UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F


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


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


~~For the fiscal year ended March 31, 2004~~

For the fiscal year ended March 31, 2006


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

For the transition period fromto


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

Date of event requiring this shell company report

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~~
None		None

Securities registered pursuant to Section 12(g) of the Act.
~~None~~

Common Stock

(Title of Class)

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.


	Outstanding as of March 31, 2006
Title of class	~~March 31, 2004~~
~~Title of class~~	(Japan time)
Common Stock		~~175,430,874~~	174,421,890

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yesþ Noo

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yeso Noþ

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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.

Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filerþ	Accelerated filero	Non-accelerated filero

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

Item 17þ Item 18o

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).

Yeso Noþ

TABLE OF CONTENTS


	Page
Certain Defined Terms		43
Cautionary Statement with Respect to Forward-Looking Statements		43

PART I

Item 1. Identity of Directors, Senior Management and Advisers		43
Item 2. Offer Statistics and Expected Timetable		43
Item 3. Key Information		54
Item 4. Information on the Company		1512
Item 4A. Unresolved Staff Comments		24
Item 5. Operating and Financial Review and Prospects		3125
Item 6. Directors, Senior Management and Employees		5448
Item 7. Major Shareholders and Related Party Transactions		6555
Item 8. Financial Information		6656
Item 9. The Offer and Listing		6858
Item 10. Additional Information		6959
Item 11. Quantitative and Qualitative Disclosures About Market Risk		8577
Item 12. Description of Securities Other than Equity Securities		8779

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies		8880
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds		8880
Item 15. Controls and Procedures		8880
Item 16. [Reserved]		8881
Item 16A. Audit Committee Financial Expert		8881
Item 16B. Code of Ethics		8981
Item 16C. Principal Accountant Fees and Services		8982
Item 16D. Exemptions from the Listing Standards for Audit Committees		9083
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers		9083

PART III

Item 17. Financial Statements		9184
Item 18. Financial Statements		9184
Item 19. Exhibits		9184

EX-1.01 ~~The Articles of Incorporation, as amended and currently in effect~~THE ARTICLES OF INCORPORATION OF PIONEER CORPORATION
EX-1.02 REGULATIONS OF THE BOARD OF DIRECTORS, AS AMENDED AND CURRENTLY IN EFFECT (ENGLISH TRANSLATION)
EX-2.01 SHARE HANDLING REGULATIONS OF PIONEER CORPORATION
EX-12.01 ~~Certification of Chief Executive Officer pursuant to Section 302~~CERTIFICATION
EX-12.02 ~~Certification of Chief Financial Officer pursuant to Section 302~~CERTIFICATION
~~EX-13.(a) Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906~~EX-13.01 CERTIFICATION

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,” “intend,” “plan,” “aim,” “forecast,” “estimate,” “project,” “anticipate,” “strategy,” “prospects,” “may,” “might” or “will” and words of similar meaning in connection with a discussion of future operations, financial performance, events or 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 in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not believe 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 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~~as well as 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

Item 2. Offer Statistics and Expected Timetable

Not applicable

Item 3. Key Information

A. Selected financial data

The following table presents selected consolidated financial data as of the dates and for the periods indicated. We derived the consolidated ~~statement~~statements of ~~income~~operations data for each of the three years in the period ended March 31, ~~2004~~2006 and the consolidated balance sheet data as of March 31, ~~2003~~2005 and ~~2004~~2006 from our audited consolidated financial statements ~~include~~included elsewhere herein. We derived the consolidated statement of ~~income~~operations data for each of the two years in the period ended March 31, ~~2001~~2003 and the consolidated balance ~~sheet~~sheets data as of March 31, ~~2000, 2001~~2002, 2003 and ~~2002~~2004 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.


	Year ended March 31											Year ended March 31
	2000		2001			2002		2003		2004		2002		2003		2004		2005			2006
	(In millions of yen, except per share data)											(In millions of yen, except per share data)
Consolidated Statement of Income Data:
Operating revenue (Note 5) (Note 6)	¥	575,559	¥	610,171		¥	629,777	¥	677,259	¥	700,885
Operating income from continuing operations (Note 5) (Note 6)		16,443		32,641			16,660		30,765		43,719
Income from continuing operations before income taxes (Note 6)		25,756		34,216			14,472		28,079		41,848
Income (loss) from discontinued operations, net of tax (Note 6)		1,173		(53	)		565		136		4,475
Net income		13,075		18,298			8,047		16,078		24,838
Per share of common stock and per American Depositary Share (ADS) (Note 1):
Income from continuing operations:
Consolidated Statements of Operations Data:
Operating revenue (Note 4) (Note 5)												¥	624,978	¥	664,828	¥	684,749	¥	711,042		¥	754,964
Income (loss) from continuing operations before income taxes (Note 5)													7,268		15,029		19,464		(10,112	)		(85,758	)
Income (loss) from discontinued operations, net of tax (Note 5)													779		1,049		5,374		1,323			772
Net income (loss)													8,047		16,078		24,838		(8,789	)		(84,986	)
Per share of common stock:
Income (loss) from continuing operations:
Basic		66.28		102.06			41.56		89.48		116.07		40.37		84.35		110.95		(57.65	)		(491.66	)
Diluted		66.27		102.00			41.55		89.48		115.18		40.36		84.35		110.09		(57.65	)		(491.66	)
Net income:
Net income (loss):
Basic		72.81		101.76			44.70		90.24		141.58		44.70		90.24		141.58		(50.11	)		(487.23	)
Diluted		72.80		101.70			44.69		90.24		140.52		44.69		90.24		140.52		(50.11	)		(487.23	)

Consolidated Balance Sheet Data:
Consolidated Balance Sheets Data:
Total assets	¥	601,137	¥	605,156		¥	645,129	¥	647,029	¥	722,542	¥	645,129	¥	647,029	¥	722,542	¥	725,167		¥	678,046
Short-term borrowings		41,318		37,571			45,867		29,893		23,327		45,867		29,893		23,327		33,152			23,205
Current portion of long-term debt		37,235		7,996			2,551		974		4,510		2,551		974		4,510		19,276			7,165
Long-term debt, less current portion		47,060		38,304			35,677		32,196		89,691		35,677		32,196		89,691		81,219			92,970
Shareholders’ equity		312,460		336,995			347,003		318,393		332,938		347,003		318,393		332,938		332,239			273,250
Common stock		48,452		48,843			49,049		49,049		49,049		49,049		49,049		49,049		49,049			49,049
Number of shares issued (in thousands)		179,588		179,894			180,064		180,064		180,064		180,064		180,064		180,064		180,064			180,064

Year ended March 31
2000
2001
2002
2003
2004
(In millions of yen, except per share data
and percentage amounts)
Other Data:

Capital expenditures (Note 6) ¥ 25,435 ¥ 41,944 ¥ 46,909 ¥ 40,493 ¥ 57,978
Research and development (R&D) expenses 33,265 37,105 39,050 45,388 51,483
Cash flows from operating activities (Note 6) 45,615 51,141 57,358 91,509 60,378
Cash flows from investing activities (Note 6) 11,759 (41,481 ) (51,396 ) (35,228 ) (52,754 )
Cash flows from financing activities (Note 6) (4,139 ) (46,567 ) (4,207 ) (34,680 ) 51,827
Return on equity (Note 2) 4.2 % 5.6 % 2.4 % 4.8 % 7.6 %
Return on assets (Note 3) 2.2 % 3.0 % 1.3 % 2.5 % 3.6 %
Cash dividends declared per share of common stock and per ADS (Note 4): ��
Interim (in yen) 5.00 7.50 7.50 7.50 12.50
(in U.S. dollars) 0.05 0.07 0.06 0.06 0.12
Year-end (in yen) 5.00 7.50 7.50 10.00 12.50
(in U.S. dollars) 0.05 0.06 0.06 0.08 0.11

Year ended March 31
2002 2003 2004 2005 2006
(In millions of yen, except per share data and percentage amounts)
Other Data:

Capital expenditures ¥ 46,909 ¥ 40,493 ¥ 57,978 ¥ 63,866 ¥ 40,325
Research and development (R&D) expenses 39,033 45,366 51,449 55,858 63,442
Cash flows from operating activities 57,358 91,509 60,378 19,946 68,329
Cash flows from investing activities (51,396 ) (35,228 ) (52,754 ) (93,516 ) (29,759 )
Cash flows from financing activities (4,207 ) (34,680 ) 51,827 (4,019 ) (38,551 )

Return on equity (Note 1) 2.4 % 4.8 % 7.6 % (2.6 %) (28.1 %)
Return on assets (Note 2) 1.3 % 2.5 % 3.6 % (1.2 %) (12.1 %)

Cash dividends declared per share of common stock (Note 3):
Interim (in yen) 7.50 7.50 12.50 12.50 7.50
(in U.S. dollars) 0.06 0.06 0.12 0.12 0.06
Year-end (in yen) 7.50 10.00 12.50 12.50 2.50
(in U.S. dollars) 0.06 0.08 0.11 0.11 0.02

~~Notes:~~	1.	Basic income from continuing operations and net income per share of common stock and per American Depositary Share (“ADS”) have been computed based on the weighted average number of shares outstanding during each year. Diluted income from continuing operations and net income per share of common stock and ADS have been computed on the basis that all dilutive warrants and stock options were exercised. One ADS represents one share of common stock.
Notes: 1.	2.	Net income (loss) as a percentage of average (simple average of beginning and end of year balances) shareholders’ equity.

3.2.		Net income (loss) as a percentage of average (simple average of beginning and end of year balances) 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.

5.4.		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, with no effect on operating income. Also, starting fiscal 2003, we 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 accordingly.

6.5.	As	In fiscal 2006, we sold a ~~result~~subsidiary engaged in the development of cable TV software, and reached a preliminary agreement on the sale of subsidiaries involved in the ~~audio/video software business in fiscal 2004, the gain on such sale, as well as~~electronic components business. As a result, the operating results of these subsidiaries, and the ~~discontinued operations,~~gain on the sale are presented as ~~a separate line item~~income from discontinued operations in the consolidated statements of ~~income~~operations in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ~~Previously reported amounts~~Corresponding figures for the previous fiscal years have been reclassified accordingly.

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 ~~¥110.60~~¥115.65 = US$1.00 on ~~August 3, 2004.~~July 5, 2006.


									Average		High		Low		Period-end
Year ended March 31	Average		High		Low		Period-end
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	¥	125.64	¥	115.89	¥	134.77	¥	132.70
2003		121.10		115.71		133.40		118.07		121.10		115.71		133.40		118.07
2004		112.97		104.18		120.55		104.18		112.75		104.18		120.55		104.18
2004
2005										107.28		102.26		114.30		107.22
2006										113.67		104.41		120.93		117.48

2006
January												113.96		117.55
February				105.36		109.59						115.82		118.95
March				104.18		112.12						115.89		119.07
April				103.70		110.37						113.79		118.66
May				108.50		114.30						110.07		113.46
June				107.10		111.27						111.66		116.42
July				108.21		111.88

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

C. Reasons for the offer and use of proceeds

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 the “Cautionary 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.

Economic conditions may adversely affect our ~~business results~~sales and ~~financial condition~~profitability

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 results~~sales and ~~financial condition.~~
profitability.

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 results~~sales 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.

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—~~products — currently including ~~DVD-related products,~~ plasma ~~and organic 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.~~
products, such as Blu-ray Disc players.

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:

•		~~There can~~We may be ~~no assurance that we will have~~unable to obtain adequate funding and resources necessary for investments in new products and technologies.

•		~~There can be no assurance that our~~Our long-term investments and commitment of significant resources ~~will~~may 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.~~

•		~~There can~~We may not be ~~no assurance that we can~~able to anticipate successfully the new products and technologies

which will gain market acceptance and that such products can be successfully marketed.

• ~~There can be no assurance that our~~Our newly developed products or technologies ~~can~~may 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 OLED displays, which are now under development in our affiliated company, ELDis, Inc., we may not secure significant portions 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 and may adversely affect our business results and financial condition.~~
Benefits may not be gained from the acquisition of the shares in NEC Plasma Display Corporation (“NPD”), the subsidiary of NEC Corporation (“NEC”), and related intellectual property rights held by NEC
On July 1, 2004, Pioneer and NEC concluded the stock transfer agreement under which NEC will transfer to Pioneer 100% of the issued share capital of its subsidiary, NPD, and the intellectual property rights relating to plasma displays held by NEC. See “Item 4.A. History and development of the Company—Principal capital expenditures, investments and divestitures.”
The expected acquisition of the shares in NPD and related intellectual property right held by NEC may not yield expected benefits to us. Achieving these benefits depends on the timely, efficient and successful execution of a number of post-acquisition events, including integrating the business of NPD into our operations, distribution networks, marketing programs and information systems. Our ability to integrate the operations of NPD may be adversely affected by many factors, including information system integration and employee relations. In addition, NPD may not perform as we expect.
Furthermore, a significant portion of NPD’s customers for original equipment manufacturer (“OEM”) products are major players in the electronics industry who are in direct competition with us. There can be no assurance that such customers will not cease to utilize NPD’s services.
Any failure to realize the benefits expected from the acquisition, or the failure of NPD to perform as we anticipate, could have a material adverse effect on our business results and financial condition.
~~As our exposure to the PDP market as a result of the acquisition of NPD will increase significantly, lack of growth in the PDP market may adversely affect our business results and financial condition~~
The acquisition of NPD will increase our production capacity significantly. In addition, we are focusing on the plasma display business to establish it as a core of our business. If the plasma display market does not grow as we anticipate, such increased production capacity may not be used efficiently or in a cost-effective manner. There can be no assurance that the PDP market will continue to grow. Any such lack of growth may adversely affect our business results and financial condition.
profitability.

Competition generally, and especially on the basis of price and standardization of products, may adversely affect our ~~business~~ results ~~and financial condition~~of 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
9

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 innovators of advanced, high-quality and value-added electronics products, ~~there can be no assurance that~~ we ~~will~~may 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~~digital versatile disc (“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.

Failure of our ~~DVD-recorder~~next generation optical disc format to gain broad market acceptance may adversely affect our business and results ~~and financial condition~~of operations

Currently, there are ~~a number of~~two generally recognized competing ~~recording~~ formats for ~~digital versatile~~the next generation optical discs, ~~(“DVDs”): the DVD-RW, the DVD-RAM,~~Blu-ray Disc and ~~the DVD+RW, as rewritable formats, and the DVD-R and the DVD+R, as write-once formats.~~HD DVD. Each of the ~~recording~~ disc formats makes use of its own distinct technology and is ~~generally~~ incompatible with the other ~~formats.~~
~~Our DVD recorders for home-use adopt DVD-RW~~format.

We are focusing on the Blu-ray Disc format as the next generation optical discs and ~~DVD-R formats, while our recordable DVD drives for PCs support DVD-RW/+RW and DVD-R/+R format recording and DVD-RAM format playback.~~
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 our adopted ~~formats~~format fail to be accepted as thede factoindustry standard, or otherwise ~~fails~~fail to gain wide acceptance, our business strategy and results ~~and financial condition will~~of operations may be adversely affected.

