acquired        (34,015)  (317,897)
Payment for other assets  (568)  (953)  (1,252)  (11,701)
Proceeds from sale of fixed assets  2,982   1,458   2,184   20,411 
Proceeds from sale of discontinued operations     4,897       
Proceeds from sale of investment securities  103   53   12   112 
Proceeds from sale of available-for-sale securities  3,493   156   3,091   28,888 
Other  808   261   840   7,851 
 
Net cash used in investing activities  (35,228)  (52,754)  (93,516)  (873,981)
 
Financing activities:
                
Proceeds from issuance of convertible bonds (net of issuance cost ¥1,586 million)     60,514       
Payment of long-term debt  (4,914)  (934)  (6,246)  (58,374)
Increase (decrease) in short-term borrowings  (16,214)  (3,509)  9,025   84,346 
Purchase of treasury stock (Note 12)  (11,566)  (14)  (1,979)  (18,495)
Proceeds from sale of treasury stock  714   2   12   112 
Dividends paid  (2,688)  (3,947)  (4,386)  (40,991)
Dividends paid to minority interests  (12)  (285)  (445)  (4,159)
 
Net cash provided by (used in) financing activities  (34,680)  51,827   (4,019)  (37,561)
 
Effect of exchange rate changes on cash and cash equivalents  (6,234)  (9,512)  1,851   17,299 
 
Net increase (decrease) in cash and cash equivalents
  15,367   49,939   (75,738)  (707,832)
Cash and cash equivalents, beginning of year  127,113   142,480   192,419   1,798,309 
 
Cash and cash equivalents, end of year
 ¥142,480  ¥192,419  ¥116,681  $1,090,477 
 
See notes to consolidated financial statements.

F-7


Notes to Consolidated Financial Statements

Pioneer Corporation and Subsidiaries


1. Basis of presentation and significant accounting policies:

1) Basis of Presentation

Basis of Financial Statements—
The accompanying consolidated financial statements are stated in Japanese yen, the currency of the country in which Pioneer Corporation (Pioneer Kabushiki Kaisha) (the “parent company”) is incorporated. The translation of Japanese yen amounts into U.S. dollar amounts for the year ended March 31, 20032005 is included solely for the convenience of readers outside Japan and has been made at the rate of ¥120¥107 to U.S.$1.00, the approximate rate of exchange prevailing at the Tokyo Foreign Exchange Market at March 31, 2003.2005. Such translation should not be construed as a representation that Japanese yen amounts could be converted into U.S. dollars at the above or any other rate.

     The accompanying consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (U.S. GAAP)(“U.S. GAAP”) except for the omission of segment information concerning the operations of the parent company and its majority-owned subsidiaries (together, the “Company”), as required by Statement of Financial Accounting Standards (“SFAS”) No.131.

No. 131.

     The accompanying consolidated financial statements reflect the adjustments which management believes are necessary to conform them with U.S. GAAP. Effect has been given in the consolidated financial statements to adjustments which, because of either customary accounting practices in Japan or income tax law requirements, have not been entered in the Company’s general books of account.

Nature of Operations—
The Company is engaged in the development, manufacture and sale of electronics products. The Company is one of the leading manufacturers of consumer- and commercial-use electronics such as audio, video and car electronics on a global scale.

     The principal production activities of the Company are carried out in Asia including Japan. The Company’s products are generally sold under its own brand names, principally “Pioneer.” The principal markets for the Company are Japan, the United States of America, European countries and Asia. The Company sells its products to customers in consumer and commercial markets through its sales offices in Japan, and its sales subsidiaries and independent distributors overseas. On an original-equipment-manufacturer basis, the Company markets certain products, such as car electronics products, to other companies.

Use of Estimates—

The preparation of the consolidated 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 the disclosure of contingent assets and liabilities at the dates of these statements and the reported amounts of revenues and expenses during the reporting period.

     Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates.

2) Summary of Significant Accounting Policies
Consolidation and Investments in Affiliated Companies—The consolidated financial statements include the accounts of the parent company and its majority-owned subsidiaries. Investments in 20% to 50% owned companies are accounted for by the equity method of accounting. All significant intercompany transactions have been eliminated.

     Gains and losses resulting from the issuance of subsidiaries’ stock are recognized in consolidated earnings.

     For the year ended March 31, 2005, the Company adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN46R”) which requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The adoption of FIN46R had no impact on its financial position and results of operations.
Foreign Currency Translation—
For all significant foreign operations, the functional currency is the local currency. Generally, all asset and liability accounts of foreign operations are translated into Japanese yen at year-end rates and all revenue and expense accounts are translated at rates prevailing at the time of the transactions. The resulting translation adjustments are accumulated and reported as a component of accumulated other comprehensive income (loss).

     Foreign currency receivables and payables are translated at year-end exchange rates and resulting exchange gains and losses are recognized in earnings currently.

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Revenue Recognition—
Sales are generally recorded when merchandise is shipped or delivered to customers. Recognition of sales occurs when the title and risks and rewards of ownership are transferred to customers based on purchase orders orsales contracts. In circumstances where sales are recorded when services are renderedmerchandise is shipped to customers, the shipment date is equivalent to the third parties.delivery date because of a short delivery time. In certain cases, terms of the contract require the product to pass customer inspection after shipmentdelivery and the Company records the sale upon satisfactory customer acceptance. Royalty revenue, which is based on actual amounts produced or sold by the licensee, is recognized when either a royalty report or payment is received from the licensee, whichever is earlier. Until such time, this revenue is not considered to have met the recognition criterion of being fixed or determinable, nor is collectibility reasonably assured. The Company normally does not accept returns except for warranty issues, non-compliance with purchase order specifications and returns from end-users to certain dealers. The financial impact of the future returns are estimated and reserved based on royalty statements from licensees.

historical experience.


F-8


     Costs incurred by the Company in connection with sales incentives related to the purchase or promotion of the Company’s products are classified as a reduction of revenues in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer.” Such costs include the estimated cost of promotional discounts, dealer price protection, dealer rebates, consumer rebates, cash discounts, and support for dealers’ promotion of the Company’s products. Sales incentives that are dependent on future customer performance are estimated and recorded at the later of when the original sale is recorded and when the incentive is offered.

Cash and Cash Equivalents—
Consolidated cash
Cash and cash equivalents include cash on hand and deposits in bank including time deposits. The Company considers all time deposits with an original maturity of one year or less to be cash equivalents. Generally, suchSuch time deposits can be withdrawn at any time without diminution of the principal amount.

Available-for-Sale Securities—
Under SFAS No.115,No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” all debt securities and marketable equity securities held by the Company are classified as available-for-sale securities, and are carried at their fair values with unrealized gains and losses reported as a component of shareholders’ equity.in other comprehensive income (loss). The cost of securities is determined using the average-cost method.

     The Company reviews the fair value of its available-for-sale securities on a regular basis to determine if the fair value of any individual security has declined below its cost and if such decline is other than temporary. If the decline in value is judged to be other than temporary, the cost basis of the security is written down to fair value and the resulting realized loss is included in the consolidated statements of consolidated income.

operations. For such marketable debt and equity securities, we assume the decline is other than temporary when market value is less than cost for a period of six months, or sooner depending on severity of decline or other factors.

Sundry Investments—
Sundry investments are stated at cost andcost. The Company reviews the investments for impairment when the events or changes in circumstances that may have significant adverse effect on the value of those investments are identified. The investments are written down if the value of investments is estimated to have declined and such decline is judged to be other than temporary.

Inventories—
Inventories are valued at the lower of cost, which is determined principally by the average-cost method, or market.market, which is net realizable value. Cost of finished goods and work in process inventories include the cost of materials, labor and applied factory overhead. Applied factory overhead includes depreciation on production related assets, utilities of the production area, and production tools and equipment that are not capitalized. Inventories are reviewed periodically and items considered to be slow moving or obsolete are written down to their estimatedmarket, net realizable value.

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Property, Plant and Equipment and Depreciation—
Property, plant and equipment are stated at cost. Depreciation is computed principally using the declining-balance method for assets located in Japan and under the straight-line method for assets located outside Japan, using rates based on the estimated useful lives of the assets.

     The principal ranges of estimated useful lives are as follows:
   
Buildings15-65 years15–65 years
Machinery and equipment2-10 years2–10 years

Goodwill and Other Intangible Assets—
In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations” and

Under SFAS No. 142, “Goodwill and Other Intangible Assets.Assets, SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001, eliminates the pooling-of-interests method, and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination.

     Under SFAS No. 142, acquired goodwill and other intangible assets that are determined to have an indefinite life willare no longer be amortized. Instead, the carrying value of these assets will beare reviewed for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets that are determined to have a definite life will continue to beare amortized over their estimated useful lives. At April 1, 2002,March 31, 2005, the Company had no goodwill. The Company has adopted SFAS No. 142 effective April 1, 2002. Adoption of SFAS No. 142 had no significant effect on the Company’s operating income and income before income taxes for the year ended March 31, 2003. Amortization of intangible assets with definite lives is computed using the straight-line method with no residual value. The cost of patents is amortized over 7seven to 19nineteen years and software is amortized principally over 2two to 5five years.

Long-Lived Assets—
On April 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” which applied to all long-lived assets.
The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. For the purpose of assessment of an impairment loss, the Company groups long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When the sum of expected future cash flows is less than the carrying amount of the asset group, an impairment loss is recognized. Such impairment loss is measured as the amount by which the carrying amount of the asset group exceeds the fair value of the asset.

     During the year ended March 31, 2001, the Company recorded an impairment loss of ¥1,163 million related to intangible assets of its karaoke business reflecting reduced revenue expectations from the business.

asset group.

     In fiscal 2003, the Company sold its subsidiaries’ stock and recorded gains of ¥768 million ($6,400 thousand). Subsidiaries’million. The subsidiaries’ main operation was Karaokekaraoke business.


F-9


Warranty Reserve—

The Company engages in extensive product quality programs and processes including actively monitoring and evaluating the quality of component suppliers. The Company’s warranty obligation is affected by product failure rates and service costs incurred in correcting product failure. The Company provides for the estimated cost of product warranties at the time revenue is recognized. These estimates are established using historical information.

Long-term Debt—
Premiums and issuance costs of long-term debt are amortized over the term of long-term debt using the interest method.
Income Taxes—
Income taxes are provided based on the asset and liability method of accounting. Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at year-end. These deferred taxes are measured by applying currently enacted tax laws. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that all, or some portion, of such deferred tax assets will not be realized.

Sales Incentives—
At April 1, 2002, the Company adopted Emerging Issues Task Force (“EITF”) 01-09, “Accounting for Consideration given by a Vendor to a Customer.” EITF 01-09 clarifies the income statement classification of costs incurred by a vendor in connection with the reseller’s purchase or promotion of the vendor’s products, resulting in certain cooperative advertising and product placement costs previously classified as selling expenses to be reflected as a reduction of revenues earned from that activity. The adoption of EITF 01-09 resulted in a reduction of sales of ¥6,711 million, ¥6,774 million and ¥9,588 million ($79,900 thousand) and a corresponding decrease in selling, general and administrative expenses, with no effect on net income for the years ended March 31, 2001, 2002 and 2003, respectively. Previous figures for the corresponding periods have been reclassified to conform to this presentation.

Research and Development Costs and Advertising Cost—
Research and development costs and advertising cost are expensed as incurred.

Shipping and Handling Charges—

Shipping and handling costs totaled ¥8,691¥10,373 million, ¥10,178¥11,282 million and ¥10,816¥12,830 million ($90,133119,907 thousand) for the years ended March 31, 2001, 20022003, 2004 and 2003,2005, respectively, and are included in selling, general and administrative expenses in the consolidated statements of income.

operations.

Accounting for Stock-Based Compensation—
The Company accounts for its stock-based compensation agreements using the fair value based method in accordance with SFAS No.123,No. 123, “Accounting for Stock-Based Compensation.”

F-10


Earnings (loss) per Share—
Basic net income (loss) per share has been computed by dividing net income (loss) available to holders of common stock by the weighted-average number of shares of common stock outstanding during each year. Diluted net income per share reflects the potential dilution and has been computed on the basis that all dilutive warrants and stock optionspotential common stocks were exercised.

Derivatives—
Derivative financial instruments utilized by the Company are comprised principally of forward exchange contracts currency options and currency swaps. Forward exchange contracts, and currency options, the majority of which mature within six months, and currency swaps, which mature from 20032005 to 2005,2006, are utilized to hedge exposures to foreign exchange risk and interest risk. The Company does not hold or issue derivative financial instruments for trading purposes.

     Prior to April 1, 2001, gains and losses on hedges of existing assets and liabilities were included in the carrying amounts of those assets and liabilities and were ultimately recognized in other income (expenses). Gains and losses related to qualifying hedges of firm commitments or anticipated transactions were also deferred and were recognized in other income (expenses) or as adjustments of carrying amounts when the hedged transaction occurred. Unrealized gains and losses on forward contracts including foreign currency options intended as hedges for foreign currency risk of anticipated transactions with companies within the consolidated group were recognized currently in other income (expenses).


F-10


     At April 1, 2001, the     The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities — Activities—an amendment of FASB Statement No.133.No. 133,” and by SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.” Under SFAS No. 133, all derivative instruments are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of changes in fair value is recorded in other comprehensive income, then recognized in earnings along with the related effects of the hedged items. Any ineffective portion of hedges is reported in earnings as it occurs.

     The cumulative effect of adopting this accounting change at April 1, 2001, was not significant.

     Forward exchange contracts currency swaps and currency optionsswaps are utilized to hedge certain foreign currency and interest rate exposures. However, none of these derivatives were designated as hedging instruments under SFAS No. 133 at March 31, 20022003, 2004 and 2003.2005. Unrealized gains and losses on such instruments are recognized currently in earnings.