~~Substantial~~A 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 condition~~profitability

The licensing of our patent and other intellectual property rights ~~make~~makes 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 2004 was generated by our worldwide patents relating to laser optical disc technologies, these~~patent rights ~~were responsible~~and expenses for ~~approximately 26% of our operating income in fiscal 2004.~~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~~our patent rights relating to laser optical disc technologies have expired in Europe and Japan ~~during fiscal 2003~~ and ~~2004.~~some portion of those in North America started to expire. As a result, our royalty revenue ~~has declined substantially from previous years and may continue~~is expected to decline in the future. This decline in royalty revenue may in turn have an adverse impact on our business results. At the same time, we are working to acquire patents owned by third parties and licensing such patents. We do not expect that the revenue, if any, from such new patents 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.”
10

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 condition~~production 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 changes;

•		Unfavorable political or economic factors;

•		Difficulties in recruiting and retaining personnel;

•		Labor disputes including strikes;

•		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 factors.

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 Guang Dong areas of the People’s Republic of 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 outbreaks of epidemics ~~such as SARS (“Severe Acute Respiratory Syndrome”) or avian influenza in China~~ may, depending on how they develop, adversely impact our operations in China, 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 ~~business~~production capacity and results ~~and financial condition~~of 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 ~~assure~~secure supply where necessary through strategic alliances and other measures, ~~there can be no assurance that~~ we ~~will not~~may 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 as~~may 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 ~~OEM~~original equipment manufacturing (“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.

119

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

We provide our OEM ~~business~~products to automobile manufacturers, electronics manufacturers, personal computer (“PC”) makers ~~the broadcasting industry~~ and other large-scale businesses worldwide. The products we supply include car stereo products, car navigation systems, ~~DVD-R/RW~~DVD drives, ~~DVD-ROM drives, set-top boxes for cable-TV~~plasma displays and ~~digital satellite broadcast and OLED~~organic light-emitting diode (“OLED”) 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-cutting to meet customer demands may cause a reduction in our profit margin. The under-performance of a ~~customers’~~customer’s business, the unexpected termination of contracts, changes in the purchasing practices of our OEM customers or aggressive price-cutting to satisfy a large business customer’s demands may adversely affect our ~~business~~ results ~~and financial condition.~~
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~~personnel; therefore, 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.

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. Although we have the ability to ~~diminish~~reduce illegal imports of such products into certain jurisdictions through exercise of our legal rights, we may be unable to effectively 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~~of operations

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-~~
12

~~scale~~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, technological tie-ups, and joint ventures with third parties may adversely affect our ~~business~~ results of operations and ~~financial condition~~future 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.~~
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—~~overview–Governmental regulation” for a discussion of certain government regulations applicable to us.

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 production facilities to minimize potential negative impact caused by disruptions on our manufacturing lines. ~~There can be no assurance, however, that~~However, we ~~can~~may not completely prevent or mitigate the effect of a disaster, outage or other disruption at our production facilities. For example, our plasma display ~~products~~panels are currently manufactured ~~mainly~~ at our Shizuoka, Yamanashi and ~~Yamanashi~~Kagoshima plants ~~and we are~~ in ~~the process of expanding our manufacturing lines there.~~Japan which is an earthquake-prone country. 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 Yamanashi plants.~~
in Japan.

Employee retirement benefit costs and obligations may adversely affect our ~~business~~ results ~~and financial condition~~of operations

Pioneer is obligated to pay certain employee retirement benefit costs and obligations to ~~qualifying~~qualified 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
13

declines of discount rates and lower returns on pension plan assets may adversely affect our ~~business~~ results ~~and financial condition. In connection with the return to the Japanese government~~ of responsibility for pension obligations under the governmental welfare component of our pension plan, we will transfer some of our pension plan assets to the Japanese government. Such transfer will be accounted for upon completion of the transfer to the government in accordance with U.S. GAAP and may result in a negative impact on our business results and financial condition. The impact of the transfer depends on pension plan assets to be transferred.

operations.

~~Changes in business or economic conditions or other uncertain or unforeseen factors may make it difficult for us to achieve strategic aims and targets~~

Consistent with the strategies set out in “Item 4.B. Business overview—Strategy,” we announced in fiscal 1999 our “Pioneer Group Vision,” a medium-term initiative, with the intent of revitalizing us and our business through the achievement of two financial targets by the end of March 2006, as well as four business targets. See “Item 4.B. Business overview—Strategic Focus—‘~~Pioneer Group Vision~~~~’.” However, changes in business or economic conditions or other uncertain or unforeseen factors, including (but not limited to) the risks and uncertainties set out inCautionary Statement with Respect to Forward-Looking Statements~~, may make it difficult for us to achieve our aims or meet the targets that have been set in time or at all, or to maintain such aims or targets. There can be no assurance that we will be successful in achieving our strategic aims or meeting the quantitative or qualitative targets set out in “Pioneer Group Vision” or that our management will not change such aims or targets in the future.

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Item 4. Information on the Company

A. History and development of the Company

History

Pioneer was incorporated under the 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.

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-TV~~cable 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 American 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”) equipment. We started marketing laser disc (“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”) players. We also 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”). In addition, we introduced DVD players and thin-profile color plasma displays and began supplying digital direct-broadcast satellite (“DBS”) decoders to a European pay-TV company. Our other recent industry firsts include four-color OLED displays and DVD recorders.

In fiscal 2001, we started supplying to PC makers recordable 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”) 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. In fiscal 2004, we started supplying passive-matrix ~~full color~~full-color OLED display panels in cellular phones.
In fiscal 2005, we introduced recordable DVD drives for PC use, which are compatible with dual layer DVD-R discs and 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. Pioneer’s telephone number is 81-3-3494-1111.
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Principal capital expenditures, investments and divestitures

In fiscal ~~2002, 2003~~2004, 2005 and ~~2004,~~2006, our capital expenditures consisted principally of facilities and molds for production and totaled ~~¥46,909~~¥57,978 million, ~~¥40,493~~¥63,866 million and ~~¥57,978~~¥40,325 million, respectively. They were

paid principally out of our internally generated working capital. The facilities for production comprised those for ~~OLED 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.

In fiscal ~~2004,~~2006, through a management buyout, we sold all of our shares in ~~order to meet fast-growing demand~~Pioneer Digital Technologies, Inc., a wholly-owned subsidiary engaged in the development of operating software for ~~DVD recorders and recordable DVD drives, we invested ¥1.3 billion~~cable TV set-top boxes in ~~building~~ the ~~second manufacturing line for optical pickups, which are key parts~~United States. We recognized a gain on the sale of ~~DVD recorders and recordable DVD drives, at Guang Dong Plant~~¥282 million, net of taxes, in ~~China. This line started its operation in November 2003 and our overall production capacity for optical pickups reached one million units per month.~~
~~To address expanding demand for plasma displays, in fiscal 2004, we invested ¥22 billion in building a more efficient production system, including~~ the building of new manufacturing lines at our plants in Shizuoka and Yamanashi, in Japan. Our overall production capacity increased about 67% to 250 thousand units annually through the expansion of the Shizuoka Plant, which was completed in August 2003. The ongoing building of a new line of the Yamanashi Plant is expected to be completed by fall of 2004 and increase our total production capacity to 600 thousand units annually. year ended March 31, 2006.

In fiscal ~~2005,~~2006, we ~~plan to spend approximately ¥30 billion, including ¥6.2 billion paid~~cancelled plans for the mass-production of active-matrix OLEDs, as we did not anticipate profitability in this business. Accordingly, we withdrew from the thin-film transistor (“TFT”) substrate business conducted by ~~June 30, 2004,~~ELDis, Inc., 47.5% owned by Tohoku Pioneer Corporation, a 67% owned subsidiary. We recorded equity in ~~relation to PDP-related capital expenditure not including investment related to~~losses of affiliated companies of ¥24,139 million for the ~~acquisition of NPD as described below.~~
On July 1, 2004, Pioneer and NEC concluded the stock transfer agreement under which NEC will transfer to Pioneer 100% of the issued share capital of its plasma display manufacturing subsidiary, NPD, and the intellectual property rights relating to plasma displays held by NEC. We expect to invest approximately ¥40 billionyear ended March 31, 2006. ELDis, Inc. was liquidated in the acquisition of NPD and NEC’s intellectual property rights in fiscal 2005. This acquisition is expected to be completed by September 30, 2004. With this acquisition and the new line of the Yamanashi Plant as described above, our total capacity is expected to add up to more than one million units a year. In order to carry out this investment, on March, ~~5, 2004 we issued the aggregate principal amount of ¥60,000 million of its Euro Yen Zero Coupon Convertible Bonds due 2011. See “Item 4.B. Business overview—Strategic Focus—‘~~~~Pioneer Group Vision~~~~’.”~~
2006.

In order to improve management efficiency by concentrating resources in strategic ~~businesses, in July 2003~~business, on March 31, 2006, we reached agreements to sell 100% of our shares in two of its wholly-owned subsidiaries, Pioneer LDC, Inc. (“PLDC”) and Pioneer Entertainment (USA) Inc. (“PEUSA”), to Dentsu Inc. (“Dentsu”), Japan’s largest comprehensive advertising agency. These subsidiaries were engaged ina preliminary agreement with OMRON Corporation concerning the ~~AV software businesses in Tokyo, Japan and in California, U.S.A., respectively. The~~ transfer of all ~~the shares of PLDC, and 90%~~ of the shares of ~~PEUSA owned by us was completed by fiscal 2004. The remaining shares of PEUSA owned by us are expected to be transferred to Dentsu by September 30, 2006.~~
~~In March 2004, Q-Tec, Inc., which was~~Pioneer Precision Machinery Corporation, a ~~99.26%~~99.5% owned subsidiary, of Pioneer, became an independent company through a Management Buyout after it acquired all of the shares owned by Pioneer, forming a business alliance with Vision Capital Corporation and Memory-Tech Corporation. Q-Tech, Inc.which is one of the largest manufacturers in the Japanese postproduction industry which offers high-quality total services including editing of video and audio products such as animation, movies, commercials, and broadcast programs, DVD encoding/authoring and pressing.
~~The amount paid to us in respect of these sales of subsidiaries that are~~ engaged in the ~~audio/video business was ¥4.9 billion in fiscal 2004. See Note 3 in “Notes to Consolidated Financial Statements.”~~
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manufacturing and marketing of high-precision parts for electronic equipment.

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.

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

• ~~develop innovative, technologically-advanced products that meet and stimulate market demand;~~
• ~~enhance our brand recognition and promote customer satisfaction;~~
• ~~leverage our leadership position in the car electronics business;~~
• ~~focus on our strategic products targeting global markets; and~~
• ~~adopt optimal production methods to maximize profitability.~~

~~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 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 OLED 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 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. 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 recordable DVD drives. This format has already gained support from other major consumer electronics companies such as Sony Corporation and Sharp Corporation (“Sharp”). We also aim to differentiate ourselves by introducing to targeted markets innovative plasma displays, OLED displays and car navigation systems. We market 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 economies in the world.

~~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 the proximity of the end-market, production facilities and labor costs. Consequently, we have increased the proportion of our production in China. To meet the fast-growing demand for plasma displays, we have built a more efficient production system at our plasma display panel manufacturing subsidiary. We are in the process of building our fourth production line in Japan, which is expected to start operation by fall of 2004. Moreover, the acquisition of NPD is expected to be completed by September 2004. Following these measures, we plan to establish in fall 2004 an overall production system capable of 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, we introduced supply chain management to 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 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 recordable DVD drives for PC use. Pioneer believes that these DVD products have a competitive edge in design, function and price, contributing to the expansion of its DVD business.

~~(ii) Establishing a business foundation for plasma displays and OLED displays~~

We believe plasma displays offer significant advantages over cathode ray tubes (“CRTs”) and liquid crystal displays (“LCDs”). Among other advantages, it is technically easier to enlarge plasma displays than CRTs and LCDs. Thus, we expect that plasma display panels in the future will capture a substantial portion of the larger-screen TV market, which is expanding with the advent of high-quality pictures such as DVD and digital TV broadcast. 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.

OLED display is another type of display, which we are promoting aggressively. OLEDs are particularly well-suited for small size displays, such as cellular phone displays. In fiscal 1998, we became the first in the world to market car electronics products equipped with an OLED display, and in fiscal 2000 we were the first in the world to mass-produce four-color OLED displays. To strengthen our market position, in fiscal 2001, Tohoku Pioneer Corporation, Pioneer’s majority-owned subsidiary, established a joint venture company, ELDis, Inc., with Semiconductor Energy Laboratory Co., Ltd. and Sharp to develop and manufacture active-matrix full-color OLED 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 AV 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 OLED display panels for mobile phone companies.

Nature of operations

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 car navigation systems, plasma displays and DVD ~~products and plasma displays.~~products. We are also one of the leading ~~manufactures~~manufacturers of car audio products ~~and car navigation systems~~ in the world consumer market.
In addition, we derive revenue from the manufacture and sale of industrial electronics, such as factory automation (“FA”) systems and parts and from the licensing of patents that we own.

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, Europe and Asia and we sell our products to customers in consumer and business markets through sales
19

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, ~~digital broadcast set-top boxes~~plasma displays and OLED displays to other companies.

In fiscal 2006, we sold Pioneer Digital Technologies, Inc., a ~~result~~subsidiary engaged in the development of cable TV software, and reached a preliminary agreement on the sale of ~~subsidiaries~~Pioneer Precision Machinery Corporation involved in the ~~audio/video software business in fiscal 2004, the gain from such sale, as well as~~electronic components business. Consequently, the operating results of these subsidiaries, and the gain on the sale are presented as income from discontinued operations ~~are presented net of tax as a separate line item~~ in ~~the consolidated statement of income in accordance with Statement of Financial Accounting Standards No. 144, “Accounting~~this report. Corresponding figures for the ~~Impairment or Disposal of Long-Lived Assets.”~~
previous fiscal years have been reclassified accordingly.

Also, in fiscal ~~2004,~~2006, we changed our business segment classification for certain businesses. Results related to ~~DVD drives~~plasma displays for ~~PCs~~business use and disc jockey (“DJ”) equipment 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.~~Electronics.” Corresponding figures for the previous fiscal years have been ~~restated~~reclassified 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:

Operating Revenue from Unaffiliated Customers by Business Segments


	Year ended March 31												Year ended March 31
	2002				2003				2004				2004				2005				2006
	(In millions of yen, except for percentage amounts)												(In millions of yen, except for percentage amounts)
Home Electronics
Domestic	¥	70,678	11.2	%	¥	86,766	12.8	%	¥	78,798	11.2	%	¥	82,580	12.1	%	¥	90,838	12.8	%	¥	81,998	10.9	%
Overseas		189,131	30.0			191,202	28.2			202,684	29.0			223,625	32.6			231,933	32.6			272,692	36.1

Total	¥	259,809	41.3	%	¥	277,968	41.0	%	¥	281,482	40.2	%	¥	306,205	44.7	%	¥	322,771	45.4	%	¥	354,690	47.0	%


Car Electronics
Domestic	¥	95,578	15.2	%	¥	105,736	15.6	%	¥	121,708	17.4	%	¥	121,708	17.8	%	¥	120,260	16.9	%	¥	117,560	15.6	%
Overseas		162,094	25.7			175,354	25.9			170,479	24.3			170,479	24.9			183,150	25.8			212,962	28.2

Total	¥	257,672	40.9	%	¥	281,090	41.5	%	¥	292,187	41.7	%	¥	292,187	42.7	%	¥	303,410	42.7	%	¥	330,522	43.8	%


Others
Domestic	¥	49,283	7.8	%	¥	62,137	9.2	%	¥	62,792	9.0	%	¥	44,502	6.5	%	¥	37,653	5.3	%	¥	33,208	4.3	%
Overseas		45,425	7.2			43,480	6.4			52,603	7.4			30,034	4.4			36,971	5.2			28,004	3.8

Total	¥	94,708	15.0	%	¥	105,617	15.6	%	¥	115,395	16.4	%	¥	74,536	10.9	%	¥	74,624	10.5	%	¥	61,212	8.1	%


Patent Licensing	¥	17,588	2.8	%	¥	12,584	1.9	%	¥	11,821	1.7	%	¥	11,821	1.7	%	¥	10,237	1.4	%	¥	8,540	1.1	%


Total Operating Revenue	¥	629,777	100.0	%	¥	677,259	100.0	%	¥	700,885	100.0	%	¥	684,749	100.0	%	¥	711,042	100.0	%	¥	754,964	100.0	%

Home Electronics:

This segment includes plasma displays, DVD recorders, DVD players, DVD ~~recorders, recordable DVD~~ drives, ~~DVD-ROM drives, home-use plasma displays, projection TVs,~~ stereo systems, individual stereo components, DJ equipment, telephones and equipment for ~~cable-TV systems, digital broadcast set-top boxes and telephones.~~
~~Recordable DVD drives~~cable TV systems.