Reclassifications—
Starting fiscal 2003, the Company classified losses on sale and disposal of fixed assets, which were previously included in Other — net in Other income (expense), into selling, general and administrative expenses. Previously reported amounts have been reclassified to conform to this presentation. Other
Certain reclassifications and format changes have been made to prior year amounts to conform to the current year presentation.

New Accounting Standards—

In June 2001,November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the language used in Accounting Research Bulletin No. 43 with respect to accounting for abnormal amounts of idle facility expenses, freight, handling costs and spoilage. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005, and is required to be adopted by the Company effective April 1, 2006. The adoption of this standard is not expected to have any material impact on the Company’s consolidated statements of operations or financial position.
     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29,” which will become effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Accounting Principles Board (“APB”) Opinion No. 29 generally requires that exchanges of nonmonetary assets be measured based on fair value of the assets exchanged but provided an exception for nonmonetary exchanges of similar productive assets, which did not result in a change in carrying value for the new asset acquired even if the cash flows resulting from the exchange would change significantly. SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Nonmonetary exchanges lack commercial substance if the cash flows to the entity will not change significantly as a result of the exchange. The adoption of this standard is not expected to have any material impact on the Company’s consolidated statements of operations or financial position.
     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” The revised SFAS No. 123 supersedes APB Opinion No. 25, which requires recognition of an expense when goods or services are provided, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS No. 123. The adoption of this standard is not expected to have any material impact on the Company’s consolidated statements of operations or financial position because the Company accounts for its stock-based compensation agreements using the fair value based method, not the intrinsic value method prescribed by APB Opinion No. 25.
     In March 2004, the EITF confirmed as a consensus EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”

F-11


(“EITF 03-1”). The objective of this issue is to provide guidance on determining when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. In September 2004, the FASB issued FASB Staff Position EITF 03-1-1 that delays the effective date for the measurement and recognition guidance included in EITF 03-1. The disclosures required by EITF 03-1 have not been deferred and are effective for the annual periods ending after June 15, 2004.
     In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143” FIN No. 47 clarifies that the term “conditional asset retirement obligation” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is effective for years beginning after June 15, 2002, which willunconditional even though uncertainty exists about the timing and (or) method of settlement. SFAS No. 143 acknowledges that in some cases, sufficient information may not be the Company’s fiscal year 2004. FAS 143 addresses legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. The standard requires thatavailable to reasonably estimate the fair value of a liability for an asset retirement obligation be recognized inobligation. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the period in which it is incurred if a reasonable estimate of fair value can be made. Any associatedof an asset retirement costs are to be capitalized as partobligation. FIN No. 47 is effective no later than the end of the carrying amount of the long-lived asset and expensed over the life of the asset.fiscal years ending after December 15, 2005. The Company has not yet determinedcompleted the study of what the effect of FAS 143FIN No. 47 will have on the earnings or theits financial position and results of the Company.

operations.

     In April 2002,May 2005, the FASB issued SFAS No. 145, “Rescission154, “Accounting Changes and Error Corrections—a replacement of FASB StatementsAPB Opinion No. 4, 4420 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.3.” SFAS No. 145, among other things, rescinds154 replaces APB No. 20, “Accounting Changes,” and SFAS No. 4, which required all gains3, “Reporting Accounting Changes in Interim Financial Statements,” and losses fromchanges the extinguishmentrequirements for the accounting for and reporting of debt to be classified as an extraordinary item and amendsa change in accounting principle. SFAS No. 13154 applies to require that certain lease modifications that have economic effects similarall voluntary changes in accounting principle. SFAS No. 154 also applies to sale-leaseback transactions be accounted forchanges required by an accounting pronouncement in the same manner as sale-leaseback transactions.unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 145154 is effective for accounting changes and corrections of errors made in fiscal years beginning after MayDecember 15, 20022005, with earlier adoption encouraged. The adoptionpermitted. Accordingly, the Company can not reasonably estimate the ultimate impact of SFAS No. 145 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

154.



2. Supplemental cash flow information:

Selected cash payments and noncash activities for the years ended March 31, 2001, 20022003, 2004 and 20032005 were as follows:
                  
               Thousands of 
   Millions of Yen  U.S. Dollars 
   
  
 
   2001  2002  2003  2003 

Cash payment for interest ¥ 4,889  ¥ 3,281  ¥ 2,654  $22,117 
Cash payment for income taxes  16,245   12,580   9,047   75,392 
Noncash investing activities:                
 Capitalized lease obligations incurred  141          

                 
              Thousands of 
  Millions of Yen  U.S. Dollars 
  2003  2004  2005  2005 
 
Cash payment for interest ¥2,654  ¥2,458  ¥2,038  $19,047 
Cash payment for income taxes  9,047   14,260   17,195   160,701 
Noncash investing activities:                
Acquisition of a subsidiary:                
Fair value of assets, net of cash acquired        60,736   567,626 
Liability assumed including capital lease obligation of ¥12,882 million ($120,393 thousand)        (26,721)  (249,729)
   
Payment for acquisition of a subsidiary, net of cash acquired        34,015   317,897 
   
Sales of discontinued operations:                
Transferred assets     14,932       
Transferred liabilities     (11,823)      
Foreign currency translation adjustments     (37)      
Gain on sales     1,825       
   
Cash received—net     4,897       
 

F-12

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3. Acquisition:
On September 30, 2004, the Company acquired 100% of the issued common stock of NEC Plasma Display Corporation (“NPD”), a subsidiary of NEC Corporation, and the intellectual property rights of NPD for cash in an aggregate amount of ¥35,097 million. NPD changed its name to Pioneer Plasma Display Corporation (“PPD”) on September 30, 2004. This acquisition was to meet a fast-growing global demand of plasma displays and to ensure its leading role in this market.
     The consolidated financial statements for the year ended March 31, 2005 include the operating results of PPD from the date of acquisition.
     In connection with this acquisition, ¥6,937 million was assigned to intangible asset of patents subject to amortization with an amortization period of 7 years which is based on legal provisions that may limit the useful life.
     The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Millions of Yen
Current assets¥15,390
Property, plant and equipment37,426
Acquired intangible asset of patent6,937
Other assets2,065
Current liabilities(17,420)
Long-term liabilities(9,301)
Net assets acquired¥35,097
     The following unaudited pro forma information shows the results of the Company’s consolidated operations for the years ended March 31, 2004 and 2005 as if the acquisition had been completed at the beginning of each fiscal year presented.
         
  Unaudited
  Millions of Yen
  2004  2005 
 
Revenues ¥752,858  ¥754,161 
Net income (loss)  17,332   (19,002)
 
         
      Yen
  2004  2005 
 
Net income (loss) per share:        
Basic ¥98.80  ¥(108.34)
Diluted  98.02   (108.34)
 

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3. 4. Discontinued operations:
For the year ended March 31, 2004 in accordance with SFAS No. 144, the Company presented the results of discontinued operations as a separate line item in the consolidated statements of operations under “Income from discontinued operations, net of tax.”
     In order to improve management efficiency by concentrating resources in strategic business, the Company reached an agreement to sell 100% of its shares in two of its wholly-owned subsidiaries, Pioneer LDC, Inc. and Pioneer Entertainment (USA) Inc., to Dentsu Inc., Japan’s largest comprehensive advertising agency. These subsidiaries were engaged in the audio/video software businesses in Tokyo, Japan and in California, the United States of America, respectively. The transfer of 100% of the shares of Pioneer LDC, Inc. and 90% of the shares of Pioneer Entertainment (USA) Inc. owned by the Company were each completed in the year ended March 31, 2004. The remaining shares of Pioneer Entertainment (USA) Inc. are expected to be transferred to Dentsu Inc. by September 30, 2006.
     In March 2004, Q-Tec, Inc., which had been a 99.26% owned subsidiary of the Company, became an independent company through a management buyout after acquiring all of the shares owned by the Company, with a business alliance of Vision Capital Corporation and Memory-Tech Corporation.
     Summarized selected financial information for the years ended March 31, 2003 and 2004 for the discontinued operations reclassified during the year ended March 31, 2004 was as follows:
         
  Millions of Yen
  2003  2004 
 
Revenues ¥35,051  ¥16,664 
Cost and expenses ¥34,500  ¥16,324 
 
Income before income taxes ¥551  ¥340 
Gain on sales of discontinued operations     1,825 
Income taxes (benefit)  415   (2,310)
 
Income from discontinued operations ¥136  ¥4,475 
 

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5.Available-for-sale securities:
securities and sundry investments:

Cost, gross unrealized holding gains, gross unrealized holding losses and the aggregate fair value of available-for-sale securities at March 31, 20022004 and 20032005 were as follows:
                                   
    Millions of Yen 
    
 
    2002  2003 
    
  
 
        Gross  Gross          Gross  Gross     
        Unrealized  Unrealized          Unrealized  Unrealized     
        Holding  Holding  Aggregate      Holding  Holding  Aggregate 
    Cost  Gains  Losses  Fair Value  Cost  Gains  Losses  Fair Value 

Marketable equity securities:                                
 Current ¥ 10     ¥ 2  ¥ 8             
 Non-current  7,963  ¥ 10,805   486   18,282  ¥ 6,636  ¥ 8,187  ¥ 63  ¥ 14,760 
Marketable debt securities:                                
 Current  3,485      38   3,447             
 Non-current  111      33   78   85      14   71 

  Total ¥ 11,569  ¥ 10,805  ¥ 559  ¥ 21,815  ¥ 6,721  ¥ 8,187  ¥ 77  ¥ 14,831 

                   
    Thousands of U.S. Dollars 
    
 
    2003 
    
 
        Gross  Gross     
        Unrealized  Unrealized     
        Holding  Holding  Aggregate 
    Cost  Gains  Losses  Fair Value 

Marketable equity securities:                
 Non-current $55,300  $68,225  $525  $123,000 
Marketable debt securities:                
 Non-current  708      116   592 

  Total $56,008  $68,225  $641  $123,592 

                                 
  Millions of Yen 
  2004  2005 
      Gross  Gross          Gross  Gross    
      Unrealized  Unrealized          Unrealized  Unrealized    
      Holding  Holding  Aggregate      Holding  Holding  Aggregate 
  Cost  Gains  Losses  Fair Value  Cost  Gains  Losses  Fair Value 
 
Marketable equity securities:                                
Non-current ¥6,520  ¥17,890  ¥1  ¥24,409  ¥5,734  ¥16,438  ¥2  ¥22,170 
Marketable debt securities:                                
Non-current  106   1      107   94   4      98 
 
Total ¥6,626  ¥17,891  ¥1  ¥24,516  ¥5,828  ¥16,442  ¥2  ¥22,268 
 
 
                  Thousands of U.S. Dollars 
                  2005 
                      Gross  Gross    
                      Unrealized  Unrealized    
                      Holding  Holding  Aggregate 
              Cost  Gains  Losses  Fair Value 
 
Marketable equity securities:                                
Non-current                 $53,589  $153,626  $19  $207,196 
Marketable debt securities:                                
Non-current                  878   38      916 
 
Total                 $54,467  $153,664  $19  $208,112 
 
     The following table presents fair value and unrealized losses of available-for-sale marketable equity securities, aggregated by length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2005.
                 
  Millions of Yen  Thousands of U.S. Dollars 
  Less than 12 Months  Less than 12 Months 
  Fair  Unrealized  Fair  Unrealized 
  Value  Losses  Value  Losses 
 
Marketable equity securities ¥16  ¥2  $150  $19 
 

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     At March 31, 2003,2005, the fair values of marketable debt securities by contractual maturities for securities classified as available-for-sale due in one year through five years were ¥ 71¥98 million ($592916 thousand).

     Gross realized gain on available-for-sale securities for the yearyears ended March 31, 2001 was ¥1,556 million.2004 and 2005 were ¥43 million and ¥2,300 million ($21,495 thousand), respectively. Gross realized losses for the years ended March 31, 20012003, 2004 and 20032005 were ¥2¥16 million, ¥6 million and ¥20¥1 million ($1669 thousand), respectively. NeitherThere was no gross realized gain nor loss on available-for-sale securities was recorded for the year ended March 31, 20022003.
     The Company holds marketable equity securities of customers and no gross realized gain on

available-for-sale securities was recordedfinancial institutions for the year endedpurpose of maintaining long-term relationships, whose share prices are highly volatile. The Company has one investment in Japan which was in an unrealized loss position due to the share price’s poor performance at March 31, 2003.

2005. The duration of the impairment was less than six months. The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold this investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2005. For the years ended March 31, 2001, 20022003, 2004 and 2003,2005, losses on write-downother than temporary impairment of marketable equity securities were recognized to reflect the decline in market value considered to be other than temporary totaling ¥246¥1,346 million, ¥1,828¥27 million and ¥1,346¥3 million ($11,21728 thousand), respectively.

For the year ended March 31, 2005, a loss on other-than-temporary impairment of marketable debt securities was ¥3 million ($28 thousand).


F-12



4.          Sundry investments consist of non-marketable equity securities and memberships. The aggregate cost of the Company’s non-marketable equity securities totaled ¥2,977 million ($27,823 thousand) at March 31, 2005. Investments with an aggregate cost of ¥2,970 million ($27,757 thousand) were not evaluated for impairment because (a) those investments were not practicable to estimate the fair value and (b) the Company did not identify any events or changes in circumstances that may have had significant adverse effect on the fair value of those investments.

6.Inventories:

Inventories at March 31, 20022004 and 20032005 comprise the following:

              
           Thousands of 
   Millions of Yen  U.S. Dollars 
   
  
 
   2002  2003  2003 

 
Finished products ¥53,912  ¥50,202  $418,350 
Work in process  18,813   19,158   159,650 
Materials and supplies  24,185   24,260   202,167 

 
 Total ¥96,910  ¥93,620  $780,167 

 
             
          Thousands of 
  Millions of Yen  U.S. Dollars 
  2004  2005  2005 
 
Finished products ¥51,360  ¥52,807  $493,523 
Work in process  27,956   26,330   246,075 
Materials and supplies  28,490   29,878   279,233 
 
Total ¥107,806  ¥109,015  $1,018,831 
 



5.     7.Investments in and advances to affiliated companies:

Investments in and advances to affiliated companies principally represent the Company’s equity in the underlying assets of 20% to 50% owned companies. Dividends received from companies accounted for on an equity basis were ¥6¥58 million, ¥9¥4 million and ¥58¥4 million ($48337 thousand), respectively, for the years ended March 31, 2001, 20022003, 2004 and 2003.