Plasma displays worldwide accounted for the largest sales in this segment for fiscal ~~2004.~~2006. In addition, ~~home-use plasma displays~~DVD drives also contributed significantly to sales in this segment. ~~Moreover, DVD recorders contributed significantly to sales in this segment reflecting a large increase in sales during fiscal 2004.~~

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~~The market for DVD products and plasma ~~displays.~~displays are growing, but prices are falling rapidly. In ~~our~~the DVD recorder business, we plan to curb investment in the development of new products that entail large development expenses and do not directly take advantage of our strengths. In optical disc drives for PCs, we plan to reduce our business risks through collaboration with other companies and other means, while lowering costs by increasing production. We intend to concentrate on developing and marketing Blu-ray Disc related products, which are shifting the emphasis from price-competitive DVD players to higher value-added DVD recorders and DVD home theater systems. Moreover, our DVD-related products as computer peripherals have shifted from DVD-ROM drives to recordable DVD drives.promising next generation optical disc products. In our plasma display business, we continue to promote vigorously ~~50-~~40-inch and ~~43-inch~~larger models of high-definition plasma displays in the worldwide market. Japan Electronics and Information Technology Industry Association (“JEITA”) forecasts an approximately 37% increase in consumer DVD player and DVD recorder sales worldwide, from 62 million units in 2003 to 85 million in 2008, and strong growth in recordable DVD drives from 23 million units in 2003 to 88 million units in 2006 worldwide. It also forecasts thatWe are reducing OEM sales of ~~plasma displays worldwide will increase approximately 8 times, from 1 million units~~panel modules, which carry the risk of volatility in ~~2003~~sales volumes. Instead, we plan to ~~8 million in 2008.~~focus on increasing sales under Pioneer’s own brands.

Car Electronics:

This segment includes car navigation systems, car stereos, car AV systems ~~car speakers~~ and car ~~navigation systems.~~
speakers.

Overall, car stereos accounted for the largest sales in this segment for fiscal ~~2004.~~2006. In Japan, our car navigation systems accounted for the largest ~~sales, while overseas~~sales. 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 ~~32.3%~~35% in this segment.

Both in Japan and outside Japan, sales in this ~~group~~segment 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. We ~~plan~~intend to ~~expand this~~actively press ahead with business expansion in Europe and North America, where ~~the~~full-fledged consumer markets ~~are expanding recently. JEITA forecasts that sales of~~for car navigation systems ~~worldwide will increase approximately 2 times, from 5.2 million units in 2003 to 10 million in 2008.~~are emerging. In ~~November 2002,~~fiscal 2006, we ~~released in the consumer market the world’s~~introduced our first car navigation ~~system that incorporates a data communication module for access~~systems to the ~~latest map data.~~Chinese consumer market. In the car audio business, we also strive to widen our market share with new products and innovations, such as car CD players with OLED 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.
21

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~~A significant portion of these patents have expired in certain countries/regions such as Japan and Europe and some ~~have not expired and DVA continues~~portion of those in North America started to ~~collect~~expire. As a result, our royalty ~~revenue. We are currently seeking~~revenue is expected to ~~develop new sources of revenue by acquiring patents held by third parties and licensing such patents.~~
decline in the future.

Revenue from the Patent Licensing segment is substantially less than from our other segments, constituting ~~less than 2%~~1.1% of operating revenue for fiscal ~~2004.~~2006. However, the contribution of this segment to our ~~operating~~ income is significant compared to its contribution to our operating revenue, ~~constituting approximately 26%~~since costs related to patent licensing are limited principally to amortization of ~~our operating income in fiscal 2004.~~
patent rights and expenses for licensing activities.

Others:

This segment includes products primarily for business use, such as ~~business-use plasma displays, business-use AV systems,~~ OLED display panels, ~~factory automation~~FA systems, ~~and~~electronics devices and ~~parts.~~
~~Devices~~parts and business-use AV systems.

Electronics devices and parts, including ~~semiconductors related to laser pickups,~~devices for cellular phones, accounted for the largest sales in this segment for fiscal ~~2004. Factory automation~~2006. FA systems ~~and business-use plasma displays~~ also contributed materially to sales in this segment.

OLED displays, which are particularly well-suited for small size displays, such as cellular phone displays are expected to become the next generation display. In fiscal 2000, we were the first in the world to mass-produced four-color OLED displays. In fiscal 2004, we started supplying passive-matrix full color OLED display panels in cellular phones. To strengthen our market position, in fiscal 2001, 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 to develop and manufacture active-matrix full-color OLED displays.

2216

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


	Year ended March 31												Year ended March 31
	2002				2003				2004				2004				2005				2006
	(In millions of yen, except for percentage amounts)												(In millions of yen, except for percentage amounts)
Japan	¥	215,539	34.2	%	¥	254,639	37.6	%	¥	263,298	37.6	%	¥	248,790	36.3	%	¥	248,751	35.0	%	¥	232,766	30.8	%
North America		189,599	30.1			190,147	28.1			170,711	24.3			170,702	24.9			174,106	24.5			201,378	26.7
Europe		131,046	20.8			132,977	19.6			146,250	20.9			146,250	21.4			150,770	21.2			171,912	22.8
Other Regions		93,593	14.9			99,496	14.7			120,626	17.2			119,007	17.4			137,415	19.3			148,908	19.7

Total	¥	629,777	100.0	%	¥	677,259	100.0	%	¥	700,885	100.0	%	¥	684,749	100.0	%	¥	711,042	100.0	%	¥	754,964	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, plasma displays and ~~recordable~~ 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 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”), 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.

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.
23

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 ~~and~~and/or manufacture certain key parts internally for our products, including plasma display panels, laser pickups and certain integrated circuits (“ICs”) and large-scale integrations (“LSIs”). We also purchase certain completed products, then sell them under our own brand names.

No single source accounted for more than 5%9% of total supply purchases in fiscal ~~2004.~~2006. 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 ~~2004~~2006 (on a yen basis), representing approximately ~~40%~~25% 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 place~~to strengthen our ~~order three to four months earlier than our usual practice~~partnership with such supplier to reduce the risk of ~~being unable to obtain~~shortages of key ~~parts.~~parts and, if necessary, take other measures such as placing our order earlier than our usual practice. We purchase a portion (approximately ~~10%~~4%) 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.~~
supply at favorable prices.

The ~~political instability in the Middle East affects the stable supply~~rising price of ~~petroleum which may cause~~crude oil has caused an increase in the price of plastic materials used in our products. In addition, the rapid economic growth in China ~~may cause a shortage~~has caused an increase in the price of steel materials and nonferrous metals. ~~We continue~~Although these conditions have not made a significant impact on our ~~effort~~current operations, we are continuing our efforts to procure a stable supply of these materials and maintain costs at appropriate levels.
~~To date, the prices of parts and other principal raw materials used by us to produce its products have remained relatively stable.~~
We plan to increase the percentage of raw materials and parts we purchase through online network systems, including the Internet. We believe this will contribute to more timely manufacturing and a decrease in production costs.

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 guides 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.

2418

Competition
~~We believe that we compete successfully and that we are one of leading innovators 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 ~~us.~~we do. The electronics industry in general has been subject to substantial price competition ~~in light~~as part of ~~decreased demand.~~efforts by electronics manufacturers to increase their market share. In addition, electronics companies in Asia, particularly those from ~~Korea~~China and ~~China,~~South Korea, 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” and “Item 4.B. Business overview—Strategy.~~of operations.”

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, personal information protection and environmental and recycling requirements.

2519

C. Organizational structure

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

2620

The following table sets forth the principal subsidiaries owned, directly or indirectly, by Pioneer.


	~~Country of~~	Ownership ~~interest~~
	Country of	interest and
Name of subsidiary	incorporation	~~and~~ voting interest			Principal business
Tohoku Pioneer Corporation	Japan		67.0	%	Manufacture of car electronics products, ~~Factory automation~~FA systems and OLED display panels

Pioneer Display Products Corporation	Japan		100.0	%	Manufacture of plasma displays

Pioneer ~~Micro Technology~~Plasma Display Corporation	Japan		100.0	%	Manufacture ~~and distribution~~ of ~~ICs and LSIs~~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

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


*		Discovision Associates is a general partnership organized under the laws of the State of California in the United States.

2721

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, ~~2004,~~2006, 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

~~Shizuoka Plant~~ ~~(Pioneer Display Products Corporation)~~	~~Fukuroi, Shizuoka~~		~~786,000~~
Kagoshima Plant	Izumi, Kagoshima		1,281,000	Plasma displays

~~Tendo Plant~~ (~~Tohoku~~ Pioneer Plasma Display Corporation)	~~Tendo, Yamagata~~		~~504,000~~	~~Car stereos, Car speakers, Loudspeakers~~

~~Tokorozawa Plant~~ ~~(Pioneer Corporation)~~	~~Tokorozawa, Saitama~~		~~490,000~~	~~Stereo systems, Individual stereo components, DVD players, Recordable DVD drives for PCs, DVD recorders~~

~~Kawagoe Plant~~ ~~(Pioneer Corporation)~~	~~Kawagoe, Saitama~~		~~414,000~~	~~Car stereos, Car navigation systems~~

~~Yonezawa Plant~~ ~~(Tohoku Pioneer Corporation)~~	~~Yonezawa, Yamagata~~		~~234,000~~	~~OLED displays~~

~~Kokubo Plant~~ ~~(Pioneer Micro Technology Corporation)~~	~~Kofu, Yamanashi~~		~~204,000~~	~~ICs, LSIs~~

~~Tendo the 2nd Plant~~ ~~(Tohoku Pioneer Corporation)~~	~~Tendo, Yamagata~~		~~186,000~~	~~Factory automation systems~~

~~Towada the 2nd Plant~~ ~~(Towada Electronics Corporation)~~	~~Towada, Aomori~~		~~134,000~~	~~DVD-RW pickups, Car stereos~~

~~Niike Plant~~ ~~(Pioneer Display Products Corporation)~~	~~Fukuroi, Shizuoka~~		~~134,000~~	~~Plasma displays~~

~~Yamanashi Plant~~ ~~(Pioneer Display Products Corporation)~~	~~Nakakoma, Yamanashi~~		~~102,000~~	~~Plasma displays~~


Yamanashi Plant	Nakakoma, Yamanashi	874,000	Plasma displays
(Pioneer Display Products Corporation)

Shizuoka Plant	Fukuroi, Shizuoka	730,000	Plasma displays
(Pioneer Display Products Corporation)

Kawagoe Plant	Kawagoe, Saitama	553,000	Car stereos, Car navigation systems
(Pioneer Corporation)

Tendo Plant	Tendo, Yamagata	459,000	Car stereos, Car speakers, Loudspeakers
(Tohoku Pioneer Corporation)

Yonezawa Plant	Yonezawa, Yamagata	243,000	OLED displays
(Tohoku Pioneer Corporation)

Kokubo Plant	Kofu, Yamanashi	194,000	ICs, LSIs
(Pioneer Micro Technology Corporation)

Tendo the 2nd Plant	Tendo, Yamagata	186,000	FA systems
(Tohoku Pioneer Corporation)


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

Shanghai Plant ~~(Shanghai Pioneer Speakers Ltd.)~~	Shanghai, China		~~420,000~~458,000	Car speakers
(Shanghai Pioneer Speakers Co., Ltd.)

Mexico Plant ~~(Pioneer Speakers, S.A. de C.V.)~~	Baja California, ~~Mexico~~		~~352,000~~397,000	Car speakers
(Pioneer Speakers,	Mexico
S.A. de C.V.)

Shanghai Plant ~~(Pioneer Technology (Shanghai) Co., Ltd.)~~	Shanghai, China		~~337,000~~374,000	DVD Recorders, Car AV systems, Car stereos
(Pioneer Technology			[22,000]
(Shanghai) Co., Ltd.)

Thailand Plant ~~(Pioneer Manufacturing (Thailand) Co., Ltd.)~~	Ayutthaya, Thailand		300,000	Car stereos, Stereo systems

~~Guang Dong Plant~~ (Pioneer ~~Technology (Dongguan)~~ Manufacturing (Thailand) Co., Ltd.)	~~Guang Dong, China~~		~~295,000~~	~~Recordable DVD drives~~

Malaysia Plant ~~(Pioneer Technology (Malaysia) Sdn. Bhd.)~~	Johor, Malaysia		262,000	Stereo systems, Car stereos

~~Guang Dong Plant~~(Pioneer Technology ~~(Dongguan Monetech Electronic Co., Ltd.~~(Malaysia) Sdn. Bhd.)	~~Guang Dong, China~~		~~249,000~~	~~Speaker systems~~

~~California Plant~~ ~~(Pioneer Electronics Technology, Inc.)~~	~~California, U.S.A.~~		~~185,000~~	~~Plasma displays, Speaker systems~~

~~U.K. Plant~~ ~~(Pioneer Technology (U.K.) Ltd.)~~	~~West Yorkshire,~~ ~~United Kingdom~~		~~184,000~~	~~Plasma displays, DVD recorders~~


~~Name of plant~~		~~Floor space~~
~~(Name of company~~
Guang Dong Plant	Guang Dong, China		255,000		Recordable DVD drives, DVD Recorders
(~~square feet)~~Pioneer Technology
~~which owns the plant)~~ (Dongguan) Co., Ltd.)	~~Location~~	~~[leased space]~~		~~Principal products~~

Guang Dong Plant	Guang Dong, China		237,000		Speaker systems
(Dongguan Monetech			[237,000]
Electronic Co., Ltd.)

California Plant	California, U.S.A.		208,000		Plasma displays, Speaker systems
(Pioneer Electronics Technology, Inc.)

U.K. Plant	West Yorkshire,		184,000		Plasma displays
(Pioneer Technology	United Kingdom
(U.K.) Ltd.)

Ohio Plant ~~(Pioneer Industrial Components, Inc.)~~ ~~Others~~	Ohio, U.S.A.		157,000		Car stereos
(~~7 plants in Japan and 8 plants outside Japan)~~	~~1,253,000~~Pioneer Automotive ~~[45,000]~~
Technologies, Inc.)

~~Total~~		~~7,182,000~~ ~~[45,000]~~

Most of the buildings of these plants and the land ~~(except those in China)~~ on which they are located are owned by us.

As of March 31, ~~2004,~~2006, we owned our ~~headquarters’~~headquarters 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 ~~294,000~~298,000 square feet.

Our sales office buildings in Japan and outside Japan are mainly leased. The head office buildings of some ~~distribution~~sales subsidiaries outside Japan are owned by us. Land and buildings for ~~the Ohio Plant~~one of our subsidiaries and one of our headquarters’ buildings with an aggregate book value of ~~¥11,902~~¥7,366 million were pledged as collateral for certain loans on March 31, ~~2004.~~
~~In fiscal 2004, in order~~2006.

We are reviewing our global production systems. For the past several years, we have been accelerating the shift to ~~meet fast-growing demand for DVD recorders~~overseas production. We currently plan to shift from our emphasis on overseas manufacturing and ~~recordable DVD drives, we invested ¥1.3 billion in building the second manufacturing line for optical pickups, which are key parts~~focus more on an efficient response to fast-changing markets. As part of ~~DVD recorders and recordable DVD drives, at Guang Dong Plant in China. This line started November 2003 and our overall production capacity for optical pickups reached one million units per month.~~
~~To address expanding demand for plasma displays,~~this plan, in fiscal ~~2004,~~2006, we ~~invested ¥22 billion~~closed a car electronics plant in ~~building~~Mexico and decided to close a ~~more efficient production system, including the building of new manufacturing lines at our plants~~car electronics plant in Shizuoka and Yamanashi, in Japan. Our overall production capacity increased about 67% to 250 thousand units annually through the expansion of the Shizuoka Plant completed in August 2003. The ongoing building of a new line of the Yamanashi Plant is expected to be completed by fall of 2004 and increase our total production capacity to 600 thousand units annually. In fiscal 2005, we plan to spend approximately ¥30 billion in relation to PDP-related capital expenditure not including investment related to the acquisition of NPD as described below.
On July 1, 2004, Pioneer and NEC concluded the stock transfer agreement under which NEC will transfer to Pioneer 100% of the issued share capital of its plasma display manufacturing subsidiary, NPD and the intellectual property rights relating to plasma displays held by NEC. We expect to invest approximately ¥40 billion in the acquisition of NPD and NEC’s intellectual property rights in fiscal 2005. This acquisition is expected to be completed by September 30, 2004. NPD’s plant has an approximate aggregate floor space of 867,000 square feet in Izumi, Kagoshima, Japan. With this acquisition and the
30
Belgium.

new line of the Yamanashi Plant as described above, our total capacity will add up to more than one million units a year. In order to apply to this investment, on March 5, 2004 we issued the aggregate principal amount of ¥60,000 million of Euro Yen Zero Coupon Convertible Bonds due 2011.

~~We intend to fund the capital requirement to fulfill these capital expenditure plans through internally generated cash, except for the acquisition of NPD.~~

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 ~~promote~~support continued growth.

Item 4A. Unresolved Staff Comments

None

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,~~car navigation systems, plasma displays and ~~car navigation systems.~~DVD products. We are also one of the leading ~~manufactures~~manufacturers in the world consumer market of car audio ~~products and car navigation systems.~~products. In addition, we derive revenue from the manufacture and sale of industrial electronics, such as ~~factory automation~~FA systems and parts and from the licensing of patents that we own.

During fiscal ~~2004,~~2006, the global economy ~~was supported~~continued steady growth, in part by ~~continued expansion~~robust consumer spending, despite concerns over surging prices of ~~the U.S. economy, despite uncertainties in Iraq~~raw materials, including crude oil and ~~other parts of the world.~~certain metals. In Japan, ~~where we have the~~our largest ~~sales,~~market, the economy ~~exhibited signs of recovery. However, uncertainties remain as~~continued to ~~whether this trend will lead~~recover due to ~~a sustainable growth.~~increased consumer spending and corporate investment. In the consumer electronics market, the popularity of and demand for newer products, such as flat panel TVs and DVD recorders ~~rose, while price~~continued to grow significantly. However, we faced an extremely challenging business environment, due to severe, price-based competition involving those core products, which adversely affected our profitability.

In response to this challenging environment we announced plans to restructure our business on December 8, 2005 and we are currently implementing them. The primary components of our business restructuring plans are:

Organizational restructuring. In order to improve management efficiency, we are comprehensively reorganizing our organizational structure. On January 1, 2006 we reorganized our operations into two business groups: the Home Entertainment Business Group and the Mobile Entertainment Business Group. All operations related to plasma displays, DVD products and home audio products were integrated into the Home Entertainment Business Group. Also, all operations related to car navigation systems and car audio products were inherited by the Mobile Entertainment Business Group. Home Entertainment Business Group staff currently based in three separate locations will be consolidated into one location in Japan by spring of 2007. We believe that this organization restructuring will encourage more effective inter-departmental integration and help us to operate more efficiently.

Reduce fixed costs. To reduce fixed costs across our entire operations we are consolidating our worldwide production sites. This plan has been already implemented or is in process for major targeted production sites and will be completed by the spring of 2007.

Review employee numbers.In accordance with our plans to integrate our home entertainment business operations and consolidate our production sites and headquarters functions, we adjusted our employment levels at Pioneer and its subsidiaries in Japan. This plan resulted in the retirement of 777 employees.

As a result of these ~~products intensified worldwide.~~ restructuring plans, we recorded involuntary special termination benefits, contract termination costs and other associated costs of ¥4.1 billion for fiscal 2006 in connection with the closure or scaling down of our manufacturing facilities in Europe and Mexico. At the end of March 2006, ¥2.8 billion out of the ¥4.1 billion remained as liabilities in our consolidated balance sheet, which we will pay in fiscal 2007. Funding will come from short-term borrowing. In addition, Pioneer and eleven subsidiaries in Japan implemented voluntary, incentive-based early retirement programs. As a result of such programs, we recorded special termination benefits of ¥10.8 billion which was accrued at the end of fiscal 2006 and we will pay in fiscal 2007. The sources of these payments are mostly cash on hand and short-term borrowing.

We also recorded impairment losses on long-lived assets of ¥41.4 billion, and equity in losses of affiliated companies in the amount of ¥24.1 billion in connection with our business restructuring plans.

Because most of the costs and expenses related to our business restructuring plans were recognized in fiscal 2006, we expect no significant negative impact on profitability for the following years relating to our business restructuring plans.

In foreign exchange markets, the average value of the yen during fiscal ~~2004~~2006 was approximately ~~8% higher~~5% weaker against the U.S. dollar and approximately ~~9% lower~~2% weaker against the euro compared with fiscal ~~2003.~~ 2005.

In ~~these~~those business circumstances and economic conditions, our operating revenue for fiscal ~~2004~~2006 was ~~¥700.9~~¥755.0 billion, up ~~3.5%~~6.2% from fiscal ~~2003. Operating income was ¥43.7~~2005. However, we recorded a net loss of ¥85.0 billion, compared with a ~~42.1% increase from ¥30.8 billion recorded in fiscal 2003, and~~ net ~~income increased to ¥24.8 billion, a 54.5% increase from ¥16.1~~loss of ¥8.8 billion posted in fiscal ~~2003.~~
2005.

We classify our business groups into four segments: “Home Electronics,” “Car Electronics,” “Patent Licensing” and “Others.” ~~Main~~The primary products in each segment are as follows: “Home Electronics” includes ~~the manufacture and sale of audio/video equipment for home use, equipment for cable-TV systems, digital broadcast set-top boxes,~~plasma displays, DVD-related products, 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~~FA system, parts, and others. The following ~~are~~is a summary of operating ~~revenue and operating income~~revenues by business segment for the ~~three~~ years ended March 31, ~~2004. “Car Electronics” is our largest segment by revenue, accounting for 41.7% of operating revenue in fiscal 2004.~~
31
2004, 2005 and 2006.

Operating Revenue ~~and Operating Income~~ by Business Segments


	Year ended March 31														Year ended March 31
	2002					2003					2004				2004				2005				2006
	(In millions of yen, except for percentage amounts)
Operating Revenue:
															(In millions of yen, except for percentage amounts)
Home Electronics	¥	259,809		41.3	%	¥	277,968		41.0	%	¥	281,482	40.2	%	¥	306,205	44.7	%	¥	322,771	45.4	%	¥	354,690	47.0	%
Car Electronics		257,672		40.9	%		281,090		41.5	%		292,187	41.7	%		292,187	42.7			303,410	42.7			330,522	43.8
Patent Licensing		17,588		2.8	%		12,584		1.9	%		11,821	1.7	%		11,821	1.7			10,237	1.4			8,540	1.1
Others		94,708		15.0	%		105,617		15.6	%		115,395	16.4	%		74,536	10.9			74,624	10.5			61,212	8.1

Total	¥	629,777		100.0	%	¥	677,259		100.0	%	¥	700,885	100.0	%	¥	684,749	100.0	%	¥	711,042	100.0	%	¥	754,964	100.0	%

Operating Income (Loss):
Home Electronics	¥	(5,717	)			¥	3,878				¥	2,099
Car Electronics		16,071					26,126					28,936
Patent Licensing		16,837					10,736					11,398
Others		(5,790	)				8					1,096
Corporate and Elimination		(4,801	)				(9,983	)				190

Total	¥	16,660				¥	30,765				¥	43,719

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 and we~~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, ~~digital broadcast set-top boxes~~plasma displays and OLED displays to other companies. The following ~~are~~is a summary of operating ~~revenue~~revenues from unaffiliated customers by geographic market for the ~~three~~ years ended March 31, ~~2004.~~
2004, 2005 and 2006.

Operating Revenue by Geographic Market


													Year ended March 31
	Year ended March 31												2004				2005				2006
	2002				2003				2004
	(In millions of yen, except for percentage amounts)												(In millions of yen, except for percentage amounts)
Japan	¥	215,539	34.2	%	¥	254,639	37.6	%	¥	263,298	37.6	%	¥	248,790	36.3	%	¥	248,751	35.0	%		¥	232,766	30.8	%
North America		189,599	30.1			190,147	28.1			170,711	24.3			170,702	24.9			174,106	24.5				201,378	26.7
Europe		131,046	20.8			132,977	19.6			146,250	20.9			146,250	21.4			150,770	21.2				171,912	22.8
Other Regions		93,593	14.9			99,496	14.7			120,626	17.2			119,007	17.4			137,415	19.3				148,908	19.7

Total	¥	629,777	100.0	%	¥	677,259	100.0	%	¥	700,885	100.0	%	¥	684,749	100.0	%	¥	711,042	100.0	%		¥	754,964	100.0	%


Note:		Operating revenue by geographic market represents revenue from unaffiliated customers, based on the geographic location of each unaffiliated customer.

Our principal production activities are carried out in Asia, including Japan. We have been expanding production activities in China. The production in China accounted for approximately 29% of total production in fiscal 2004, compared with 22% in fiscal 2003 and 18% in fiscal 2002.

Home Electronics, Car Electronics and Others

~~In our home electronics business, we experienced significant price competition for conventional DVD players due to increasing competition. At the same time,~~

Although we continue to see strong growth in demand ~~within the Japanese market and overseas~~ for plasma displays, DVD recorders and recordable DVD drives ~~although sales of~~in worldwide markets, in our ~~CD-ROM/R/RW drives and DVD-ROM drives have shown a decrease. Demand~~home electronics business we are exposed to significant price competition for plasma displays and DVD-related products, which ~~has been conspicuous in Japan, is expanding in the overseas market.~~ adversely affects our profitability.

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. Our royalty revenue from the licensing of worldwide patents for our laser optical disc technologies has started to decline substantially as a significant portion of our patents in Japan and Europe expired during fiscal 2003 and 2004.

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. Our sales of new products such as DVD-related products, including DVD recorders and recordable DVD drives for PCs, plasma displays, car navigation systems and OLED displays have grown rapidly. In fiscal 2004, sales of such new products accounted for approximately 47% of our total sales. We expect to continue concentrating our resources on these strategic products in order to further expand sales.

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, we have increased the percentage of our manufacturing outside Japan from 51% in~~

In fiscal ~~2000 to 65% in fiscal 2004 in terms of the yen value of cost of goods produced, mainly by expanding production facilities in Southeast Asia and China.~~
As a result of the sale of subsidiaries in the audio/video software business in fiscal 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 income in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” See Note 3 in “Notes to Consolidated Financial Statements.”
~~Also, in fiscal 2004,~~2006, we changed our business segment classification for certain ~~businesses.~~businesses reflecting the changes of the market and product usage. Results related to ~~DVD drives~~plasma displays for ~~PCs~~business use and DJ equipment 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.~~Electronics.” Corresponding figures for the ~~previous fiscal years~~previously reported operating revenue by segment and segment information have been ~~restated~~reclassified 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 in Japan and Europe has expired ~~during fiscal 2003~~ and ~~fiscal 2004.~~some portion of those in North America started to expire. Accordingly, we have ~~started to experience~~experienced a substantial decrease in operating revenue and ~~operating~~segment income from this segment. We are currently working to acquire patents held by third parties and licensing such patents. 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 will be sufficient to offset the decrease in royalty revenue resulting from the expiration of our existing patents.
33

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.

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 in different countries.~~
products.

Derivative financial instruments are utilized by us to reduce the risks from ~~the~~ fluctuations in foreign exchange rates but are not held or issued for trading purposes. To hedge certain purchase and sale commitments for anticipated ~~and~~but not yet committed transactions that are denominated in other than functional currencies, we enter into forward exchange contracts and purchases and ~~writes~~write 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 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 ~~our~~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-going~~ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition and customer incentives, bad debts, inventories, long-lived assets, 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.
34

Revenue recognition

Sales are generally recorded when merchandise is shipped or delivered to customers. Recognition of sales occurs when title and risks and rewards of ownership are transferred to customers based on ~~purchase orders or when services are rendered to~~ the ~~third parties.~~facts which include the sales contract and Pioneer’s practice. In certain cases, terms of the contract require the product to pass customer inspection after ~~shipment~~delivery and we record the sale upon satisfactory customer acceptance. Royalty revenue is recognized based on royalty statements received from licensees.

We normally do not accept returns except in connection with our obligations under product warranties, 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.

Estimated reductions toof revenue are recorded for ~~customer~~costs incurred by us in connection with sales incentive ~~offerings.~~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 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 ~~such as volume incentive rebates or co-operative advertising~~ are ~~accrued based on estimates~~estimated and recorded at the later of when the original sale is ~~recorded. Rebates and incentives given directly to consumers are accrued earlier of~~recorded or when the ~~program becomes effective or the program~~incentive is ~~announced, to the extent related sales have been recognized.~~offered. Estimates of future customer performance such as purchase volume, early payments and consumer rebate redemption rate are based on ~~experience and such estimates are reviewed monthly, quarterly or annually depending on the type of incentive.~~historical experience. Should a greater proportion of customers redeem 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 allowances~~occasionally 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 accounts~~early 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 ~~inability~~purpose of supporting dealers’ sales promotions of our ~~customers~~products. 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. If~~dealers as reductions from sales, except for the ~~financial condition~~payments in return for the evidence

which is sufficient to account for the payments as sales expenses. Certain promotional allowances, such as co-op advertising, are determined as certain percentages of the respective sales amount and are recorded at the time of sale. Although reimbursement for such incentives requires dealers to perform sales promotions of our ~~customers were to deteriorate, resulting in an impairment of their ability to make payments, additional~~products, we assume, based on historical experience, that almost all dealers will eventually perform such sales promotions and submit claims for reimbursement. Other allowances, ~~may be required. The changes~~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 share costs incurred by dealers for ~~doubtful accounts are disclosed in Note 19 to consolidated financial statements.~~
items such as new signboards, new display racks and salaries of 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. ~~Our warranty~~Warranty reserve ~~as of~~at March 31, ~~2004~~2006 was ¥6.6 billion.