2005.

     Retained earnings include the parent company’s and its

consolidated subsidiaries’ equity in undistributed earnings of 20% to 50% owned companies accounted for on an equity basis in the amount of ¥163¥310 million and ¥245¥329 million ($2,0423,075 thousand) at March 31, 20022004 and 2003,2005, respectively.

     Summarized financial information of companies owned 20% to 50%, including ELDis, Inc., 45%47.5% owned by Tohoku Pioneer Corporation, a 67% owned subsidiary, accounted for by the equity method of accounting is as follows:

F-16


             
           Thousands of
   Millions of Yen  U.S. Dollars
   
  
   2002  2003  2003

Current assets ¥8,546  ¥19,802  $165,017
Property, plant and equipment  15,579   27,209   226,742
Other assets  2,928   338   2,816

 Total assets ¥27,053  ¥47,349  $394,575

Current liabilities ¥5,359  ¥4,857  $40,475
Long-term liabilities  660   27,430   228,583
Shareholders’ equity  21,034   15,062   125,517

 Total liabilities and shareholders’ equity ¥27,053  ¥47,349  $394,575

                
              Thousands of
      Millions of Yen  U.S. Dollars
  
  
Year ended March 31 2001  2002  2003  2003

Net sales ¥4,281  ¥7,404  ¥7,845  $65,375
Gross profit  849   996   808   6,733
Net loss  173   237   6,802   56,683

F-13



6.     

                 
              Thousands of 
      Millions of Yen  U.S. Dollars 
     2004  2005  2005 
 
Current assets     ¥10,619  ¥8,427  $78,757 
Property, plant and equipment      28,978   25,326   236,692 
Other assets      393   403   3,766 
 
Total assets     ¥39,990  ¥34,156  $319,215 
 
Current liabilities     ¥2,822  ¥5,116  $47,813 
Long-term liabilities      27,110   24,736   231,178 
Shareholders’ equity    10,058   4,304   40,224 
 
Total liabilities and shareholders’ equity     ¥39,990  ¥34,156  $319,215 
 
 
              Thousands of 
  Millions of Yen  U.S. Dollars 
Year ended March 31 2003  2004  2005  2005 
 
Net sales ¥7,845  ¥8,408  ¥9,229  $86,252 
Gross profit (loss)  808   1,004   (1,932)  (18,056)
Net loss  6,802   5,023   5,801   54,215 
 
8.Intangible assets:

Upon the adoption of SFAS No. 142, as discussed in Note 1, the Company reassessed the useful lives of its intangible assets and determined that it does not have any intangible assets with indefinite lives.

Intangible assets subject to amortization acquired during the year ended March 31, 20032005 totaled ¥9,083¥12,189 million ($75,692113,916 thousand) and primarily consist of software

of ¥8,076¥4,853 million ($67,30045,355 thousand) and patents of ¥511¥6,937 million ($4,25864,832 thousand) (see Note 3). The weighted averageweighted-average amortization periods for software, patents and patentstotal acquired during the year ended March 31, 20032005 are 4.13.5 years, 7.0 years and 7.35.9 years, respectively.

     Intangible assets subject to amortization are comprised of the following:


                         
                  Thousands of 
  Millions of Yen  U.S. Dollars 
  
  
 
2002  2003  2003 

  
  
 
  Gross      Gross      Gross     
  Carrying  Accumulated  Carrying  Accumulated  Carrying  Accumulated 
  Amount  Amortization  Amount  Amortization  Amount  Amortization 

 
Software ¥18,990  (¥8,414) ¥23,726  (¥11,441) $197,717  ($95,342)
Patents  28,849   (25,562)  25,472   (23,623)  212,266   (196,858)
Other  3,061   (1,363)  2,850   (1,365)  23,750   (11,375)

 
Total ¥50,900  (¥35,339) ¥52,048  (¥36,429) $433,733  ($303,575)

 

                         
                  Thousands of 
  Millions of Yen  U.S. Dollars 
  2004  2005  2005 
  Gross      Gross      Gross    
  Carrying  Accumulated  Carrying  Accumulated  Carrying  Accumulated 
  Amount  Amortization  Amount  Amortization  Amount  Amortization 
 
Software ¥31,161  ¥(15,412) ¥34,281  ¥(19,595) $320,383  $(183,131)
Patents  22,798   (21,426)  28,107   (20,538)  262,682   (191,944)
Other  2,693   (848)  2,737   (940)  25,580   (8,785)
 
Total ¥56,652  ¥(37,686) ¥65,125  ¥(41,073) $608,645  $(383,860)
 

     The aggregate amortization expense for intangible assets for the yearyears ended March 31, 2003, is ¥7,9782004 and 2005 was ¥7,949 million, ¥6,109 million and ¥7,229 million ($66,48367,561 thousand)., respectively. The estimated aggregate amortization expense for intangible assets for the next five years is as follows:
         
      Thousands of 
Year ending March 31 Millions of Yen  U.S. Dollars 
 
2006 ¥6,811  $63,654 
2007  5,929   55,411 
2008  4,192   39,178 
2009  3,059   28,589 
2010  2,346   21,925 
 

F-17

         
      Thousands of 
Year ending March 31 Millions of Yen  U.S. Dollars 

 
2004 ¥5,188  $43,233 
2005  4,102   34,183 
2006  2,824   23,533 
2007  1,361   11,342 
2008  839   6,992 


F-14


     Amounts previously reported for net income and basic and diluted earnings per share for the years ended March 31, 2001 and 2002 are reconciled to amounts adjusted to

exclude the amortization expense related to goodwill and net income and basic and diluted earnings per share for the year ended March 31, 2003 as follows:


                     
              Thousands of 
          Millions of Yen  U.S. Dollars 
  
  
  2001  2002  2003      2003

Reported net income ¥18,298  ¥8,047  ¥16,078      $133,983 
Add back: Goodwill amortization  610   748           

Adjusted net income ¥18,908  ¥8,795  ¥16,078      $133,983 

                  
   Yen  U.S. Dollars 
   
  
 
   2001  2002  2003  2003 

Basic earnings per share:                
 Reported net income ¥101.76  ¥44.70  ¥90.24  $0.75 
 Goodwill amortization  3.39   4.15       

 Adjusted net income ¥105.15  ¥48.85  ¥90.24  $0.75 

Diluted earnings per share:                
 Reported net income ¥101.70  ¥44.69  ¥90.24  $0.75 
 Goodwill amortization  3.39   4.15       

 Adjusted net income ¥105.09  ¥48.84  ¥90.24  $0.75 


7.     9.Short-term borrowings and long-term debt:

Short-term borrowings at March 31, 20022004 and 20032005 comprise the following:
              
           Thousands of 
   Millions of Yen  U.S. Dollars 
   
  
 
   2002  2003  2003 

 
Bank loans
Weighted average interest rate 2.04% at March 31, 2002 and 2.01% at March 31, 2003:
            
 Uncollateralized ¥45,867  ¥29,893  $249,108 

 
             
          Thousands of 
  Millions of Yen  U.S. Dollars 
  2004  2005  2005 
 
Bank loans:            
Weighted-average interest rate 1.74% at March 31, 2004 and 1.25% at March 31, 2005:            
Uncollateralized ¥23,327  ¥33,152  $309,832 
 
 
          Long-term debt at March 31, 2004 and 2005 comprises the following:
 
          Thousands of 
  Millions of Yen  U.S. Dollars 
  2004  2005  2005 
 
Loans, principally from banks, maturing serially through 2013 interest ranging from 3.06% to 3.90% at March 31, 2004 and from 2.90% to 3.06% at March 31, 2005:            
Collateralized ¥2,804  ¥1,960  $18,318 
Uncollateralized  3,680   50   467 
2.35% Uncollateralized bonds due 2005  15,000   15,000   140,187 
2.80% Uncollateralized bonds due 2008  10,000   10,000   93,458 
Zero coupon convertible bonds due 2011, including unamortized issue premium, ¥1,779 million ($16,626 thousand) (effective annual rate 0.5%)  62,079   61,779   577,374 
Long-term capital lease obligations, 1.25% to 3.26% at March 31, 2005, due principally to 2012     11,129   104,009 
Industrial development U.S. dollar revenue bonds due 2005 with fluctuating interest rates (1.29% at March 31, 2004 and 1.70% at March 31, 2005), subject to maximum rate of 15% in 2004 and 2005 and other  638   577   5,393 
 
Total  94,201   100,495   939,206 
Less—Portion due within one year  4,510   19,276   180,150 
 
Total ¥89,691  ¥81,219  $759,056 
 

F-18

F-15


Long-term debt at March 31, 2002 and 2003 comprises the following:

              
           Thousands of 
   Millions of Yen  U.S. Dollars 
   
  
 
   2002  2003  2003 

Loans, principally from banks, maturing serially through 2013 interest ranging from 1.39% to 4.00% at March 31, 2002 and from 1.85% to 3.90% at March 31, 2003:            
   Collateralized ¥6,172  ¥3,048   $25,400 
   Uncollateralized  6,160   4,370   36,417 
2.35% Uncollateralized bonds due 2005  15,000   15,000   125,000 
2.80% Uncollateralized bonds due 2008  10,000   10,000   83,333 
Industrial development U.S. dollar revenue bonds due 2005 with fluctuating interest rates (1.65% at March 31, 2002, and 1.59% at March 31, 2003), subject to maximum rates of 15% in 2002 and 2003 and other  896   752   6,267 

       Total  38,228   33,170   276,417 
Less—Portion due within one year  2,551   974   8,117 

      Total ¥35,677  ¥32,196   $268,300 

     The outstanding bond indentures generally require the parent company to provide collateral for the outstanding bonds if the parent company provides collateral to new bonds issued in Japan.

     On March 5, 2004, the parent company issued ¥60,000 million zero coupon convertible bonds due 2011 (bonds with stock acquisition rights) (“Bonds”) at 103.5% of their principal amount. The Bonds do not bear interest. The stock acquisition rights are not transferable separately from the Bonds. The Bonds are traded on the London Stock Exchange’s market for listed securities. The Bonds were issued in the denomination of ¥5 million each and each bondholder is entitled to exercise the stock acquisition right from April 1, 2006 until February 18, 2011 (unless previously redeemed) into common shares at an initial conversion price, subject to adjustment in certain events, of ¥4,022. Market price of common stock at the date of issuance of the Bonds was ¥3,220.
     Parent company may redeem all, but not some of the Bonds, with advance irrevocable notice to bondholders in each case (1) if the closing price of common stock for each of the 30 consecutive trading days is at least 120% of the conversion price on or after March 4, 2007 and prior to maturity, or (2) if the laws or regulations of Japan having power to tax is changed, or (3) if a resolution is passed at the general meeting of shareholders of the parent company to become a wholly-owned subsidiary of another company.
     The stock acquisition right is also exercisable on or after March 19, 2004 if the parent company issues an irrevocable notice to bondholders for (2) or (3) above, or if a resolution passes at a general meeting of shareholders of parent company (a) for any consolidation or amalgamation of parent company with any company, or (b) for any split of parent company’s business, or (c) for the parent company to become a wholly-owned subsidiary of another company.
     The parent company will redeem the outstanding Bonds at 100% of their principal amount on March 4, 2011.
     Unused lines of credit for short-term financing at March 31, 20032005 approximated ¥231,829¥230,109 million ($1,931,9082,150,551 thousand) of which ¥30,000 million ($250,000280,374 thousand) relates to commercial paper programs. Unused commitments for long-term financing arrangements at March 31, 20032005 amounted to ¥5,000 million ($41,66746,729 thousand). There were no commitment fees.

     Land and buildings with a book value of ¥6,176¥5,999 million ($51,46756,065 thousand) were pledged as collateral for certain long-term loans of the Company at March 31, 2003.

2005.

     The aggregate annual maturities of long-term debt during the five years ending March 31, 20082010 and thereafter are as follows:

         
      Thousands of 
Year ending March 31 Millions of Yen  U.S. Dollars 

  
 
2004  ¥974   $8,117 
2005  4,521   37,675 
2006  15,927   132,725 
2007  258   2,150 
2008  250   2,083 

         
      Thousands of 
Year ending March 31 Millions of Yen  U.S. Dollars 
 
2006 ¥19,276  $180,150 
2007  3,338   31,196 
2008  2,649   24,757 
2009  10,740   100,374 
2010  716   6,692 
2011 and thereafter  63,776   596,037 
 
Total ¥100,495  $939,206 
 
     Substantially all short-term and long-term loans from banks are made under agreements which, as is customary in Japan, provide that the bank may, under certain conditions, require the borrower to provide collateral (or additional collateral) or guarantors with respect to the loans, and that the bank may treat any collateral, whether furnished as security for short-term or long-term loans or otherwise, as collateral for all indebtedness to such bank. The Company has no compensating balance arrangements with any lending bank.

F-19


F-16



8.     

10.Pension plans and accrued severance cost:

The parent company and major domestic subsidiaries have trusteed non-contributory defined benefit pension plans which cover substantially all of their employees. The benefits are in the form of annuity payments and/or lump-sum payments and are based on points and length of service and conditions under which termination occurs. The Company’s policy is to fund amounts required to maintain sufficient plan assets to provide for accrued benefits, subject to the limitation on deductibility imposed by the Japanese income tax laws. The plan assets are invested primarily in interest-bearing securities, marketable equity securities and loan receivables.