Inventories

The majority of our products are produced for the consumer electronics market, and our inventory is ~~¥5.4~~susceptible to quickly changing demands and selling prices. We write-down in full inventories with no potential for future sale or potential use by us and write-down to net realizable value inventories which are considered to be obsolete or slow-moving, but salable at reduced prices. 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. At March 31, 2006, we have inventories on hand amounting to ¥8.6 billion that we have written-down in full and have recognized write-downs to net realizable value amounting to ¥3.6 billion.
~~Inventories~~
~~We write down~~

The following table sets forth the changes in the inventory reserve during fiscal 2006. Reversal was made in connection with sale or disposal of the related inventory.


Beginning	Provision		Reversal from sale or disposal		Other		End

(In billions of yen)
¥ 10.3		¥ 10.0		¥ (8.4)		¥ 0.3		¥ 12.2

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 the carrying amount of the asset group exceeds its estimated ~~obsolescence in amounts equal to~~fair value. Fair value is determined using the ~~difference between the~~present value of estimated cash flows. A weighted average cost of ~~inventory and~~capital, which is derived from our capital structure, is used as a discount rate for calculating the present value of the estimated ~~market value based upon assumptions about future demand~~cash flows. For the year ended March 31, 2005, we recorded ¥4.5 billion representing impairment charges for plasma display production facilities of a domestic subsidiary, production facilities of a foreign subsidiary to be closed and ~~market conditions. As~~assets used for manufacture of the end of fiscal 2004, such inventory reserve amounted to ¥8.3 billion. If future demand or market conditions are less favorable than those projected by the management, additional inventory write-downs may be required.
cable TV set-

3530

~~Impairment~~

top boxes. For the year ended March 31, 2006, we recorded ¥41.4 billion of ~~investments~~
~~We hold minority interests in customers~~impairment charges consisting of ¥31.9 billion for plasma display production facilities, ¥9.0 billion for DVD recorder-related production facilities and ~~financial institutions~~¥0.6 billion for ~~the purpose~~production facilities of maintaining long-term relationships, some of which are in publicly traded companies whose share prices are highly volatile and some of which are in non-publicly traded companies whose value is difficulta foreign subsidiary to ~~determine. We record an impairment charge when~~be closed. While we believe an investment has experienced a decline in value that is other than temporary. For investments in publicly traded companies, we assume the decline is other than temporary when market value is less than cost for a period of six to nine months, or sooner depending on severity of decline or other factors. For investments in non-publicly traded companies, an impairment is presumed to be other than temporary when net assets of the investee decline generally by 30% to 50% due to losses incurred. Such presumption may be overcome if there is evidence to support the judgment that the ~~decline in net assets~~estimates of ~~the investee is temporary. The factors that are considered in the judgment include business plans and estimated~~ future cash flows of the investee. Impairment losses recognized in income during fiscal 2004 as a result of decline in prices of stocks in our portfolio was ¥0.2 billion. The unrealized losses in the portfolio at the end of fiscal 2004 were immaterial. Future adverseand fair value are reasonable, changes in ~~stock market conditions or poor operating results~~estimates resulting in lower future cash flows and fair value would affect the valuations of ~~underlying investments could result in losses that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.~~
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 based on our short-term and ~~ongoing prudent~~long-term business plans 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.

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.
Our principal pension plans are our Japanese defined benefit pension plans. Pioneer and its domestic subsidiaries sponsors trusteed non-contributory defined benefit pension plans and a contributory welfare pension plan. The contributory welfare pension plan was established under the Japanese Welfare Pension Insurance Law (“JWPIL”), and is composed of a substitutional portion based on the pay-related part of the pension benefits prescribed by JWPIL and a corporate portion based on a defined benefit pension arrangement established at our discretion. Pension plans for our overseas subsidiaries are insignificant with aggregate pension assets and obligations amounting to less than 10% of those of our Japanese pension plans.

For pension plans ~~in Japan,~~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. To determine the expected long-termdetermined by using information about rates of return on ~~our~~currently available high-quality fixed-income bonds. The expected long-term rate of return on pension plan assets ~~we consider mainly~~is based on the ~~current and target asset allocations, as~~
36

~~well as historical and~~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 by asset category is derived from historical studies by investment advisors. The future compensation levels are calculated based on points. These points are accumulated based on years of service, job class and conditions under which termination occurs. 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.

The following table sets forth the effects of March 31, 2004, the actual asset allocation was equity securities 46%, debt securities 30%, other 24%, compared with target asset allocation of equity securities 56%, debt securities 41%, other 3%. The higher actual allocation for other assets resulted from our temporary shift from market sensitive assets to highly liquid assets as we plan to apply for transfer of pension obligations and assets for a substitutional portion of our contributory welfare pension plan.
~~Total net periodic pension costs for our pension plans~~assumed changes in ~~Japan for fiscal 2002, 2003 and 2004 were ¥5.0 billion, ¥8.1 billion and ¥10.1 billion, respectively, each representing 0.8%, 1.2% and 1.4% of operating revenue. Declines of~~ discount rates and ~~negative returns on plan assets that continued through fiscal 2003 adversely affected our pension benefit costs. Amortization of~~ the unrecognized net actuarial loss, which is a component of pension benefit costs and represents a systematic expense recognition of the effects of changes in assumptions and differences between assumptions and actual results, for our domestic pension plans increased to ¥4.1 billion in fiscal 2004 from ¥2.9 billion in fiscal 2003 and ¥2.0 billion in fiscal 2002, although such amortization is expected to decrease in fiscal 2005 due to higher than expected returns on plan assets during fiscal 2004. The increases in our pension costs are also attributable to increases of service cost mainly resulted from a decline of discount rate, and decreases of expected return on assets reflecting reduction of expectedlong-term rate of return ~~and decline of plan assets through the end of fiscal 2003. Lowering the discount rates~~ for pension plans in Japan by 0.5 percentage point would have increased the projected benefit obligation at the end of fiscal 2004 by approximately ¥13 billion and would increase the pension cost for fiscal 2005 by approximately ¥1.1 billion. Lowering the expected rate of return on plan assets by 0.5 percentage point would increase the pension cost for fiscal 2005 by approximately ¥0.5 billion.Japan.

Effect on shareholders’ equity Net periodic pension cost
at March 31, 2006 for fiscal 2007
(In billions of yen)
Discount rate:
0.5% increase ¥ 4.7 ¥ (0.7 )
0.5% decrease (5.3 ) 0.7

Expected long-term rate of return:
0.5% increase — (0.4 )
0.5% decrease — 0.4

~~A. Operating results~~

Fiscal ~~2004~~2006 compared with fiscal ~~2003~~2005
~~Operating revenue~~
~~Operating~~

Net sales amounted to ¥746.4 billion, a 6.5% increase over fiscal 2005. Net sales in Japan were ¥232.8 billion, down 6.4% from fiscal 2005, and overseas net sales increased 13.6% to ¥513.7 billion. The 6.4% decrease in sales in Japan pertains to the decrease in sales of DVD recorders and own-brand plasma displays, while the 13.6% increase in our overseas net sales is largely attributable to the increase in sales of plasma displays. Royalty revenue decreased 16.6% from fiscal 2005 to ¥8.5 billion.

Home Electronicsnet sales increased 9.9% over fiscal 2005, amounting to ¥354.7 billion. Sales in Japan decreased by 9.7% to ¥82.0 billion primarily due to the ~~sum~~decrease in sales of DVD recorders and own-brand plasma displays as a result of the decrease in the market prices at a pace faster than we had anticipated because of intensified competition. On the other hand, overseas sales were up 17.6% to ¥272.7 billion due mainly to an increase in sales of plasma displays in North America and Europe.

Overall, sales of plasma displays increased by approximately 30%, primarily driven by an expanding market for high-resolution models in North America and Europe, even though sales in Japan decreased. In our North American and European markets, our newly introduced plasma display products with high visual quality were welcomed by local consumers. Although OEM sales increased, this mainly reflects the September 30, 2004 acquisition of a plasma display production subsidiary. We reported higher sales of DJ equipment, but sales of DVD recorders, DVD players, and stereo systems declined.

Car Electronicsnet sales increased 8.9% to ¥330.5 billion. Sales of car audio products were higher both in consumer markets and on an OEM basis. Consumer-market sales expanded primarily in Central and South America, as well as North America and Russia, while OEM sales rose primarily in North America and Japan. Sales of car navigation systems increased in consumer markets, with sales growth coming mainly from Japan and North America. OEM sales increased in North America due to the start of new OEM transactions, but dropped in Japan as a result of diminished demand for product models rolled out in fiscal 2005. Sales in Japan decreased by 2.2% to ¥117.6 billion, due to decreased sales in OEM car navigation systems. Overseas sales increased 16.3% to ¥213.0 billion, due to an increase in sales of car audio products and car navigation systems. Sales of car audio products for the consumer market increased in Central and South America, North America and Russia. Also, sales of car audio systems and car navigation systems for the OEM market increased in North America. OEM sales represented 35% of total car electronics sales in fiscal 2006, down from 36% in the previous fiscal year.

Royalty revenue fromPatent Licensingdecreased 16.6% year on year to ¥8.5 billion. This decrease was mainly attributable to the impact of the expiration of certain patents licensed to the optical disc industry.

Net sales forOthersdeclined 18.0% year on year to ¥61.2 billion. This mainly reflected falling sales of FA systems, despite higher sales of compact speaker units for cellular phones. Sales in Japan fell 11.8% to ¥33.2 billion due to decreased sales of FA systems. Overseas sales were down 24.3% to ¥28.0 billion due to decreased sales of FA systems in South East Asia, despite increased sales of speaker units for cellular phones in South East Asia.

Other revenues (Revenues excluding net sales and royalty ~~revenue,~~revenue)

Other revenues include interest income and other income. Interest income increased from ¥1.9 billion to ¥2.7 billion due to higher interest rates in North America. Other income increased from ¥3.4 billion to ¥6.8 billion, due mainly to an increase in gain on sale of available for sale securities.

Cost and expenses

Cost of salesincreased to ¥593.2 billion from fiscal 2005’s ¥564.5 billion. Cost of sales for fiscal ~~2004 was ¥700.9~~2006 represented 78.6% of operating revenue, down by 0.8 of a percentage point from 79.4% for fiscal 2005. This decrease is net of absence of one time of pension cost amounting to ¥25.3 billion ~~up 3.5%~~recognized as a result of the transfer of the substitutional portion of employee welfare pension plan to the Japanese government recorded in fiscal 2005 and increase of percentage of other cost of sales due to adverse effects of intensified 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 25–30% during fiscal 2006. Gross profit margin in the Car Electronics business also decreased. This is due mainly to an increase of development costs.

Selling, general and administrative (“SGA”) expensesdecreased by ¥16.5 billion to ¥178.1 billion from fiscal ~~2003.~~2005’s ¥194.6 billion. This decrease is net of absence of one time pension cost amounting to ¥24.2 billion recognized as a result of the transfer of the substitutional portion of employee welfare pension plan to the Japanese government recorded in fiscal 2005 and increase of other SGA expenses, such as shipping and handling costs and royalty expenses. Shipping and handling costs and royalty expenses increased by ¥7.8 billion in total in line with the increase in the number of shipped plasma display units.

In fiscal 2005, we transferred the benefit obligation of the substitutional portion of employee welfare pension plan in Japan and the related portion of the plan assets to the Japanese government. The transfer resulted in recording of a ¥48.7 billion gain as a 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 SGA expenses. Please see Note 12 of the notes to consolidated financial statements for additional information.

R&D expenses, which are included in cost of sales and SGA expenses, increased 13.6% to ¥63.4 billion, representing 8.4% of operating revenue. The increase reflected R&D activities to enhance our technological advantage in our strategic products such as car navigation systems and plasma displays.

Loss on sale and disposal of fixed assetsincreased by ¥2.7 billion. The increase was attributable mainly to losses recorded in fiscal 2006 for disposal of production facilities for the purpose of improving production efficiencies, mainly in OLED products and plasma display panels.

Other deductionsincreased from ¥6.3 billion to ¥60.0 billion. The difference is mainly due to ¥41.4 billion impairment losses recognized in fiscal 2006 related to our corporate restructuring. During fiscal 2006, we reviewed the production facilities of plasma display and DVD recorder related products because of decreases in gross profit margins for plasma displays and DVD recorders due to sharp decline in market prices. As a result of the review, an impairment loss of ¥31.9 billion in plasma display and ¥9.0 billion in DVD recorder related assets were recognized as the excess of the carrying value of the asset group over the estimated fair value of the asset group. In addition, a foreign subsidiary recognized an impairment loss of ¥0.6 billion for fiscal 2006 in relation to the property and equipment of the plant to be closed.

As a part of our efforts to improve business performance, 12 Pioneer group companies, including Pioneer Corporation, implemented voluntary incentive-based early retirement programs. As a result of these programs, we recorded special termination benefits of ¥10.8 billion in connection with the retirement of 777 employees. As a part of the integration plan in foreign manufacturing companies, we decided to close a car electronics plant in Belgium. As a result of the closure of the plant in Belgium, one-time termination benefits of ¥3.0 billion, operating lease termination costs of ¥0.3 billion and other costs of ¥0.6 billion were recorded. Finally, ¥0.2 billion was recorded for one-time termination benefits at our plant in Mexico.

Income (loss) from continuing operations before income taxes

As a result of factors discussed above, we posted a ¥71.2 billion loss before income taxes in fiscal 2006, compared with loss of ¥2.1 billion in fiscal 2005.

Income taxes

In fiscal 2006, the provision for income taxes was minus ¥4.7 billion against ¥71.2 billion loss before taxes. The relationship between loss before taxes and tax expense was distorted mainly due to a valuation allowance set up for deferred tax assets of the parent company and certain subsidiaries which posted losses.

Equity in losses of affiliated companies

Equity in losses of affiliated companies was ¥24.0 billion in fiscal 2006, compared with ¥3.1 billion in fiscal 2005. The increase in losses of affiliated companies is mainly attributable to the assumption of debt amounting to ¥25.3 billion incurred by ELDis, Inc., as a result of the decision to withdraw from thin film transistor substrate business which had been carried out by ELDis, Inc.

Income from discontinued operations, net of tax

In fiscal 2006, we sold a subsidiary engaged in the development of cable TV software, and reached a preliminary agreement on the sale of subsidiaries involved in the electronic components business. As a result, the operating results of these subsidiaries and the gain on the sale are presented as income from discontinued operations. Corresponding figures for the previous year have been reclassified accordingly.
Net income from discontinued operations for fiscal 2006 and 2005 was ¥0.8 billion and ¥1.3 billion respectively.

Net loss

Net loss in fiscal 2006 was ¥85.0 billion, compared with net loss of ¥8.8 billion posted in fiscal 2005. Basic net loss per share of common stock in fiscal 2006 was ¥487.23, compared with net loss per share of ¥50.11 in fiscal 2005.

Fiscal 2005 compared with fiscal 2004

Operating revenue

Net sales amounted to ~~¥689.1~~¥700.8 billion, a ~~3.7%~~4.1% increase over fiscal ~~2003.~~2004. Net sales in Japan came to ~~¥263.3~~¥248.8 billion, ~~up 3.4% from~~almost the same as that of fiscal ~~2003,~~2004, and overseas net sales increased ~~3.8%~~6.6% to ~~¥425.8~~¥452.1 billion.
Royalty revenue decreased 13.4% from fiscal 2004 to ¥10.2 billion.

Home Electronicsnet sales increased ~~1.3%~~5.4% over fiscal ~~2003,~~2004, amounting to ~~¥281.5~~¥322.8 billion, primarily as a result of increased sales of plasma displays and DVD recorders, ~~and~~while sales of recordable DVD drives for PCs, ~~while sales of~~ DVD players, cable TV 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, and sales of DVD recorders increased overseas. In Japan, sales rose 10.0% to ~~more than twice~~¥90.8 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 the ~~levels~~acquisition of a plasma display production subsidiary, Pioneer Plasma Display Corporation (“PPD”). Pioneer brand plasma display sales to the consumer market increased as well. Sales of recordable DVD drives, DVD recorders and audio products decreased in ~~fiscal 2003~~Japan. Sales decrease of recordable DVD drives and DVD recorders was mainly attributable to the impact of a price decline resulting from intensified competition. Overseas sales also rose 3.7% to ¥231.9 billion, due to an increase in ~~terms~~sales worldwide of ~~units sold, while~~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 ~~amount of net sales did not grow so fast because of declining average selling prices. Consumer demand for DVD products~~market is shifting ~~rapidly~~ from DVD players to DVD recorders ~~particularly in Japan. Accordingly, our marketing effort has shifted from DVD players to DVD recorders. Sales of recordable DVD drives for PCs 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 increased. Overseas, sales increased by 6.0% to ¥202.7 billion. This primarily reflects a large increase in the sale of plasma displays in each overseas market, DVD recorders in North America and Europe, and recordable DVD drives for PCs in Europe and Asia, offsetting sales declines of digital cable-TV set-top boxes in North America, digital broadcast set-top boxes in Europe and audio products in
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worldwide.

North America and Europe. Sales increase of plasma displays, DVD recorders and recordable DVD drives overseas were attributable to growth of sales quantity, and declines in sales of digital cable-TV set-top boxes and digital broadcast set-top boxes were due to decreases of units sold.

Car Electronicsnet sales rose ~~3.9%~~3.8% to ~~¥292.2~~¥303.4 billion, primarily as a result of sales growth of car navigation ~~systems.~~systems overseas. In Japan, net sales ~~increased 15.1%~~decreased 1.2% to ~~¥121.7~~¥120.3 billion, mainly ~~due to increased sales of~~influenced by slow demand for car navigation systems in the consumer market, ~~and~~reflecting shifting demand from the consumer market to the OEM market, although car navigation systems for automobile ~~manufacturers. Sales~~manufacturers increased. Overseas net sales increased 7.4% to ¥183.2 billion, primarily due to increased sales of car audio products ~~to automobile manufacturers increased as well. Overseas net sales decreased 2.8% to ¥170.5 billion, primarily due to~~for the OEM market and car navigation systems, despite decreased sales of car audio products ~~to automobile manufacturers~~for the consumer market in Europe and North America. Sales of car navigation systems ~~rose~~for the consumer market, particularly map-type DVD models, grew in North America and ~~Europe, and~~Europe. Also, sales of car audio products for the consumer market increased in ~~other areas.~~

Russia and South and Central America.

Royalty revenue fromPatent Licensingdecreased ~~6.1%~~13.4% to ~~¥11.8~~¥10.2 billion, compared to that of fiscal ~~2003.~~2004. This was attributable to expiration of ~~our~~patents included in a larger portfolio of patents licensed to the optical ~~disc-related patents in certain areas.~~
disc industry.

Net sales forOthers~~rose 9.3%~~increased 0.1% over fiscal ~~2003~~2004 to ~~¥115.4~~¥74.6 billion, reflecting primarily increased sales of ~~factory automation~~FA systems ~~OLED display panels~~ and ~~other~~ component ~~parts.~~parts for cellular phones. In Japan, net sales ~~increased slightly by 1.1%~~decreased 15.4% to ~~¥62.8~~¥37.7 billion. This primarily resulted from ~~increased sales of cellular phone-related devices, mainly OLED display panels, partially offset by a~~ decrease in sales of ~~commercial karaoke products resulting~~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 ~~the sale of the karaoke business subsidiaries in the second half of fiscal 2003.~~Japan to China. Overseas, net sales were up ~~21.0%~~23.1% over fiscal ~~2003~~2004 to ~~¥52.6 billion,~~¥37.0 billion. The increase is primarily due to increased sales ~~of factory automation systems, mainly optical disc manufacturing systems~~ in ~~Asia. The increasing popularity of DVDs as recording media is a major factor of increased orders for the optical disc manufacturing systems. Sales~~China of semiconductors ~~related to~~for laser pickups and in ~~China~~Asia of speaker devices for cellular phones.

Other revenues (Revenues excluding net sales and ~~business-use plasma displays worldwide~~royalty revenue)

Other revenues include interest income and other income. Interest income increased ~~as well.~~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.

~~Operating costs~~Cost and expenses

Cost of salesincreased to ~~¥487.3~~¥564.5 billion from fiscal ~~2003’s ¥473.2~~2004’s ¥474.0 billion. After excluding ¥25.3 billion ~~consistent with~~of one-time pension cost recognized as a result of the ~~increase in net sales. However,~~transfer of the substitutional portion of employee welfare pension plan to the Japanese government, cost of sales ~~as a percentage~~represented 75.8% of operating revenue, ~~declined 0.4~~up by 6.6 percentage points from fiscal 2004’s 69.2%. The increase is primarily due to ~~69.5%, despite~~ the adverse effects of ~~keen~~harsh price competition, particularly for ~~home electronics~~Home Electronics products such as plasma displays, DVD recorders and recordable DVD ~~recorders.~~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~~Car Electronics business ~~improved as a result of cost reductions in~~also decreased. Gross profit margin decreased for car navigation ~~systems. For recordable DVD drives,~~systems in the consumer market in Japan, and the decline in sales prices of car CD players worldwide decreased gross profit margin ~~improved~~ as ~~well~~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 ¥194.6 billion from fiscal 2004’s ¥165.0 billion. The difference was ¥5.4 billion after excluding ¥24.2 billion one-time pension cost resulting from the transfer of the substitutional portion of employee welfare pension plan. Increases in shipping and handling costs and warranty cost accounted for the majority of the increase. Shipping and handling costs increased by ¥1.4 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 ~~result~~part of cost reductions, contributing to overall gross profit margin improvement in almost same significance with contribution from car electronics business. Also, exchange rate fluctuations favorably affected gross profit margin. A weaker yen againsta sales promotion measure.

In fiscal 2005, we transferred the ~~euro increased net sales in terms~~benefit obligation of ~~yen, and a stronger yen against currencies in Asian countries, where our major production facilities are located, reduced production costs in terms~~the substitutional portion of ~~yen.~~
Selling, general and administrative (“SGA”) expenses decreased by 1.4% or ¥2.3 billion over fiscal 2003 to ¥166.4 billion. This primarily reflected decreases in personnel-related expenses, special retirement allowances and various operating expenses. Personnel-related expenses in fiscal 2004 decreased by ¥1.9 billion, reflecting the sale of subsidiaries in the karaoke business in the second half of fiscal 2003. The decrease of special retirement allowances was due to ¥1.4 billion special termination benefits recorded by Tohoku Pioneer Corporation, a subsidiaryemployee welfare pension plan in Japan ~~for its voluntary early retirement~~and related portion of the plan ~~implemented~~assets to the Japanese government. The transfer resulted in June 2002. Such benefits were not incurred in fiscal 2004. In addition to these decreases, reductions in various operating expenses led to an overall decrease of SGA expenses, offsetting the unfavorable impactrecording of a ~~$14 million (¥1.5 billion) one-time payment~~¥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 ~~Gemstar-TV Guide International, Inc. as part~~cost of ~~resolving pending litigation, ¥2.0~~sales and ¥24.2 billion ~~provided for estimated costs for free inspection and repair~~to SGA expenses. Note 12 of ~~certain plasma TVs, and a ¥1.7 billion increase in advertising expenses. The ratio of SGA expenses~~the notes to ~~operating revenue decreased by 1.2 percentage points to 23.7%.~~
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consolidated financial statements provides detailed information.

Loss on sale and disposal of fixed assets decreased by ¥1.1 billion. The decrease was mainly attributable to losses recorded in fiscal 2003 for the conversion of optical disc production facilities at the plant in Yamanashi, Japan into plasma display panel production facilities, which are planned to start operations in fiscal 2005.

R&D ~~expenditures,~~expenses, which are included in cost of sales and SGA expenses, increased ~~13.4%~~8.6% to ~~¥51.5~~¥55.9 billion, representing ~~7.3%~~7.9% 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 OLED displays.

~~Operating income~~
~~Operating income in fiscal 2004 was ¥43.7 billion, a 42.1% increase from ¥30.8 billion recorded in fiscal 2003, mainly resulting from increased net sales, improved gross profit margins~~Loss on sale and disposal of fixed assetsdecreased ~~SGA expenses. Operating income for the~~~~Home Electronics~~~~segment was ¥2.1 billion in fiscal 2004 compared with ¥3.9 billion in fiscal 2003, despite increased profit from DVD drives for PCs.~~by ¥3.4 billion. The decrease was attributable mainly ~~reflected a downward trend in market product prices, slack set-top box business and increased SGA expenses, including a one-time payment~~ to ~~Gemstar-TV Guide International, Inc. and provisions for plasma TV service costs. Operating income for the~~~~Car Electronics~~segment in fiscal 2004 amounted to ¥28.9 billion, up 10.8% from fiscal 2003. Increased sales and improved gross profit margins primarily due to cost reductions in car navigation systems are the main reasons. In the~~Patent Licensingsegment, operating income increased to ¥11.4 billion from ¥10.7 billion, despite a decrease in royalty revenue, mainly due to decreases in operating expenses.~~~~Others~~segment, which broke even in fiscal 2003, posted ¥1.1 billion operating income in fiscal 2004. The increases in sales of OLED display panels and other component parts as well as factory automation systems improved profitability.
~~Other income (expenses)~~
Other expense, on a net basis, decreased from an expense of ¥2.7 billion to ¥1.9 billion. Net interest (interest income, less interest expense) was almost the same as in fiscal 2003, representing an expense of ¥0.7 billion, with both interest income and interest expense decreasing. The decrease of interest income mainly reflected a decline of interest rates in the U.S. financial market, and the decrease of interest expense mainly reflected reductions of interest bearing short-term and long-term borrowings. A ¥0.8 billion gain on sale of subsidiaries’ stock posted in fiscal 2003 resulted from the sale of karaoke related subsidiaries. Foreign exchange loss decreased by ¥0.8 billion, to a ¥1.2 billion loss. The losses in fiscal 2004 primarily arose from conversion of U.S. dollar 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 was income of ¥0.1 billion compared with expense of ¥0.7 billion. A ¥1.1 billion decrease of losses on write-down of investments to ¥0.2 billion in fiscal 2004, compared with ¥1.3 billion losses recorded in fiscal ~~2003, accounted~~2004 for relocation and replacement of production facilities for the purpose of improving production efficiency, mainly in DVD products and plasma display panels.

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 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 ~~Other—net. During fiscal 2004,~~North America any longer. ¥1.8 billion was recorded for asset disposal, employee termination benefits and contract termination costs, in addition to the ~~prices of stock in our portfolio recovered, and significant write-downs were not recorded.~~
impairment loss discussed above.

Income (loss) from continuing operations before income taxes
~~Income~~

As a result of factors discussed above, we posted ¥2.1 billion loss before income taxes in fiscal ~~2004 increased 49.0% to ¥41.8 billion from ¥28.1~~2005, compared with income of ¥40.5 billion in fiscal ~~2003,~~2004.

Income taxes

In fiscal 2005, the provision for income taxes was ¥4.3 billion against ¥2.1 billion loss before taxes. The relationship between loss before taxes and tax expense was distorted mainly due to ~~increased operating income.~~
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~~Income taxes~~

~~Income~~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 ~~(the effective tax rate)~~were 44.8%, which was ~~44.4%, an increase of 12.2 percentage points compared with 32.2% in fiscal 2003 and was 2.4%~~2.8% higher than the normal statutory tax rate of 42.0% in Japan. In 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. The reversal was the main reason for the lower effective tax rate for fiscal 2003. The 2.4% deviation from the normal statutory tax rate was due mainly to ¥0.7 billion in 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 an effect of increasing deferred income taxes by ¥0.4 billion and by ¥0.8 billion in fiscal 2004 and 2003, respectively.

~~Minority interest in losses (earnings) of subsidiaries~~

Minority interest in earnings of subsidiaries, which primarily consists of the earnings of Tohoku Pioneer Corporation and its subsidiaries attributable to its minority shareholders, amounted to ¥0.7 billion in fiscal 2004 compared with losses of ¥0.02 billion in fiscal 2003.

Equity in losses of affiliated companies
Equity in losses of affiliated companies was ¥2.2 billion in fiscal 2004 compared with ¥3.1 billion in fiscal 2003. The decrease in loss is mainly attributable to the decrease of research and development costs incurred by ELDis, Inc., where active-matrix full-color OLED displays are still in development.
~~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 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 2004 was ¥24.8 billion, a 54.5% increase compared with fiscal 2003’s ¥16.1 billion. Basic net income per share of common stock in fiscal 2004 was ¥141.58, compared with ¥90.24 in fiscal 2003. Diluted net income per share in fiscal 2004 was ¥140.52 compared with ¥90.24 in fiscal 2003.
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~~Fiscal 2003 compared with fiscal 2002~~

~~Operating revenue~~

~~Operating revenue, the sum of net sales and royalty revenue, for fiscal 2003 was ¥677.3 billion, up 7.5% from fiscal 2002.~~

Net sales amounted to ¥664.7 billion, an 8.6% increase over fiscal 2002. Net sales in Japan came to ¥254.6 billion, up 18.1% from fiscal 2002, and overseas net sales increased 3.4% to ¥410.1 billion.

~~Home Electronics~~net sales increased 7.0% over fiscal 2002, amounting to ¥278.0 billion, primarily as a result of increased sales of plasma displays, DVD recorders and recordable DVD drives for PCs, and despite decreased sales of compact stereo systems worldwide. Net 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 as a result of successful introduction of the models with a large-capacity HDD in the second half of fiscal 2003. Sales of recordable DVD drives to PC makers increased both in Japan and overseas despite generally lower PC demand, primarily reflecting a shift in demand from DVD-ROM drives toward recordable DVD drives. As a result of the increased sales of DVD recorders, plasma displays and recordable DVD drives with growth of home telephones sales, total~~Home Electronics~~sales in Japan increased by 22.8% to ¥86.8 billion despite decreased sales of compact stereo systems. Overseas, sales increased 1.1% to ¥191.2 billion. This primarily reflects a large increase in the sale of plasma displays, increased sales of recordable DVD drives and a favorable effect of the yen’s depreciation against the euro, which increased sales in terms of yen in Europe, offsetting falling sales of digital broadcast set-top boxes in Europe and compact stereo systems in North America and Europe.

~~Car Electronics~~net sales rose 9.1% to ¥281.1 billion, growing both in Japan and overseas. In Japan, net sales increased 10.6% to ¥105.7 billion, mainly due to continuing increased sales 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. Sales of car audio products to automobile manufacturers increased as well, mainly in North America.

~~Royalty revenue from~~~~Patent Licensing~~decreased 28.5% to ¥12.6 billion, compared to that of fiscal 2002. 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.

~~Net sales for~~~~Others~~rose 11.5% over fiscal 2002 to ¥105.6 billion. In Japan, net sales increased 26.1% to ¥62.1 billion. This primarily reflected sales growth of cellular phone-related devices, including OLED displays. Overseas, net sales were down 4.3% from fiscal 2002 to ¥43.5 billion, primarily due to decreased sales of speaker devices for cellular phones, although sales of optical disc manufacturing systems in Asia increased.