     The Company also sponsors a domestic contributory defined-benefit welfare pension plan (the “welfare pension plan”) covering substantially all of its Japanese employees. The benefits of the welfare pension plan are primarily based on years of service and on the average compensation during years of service and subject to governmental regulations. The welfare pension plan consists of a basic component,substitutional portion, which has been specified by the Japanese government’s welfare pension regulations, and componentsa corporate portion established by the Company. During the year ended

March 31, 2003, the Company established a new component within the welfare pension plan. The new component covers a part of the parent company’s employees. Management considers that a portion of the contributorywelfare pension plan, which is administered by a board of trustees composed of management and labor representatives, represents a welfare pension plan carried on behalf of the Japanese government. Management believes that

     The Company received approval from the government for an exemption from the obligation to pay benefits for future employee service related to the substitutional portion on October 29, 2003 and an exemption from the obligation to pay benefits for past employee service related to the substitutional portion on November 1, 2004. On March 11, 2005, the benefit obligation for the additional component is approximately one fifth of the total benefit obligation. Thesubstitutional portion and the related government-specified portion of plan assets of the welfare pension plan were transferred to the government. In accordance with EITF Issue No. 03-2, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities,” the Company recorded the transaction upon completion of transfer to the government of the substitutional portion of the benefit obligation and related plan assets. The transfer resulted in the Company recording a subsidy from the government of ¥48,697 million ($455,112 thousand) representing the difference between the accumulated benefit obligation of the substitutional portion and the related plan assets. Additionally, the Company recorded a reduction in net periodic benefit cost related to the derecognition of previously accrued salary progression of ¥2,402 million ($22,448 thousand) and a settlement loss of ¥51,893 million ($484,981 thousand). The total amount of derecognition of previously accrued salary progression and settlement loss is fundedallocated to cost of sales of ¥25,339 million ($236,813 thousand) and selling, general and administrative expenses of ¥24,152 million ($225,720 thousand).
     In the year ended March 31, 2005, the Company amended the corporate portion of the contributory plan. A major change was a change in conformity with the funding requirementsbenefits calculation factor and the period of applicable governmental regulations.benefit payments. The amendment generated an unrecognized prior service gain of ¥9,602 million ($89,738 thousand).
     The plan assets and pension obligation for the non-contributory plans and the contributory plan of the parent company and certain subsidiaries are invested primarilymeasured at March 31 in interest-bearing securities, marketable equity securities and loan receivables.

each fiscal year.

     Net periodic benefit costs for the non-contributory plans and the contributory plan of the parent company and certain domestic subsidiaries for 2001, 2002the years ended March 31, 2003, 2004 and 20032005 consisted of the following:

F-20


                                   
                            Thousands of 
    Millions of Yen  U.S. Dollars 
    
  
 
    2001 2002 2003 2003
    
 
 
 
    Non-      Non-      Non-      Non-     
    Contributory  Contributory  Contributory  Contributory  Contributory  Contributory  Contributory  Contributory 
    Plans  Plan  Plans  Plan  Plans  Plan  Plans  Plan 

Service cost  ¥2,519   ¥1,312   ¥2,657   ¥1,288   ¥2,884   ¥2,400  $24,033  $20,000 
Interest cost  1,732   2,954   1,662   2,926   1,695   3,195   14,125   26,625 
Expected return on assets  (2,091)  (2,450)  (1,907)  (2,245)  (1,606)  (1,941)  (13,383)  (16,175)
Amortization of unrecognized net actuarial loss  171   276   744   1,287   1,021   1,853   8,508   15,442 
Amortization of unrecognized net assets at date of application  (163)  (344)  (163)  (344)  (163)  (344)  (1,358)  (2,867)
Amortization of unrecognized prior service gain  (535)     (535)  (364)  (535)  (364)  (4,458)  (3,033)

  Net periodic benefit cost  ¥1,633   ¥1,748   ¥2,458   ¥2,548   ¥3,296   ¥4,799  $27,467  $39,992 

Actuarial assumptions:
                                
 Discount rate  2.8%  4.5%  2.7%  4.3%  2.2%  4.1%        
 Rate of salary increase  –*   3.1%  –*   2.7%  *   2.6%        
 Long-term rate of return on plan assets  4.5%  4.5%  4.5%  4.5%  3.9%  3.9%        

*Non-contributory plans are not pay-related.

F-17


                                 
                          Thousands of 
  Millions of Yen  U.S. Dollars 
  2003  2004  2005  2005 
  Non-      Non-      Non-      Non-    
  contributory  Contributory  contributory  Contributory  contributory  Contributory  contributory  Contributory 
  Plans  Plan  Plans  Plan  Plans  Plan  Plans  Plan 
 
Service cost ¥2,884  ¥2,400  ¥2,892  ¥2,860  ¥2,795  ¥1,745  $26,121  $16,308 
Interest cost  1,695   3,195   1,518   3,301   1,712   3,512   16,000   32,823 
Expected return on assets  (1,606)  (1,941)  (1,386)  (1,741)  (1,692)  (2,037)  (15,813)  (19,037)
Amortization of unrecognized net actuarial loss  1,021   1,853   1,632   2,428   1,185   2,040   11,075   19,065 
Amortization of unrecognized net assets at date of application  (163)  (344)  (160)  (344)  (160)  (344)  (1,495)  (3,215)
Amortization of unrecognized prior service gain  (535)  (364)  (535)  (364)  (535)  (364)  (5,000)  (3,402)
Settlement loss                 51,893      484,981 
Derecognition of previously accrued salary progression                 (2,402)     (22,448)
 
Net periodic benefit cost ¥3,296  ¥4,799  ¥3,961  ¥6,140  ¥3,305  ¥54,043  $30,888  $505,075 
 
Actuarial assumptions used to determine net periodic pension cost:
                                
Discount rate  2.7%  4.3%  2.2%  4.1%  2.5%  4.1%        
Rate of salary increase  *  2.7%  *  2.6%  *  2.6%        
Long-term rate of return on plan assets  3.9%  3.9%  3.9%  3.9%  3.9%  3.9%        
 
*Non-contributory plans are not pay-related.

F-21


     Reconciliations of beginning and ending balances of benefit obligations and the fair value of the plan assets are as follows:
                           
                        Thousands of 
    Millions of Yen      U.S. Dollars 
    
  
 
    2002 2003 2003 
    
 
 
 
    Non-      Non-      Non-     
    Contributory  Contributory  Contributory  Contributory  Contributory  Contributory 
    Plans  Plan  Plans  Plan  Plans  Plan 

Change in benefit obligation:
                        
 Benefit obligation at beginning of year ¥59,391  ¥65,023  ¥62,802  ¥74,305  $523,350  $619,209 
 Service cost  2,657   1,288   2,884   2,400   24,033   20,000 
 Interest cost  1,662   2,926   1,695   3,195   14,125   26,625 
 Plan participants’ contribution     1,080      1,063      8,858 
 Actuarial loss  1,492   4,718   5,086   534   42,383   4,450 
 Lump-sum cash payments  (2,078)     (2,607)     (21,725)   
 Benefits paid  (322)  (730)  (414)  (985)  (3,450)  (8,208)

  Benefit obligation at end of year ¥62,802  ¥74,305  ¥69,446  ¥80,512  $578,716  $670,934 

Change in plan assets:
                        
 Fair value of plan assets at beginning of year ¥42,334  ¥49,899  ¥41,167  ¥49,778  $343,058  $414,817 
 Actual return on plan assets  (2,494)  (2,855)  (6,198)  (7,963)  (51,650)  (66,358)
 Employer contribution  3,727   2,384   3,975   2,746   33,125   22,883 
 Plan participants’ contribution     1,080      1,063      8,858 
 Lump-sum cash payments  (2,078)     (2,607)     (21,725)   
 Benefits paid  (322)  (730)  (414)  (985)  (3,450)  (8,208)

  Fair value of plan assets at end of year ¥41,167  ¥49,778  ¥35,923  ¥44,639  $299,358  $371,992 

 Funded status (¥21,635) (¥24,527) (¥33,523) (¥35,873) ($279,358) ($298,942)
 Unrecognized actuarial loss  24,605   33,798   36,474   42,383   303,950   353,192 
 Unrecognized net assets at the date of application  (809)  (1,641)  (646)  (1,297)  (5,384)  (10,808)
 Unrecognized prior service gain  (8,770)  (4,937)  (8,235)  (4,573)  (68,625)  (38,109)

  Net amount recognized (¥6,609) ¥2,693  (¥5,930)  ¥640  ($49,417) $5,333 

Amounts recognized in the statement of financial position consist of:
                        
 Accrued benefit liabilities (¥19,358) (¥22,063) (¥31,037) (¥33,013) ($258,642) ($275,108)
 Accumulated other comprehensive income  12,749   24,756   25,107   33,653   209,225   280,441 

  Net amount recognized (¥6,609) ¥2,693  (¥5,930) ¥640  ($49,417) $5,333 

Accumulated benefit obligation at end of year ¥60,438  ¥71,841  ¥66,960  ¥77,652  $558,000  $647,100 

                         
                  Thousands of 
  Millions of Yen  U.S. Dollars 
  2004  2005  2005 
  Non-      Non-      Non-    
  contributory  Contributory  contributory  Contributory  contributory  Contributory 
  Plans  Plan  Plans  Plan  Plans  Plan 
 
Change in benefit obligation:
                        
Benefit obligation at beginning of year ¥69,446  ¥80,512  ¥68,465  ¥85,660  $639,860  $800,561 
Service cost  2,892   2,860   2,795   1,745   26,121   16,308 
Interest cost  1,518   3,301   1,712   3,512   16,000   32,823 
Plan participants’ contribution     659      39      364 
Actuarial loss (gain)  (3,004)  (543)  (922)  37,013   (8,617)  345,916 
Lump-sum cash payments  (1,429)     (1,878)     (17,551)   
Benefits paid  (507)  (1,129)  (623)  (1,287)  (5,822)  (12,028)
Transfer of substitutional portion           (92,219)     (861,860)
Plan amendment           (9,602)     (89,738)
Decrease due to sales of discontinued operations  (451)               
 
Benefit obligation at end of year ¥68,465  ¥85,660  ¥69,549  ¥24,861  $649,991  $232,346 
 
Change in plan assets:
                        
Fair value of plan assets at beginning of year ¥35,923  ¥44,639  ¥43,375  ¥52,220  $405,374  $488,037 
Actual return on plan assets  5,739   5,670   2,016   688   18,841   6,430 
Employer contribution  4,040   2,381   4,074   1,821   38,074   17,019 
Plan participants’ contribution     659      39      364 
Lump-sum cash payments  (1,429)     (1,878)     (17,551)   
Benefits paid  (507)  (1,129)  (623)  (1,287)  (5,822)  (12,028)
Transfer of substitutional portion           (41,120)     (384,299)
Decrease due to sales of discontinued operations  (391)               
 
Fair value of plan assets at end of year ¥43,375  ¥52,220  ¥46,964  ¥12,361  $438,916  $115,523 
 
Funded status ¥(25,090) ¥(33,440) ¥(22,585) ¥(12,500) $(211,075) $(116,823)
Unrecognized actuarial loss  27,476   35,483   25,045   19,912   234,066   186,094 
Unrecognized net assets at the date of application  (486)  (953)  (326)  (609)  (3,047)  (5,691)
Unrecognized prior service gain  (7,700)  (4,209)  (7,165)  (13,447)  (66,963)  (125,673)
 
Net amount recognized ¥(5,800) ¥(3,119) ¥(5,031) ¥(6,644) $(47,019) $(62,093)
 
Amounts recognized in the statement of financial position consist of:
                        
Accrued benefit liabilities ¥(23,017) ¥(27,302) ¥(20,589) ¥(12,170) $(192,421) $(113,738)
Accumulated other comprehensive income  17,217   24,183   15,558   5,526   145,402   51,645 
 
Net amount recognized ¥(5,800) ¥(3,119) ¥(5,031) ¥(6,644) $(47,019) $(62,093)
 
Accumulated benefit obligation at end of year ¥66,392  ¥79,522  ¥67,543  ¥24,531  $631,243  $229,261 
 
Actuarial assumptions used to determine benefit obligations:
                        
Discount rate  2.5%  4.1%  2.5%  2.5%        
Rate of salary increase  *  2.6%  *  **        
 
*Non-contributory plans are not pay-related.
**Corporate portion of contributory plan are not pay-related.

F-22

F-18


     Substantially all of the employees of U.S. and European subsidiaries are covered by defined benefit pension plans.
     The plan assets and pension obligations for the defined benefit pension plans of U.S. and European subsidiaries are measured at March 31 in each fiscal year.
     Net periodic benefit costs for the defined benefit pension plans of U.S. and European subsidiaries for the years ended March 31, 2003, 2004 and 2005 consisted of the following:
                 
              Thousands of 
  Millions of Yen  U.S. Dollars 
  2003  2004  2005  2005 
 
Service cost ¥566  ¥542  ¥565  $5,280 
Interest cost  632   639   693   6,477 
Expected return on assets  (166)  (442)  (580)  (5,420)
Amortization of unrecognized net actuarial loss (gain)  (9)  11   52   486 
Amortization of unrecognized prior service cost  17   16   4   37 
Curtailment/settlement loss (gain)  (168)  (18)  26   243 
 
Net periodic benefit cost ¥872  ¥748  ¥760  $7,103 
 
Actuarial assumptions used to determine net periodic pension cost:
                
Discount rate  6.5%  6.1%  5.6%    
Rate of salary increase  4.3%  3.9%  4.0%    
Long-term rate of return on plan assets  7.5%  7.6%  7.0%    
 

F-23


     Reconciliations of beginning and ending balances of benefit obligations and the fair value of the plan assets are as follows:
             
          Thousands of 
  Millions of Yen  U.S. Dollars 
  2004  2005  2005 
 
Change in benefit obligation:
            
Benefit obligation at beginning of year ¥10,732  ¥12,574  $117,514 
Service cost  542   565   5,280 
Interest cost  639   693   6,477 
Plan participants’ contribution  103   110   1,028 
Actuarial loss  1,496   781   7,299 
Benefits paid  (235)  (228)  (2,131)
Curtailment  (80)  (1,412)  (13,196)
Translation adjustments  (623)  512   4,785 
 
Benefit obligation at end of year ¥12,574  ¥13,595  $127,056 
 
Change in plan assets:
            
Fair value of plan assets at beginning of year ¥6,248  ¥7,656  $71,551 
Actual return on plan assets  1,249   499   4,664 
Employer contribution  703   990   9,252 
Plan participants’ contribution  103   110   1,028 
Benefits paid  (232)  (228)  (2,131)
Translation adjustments  (415)  303   2,832 
 
Fair value of plan assets at end of year ¥7,656  ¥9,330  $87,196 
 
Funded status ¥(4,918) ¥(4,265) $(39,860)
Unrecognized actuarial loss  2,317   1,814   16,954 
Unrecognized prior service cost  62   58   542 
 
Net amount recognized ¥(2,539) ¥(2,393) $(22,364)
 
Amounts recognized in the statement of financial position consists of:
            
Accrued benefit liabilities ¥(3,096) ¥(3,263) $(30,495)
Accumulated other comprehensive income  557   870   8,131 
 
Net amount recognized ¥(2,539) ¥(2,393) $(22,364)
 
Accumulated benefit obligation at end of year ¥10,556  ¥12,344  $115,364 
 
Actuarial assumptions used to determine benefit obligations:
            
Discount rate  5.6%   5.4%     
Rate of salary increase  4.0%   4.0%     
 
     The accumulated benefit obligations and the fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are as follows:
             
          Thousands of 
  Millions of Yen  U.S. Dollars 
  2004  2005  2005 
 
Accumulated benefit obligations ¥10,430  ¥11,474  $107,234 
Fair value of plan assets  7,483   8,369   78,215 
 

F-24


     The unrecognized prior service gain,gain/cost, the unrecognized actuarial loss and the unrecognized net assets at the date of initial application are being amortized over the average remaining service period of employees, both foremployees.
     The Company determines the non-contributory plans and for the contributory plan.

     Substantially allexpected long-term rate of the employeesreturn on pension plan assets based on weighted average of major U.S. and European subsidiaries are covered by a defined benefit pension plan. The projected benefit obligations for the plan and related fair valueexpected long-term returns on various categories of plan assets, were ¥9,805 millionreflecting the current and ¥ 7,045 million, respectively,target allocations of pension plan asset. Expected long-term return by asset category is derived from historical studies by investment advisors.

     The pension plan weighted-average asset allocations at March 31, 20022004 and ¥10,732 million ($89,433 thousand)2005, by asset category are as follows:
         
Asset Category 2004  2005 
 
Equity securities  46%  53%
Debt securities  30   34 
Real estate and other  24   13 
 
Total  100%  100%
 
     The Company’s investment policy is to maintain a diversified portfolio of asset classes with the primary goal of producing an adequate return that, when combined with the Company’s contribution, will maintain the fund’s ability to meet future cash requirements for pension benefit payments. For primary domestic pension plans, the target asset allocation is established based on long-term pension plan asset/liability studies, and ¥6,248 million ($52,067 thousand)the current weighted-average target asset allocation for these plans is; equity securities 56%, respectively, at March 31, 2003.

debt securities 41%, other 3%. All the assets are externally managed and investment managers have discretion to carry out investment operations within their respective mandates specified by the Company.

     With respect to directors, provision is made for lump-sum severance indemnities on a basis considered adequate for such future payments as may be approved by the shareholders.

     In February 2002, the Company announced the closure

of the Hiwada plant in Fukushima, Japan because of the transfer of production sites to China. In relation to this closure, the Company recorded special termination benefits for employees’ voluntary termination of ¥906 million for the year ended March 31, 2002.     In June 2002, Tohoku Pioneer Corporation, a 67% owned subsidiary, implemented a voluntary early retirement plan. In relation to this plan, the Company recorded special termination benefits of ¥1,424 million ($11,867 thousand).million. These special termination benefits were included in the selling, general and administrative expenses.

     The net chargesCompany expects to income for worldwide pensioncontribute ¥6,522 million ($60,953 thousand) to its defined benefit plans severance indemnities and special termination benefits forin the years endedyear ending March 31, 2001, 2002 and 2003 were ¥4,560 million, ¥8,947 million and ¥13,432 million ($111,933 thousand), respectively.

2006.



9.          The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

         
      Thousands of 
Year ending March 31 Millions of Yen  U.S. Dollars 
 
2006 ¥2,314  $21,626 
2007  2,905   27,150 
2008  3,567   33,336 
2009  4,028   37,645 
2010  4,499   42,047 
Years 2011–2015  26,888   251,290 
 
11.Income taxes:

The Company is subject to a number of different income taxes which, in the aggregate, indicate a normal statutory tax rate of approximately 42% for the years ended March 31, 2001, 20022003 and 20032004 and 41% for the year ended March 31, 2005 in Japan. A change in the tax rate was enacted in Japan in March 2003 and the normal effective statutory tax rate effective for the year beginning April 1, 2004 was changed from 42% to 41%.

     Income tax expense for the year ended March 31, 2004 included ¥682 million charges resulting from the settlement of a proposed assessment from the U.S. Internal Revenue Service relating to an adjustment to transfer prices between affiliated companies for the years ended March 31, 1997 through 1999.

     The Company’s provision for income taxes differed from the provision for income taxes at the normal statutory tax rates in Japan as follows:

F-25


                  
                Thousands of 
    Millions of Yen  U.S. Dollars 
    
  
 
    2001  2002  2003  2003 

Computed tax expense at normal statutory tax rate ¥14,361  ¥6,444  ¥12,025  $100,208 
Increase (decrease) resulting from:                
 Changes in valuation allowance, net of effects of carryforward loss expiration and exchange rate changes  2,004   74   (1,975)  (16,458)
 Expenses not deductible for tax purpose                
  Domestic 563   737   284   2,367 
  Foreign  229   221   442   3,683 
 Amortization of goodwill  256   314       
 Difference in foreign and Japanese tax rates  (2,739)  (1,958)  (1,643)  (13,692)
 Effect of tax rate change on deferred taxes        836   6,967 
 Write-down of investment in a subsidiary  (1,092)         
 Other  738   890   (522)  (4,350)

Provision for income taxes ¥14,320  ¥6,722  ¥9,447  $78,725 

F-19


                 
              Thousands of 
  Millions of Yen  U.S. Dollars 
  2003  2004  2005  2005 
 
Computed tax expense at normal statutory tax rate ¥11,793  ¥17,576  ¥(77) $(720)
Increase (decrease) resulting from:                
Loss operations  992   1,294   6,137   57,355 
Realization of tax benefit of operating loss carryforwards  (1,056)  (395)  (671)  (6,271)
Expenses not deductible for tax purpose:                
Domestic  269   280   251   2,346 
Foreign  439   149   325   3,037 
Difference in foreign and Japanese tax rates  (1,595)  (1,608)  (1,848)  (17,271)
Effect of tax rate change on deferred taxes  835   447       
Tax benefit for discontinued operations     3,025       
Tax credit for research and development expenses  (530)  (898)  (232)  (2,168)
Other  (2,115)  (1,283)  957   8,944 
 
Provision for income taxes ¥9,032  ¥18,587  ¥4,842  $45,252 
 
 
     Total income taxes provided for the years ended March 31, 2003, 2004 and 2005 are as follows:
 
              Thousands of 
  Millions of Yen  U.S. Dollars 
  2003  2004  2005  2005 
 
Provision for income taxes on income from continuing operations ¥9,032  ¥18,587  ¥4,842  $45,252 
Provision for income taxes (benefit) on income from discontinued operations  415   (2,310)      
Shareholders’ equity—directly charged (credited):                
Minimum pension liability adjustments  (8,927)  6,953   8,225   76,869 
Net unrealized gains on securities  (899)  4,009   (593)  (5,542)
 
Total ¥(379) ¥27,239  ¥12,474  $116,579 
 
 
     Income from continuing operations before income taxes and income tax expense comprised the following components:
 
              Thousands of 
  Millions of Yen  U.S. Dollars 
  2003  2004  2005  2005 
 
Income (loss) from continuing operations before income taxes:                
Domestic ¥10,137  ¥18,481  ¥(8,656) $(80,897)
Foreign  17,942   23,367   8,469   79,149 
 
Total ¥28,079  ¥41,848  ¥(187) $(1,748)
 
Income taxes—Current:                
Domestic ¥6,643  ¥10,799  ¥4,091  $38,233 
Foreign  7,834   7,030   3,597   33,617 
 
Total ¥14,477  ¥17,829  ¥7,688  $71,850 
 
Income taxes—Deferred:                
Domestic ¥(3,296) ¥(385) ¥(1,576) $(14,729)
Foreign  (2,149)  1,143   (1,270)  (11,869)
 
Total ¥(5,445) ¥758  ¥(2,846) $(26,598)
 

F-26

     Total income taxes provided for the years ended March 31, 2001, 2002 and 2003 are as follows:

                   
               Thousands of 
           Millions of Yen U.S. Dollars 
    
  
 
    2001  2002  2003  2003 

Provision for income taxes ¥14,320  ¥6,722  ¥9,447  $78,725 
Shareholders’ equity—directly charged (credited):                
 Minimum pension liability adjustments  (6,456)  (6,460)  (8,927)  (74,391)
 Net unrealized gains on securities  (3,638)  (1,502)  (899)  (7,492)

  Total ¥4,226  1,240) 379) ($3,158)

      Income before income taxes and income tax expense comprised the following components:

                  
              Thousands of 
   Millions of Yen U.S. Dollars 
   
  
 
   2001  2002  2003  2003 

Income (loss) before income taxes:                
 Domestic ¥5,967  3,655) ¥9,994  $83,283 
 Foreign  28,226   18,998   18,636   155,300 

  ¥34,193  ¥15,343  ¥28,630  $238,583 

Income taxes—Current:                
 Domestic ¥4,906  ¥3,879  ¥6,824  $56,867 
 Foreign  10,105   7,228   7,938   66,150 

  ¥15,011  ¥11,107  ¥14,762  $123,017 

Income taxes—Deferred:                
 Domestic 872) 4,501) 3,286) ($27,383)
 Foreign  181   116   (2,029)  (16,909)

  691) 4,385) 5,315) ($44,292)

F-20


     The significant components of the deferred tax assets and liabilities at March 31, 20022004 and 20032005 are as follows:
                          
                   Thousands of 
   Millions of Yen  U.S. Dollars 
   
  
 
   2002 2003  2003 
   
 
  
 
   Deferred  Deferred  Deferred  Deferred  Deferred  Deferred 
   Tax  Tax  Tax  Tax  Tax  Tax 
   Assets  Liabilities  Assets  Liabilities  Assets  Liabilities 

Inventories ¥9,214     ¥8,197     $68,308    
Marketable equity securities  443  ¥24   3,831  ¥1,018   31,925  $8,484 
Accrued expenses  7,901      9,106      75,883    
Tax loss carryforwards  15,184      11,723      97,692    
Pension and severance cost  18,589      28,341      236,175    
Land  2,347   248   2,216      18,467    
Depreciation  958   293   1,563   387   13,025   3,225 
Royalty receivable  953      1,395      11,625    
Other  17,346   3,568   18,384   2,863   153,200   23,858 

 Total  72,935   4,133   84,756   4,268   706,300   35,567 
Valuation allowance  (18,299)     (15,292)     (127,433)   

 Total ¥54,636  ¥4,133  ¥69,464  ¥4,268  $578,867  $35,567 

                         
                  Thousands of 
  Millions of Yen  U.S. Dollars 
  2004  2005  2005 
  Deferred  Deferred  Deferred  Deferred  Deferred  Deferred 
  Tax  Tax  Tax  Tax  Tax  Tax 
  Assets  Liabilities  Assets  Liabilities  Assets  Liabilities 
 
Inventories ¥6,911     ¥5,590     $52,243    
Marketable equity securities  2,971  ¥5,017   2,040  ¥4,445   19,066  $41,542 
Allowance for notes and accounts receivable  1,040      824      7,701    
Accrued expenses  11,893      16,316      152,486    
Warranty reserve  2,784      1,863      17,411    
Tax loss carryforwards  9,297      21,232      198,430    
Pension and severance cost  22,268      15,116      141,271    
Property  1,840      4,230      39,533    
Depreciation  1,907   302   3,029   490   28,308   4,580 
Royalty receivable  974      539      5,037    
Other  10,268   3,408   6,539   2,469   61,112   23,075 
 
Total  72,153   8,727   77,318   7,404   722,598   69,197 
Valuation allowance  (11,591)     (20,605)     (192,570)   
 
Total ¥60,562  ¥8,727  ¥56,713  ¥7,404  $530,028  $69,197 
 

     The changes in the valuation allowance for the years ended March 31, 2003, 2004 and 2005 are as follows:
                     
  Millions of Yen 
  Balance at              Balance at 
  Beginning          Translation  End 
Valuation Allowance of Period  Addition*  Deduction  Adjustments  of Period 
 
2003 ¥18,299  ¥5,741  ¥(8,912) ¥164  ¥15,292 
2004  15,292   1,956   (5,469)  (188)  11,591 
2005  11,591   12,851   (3,963)  126   20,605 
 
 
  Thousands of U.S. Dollars 
  Balance at              Balance at 
  Beginning          Translation  End 
Valuation Allowance of Period  Addition*  Deduction  Adjustments  of Period 
 
2005 $108,327  $120,103  $(37,037) $1,177  $192,570 
 
*“Addition” includes valuation allowance of ¥7,953 million ($74,327 thousand) recognized by PPD at the time of acquisition at September 30, 2004.
     The valuation allowance principally relates to deferred tax assets for loss carryforwards of subsidiaries.