~~Operating costs and expenses~~

Cost of sales increased to ¥473.2 billion from fiscal 2002’s ¥442.9 billion associated with an increase in net sales. However, cost of sales as a percentage of operating revenue declined 0.4 percentage points to 69.9%. Gross profit margin in car electronics business improved as a result of cost reductions in car navigation systems and favorable effects of higher sales of car electronics products, absorbing factory overhead. A weaker yen against the euro favorably affected gross profit margin, as well.

SGA expenses increased by 1.1% or ¥1.9 billion over fiscal 2002 to ¥168.7 billion. Personnel-related expenses increased by ¥6.3 billion. This primarily reflected increased costs for pension plans in Japan and overseas due to declines 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. 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 as plasma displays worldwide. The ratio of SGA expenses to operating revenue decreased 1.6 percentage points to 24.9%.

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 to strategically selected business areas.

R&D expenditures, which are included in cost of sales and SGA expenses, increased 16.2% to ¥45.4 billion, representing 6.7% of operating revenue. The increase primarily reflected R&D activities to enhance our technological advantage in strategic products such as car navigation systems, plasma displays, DVD recorders and digital cable-TV set-top boxes.

~~Operating income~~

Operating income in fiscal 2003 was ¥30.8 billion, an 84.7% increase from ¥16.7 billion recorded in fiscal 2002, mainly resulting from increased net sales and improved gross profit margin. Operating income for the~~Home Electronics~~ segment was ¥3.9 billion in fiscal 2003 compared with a loss of ¥5.7 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 turnaround of the profitability of this segment. Increased sales and cost reduction of recordable DVD drives for PCs also contributed to the improvement. Operating income for the~~Car Electronics~~segment in fiscal 2003 amounted to ¥26.1 billion, up 62.6% from fiscal 2002. Increased sales both in Japan and overseas, and improved production efficiency as well as cost reductions in car navigation systems are the main reasons. In the~~Patent Licensingsegment, operating income decreased to ¥10.7 billion from ¥16.8 billion, mainly due to a decline in royalty revenue.~~~~Others~~segment in fiscal 2003 broke even, compared with ¥5.8 billion operating loss posted in fiscal 2002. This primarily reflects increased sales of cellular phone-related devices. Another reason for the improvement in operating income was that the costs incurred in fiscal 2002 in connection with withdrawal from certain businesses were no longer incurred in fiscal 2003.

~~Other income (expenses)~~

Other expense, on a net basis, increased from an expense of ¥2.2 billion to ¥2.7 billion. Net interest (interest income, less interest expense) was an expense of ¥0.7 billion, compared with an expense of ¥0.3 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, was also in line with our policy to concentrate business resources to 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 2003 primarily arose from conversion of U.S. dollar deposits and receivables into yen due to the yen’s appreciation against the U.S. dollar during fiscal 2003. Other—net decreased from expense of ¥2.2 billion to expense of ¥0.7 billion. Losses on write-down of investments decreased to ¥1.4 billion in fiscal 2003, compared with ¥2.3 billion losses recorded in fiscal

~~2002, as the decline in market value of our investments in marketable equity securities was smaller in fiscal 2003.~~

~~Income before income taxes~~

~~Income before income taxes in fiscal 2003 increased 94.0% to ¥28.1 billion from ¥14.5 billion in fiscal 2002, mainly due to the increase in operating income.~~

~~Income taxes~~

Income taxes as a percentage of pre-tax income (the effective tax rate) was 32.2%, a 12.1% decrease compared with 44.3% in fiscal 2002 and 9.8% lower than the normal statutory tax rate of 42.0% in Japan. The main reason for the differences was the reversal of valuation allowances, which had been provided for a tax benefit, the realization of which had been judged as unlikely, 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 another reason for the difference with the normal statutory tax rate in Japan. Meanwhile, a 1.0% reduction of tax rate in Japan effective from fiscal 2005 had the effect of increasing deferred income taxes by ¥0.8 billion.

~~Minority interest in losses (earnings) of subsidiaries~~

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

~~Equity in losses of affiliated companies~~

Equity in losses of affiliated companies was ¥3.1 billion in fiscal ~~2003~~2005, compared with ~~¥0.1~~¥2.2 billion in fiscal ~~2002.~~2004. The ~~increased~~increase in loss is mainly attributable to ~~research and development cost incurred in ELDis, Inc., where active-matrix full-color OLED displays are still in development.~~

~~Income from continuing operations~~

~~Income from continuing operations in fiscal 2003 came to ¥15.9 billion, more than twice the fiscal 2002 amount of ¥7.5 billion, mainly due to~~ the increase in ~~operating income.~~

~~Income from discontinued operations, net of tax~~

~~Income from discontinued operations, net of tax, which represented profit and~~ loss ~~of sold subsidiaries, decreased to ¥0.1 billion~~incurred by ELDis, Inc.

Net income (loss)

Net loss in fiscal ~~2003,~~2005 was ¥8.8 billion, compared with ~~¥0.6~~net income of ¥24.8 billion posted in fiscal ~~2002.~~
~~Net income~~
~~Net income in fiscal 2003 was ¥16.1 billion, almost double that of fiscal 2002’s ¥8.0 billion.~~2004. Basic net ~~income~~loss per share of common stock in fiscal ~~2003~~2005 was ~~¥90.24,~~¥50.11, compared with ~~¥44.70 in fiscal 2002. Diluted~~ net income per share of ¥141.58 in fiscal ~~2003 was ¥90.24 compared with ¥44.69 in fiscal 2002.~~
2004.

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Segment information

The following segment information ~~was~~is 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.~~
accounting principles generally accepted in the United States of America.

Business Segments

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
Operating income ¥ 2,099 ¥ 28,936 ¥ 11,398 ¥ 1,096 ¥ 190 ¥ 43,719
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

Year ended March 31, 2003
Year ended March 31, 2006
Corporate and Corporate
Home Electronics Car Electronics Patent Licensing Others Eliminations Consolidated Home Car Patent and

Electronics Electronics Licensing Others Eliminations Consolidated
(In millions of yen) (In millions of yen)
Operating revenue:
Unaffiliated customers ¥ 277,968 ¥ 281,090 ¥ 12,584 ¥ 105,617 — ¥ 677,259 ¥ 354,690 ¥ 330,522 ¥ 8,540 ¥ 61,212 — ¥ 754,964
Inter-segment 1,718 1,271 2,014 41,780 ¥ (46,783 ) — 2,123 1,579 2,048 37,645 ¥ (43,395 ) —

Total ¥ 279,686 ¥ 282,361 ¥ 14,598 ¥ 147,397 ¥ (46,783 ) ¥ 677,259 ¥ 356,813 ¥ 332,101 ¥ 10,588 ¥ 98,857 ¥ (43,395 ) ¥ 754,964
Operating income ¥ 3,878 ¥ 26,126 ¥ 10,736 ¥ 8 ¥ (9,983 ) ¥ 30,765

Segment income (loss) ¥ (35,184 ) ¥ 17,486 ¥ 7,217 ¥ (3,991 ) ¥ (1,937 ) ¥ (16,409 )
Identifiable assets ¥ 172,316 ¥ 153,644 ¥ 4,357 ¥ 130,275 ¥ 186,437 ¥ 647,029 ¥ 177,367 ¥ 169,338 ¥ 1,474 ¥ 74,326 ¥ 255,541 ¥ 678,046
Depreciation and amortization ¥ 11,596 ¥ 13,370 ¥ 1,550 ¥ 7,822 ¥ 1,900 ¥ 36,238 ¥ 20,654 ¥ 11,511 ¥ 963 ¥ 8,532 ¥ 4,897 ¥ 46,557
Capital expenditures (additions to fixed assets) ¥ 16,798 ¥ 13,997 ¥ 398 ¥ 6,774 ¥ 3,004 ¥ 40,971 ¥ 16,317 ¥ 12,214 ¥ 60 ¥ 8,462 ¥ 1,973 ¥ 39,026

Year ended March 31, 2005
Corporate
Home Car Patent and
Electronics Electronics Licensing Others Eliminations Consolidated
(In millions of yen)
Operating revenue:
Unaffiliated customers ¥ 322,771 ¥ 303,410 ¥ 10,237 ¥ 74,624 — ¥ 711,042
Inter-segment 2,332 1,321 1,362 36,683 ¥ (41,698 ) —

Total ¥ 325,103 ¥ 304,731 ¥ 11,599 ¥ 111,307 ¥ (41,698 ) ¥ 711,042

Segment income (loss) ¥ (24,628 ) ¥ 18,591 ¥ 9,389 ¥ 61 ¥ (2,722 ) ¥ 691
Identifiable assets ¥ 240,923 ¥ 167,346 ¥ 2,852 ¥ 92,478 ¥ 221,568 ¥ 725,167
Depreciation and amortization ¥ 22,073 ¥ 12,514 ¥ 311 ¥ 8,439 ¥ 3,478 ¥ 46,815
Capital expenditures (additions to fixed assets) ¥ 32,769 ¥ 12,358 — ¥ 9,501 ¥ 9,568 ¥ 64,196

~~Note:~~
Notes: 1.		~~In fiscal 2004,~~Segment income (loss) represents operating revenue less cost of sales, selling, general and administrative expenses and subsidy from the government.

2.		Effective from 2006, we changed our business segment classification for certain businesses. Results related to ~~DVD drives~~plasma displays for business use and DJ equipment 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.~~Electronics.” Corresponding figures for the previously reported ~~Business Segments~~operating revenue by segment and segment information have been reclassified accordingly.

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3.		In fiscal 2006, we sold a subsidiary engaged in the development of cable TV software, and reached a preliminary agreement on the sale of subsidiaries involved in the electronic components business. As a result, the operating results of these subsidiaries, and the gain on the sale, are presented as income from discontinued operations in the consolidated statements of operations in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Corresponding figures for the previous fiscal year have been reclassified accordingly.

Income (loss) by business segments

Home Electronicssegment recorded a loss of ¥35.2 billion, compared to a loss of ¥24.6 billion in fiscal 2005. Despite increased sales, mainly for plasma displays, lowered prices for plasma displays and DVD products worsened gross profit margins.

Car Electronicssegment recorded a profit of ¥17.5 billion, down 5.9% from ¥18.6 billion in fiscal 2005. Decrease of the profit of this segment is due mainly to an increase of development costs.

Patent Licensingposted ¥7.2 billion profit, down 23.1% from ¥9.4 billion in fiscal 2005 due to a decrease in royalty revenue.

Othersrecorded a loss of ¥4.0 billion, compared with ¥0.1 billion profit in fiscal 2005. This loss was principally caused by the decrease in sales of FA systems.

Geographic Segments

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
Operating income ¥ 18,456 ¥ 11,467 ¥ 2,044 ¥ 9,595 ¥ 2,157 ¥ 43,719
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

Year ended March 31, 2003
Year ended March 31, 2006
Corporate and Corporate
Japan North America Europe Other Regions Eliminations Consolidated North Other and

Japan America Europe Regions Eliminations Consolidated
(In millions of yen) (In millions of yen)
Operating revenue:
Unaffiliated customers ¥ 271,248 ¥ 187,858 ¥ 132,776 ¥ 85,377 — ¥ 677,259 ¥ 270,771 ¥ 196,809 ¥ 163,361 ¥ 124,023 — ¥ 754,964
Inter-area 272,393 7,594 700 168,128 ¥ (448,815 ) — 333,878 6,161 341 209,919 ¥ (550,299 ) —

Total ¥ 543,641 ¥ 195,452 ¥ 133,476 ¥ 253,505 ¥ (448,815 ) ¥ 677,259 ¥ 604,649 ¥ 202,970 ¥ 163,702 ¥ 333,942 ¥ (550,299 ) ¥ 754,964
Operating income (loss) ¥ 16,463 ¥ 11,091 ¥ (462 ) ¥ 7,415 ¥ (3,742 ) ¥ 30,765

Segment income (loss) ¥ (25,832 ) ¥ 3,368 ¥ 3,519 ¥ 3,697 ¥ (1,161 ) ¥ (16,409 )
Identifiable assets ¥ 222,372 ¥ 55,940 ¥ 57,092 ¥ 91,695 ¥ 219,930 ¥ 647,029 ¥ 245,695 ¥ 43,317 ¥ 65,071 ¥ 119,273 ¥ 204,690 ¥ 678,046
Depreciation and amortization ¥ 22,503 ¥ 3,484 ¥ 1,843 ¥ 6,508 ¥ 1,900 ¥ 36,238 ¥ 28,966 ¥ 3,109 ¥ 2,180 ¥ 7,405 ¥ 4,897 ¥ 46,557
Capital expenditures (additions to fixed assets) ¥ 24,030 ¥ 3,132 ¥ 2,019 ¥ 8,786 ¥ 3,004 ¥ 40,971 ¥ 25,961 ¥ 1,346 ¥ 1,097 ¥ 8,649 ¥ 1,973 ¥ 39,026

Year ended March 31, 2005
Corporate
North Other and
Japan America Europe Regions Eliminations Consolidated
(In millions of yen)
Operating revenue:
Unaffiliated customers ¥ 286,090 ¥ 171,947 ¥ 149,117 ¥ 103,888 — ¥ 711,042
Inter-area 288,196 5,030 805 175,698 ¥ (469,729 ) —

Total ¥ 574,286 ¥ 176,977 ¥ 149,922 ¥ 279,586 ¥ (469,729 ) ¥ 711,042

Segment income (loss) ¥ (7,106 ) ¥ (2,738 ) ¥ (308 ) ¥ 6,986 ¥ 3,857 ¥ 691
Identifiable assets ¥ 315,252 ¥ 60,799 ¥ 60,463 ¥ 112,312 ¥ 176,341 ¥ 725,167
Depreciation and amortization ¥ 31,819 ¥ 2,344 ¥ 2,444 ¥ 6,730 ¥ 3,478 ¥ 46,815
Capital expenditures (additions to fixed assets) ¥ 44,658 ¥ 1,911 ¥ 1,005 ¥ 7,054 ¥ 9,568 ¥ 64,196

~~Note:~~
Notes: 1.		Operating revenue reported in geographic segment information above represents that of Pioneer and its domestic subsidiaries in Japan, and each subsidiary in North America, Europe, and Other Regions.

2.		Segment income (loss) represents operating revenue less cost of sales, selling, general and administrative expenses and subsidy from the government.

3.		In fiscal 2006, we sold a subsidiary engaged in the development of cable TV software, and reached a preliminary agreement on the sale of subsidiaries involved in the electronic components business. As a result, the operating results of these subsidiaries, and the gain on the sale, are presented as income from discontinued operations in the consolidated statements of operations in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Corresponding figures for the previous fiscal year have been reclassified accordingly.