     During

     Decrease in valuation allowance for the yearsyear ended March 31, 2002 and 2003 was mainly due to the reversal of valuation allowances were increased by ¥507 million and decreased by ¥3,007 million ($25,058 thousand), respectively.allowance which had been provided for a tax benefit, the realization of which had been determined to be not more likely than not, as profitability of subsidiaries improved. Decrease in valuation allowance for the year ended March 31, 2004 was mainly due to the reversal of valuation allowance for discontinued operations. Increase in valuation allowance for the year ended March 31, 2005 was mainly due to losses incurred for which the realization of the related deferred tax assets was determined to be not more likely than not.

F-27


     At March 31, 2003,2005, the Company has tax loss carryforwardscarry-forwards which are available to reduce taxable income in subsequent periods. If not utilized, such loss carryforwards expire as follows:
          
       
Year ending March 31  Millions of Yen   Thousands of
U.S. Dollars
 

2004 ¥728  $6,067 
2005  2,070   17,250 
2006  247   2,058 
2007  2,113   17,608 
2008  1,678   13,983 
Thereafter  25,775   214,792 

 Total ¥32,611  $271,758 

         
      Thousands of 
Year ending March 31 Millions of Yen  U.S. Dollars 
 
2006 ¥203  $1,897 
2007  536   5,009 
2008  593   5,542 
2009  155   1,449 
2010  6,630   61,963 
Thereafter  47,973   448,346 
 
Total ¥56,090  $524,206 
 

     No provision for income taxes is recognized on undistributed earnings of foreign subsidiaries wherethat are not expected to be remitted in the Company considers that such earnings are reinvested or would not, under the present Japanese tax laws, be subject to additional taxation should they be distributed to the parent company.foreseeable future. Undistributed earnings of foreign subsidiaries (including related foreign currency translation adjustments) at March 31, 20022004 and 20032005 amounted to approximately ¥133,934¥116,689 million and ¥133,923¥115,606 million ($1,116,0251,080,430 thousand), respectively. It is not practical to estimate the amount of taxes that might be payable on the eventual remittance of such earnings.

     The domestic undistributed earnings would not, under the present Japanese tax laws, be subject to additional taxation.


F-21



10.     12.Shareholders’ equity:

Common Stock and Capital Surplus—
As permitted by the Commercial Code of Japan (the “Code”) prior to April 1, 1991, the parent company had made free share distributions which were accounted for by a transfer from capital surplus to common stock or without any transfers in the capital accounts.

     Companies in the United States issuing shares in similar transactions would be required to account for them as stock dividends. Had the distributions been accounted for in the manner adopted by the United States companies, ¥179,076 million ($1,492,3001,673,607 thousand) would have been transferred from retained earnings to appropriate capital accounts as of March 31, 2003.

Retained Earnings—
Retained earnings consist2005.

     The Code requires that all shares of legal reservecommon stock are recorded with no par value and unappropriated retained earnings.

     The parent company is subject to the Code amendments which became effective from October 1, 2001. Prior to October 1, 2001, the Code required at least 50% of the issue price of new shares with a minimum of the par value thereof,is required to be designatedrecorded as stated capital as determined by resolution of the Board of Directors. Proceeds in excess of amounts designated as stated capital were credited to capital surplus. Effective October 1, 2001, the revised Code eliminated common stock par values resulting in all shares being recorded with no par value.

     Prior to October 1, 2001,and the remaining net proceeds as capital surplus.

Retained Earnings—
Retained earnings consist of legal reserve and unappropriated retained earnings.
     The Code also providedprovides that an amount at least equal to 10% of the aggregate amount of cash dividends and certain other cash payments which are made as an appropriation of retained earnings applicable to each fiscal period shall be appropriated and set aside as a legal reserve until such reserve and capital surplus equals 25% of stated capital. Effective October 1, 2001, the revised Code allows for such appropriations to be determined based on total capital surplus and legal reserve.common stock. The amount of total capital surplus and legal reserve which exceeds 25% of stated capitalthe common stock is available for appropriations by resolution of the shareholders.

     The In addition, the Code permits companies tothe transfer of a portion of capital surplus and legal reserve to stated capitalthe common stock by resolution of the

Board of Directors.

     The Code also permitsallows companies to transfer a portion of unappropriated retained earnings, available for dividends, to stated capital by resolution of the shareholders.

     Prior to October 1, 2001, the Code imposed certain restrictions on the purchase and sale ofrepurchase treasury stock. Effective October 1, 2001, the Code eliminated these restrictions allowing companies to purchase treasury stock by a resolution of the shareholders at the general shareholders’ meeting and dispose of such treasury stock by resolution of the Board of Directors on and after April 1, 2002.Directors. The repurchased amount of treasury stock cannot exceed the amount available for future dividend plus amount of common stock, capital surplus or legal reserve to be reduced in the case where such reduction was resolved at the general shareholders meeting.

F-28


     The amount available for dividends under the Code was ¥132,962¥128,882 million ($1,108,0171,204,505 thousand) as of March 31, 2003,2005, that is based on the amount recorded in the parent company’s general books and records maintained in accordance with accepted Japanese accounting practices. The adjustments are included in the accompanying consolidated financial statements to conform with U.S. GAAP, but are not recorded in the books, and have no effect on the determination of retained earnings available for dividends under the Code. In addition to the provision that requires an appropriation for a legal reserve in connection with the cash payment as described above, the Code imposes certain limitations on the amount of retained earnings available for dividends.

     At the general shareholders meeting held on June 27, 2002, the shareholders of the parent company authorized the repurchasepurchase of up to 10,000,000 shares of theirthe parent company’s common stock at the maximum.stock. In August 2002, November 2002 and February 2003, the parent company repurchasedpurchased 1,610,000 shares, 2,000,000 shares and 1,500,000 shares of their common stock, respectively, in the market for the aggregate cost of ¥11,492 million ($95,767 thousand) as a publicly announced plan to improve capital efficiency pursuant to a revision in the Code.

In March 2005, the parent company purchased 1,000,000 shares of its common stock in the market for the cost of ¥1,963 million as a publicly announced plan.

     The appropriations of retained earnings for the year ended March 31, 2003,2005, which have been incorporated in the accompanying consolidated financial statements, will be proposed for approval at the general shareholders’ meeting to be held on June 27, 2003,29, 2005, and will be recorded in the parent company’s general books of account after shareholders’ approval.


F-22



11.13. Stock-based compensation plans:

The Company has two types of stock-based compensation plansa stock option plan as an incentive plansplan for directors and selected employees.

Warrant plan—
Upon issuance of detachable warrant bonds by the parent company, a consolidated subsidiary purchased all of the bonds and the Company distributed the warrants at fair value to directors and certain employees of the Company as a part of their remuneration.


Stock option plan—
In accordance with approval ofat shareholders’ meetings on June 29, 2000 and June 28, 2001, the Company granted share subscription rights to employees. Also, in accordance with approval ofat shareholders’ meetingmeetings on June 27, 2002, June 27, 2003 and June 29, 2004, the Company granted share acquisition rights to directors and certain employees of the Company. These options vest over two years and expire in five years from the date of grant. The Company recorded the fair value of the stock option as a part of their remuneration.

     A summary of information for the Company’s stock-based compensationstock option plans is as follows:
                 
      Yen    
          Weighted-Average  Number of 
      Weighted-Average  Grant Date  Shares 
Year Plan Exercisable Period Exercise Price  Share Price  (Thousands) 
 
2001 Stock option From July 1, 2002 to June 30, 2005 ¥4,400  ¥4,250   191 
2002 Stock option From July 1, 2003 to June 30, 2006  3,791   3,750   191 
2003 Stock option From July 1, 2004 to June 29, 2007  2,477   2,170   564 
2004 Stock option From July 1, 2005 to June 30, 2008  2,951   2,845   313 
2005 Stock option From July 3, 2006 to June 30, 2009  2,944   2,660   316 
 
             
      U.S. Dollars 
          Weighted-Average 
      Weighted-Average  Grant Date 
Year Plan Exercisable Period Exercise Price  Share Price 
 
2005 Stock option From July 3, 2006 to June 30, 2009 $27.51  $24.86 
 

F-29


                     
          Yen     
          
     
              Weighted-Average  Number of 
          Weighted-Average  Grant Date  Shares 
Year  Plan  Exercisable Period Exercise Price  Share Price  (Thousands) 

 2001  Warrant From July 2, 2001 to September 25, 2003 ¥4,728  ¥4,543   284 
 2001  Stock option From July 1, 2002 to June 30, 2005  4,400   4,250   191 
 2002  Warrant From July 1, 2002 to August 26, 2004  3,266   2,700   413 
 2002  Stock option From July 1, 2003 to June 30, 2006  3,791   3,750   191 
 2003  Stock option From July 1, 2004 to June 29, 2007  2,477   2,170   564 

         
      U.S. Dollars
      
        Weighted-Average
      Weighted-Average Grant Date
Year Plan Exercisable Period Exercise Price Share Price

2003 Stock option From July 1, 2004 to June 29, 2007 $20.64 $18.08


     Remuneration cost recognized for stock-based compensation plans for the years ended March 31, 2001, 20022003, 2004 and 20032005 were ¥362¥149 million, ¥346¥305 million and ¥149¥270 million ($1,2422,523 thousand), respectively.

     The weighted-average fair value per share at the date of grant for the warrants and the stock options granted during the years ended March 31, 2001, 20022003, 2004 and 20032005 were ¥762, ¥573¥704, ¥907 and ¥704¥654 ($5.87)6.11), respectively. The fair value of the warrants and the stock options granted on the date of

grant, which is amortized to expense over the vesting period, is estimated using the Black-Scholes option- valuationoption-valuation model with the following weighted-average assumptions:

             
  2001 2002 2003

 
 
Risk-free interest rate  0.86%  0.25%  0.24%
Expected lives 3.48 years 3.48 years 3.48 years
Expected volatility  48.19%  50.61%  52.81%
Expected dividends  0.36%  0.41%  0.69%


F-23


             
2003  2004  2005
Risk-free interest rate  0.24%  0.34%  0.50%
Expected lives 3.48 years 3.48 years 3.48 years
Expected volatility  52.81%  48.13%  40.02%
Expected dividends  0.69%  0.88%  0.93%
 
     A summary of the status of the Company’s warrants, which expired up until August 26, 2004, and options as of March 31, 2001, 20022003, 2004 and 2003,2005, and changes during the years is as follows:
                  
           Weighted-Average Exercise
       Weighted-Average  Price per Share
   Number of Shares  Remaining Life  
   (Thousands)  (Years)  Yen  U.S. Dollars

 
Outstanding at March 31, 2000  574   1.9  ¥2,452     
 Granted  475       4,597     
 Exercised  (306)      2,551     

    
Outstanding at March 31, 2001  743   2.4   3,782     
 Granted  604       3,432     
 Exercised  (170)      2,425     

Outstanding at March 31, 2002  1,177   2.5  ¥3,798     
 Granted  564       2,477   $20.64 
 Expired  (98)      2,188   18.23 

Outstanding at March 31, 2003  1,643   2.5  ¥3,441   $28.68 

Exercisable at March 31, 2002  382      ¥4,075     

Exercisable at March 31, 2003  888      ¥3,977   $33.14 

                 
      Weighted-Average  Weighted-Average Exercise 
  Number of Shares  Remaining Life  Price per Share 
  (Thousands)  (Years)   Yen  U.S. Dollars 
   
Outstanding at March 31, 2002  1,177   2.5  ¥3,798     
Granted  564       2,477     
Expired  (98)      2,188     
     
Outstanding at March 31, 2003  1,643   2.5  ¥3,441     
Granted  313       2,951     
Expired  (284)      4,728     
 
Outstanding at March 31, 2004  1,672   2.4  ¥3,131     
Granted  316       2,944  $27.51 
Exercised  (4)      2,477   23.15 
Expired  (413)      3,266   30.52 
 
Outstanding at March 31, 2005  1,571   2.5  ¥3,059  $28.59 
 
Exercisable at March 31, 2004  795      ¥3,664     
 
Exercisable at March 31, 2005  942      ¥3,133  $29.28 
 

F-30


12.
14. Other comprehensive income:

Change in accumulated other comprehensive income (loss) is as follows:
                 
  Millions of Yen
  
          Foreign Currency  Total Accumulated
  Minimum Pension  Net Unrealized  Translation  Other Comprehensive
  Liability Adjustments  Gains on Securities  Adjustments  Income (Loss)

Balance at March 31, 2000 2,792) ¥11,747  45,397) 36,442)
Adjustments for the year  (8,847)  (5,085)  21,723   7,791 

Balance at March 31, 2001  (11,639)  6,662   (23,674)  (28,651)
Adjustments for the year  (8,848)  (2,079)  14,842   3,915 

Balance at March 31, 2002  (20,487)  4,583   (8,832)  (24,736)
Adjustments for the year  (12,188)  (1,235)  (17,470)  (30,893)

Balance at March 31, 2003 32,675) ¥3,348  26,302) 55,629)

                 
  Thousands of U.S. Dollars
  
          Foreign Currency  Total Accumulated
  Minimum Pension  Net Unrealized  Translation  Other Comprehensive
  Liability Adjustments  Gains on Securities  Adjustments  Income (Loss)

Balance at March 31, 2002  ($170,725)  $38,192   ($73,600)  ($206,133)
Adjustments for the year  (101,567)  (10,292)  (145,583)  (257,442)

Balance at March 31, 2003  ($272,292)  $27,900   ($219,183)  ($463,575)

                 
  Millions of Yen 
          Foreign Currency  Total Accumulated 
  Minimum Pension  Net Unrealized  Translation  Other Comprehensive 
  Liability Adjustments  Gains on Securities  Adjustments  Income (Loss) 
 
Balance at March 31, 2002 ¥(20,487) ¥4,583  ¥(8,832) ¥(24,736)
Adjustments for the year  (12,188)  (1,235)  (17,470)  (30,893)
 
Balance at March 31, 2003  (32,675)  3,348   (26,302)  (55,629)
Adjustments for the year  9,745   5,755   (21,700)  (6,200)
 
Balance at March 31, 2004  (22,930)  9,103   (48,002)  (61,829)
Adjustments for the year  11,744   (853)  3,269   14,160 
 
Balance at March 31, 2005 ¥(11,186) ¥8,250  ¥(44,733) ¥(47,669)
 
                 
  Thousands of U.S. Dollars 
          Foreign Currency  Total Accumulated 
  Minimum Pension  Net Unrealized  Translation  Other Comprehensive 
  Liability Adjustments  Gains on Securities  Adjustments  Income (Loss) 
 
Balance at March 31, 2004 $(214,299) $85,075  $(448,617) $(577,841)
Adjustments for the year  109,757   (7,972)  30,551   132,336 
 
Balance at March 31, 2005 $(104,542) $77,103  $(418,066) $(445,505)
 

F-31

F-24


     Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments are as follows:
                  
   Millions of Yen
   
   Before-Tax  Tax (Expense)  Minority  Net-of-Tax
   Amount  or Benefit  Interest  Amount

2001:                
Minimum pension liability adjustments 15,375) ¥6,456  ¥72  8,847)
Net unrealized gains on securities:                
 Unrealized holding losses arising during year  (7,432)  3,121   45   (4,266)
 Less—Reclassification adjustment for gains realized in net income  (1,308)  517   (28)  (819)
  
 Net unrealized losses  (8,740)  3,638   17   (5,085)
Foreign currency translation adjustments  22,353      (630)  21,723 

Other comprehensive income (loss) 1,762) ¥10,094  541) ¥7,791 

2002:                
Minimum pension liability adjustments 15,380) ¥6,460  ¥72  8,848)
Net unrealized gains on securities:                
 Unrealized holding losses arising during year  (5,404)  2,270   7   (3,127)
 Less—Reclassification adjustment for losses realized in net income  1,828   (768)  (12)  1,048 
  
 Net unrealized losses  (3,576)  1,502   (5)  (2,079)
Foreign currency translation adjustments  15,338      (496)  14,842 

Other comprehensive income (loss) 3,618) ¥7,962  429) ¥3,915 

2003:                
Minimum pension liability adjustments 21,255) ¥8,927  ¥140  12,188)
Net unrealized gains on securities:                
 Unrealized holding losses arising during year  (3,502)  1,472   7   (2,023)
 Less—Reclassification adjustment for losses realized in net income  1,366   (573)  (5)  788 
  
 Net unrealized losses  (2,136)  899   2   (1,235)
Foreign currency translation adjustments  (18,178)     708   (17,470)

Other comprehensive income (loss) 41,569) ¥9,826  ¥850  30,893)

 
   Thousands of U.S. Dollars
   
   Before-Tax  Tax (Expense)  Minority  Net-of-Tax
   Amount  or Benefit  Interest  Amount

2003:                
Minimum pension liability adjustments  ($177,125)  $74,391  $1,167   ($101,567)
Net unrealized gains on securities:                
 Unrealized holding losses arising during year  (29,183)  12,267   58   (16,858)
 Less—Reclassification adjustment for losses realized in net income  11,383   (4,775)  (42)  6,566 
  
 Net unrealized losses  (17,800)  7,492   16   (10,292)
Foreign currency translation adjustments  (151,483)     5,900   (145,583)

Other comprehensive income (loss)  ($346,408)  $81,883  $7,083   ($257,442)

                 
  Millions of Yen 
  Before-Tax  Tax (Expense)  Minority  Net-of-Tax 
  Amount  or Benefit  Interest  Amount 
 
2003:                
Minimum pension liability adjustments ¥(21,255) ¥8,927  ¥140  ¥(12,188)
Net unrealized gains on securities:                
Unrealized holding losses arising during year  (3,502)  1,472   7   (2,023)
Less—Reclassification adjustment for losses realized in net income  1,366   (573)  (5)  788 
   
Net unrealized losses  (2,136)  899   2   (1,235)
Foreign currency translation adjustments  (18,178)     708   (17,470)
 
Other comprehensive income (loss) ¥(41,569) ¥9,826  ¥850  ¥(30,893)
 
2004:                
Minimum pension liability adjustments ¥16,803  ¥(6,953) ¥(105) ¥9,745 
Net unrealized gains on securities:                
Unrealized holding gains arising during year  9,790   (4,013)  (16)  5,761 
Less—Reclassification adjustment for gains realized in net income  (10)  4      (6)
   
Net unrealized gains  9,780   (4,009)  (16)  5,755 
Foreign currency translation adjustments:                
Foreign currency translation adjustments arising during year  (23,010)     912   (22,098)
Less—Reclassification adjustment for losses realized in net income  398         398 
   
Net foreign currency translation adjustments  (22,612)     912   (21,700)
 
Other comprehensive income (loss) ¥3,971  ¥(10,962) ¥791  ¥(6,200)
 
2005:                
Minimum pension liability adjustments ¥20,003  ¥(8,225) ¥(34) ¥11,744 
Net unrealized gains on securities:                
Unrealized holding gains arising during year  843   (347)  4   500 
Less—Reclassification adjustment for gains realized in net income  (2,293)  940      (1,353)
   
Net unrealized losses  (1,450)  593   4   (853)
Foreign currency translation adjustments  3,292      (23)  3,269 
 
Other comprehensive income (loss) ¥21,845  ¥(7,632) ¥(53) ¥14,160 
 
                 
  Thousands of U.S. Dollars 
  Before-Tax  Tax (Expense)  Minority  Net-of-Tax 
  Amount  or Benefit  Interest  Amount 
 
2005:                
Minimum pension liability adjustments $186,944  $(76,869) $(318) $109,757 
Net unrealized gains on securities:                
Unrealized holding gains arising during year  7,879   (3,243)  37   4,673 
Less—Reclassification adjustment for gains realized in net income  (21,430)  8,785      (12,645)
   
Net unrealized losses  (13,551)  5,542   37   (7,972)
Foreign currency translation adjustments  30,766      (215)  30,551 
 
Other comprehensive income (loss) $204,159  $(71,327) $(496) $132,336 
 

F-32

F-25



13.
15. Supplemental information:

Supplemental information for the years ended March 31, 2001, 20022003, 2004 and 20032005 is as follows:
                 
              Thousands of
  Millions of Yen  U.S. Dollars
  
  
  2001  2002  2003  2003

Research and development expenses charged to cost and expenses  ¥37,105   ¥39,050   ¥45,388   $378,233 
Advertising costs charged to expense as incurred  10,434   13,117   11,836   98,633 

     Other—net as shown in other

                 
              Thousands of 
  Millions of Yen  U.S. Dollars 
  2003  2004  2005  2005 
 
Research and development expenses charged to cost and expenses ¥45,388  ¥51,483  ¥55,897  $522,402 
Advertising costs charged to expense as incurred  11,089   12,813   11,599   108,402 
 
     Other income (expenses)of revenues for the years ended March 31, 2001, 20022003, 2004 and 20032005 consisted of the following:
                 
              Thousands of
  Millions of Yen  U.S. Dollars
  
  
  2001  2002  2003  2003

Gains (losses) on sale and write-down of investments and securities  ¥   254   (¥2,287)  (¥1,393)  ($11,608)
Other  1,607   (202)  640   5,333 

     Total  ¥1,861   (¥2,489)  (¥753)  ($6,275)

                 
              Thousands of 
  Millions of Yen  U.S. Dollars 
  2003  2004  2005  2005 
 
Gain on sale of available-for-sale securities and sundry investments    ¥37  ¥2,309  $21,579 
Foreign exchange gain, net        462   4,318 
Dividend income ¥283   326   385   3,598 
Other  358   141   259   2,421 
 
Total other income ¥641  ¥504  ¥3,415  $31,916 
 
     Other deductions of cost and expenses for the years ended March 31, 2003, 2004 and 2005 consisted of the following:
                 
              Thousands of 
  Millions of Yen  U.S. Dollars 
  2003  2004  2005  2005 
 
Impairment losses of long-lived assets       ¥4,460  $41,682 
Write-down of available-for-sale securities and sundry investments ¥1,369  ¥245   51   477 
Foreign exchange loss, net  2,045   1,244       
Other  20   152   1,827   17,075 
 
Total other deductions ¥3,434  ¥1,641  ¥6,338  $59,234 
 
     The Company recognized impairment losses of long-lived assets of ¥4,460 million ($41,682 thousand) for the year ended March 31, 2005 in accordance with the provisions of SFAS No. 144.
     The Company reviewed PPD’s production facilities for impairment because of the unfavorable post-acquisition changes in market conditions for plasma displays. For the impairment review purpose, PPD’s production facilities were grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, and as a result, an impairment loss of ¥3,396 million ($31,738 thousand) was recognized as the excess of the carrying value of the asset group over the estimated fair value of the asset group. Fair value was determined using an expected present value technique.
     In addition, a foreign subsidiary recognized an impairment loss of ¥477 million ($4,458 thousand) for the year ended March 31, 2005 related to the property and equipment of the plant to be closed.
     During the year ended March 31, 2005, the Company decided to no longer sell set-top boxes for cable TV providers in the United States in order to shift its research and development resources toward products for the open cable market. The Company continues to manufacture and sell cable TV set-top boxes in Japan and there was no separate financial reporting for the distribution of the cable TV set-top boxes to the U.S. market. As a result of this decision, the Company recognized an impairment loss of ¥587 million ($5,486 thousand) related to intangible assets of software in Japan for the manufacture of cable TV set-top boxes to the U.S. market and, in addition to the impairment loss, charged ¥1,783 million ($16,664 thousand) in “Other” of other deductions of cost and expenses for asset disposal cost, employee termination benefits and contract termination costs for the year ended March 31, 2005.

F-33


14.16. Leased assets:

The Company leases certain land, machinery and equipment, office space, warehouses, computer equipment and employees’ residential facilities primarilyfacilities.
     An analysis of assets under operating leases.

capital leases was as follows:

         
      Thousands of 
  Millions of Yen  U.S. Dollars 
  2005  2005 
 
Machinery and equipment ¥12,625  $117,991 
Accumulated depreciation  (1,794)  (16,767)
 
Total ¥10,831  $101,224 
 
     The following is a schedule by year of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2005:
         
      Thousands of 
Year ending March 31 Millions of Yen  U.S. Dollars 
 
2006 ¥3,710  $34,673 
2007  3,261   30,476 
2008  2,478   23,159 
2009  509   4,757 
2010  499   4,663 
2011 and thereafter  1,289   12,047 
 
Total minimum lease payments  11,746   109,775 
 
Less—Amount representing interest  617   5,766 
 
Present value of net minimum lease payment  11,129   104,009 
Less—Current obligations  3,441   32,159 
 
Long-term capital lease obligations ¥7,688  $71,850 
 
     Rental expenses under operating leases for the years ended March 31, 2001, 20022003, 2004 and 20032005 aggregated ¥5,962¥6,068 million, ¥6,777¥6,268 million and ¥6,806¥8,376 million ($56,71778,280 thousand), respectively. Such rentals relate principally to cancelable leases which are renewable upon expiration.


     The net minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 20032005 are as follows:

          
       Thousands of
Year ending March 31 Millions of Yen  U.S. Dollars

 
2004  ¥3,403   $28,358 
2005  2,406   20,050 
2006  1,461   12,175 
2007  862   7,183 
2008  435   3,625 
Thereafter  992   8,267 

       Total minimum future rentals  ¥9,559   $79,658 

         
      Thousands of 
Year ending March 31 Millions of Yen  U.S. Dollars 
 
2006 ¥6,335  $59,206 
2007  4,925   46,028 
2008  3,585   33,505 
2009  1,249   11,673 
2010  1,051   9,822 
Thereafter  2,552   23,850 
 
Total minimum future rentals ¥19,697  $184,084 
 

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15.17. Financial instruments:

Derivatives—
The Company operates internationally, giving rise to exposure to market risks from changes in foreign exchange rates and interest rates. Derivative financial instruments are utilized by the Company to reduce those risks but are not held or issued for trading purposes.

     To hedge certain purchase and sale commitments and anticipated but not yet committed transactions denominated in other than functional currencies, the Company enters into forward exchange contracts and purchases and writes currency options. Written options are entered into only with purchased options.

contracts.

     The notional amounts of forward exchange contracts as of March 31, 20022004 and 20032005 were ¥3,031¥20,505 million and ¥8,496¥34,950 million ($70,800326,636 thousand), respectively. The notional amounts of currency options purchased were ¥1,440 million and ¥1,558 million ($12,983 thousand) as of March 31, 2002 and 2003, respectively. The notional amount of currency options written was ¥1,440 million and ¥1,558 million ($12,983 thousand) as of March 31, 2002 and 2003, respectively.

     To change currency and interest rate features of intercompany finance transactions, the Company entered into currency swap contracts with banks. Currency swap contracts effectively changed, in substance, the U.S. dollars floating interest rate intercompany borrowings into Japanese yen fixed and floating interest rate borrowings and


euro floatingfixed interest rate borrowings. The notional amounts of currency swap contracts as of March 31, 20022004 and 20032005 were ¥42,882¥35,106 million and ¥32,255¥35,489 million ($268,792331,673 thousand), respectively.

Concentration of Credit Risk—
The Company distributes its products to a diverse group of domestic and foreign customers. Trade receivables arising from these sales represent credit risk to the Company. However, due to the large number and diversity of the Company’s customer base, concentration of credit risk with respect to trade receivables is limited. The Company performs ongoing credit evaluation of its customers’ financial condition and, generally, requires no collateral from its customers.

     Derivative financial instruments that the Company holds or issues may expose the Company to credit risks if the counterparties are unable to meet the terms of such contracts.

     The Company minimizes credit risk exposure of these derivatives by limiting the counterparties to major international banks and financial institutions as well as avoiding concentration with certain counterparties, and also by making frequent credit reviews of these counterparties. Management does not expect to incur any significant losses as the result of counterparty default.

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16.18. Fair value of financial instruments:

The following table presents the carrying amounts and fair values of the Company’s financial instruments at March 31, 20022004 and 2003:
         ��                 
                    Thousands of 
    Millions of Yen  U.S. Dollars 
    
  
 
    2002  2003  2003 
    
  
  
 
    Assets (liabilities)  Assets (liabilities)  Assets (liabilities) 
    
  
  
 
    Carrying  Fair  Carrying  Fair  Carrying  Fair 
    Amounts  Value  Amounts  Value  Amounts  Value 

Assets:                        
 Available-for-sale securities ¥21,815  ¥21,815  ¥14,831  ¥14,831  $123,592  $123,592 
 Long-term receivables  374   365   292   288   2,433   2,400 
 Other financial instruments                        
  Forward exchange contracts        13   13   108   108 
  Currency swap  1,846   1,846             
  Currency option  2   2             
Liabilities:                        
 Long-term debt, including current maturity  (38,228)      (33,170)      (276,417)    
 Less—Capital lease obligations  62       3       25     
  
 Long-term debt—net  (38,166)  (38,963)  (33,167)  (34,727)  (276,392)  (289,392)
 Other financial instruments:                        
  Forward exchange contracts  (33)  (33)  (250)  (250)  (2,083)  (2,083)
  Currency swap        (2,076)  (2,076)  (17,300)  (17,300)
  Currency option  (10)  (10)  (7)  (7)  (58)  (58)

2005:

                         
                   
  Millions of Yen  Thousands of U.S. Dollars 
  2004  2005  2005 
  Carrying  Fair  Carrying  Fair  Carrying  Fair 
  Amounts  Value  Amounts  Value  Amounts  Value 
 
Assets:                        
Available-for-sale securities ¥24,516  ¥24,516  ¥22,268  ¥22,268  $208,112  $208,112 
Sundry investments  528   541   411   452   3,841   4,224 
Long-term receivables  253   244   185   179   1,729   1,673 
Other financial instruments:                        
Forward exchange contracts  790   790   50   50   467   467 
Currency swap        190   190   1,776   1,776 
Liabilities:                        
Long-term debt, including current maturity  (94,201)      (100,495)      (939,206)    
Less—Capital lease obligations         11,129       104,009     
   
Long-term debt—net  (94,201)  (89,507)  (89,366)  (84,301)  (835,197)  (787,860)
   
Other financial instruments:                        
Forward exchange contracts  (95)  (95)  (555)  (555)  (5,187)  (5,187)
Currency swap  (3,179)  (3,179)  (3,009)  (3,009)  (28,121)  (28,121)
 

Estimation of Fair Values—
The following notes summarize the major methods and assumptions used in estimating the fair values of financial instruments.

     Short-term financial instruments are valued at their carrying amounts included in the consolidated balance sheets, which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. This approach is applied to cash and cash equivalents, trade receivables, short-term borrowings and trade payables.

     The carrying amounts and the fair values of available-for-sale securities are disclosed in Note 3.

5.

     Sundry investments included non-marketable equity interests in non-public companies,securities, amounting to ¥2,591¥2,855 million and ¥2,404¥2,977 million ($20,03327,823 thousand) at March 31, 20022004 and 2003,2005, respectively, and memberships amounting to ¥612¥528 million and ¥503¥411 million

($4,192 ($3,841 thousand) at March 31, 20022004 and 2003,2005, respectively. The corresponding fair values of non-marketable equity securities at those dates were not computed as such estimation is not practicable.

The fair values of memberships were estimated based on the market price.

     The fair values of long-term receivables were estimated by discounting estimated future cash flows using current interest rates.

     The fair values of the Company’s long-term debt were estimated using a discounted cash flow analysis based on incremental borrowing rates for similar types of borrowing arrangements.

     The fair values of forward exchange contracts were estimated based on the quoted market rates of similar contracts. The currency swap and the interest rate swap were valued at replacement cost.
     The fair values of foreign currency options were measured using valuation models.the Company’s contingent liabilities for guarantees of loans are not significant.

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17.19. Basic and diluted earnings (loss) per share:

A reconciliation of the numerators and denominators of basic and diluted net income (loss) per share computation for the years ended March 31, 2001, 20022003, 2004 and 20032005 is as follows:
                 
              Thousands of 
  Millions of Yen  U.S. Dollars 
  
  
 
  2001  2002  2003  2003 

Net income available to common shareholders ¥18,298  ¥8,047  ¥16,078  $133,983 

  Number of Shares (Thousands)     

Weighted average common shares outstanding  179,813   180,032   178,168     
Effect of dilutive warrants  103   32   2     
Effect of stock options        1     

Diluted common shares outstanding  179,916   180,064   178,171     

  Yen  U.S. Dollars 

Net income per share                
     Basic ¥101.76  ¥44.70  ¥90.24  $0.75 
     Diluted  101.70   44.69   90.24   0.75 

                 
              Thousands of 
  Millions of Yen  U.S. Dollars 
  2003  2004  2005  2005 
 
Income (loss) from continuing operations ¥15,942  ¥20,363  ¥(8,789) $(82,140)
Effect of dilution—Zero coupon convertible bonds     (21)      
 
Income (loss) from continuing operations—diluted ¥15,942  ¥20,342  ¥(8,789) $(82,140)
 
Income from discontinued operations, net of tax ¥136  ¥4,475       
 
Net income (loss) ¥16,078  ¥24,838  ¥(8,789) $(82,140)
Effect of dilution—Zero coupon convertible bonds     (21)      
 
Net income (loss)—diluted ¥16,078  ¥24,817  ¥(8,789) $(82,140)
 
             
Number of Shares (Thousands)  
 
Weighted-average common shares outstanding178,168   175,433   175,389 
Effect of dilutive convertible bonds   1,115    
Effect of dilutive warrants2       
Effect of stock options1   61    
 
Diluted common shares outstanding178,171   176,609   175,389 
 
                 
  Yen  U.S. Dollars 
   
Basic net income per share:                
Income (loss) from continuing operations ¥89.48  ¥116.07  ¥(50.11) $(0.47)
Income from discontinued operations, net of tax  0.76   25.51       
 
Net income (loss) ¥90.24  ¥141.58  ¥(50.11) $(0.47)
 
Diluted net income per share:                
Income (loss) from continuing operations ¥89.48  ¥115.18  ¥(50.11) $(0.47)
Income from discontinued operations, net of tax  0.76   25.34       
 
Net income (loss) ¥90.24  ¥140.52  ¥(50.11) $(0.47)
 

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18.20. Supplemental schedule:

The changes in the allowance for doubtful receivables for the years ended March 31, 2001, 20022003, 2004 and 20032005 are as follows:
                     
  Millions of Yen 
  
 
  Balance at  Charged (Credited)  Deductions for         
  Beginning  to Costs and  Accounts  Translation  Balance at End 
Allowance for Doubtful Receivables of Period  Expenses  Written Off  Adjustments  of Period 

2001 ¥8,993  ¥1,164   (¥861) ¥525  ¥9,821 
2002  9,821   (153)  (4,660)  311   5,319 
2003  5,319   411   (765)  (334)  4,631 

  Thousands of U.S. Dollars 
  
 
  Balance at  Charged (Credited)  Deductions for         
  Beginning  to Costs and  Accounts  Translation  Balance at End 
Allowance for Doubtful Receivables of Period  Expenses  Written Off  Adjustments  of Period 

2003 $44,325  $3,425   ($6,375)  ($2,783) $38,592 

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  Millions of Yen
  Balance at  Charged (Credited)  Deductions for       
  Beginning  to Costs and  Accounts  Translation  Balance at End 
Allowance for Doubtful Receivables of Period  Expenses  Written Off  Adjustments  of Period 
 
2003 ¥5,319  ¥411  ¥(765) ¥(334) ¥4,631 
2004  4,631   (667)  (13)  (417)  3,534 
2005  3,534   (515)  (497)  88   2,610 
 
                     
  Thousands of U.S. Dollars
  Balance at  Charged (Credited)  Deductions for       
  Beginning  to Costs and  Accounts  Translation  Balance at End 
Allowance for Doubtful Receivables of Period  Expenses  Written Off  Adjustments  of Period 
 
2005 $33,028  $(4,813) $(4,645) $822  $24,392 
 
     The changechanges in the warranty reserve for the yearyears ended March 31, 2003, is2004 and 2005 are as follows:
                     
  Millions of Yen 
  
 
  Balance at                 
  Beginning          Translation  Balance at End 
Warranty Reserve of Period  Provision  Payments  Adjustments  of Period 

2003    ¥6,481       ¥7,642     (¥7,374)    (¥256) ¥6,493 

                     
  Thousands of U.S. Dollars 
  
 
  Balance at                 
  Beginning          Translation  Balance at End 
Warranty Reserve of Period      Provision  Payments  Adjustments  of Period 

2003  $54,008   $63,683   ($61,450)  ($2,133) $54,108 

                     
  Millions of Yen
  Balance at               
  Beginning          Translation  Balance at End 
Warranty Reserve of Period  Provision  Payments  Adjustments  of Period 
 
2003 ¥6,481  ¥7,642  ¥(7,374) ¥(256) ¥6,493 
2004  6,493   6,050   (6,669)  (455)  5,419 
2005  5,419   8,030   (7,844)  117   5,722 
 
                     
  Thousands of U.S. Dollars
  Balance at               
  Beginning          Translation  Balance at End 
Warranty Reserve of Period  Provision  Payments  Adjustments  of Period 
 
2005 $50,645  $75,047  $(73,308) $1,093  $53,477 
 

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19.21. Commitments and contingent liabilities:

Commitments outstanding at March 31, 20032005 for the purchase of property, plant and equipment and advertisement payments approximated ¥7,562¥3,967 million ($63,01737,075 thousand).

     Contingent liabilities at March 31, 20032005 principally for loans guaranteed in the ordinary course of business amounted to ¥27,469¥25,403 million ($228,908237,411 thousand).

     Loans guaranteed at March 31, 2003 consist of2005 are as follows:


             
      Guaranteed amount 
      
 
          Thousands of 
Guarantee for Guaranteed until  Millions of Yen  U.S. Dollars 

Affiliated company May 31, 2012–October 22, 2012 ¥25,000  $208,333 
Affiliated company March 31, 2004–October 25, 2004  1,142   9,517 
Customer March 31, 2004  1,127   9,392 

Total     ¥27,269  $227,242 

           
    Guaranteed Amount 
        Thousands of 
Guarantee for Guaranteed until Millions of Yen  U.S. Dollars 
 
Affiliated company May 31, 2012–October 22, 2012 ¥25,000  $233,645 
Affiliated company April 1, 2005–March 31, 2006  403   3,766 
 
Total   ¥25,403  $237,411 
 

     The Company entered into these guarantee agreements to sustain the business relationships.

     The Company will be required to pay the guaranteed amounts if the affiliated companies or customers are unable to repay.

     During the year ended March 31, 2001, the Company received a notice of proposed assessment from the German tax authorities for approximately EUR21EUR 21 million (¥2,7212,916 million translated at the current foreign exchange rate at March 31, 2003)2005) relating to a tax position taken in prior years concerning intercompany purchase prices. The Company officially challenged the proposed assessment by arbitration procedures. There was no progress during the

year ended March 31, 2003.2005. In the opinion of management, it is not possible at this time to determine the ultimate resolution of this matter.

     In June 2002,

22. Remuneration of directors, executive officers and corporate auditors:
The aggregate remuneration (including bonuses and stock-based compensation [see Note 13]) charged to income by the Companyparent company for directors, executive officers and corporate auditors for the years ended March 31, 2003, 2004 and 2005 totaled ¥965 million, ¥1,238 million and ¥1,136 million ($10,617 thousand), respectively.
23. Subsequent event:
On April 15, 2005, Pioneer Speakers, Inc. (“PSI”), a wholly-owned U.S. subsidiary of Tohoku Pioneer Corporation received a notice from the United States Internal Revenue Service (“IRS”) forCustoms and Border Protection proposing additional taxescustom duty and penalty of approximately $66$26 million (¥7,9332,792 million translated at the foreign exchange rate at March 31, 2003) relating to an adjustment to transfer prices between affiliated companies2005) for alleged erroneous claims for preferential treatment of duties on products imported by PSI for the years ended March 31,period of June 23, 1997 through December 31, 1999. In October 2002, the Company filed protest against the assessment.PSI intends to file a petition for relief from this penalty action. In the opinion of management, it is not possible at this time to determine the ultimate outcome of this matter.

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20. Remuneration of directors, executive officers and corporate auditors:

     The aggregate remuneration (including bonuses and stock-based compensation [See Note 11]) charged to income by the parent company for directors, executive officers and corporate auditors

for the years ended March 31, 2001, 2002 and 2003 totaled ¥811 million, ¥876 million and ¥965 million ($8,042 thousand), respectively.


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21. Subsequent events:

On July 17, 2003, the Company announced that it had reached a preliminary agreement with Dentsu Inc., an advertising agency in Japan, to sell to Dentsu Inc. shares of two of its wholly-owned subsidiaries, Pioneer LDC, Inc., in Tokyo and Pioneer Entertainment (USA) Inc., in California, U.S.A., both engaged in the audio/video software businesses in Japan and the United States, respectively. The specific conditions, timetable and other matters of the dispositions are yet to be determined under definitive agreements


separately governing the two dispositions in Japan and in the United States, and therefore the management is unable to determine with reasonable accuracy the impact of these dispositions on the Company’s financial conditions and results of operation until more information is available. Net sales posted by the two subsidiaries for the year ended March 31, 2003 amounted to ¥32,431 million.


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