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B. Liquidity and capital resources

Cash flows

Summarized Consolidated Statements of Cash Flows


	Year ended March 31						Year ended March 31
	2003			2004			2005			2006
	(In millions of yen)						(In millions of yen)
Net cash provided by operating activities	¥	91,509		¥	60,378		¥	19,946		¥	68,329
Net cash used in investing activities		(35,228	)		(52,754	)		(93,516	)		(29,759	)
Net cash provided by (used in) financing activities		(34,680	)		51,827

Net cash used in financing activities								(4,019	)		(38,551	)
Effect of exchange rate changes on cash and cash equivalents		(6,234	)		(9,512	)		1,851			4,980

Net increase in cash and cash equivalents	¥	15,367		¥	49,939
Net increase (decrease) in cash and cash equivalents							¥	(75,738	)	¥	4,999

~~Fiscal 2004 compared with fiscal 2003~~

~~In fiscal 2004, net~~

Net cash provided by operating activities in fiscal 2006 was ~~¥60.4 billion. Net income from continuing operations adjusted for non-cash expenses such as depreciation and amortization, deferred income taxes, and equity~~¥68.3 billion, an increase of ¥48.4 billion compared to fiscal 2005. Changes in ~~losses of affiliated companies was the main source of the positive cash flows, generating ¥72.5 billion. ¥12.1 billion was used in cash requirement from~~ operating assets and ~~liabilities.~~liabilities were the primary cause for the increased cash flows from operating activities. Among operating assets and liabilities, trade receivables decreased despite increased ~~primarily~~sales due to increases in net sales. An increase in prepaid expenses and other current assets primarily resulted from increases in recoverable value-added taxes and similar indirect taxes in various countries where operations are expanding.securitization of receivables. Inventories ~~increased~~decreased primarily for plasma displays and car ~~navigation systems~~electronics products, reflecting our effort to control and factory automation systems. However, the negative impact of increased inventories on cash flows was largely offset by the increase of trade payables, reflecting increased purchase of materials. Plasma display inventory increased as display panel work in process inventory was built up for overseas markets. Increase in car navigation system inventory was mostly for OEM customers, and increases of factory automation system inventory reflected increased orders. Although net cash provided by operating activities decreased compared with the amount in fiscal 2003, the ¥60.4 billion was enough to cover the net cash used in investing activities. The decrease in net cash provided by operating cash flows in comparison with the amount in fiscal 2003 is primarily due to the increase of accounts receivable, trade, which is mainly attributable to increase of operating revenue in the fourth quarter. The fourth quarter in fiscal 2004 operating revenue was 4.7% or ¥8.2 billion higher than operating revenue in the equivalent period of fiscal 2003.
reduce inventories.

Net cash used in investing activities was ~~¥52.8~~¥29.8 billion for fiscal ~~2004, comprised~~2006, a decrease of ¥63.7 billion compared to ¥93.5 billion in fiscal 2005. The decrease was mainly ~~¥58.0 billion used in payment~~due to payments for the ~~purchase~~acquisition of ~~fixed assets~~a plasma display production subsidiary of ¥34.0 billion in fiscal 2005, and ~~¥4.9 billion proceeds from sale of discontinued operation. Among~~a decrease in the ~~¥58.0 billion capital expenditure, investment related to~~investments for plasma ~~displays amounted to ¥22.0 billion, investment in~~display production ~~facilities in China amounted to ¥5.5 billion. The net~~facilities.

Net cash used in ~~investing~~financing activities ~~in fiscal 2004 increased by ¥17.6~~was ¥38.6 billion, an increase of ¥34.6 billion compared to ~~¥35.2~~¥4.0 billion in fiscal ~~2003. The investments in the expansion~~2005. In fiscal 2006, cash was used primarily for reducing long-term debt, short-term borrowings and payment of ~~the plasma display production facilities and expansion of production capacities for plants in China accounted for the most of the increase.~~
~~Net cash provided by financing activities in fiscal 2004 was ¥51.8 billion and was mainly comprised of ¥60.5~~dividends. ¥31.2 billion cash ~~provided by issuance~~was used for repayments of ~~convertible bonds, ¥4.4 billion~~long-term debt and short-term borrowings. Cash used in ~~the reduction of other short-term and long-term borrowings, and ¥3.9 billion used in dividends payment. On March 5, 2004,~~
46

~~we issued zero coupon convertible bonds due 2011, with proceeds of ¥60.5 billion after deducting ¥1.6 billion issuance cost. The proceeds of the issue are planned~~dividend payments amounted to be applied principally towards investments in the plasma display business and the enhancement of distribution channels in Europe and China. In fiscal 2003, financing activities included ¥21.1 billion used in reducing short-term and long-term borrowings, ¥2.7 billion used in payments of dividends and ¥11.6 billion used in purchase of shares of Pioneer’s common stock.

¥3.5 billion.

As a result of these activities and the effect of changes in exchange ~~rate changes~~rates on cash and cash equivalents of overseas subsidiaries, cash and cash equivalents increased by ~~¥49.9~~¥5.0 billion to ~~¥192.4~~¥121.7 billion at the end of fiscal ~~2004,~~2006, from ~~¥142.5~~¥116.7 billion at the end of fiscal ~~2003.~~
2005.

Capital requirements

Our requirements for operating capital primarily are for the purchase of raw materials and parts for manufacturing our products. ~~Operating~~Also, operating expenses, including manufacturing expenses and ~~SGA~~selling, general and administrative expenses, require a substantial amount of operating capital. ~~Also, our capital~~Payroll and payroll-benefits, and marketing expenses, such as those for advertising and sales promotion, account for a primary portion of operating expenses. Our expenditure ~~plan~~ for ~~fiscal 2005~~R&D is ~~expected to require ¥68.0 billion,~~recorded as a ~~¥10.0 billion increase from ¥58.0 billion in fiscal 2004, reflecting mainly expansion of plasma display production facilities.~~
On July 1, 2004, we concluded an agreement with NEC under which NEC will transfer to us 100% of the issued share capital of its plasma display manufacturing subsidiary, NPD, and the intellectual property rights relating to plasma display held by NEC. We expect to invest approximately ¥40.0 billion in the acquisitions scheduled effective as of September 30, 2004. A part of ~~the ¥60.5 billion proceeds from issuance of convertible bonds on March 5, 2004 will be used in this investment.~~
~~We plan to apply~~various operating expenses, and payroll for ~~transfer of pension obligations and assets~~R&D-related personnel accounts for ~~substitutional~~a material portion of a contributory welfare pension plan. As of March 31, 2004 our contributory welfare pension plans maintains sufficient plan assets to complete the required transfer of plan assets, therefore, we do not expect additional cash requirement from this transfer.
R&D expenses.

We believe that our ability to generate positive operating cash flows and liquidity discussed in the following financial management section provide sufficient resources to fund future operating capital requirements and capital expenditures.

Financial management

At present, funds required for operating capital and capital ~~expenditure~~expenditures are generally financed through internally generated cash and debt or ~~debt~~equity financing.
With regard to debt financing, short-term debt financing with ~~maturity~~maturities of one year or less is utilized to fund operating capital requirements. Short-term ~~borrowings are~~borrowing is generally arranged locally ~~in the currency in which~~by each consolidated ~~company carries out~~subsidiary based on its ~~operations. As of~~capital requirements. At March 31, ~~2004,~~2006, short-term borrowings of ~~¥23.3~~¥23.2 billion ~~with weighted average interest rate of 1.74% comprised bank loans~~were principally in ~~seven different currencies, principally~~ Japanese ~~yen.~~yen, U.S. dollar, and euro. On the other hand, ~~long-term borrowings to finance~~financing of long-term funding requirements such as ~~investment~~investments in production facilities, financing through debt and equity securities markets are ~~generally~~ arranged in Japan, ~~on a fixed interest rate basis. As of~~and long-term borrowing from financial institutions is arranged locally by each consolidated subsidiary. At March 31, ~~2004,~~2006, substantially all of the long-term debt of ~~¥94.2~~¥100.1 billion, including the portion due within one year, was comprised of ~~¥62.1~~¥61.5 billion zero coupon convertible bonds due 2011 including ~~¥2.1~~¥1.5 billion unamortized issue premium, ~~¥6.5 billion loans principally from banks maturing serially through 2013 with fixed interest rates ranging from 3.06% to 3.90%, ¥15.0 billion 2.35% unsecured bonds due 2005,~~ ¥10.0 billion ~~2.80%~~ unsecured bonds due 2008, and capital lease obligations and other loans arranged locally.
47

~~As for liquidity,~~We believe that our sound financial position and ability to generate positive operating cash and cash equivalent amounted to ¥192.4 billion at the end of fiscal 2004, which are held principally in Japanese yen, the U.S. dollars and euro. Cash and cash equivalents comprised cash on hand, cash in banks including time deposit, and investment in highly liquid financial instruments provided by major international banks and financial institutions. In addition,flows, together with uncommitted and unused credit lines ~~amounted~~of ¥254.5 billion, provide sufficient resources to ~~¥229.6~~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 entered into a three-year global credit facility agreement for the amount of ¥70.0 billion ~~as of March 31, 2004 are available if there were needs for additional borrowings arising~~effective from ~~a possible decrease in cash flows from operating activities due to seasonal factors such as investment in inventory for high-sales seasons, or as a result of fluctuations in customer demands.~~

~~As a part of our effort to enhance efficiencies of cash balance held by subsidiaries, we arrange intercompany loans between the~~May 2005. This will ensure that these companies in ~~different region. To hedge the exposure to foreign exchange~~Japan and ~~interest rate fluctuations, we enter into currency swap contracts with banks, changing currency~~China have an efficient and interest features of intercompany finance transactions. The currency swap contracts effectively changes, in substance, the U.S. dollar floating interest rate intercompany borrowings into Japanese yen fixed and floating interest rates borrowings and euro fixed interest rate borrowings.

~~During fiscal 2003, we purchased 5.1 million shares of Pioneer’s common stock from the market~~stable financing source for ¥11.5 billion pursuant to the approval at the general shareholders’ meeting held in June 2002. At the general shareholders’ meeting held on June 29, 2004, our shareholders approved an amendment to the Articles of Incorporation which permits the purchase of shares of Pioneer’s common stock to be made upon resolution of the Board of Directors. This amendment allows us more flexibility in the purchase of shares of Pioneer’s common stock.

their operational funding needs.

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 high-density recording, flat-panel displays, digital signal processing, information/communications, and core LSIs. In fiscal ~~2002, 2003,~~2004, 2005 and ~~2004~~2006, our R&D expenses were ~~¥39,050~~¥51,449 million, ~~¥45,388~~¥55,858 million and ~~¥51,483~~¥63,442 million, respectively, or ~~6.2%~~7.5%, ~~6.7%~~7.9% and ~~7.3%~~8.4%, respectively, of our operating revenue. Our R&D expenses currently account for about 8% of our consolidated net sales. We will try to lower the burden of R&D expenses by increasing cooperation and alliances with other companies. We currently ~~plan~~intend to ~~continue~~reduce the ratio of R&D expenses to ~~spend more than 6% of~~ operating revenue ~~on R&D each year.~~
to below 7%.

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 & ~~Recording~~ Systems Development Center, Information & Communication Development Center, ~~and~~ PDP Development ~~Center. In November 2003, we established the~~Center and Mobile Systems Development ~~Center in Japan to develop advanced car electronics-related technologies, such as next-generation car navigation systems.~~Center. At Pioneer Research Center USA, Inc. (“PRA”), one of our overseas wholly-owned 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.

~~Multiple-Layer Optical Discs~~

During fiscal 2004, we succeeded in developing dual-layer disc technology for DVD-R recording, enabling up to 8.5 gigabytes of data to be recorded onto one side of a disc. Such performance, almost equal to levels of existing dual-layer DVD-ROM discs, allows conventional DVD-Video players to be compatible with discs using this technology. Compatible DVD recorders will also be developed with relative ease. The new discs will raise DVD recording capacity to approximately 4 hours in SP mode

4842

and 12 hours in EP mode—almost double the recording capacity of DVD-R discs currently on the market. The Company is further improving this format’s performance and will propose this format to the DVD Forum.

In the field of Blu-ray Disc, which is particularly well-suited for digital high-definition images and is expected to be the next-generation large-capacity optical disc, Pioneer has also succeeded in developing a prototype of playback-only four-layer disc with 100-gigabyte capacity on one side. The multiple-layer structure of the Blu-ray Disc format requires higher-precision control than DVDs for determining the thickness of layers between the disc surface and each layer. Pioneer has achieved this through collaboration with Hitachi Chemical Co., Ltd., involving joint development of photopolymer sheets suited for optical disc material.

~~Home AV Network~~

PRA launched the Digital Entertainment Network Initiative (“DENi”) in 2002. In January 2003, PRA and the six other consumer electronics company members of DENi drew up comprehensive technical specifications for simplifying network connection among home-use audio/video products. The new DENi technology takes advantage of Ethernet and Internet Protocol, which are commonly used for computer networking, and enables in-home connection and sharing of audio and video sources among rooms which are distant from one another, without troublesome additional cabling. PRA took the lead among DENi members in promoting this technology, and in July 2003, the Consumer Electronics Association (“CEA”) of the United States adopted the DENi proposal as the digital entertainment network standard, CEA-2008. PRA is expected to continue to advance home network technologies and promote unified industry standards.

D. Trend information

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

Home Electronics

Traditional audio/video products continue 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.~~
Electronics.

DVD ~~players and recorders.~~products.~~As a result of the dramatic expansion of the~~The market for DVD ~~players, they have become commodity~~ products is growing, but prices are falling rapidly. In the DVD recorder business, particularly for the in-house development of new products that entail large development expenses and ~~suffer from significant price competition. DVD has been one~~do not directly take advantage of our ~~fastest growing~~strengths, we plan to curb development expenses by developing products using existing assets, thus improving prospects for profitability. This approach will enable us to concentrate on developing and launching Blu-ray Disc players, which are promising next-generation optical disc products. In DVD drives for PCs, we aim to reduce our business risks through collaboration with other companies and other means, while lowering costs by increasing production. We have already shifted the main focus of our development activities in optical disc drives for PCs to Blu-ray Disc drives. In response, we will seek to continue to reduce costs through production in China and collaborations with other companies, and raise the return on product development investments through external sales of key components. Meanwhile, product development and design processes will be reviewed thoroughly to raise the efficiency and speed of development. In DVD drives for PCs, Pioneer plans to offer new value-added proposals by shifting the main focus of product development to Blu-ray Disc drives. We will reduce our DVD recorder lineup to products in areas ~~during~~of expertise, as part of efforts to propose value-added products that are embraced by customers.

Plasma displays.Our production output is increasing in line with strong overall market demand. With a forecast of further growth in demand, we expect to see an increase in the ~~past several fiscal years,~~capacity utilization rates of some production lines year on year, but will suspend or shut down the operation of certain production lines which are incompatible with new products. We are reducing OEM sales of panel modules, which carry the risk of volatility in sales volumes. Instead, we plan to focus on increasing sales under Pioneer’s own brands. In addition, we intend to bring more innovative products to market, including the world’s first 50-inch, 1080p plasma displays, aiming to improve our brand value and expand our business.

Car Electronics

We are targeting fast-growing consumer markets such as Brazil, Russia, India and China, in order to retain our position of leadership in car audio products. In addition, amid the uptake and growth of music content distribution and digital broadcasting, we ~~believe~~will work to increase earnings growth in the car electronics business by offering products that stand apart from those of other companies through the creation of new value and functions.

In car navigation systems, we will actively press ahead with business expansion in Europe and North America as well as in Japan’s consumer market, where our car navigation systems enjoy a strong reputation. In Europe and North America, in addition to the fixed-type of car navigation systems, we aim to increase our visibility by entering the fast-growing market for portable type. Aiming to reduce increasing software development costs accompanying product advancements, we are ~~well-positioned to face the competition because of our accumulated expertise~~reforming product development processes and raising their efficiency 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, demand for the DVD recorders, especially those with HDDs for long-time recording, has rapidly expanded, and these products have started to replace VCRs. There are, however, a number of competing digital recording disc formats: the DVD-RW, the DVD-RAM, the DVD+RW, as rewritable formats, and the DVD-R, the DVD+R formats, as write-once formats.
standardization.

~~Recordable DVD drives.~~Demand for recordable DVD drives is growing rapidly, although sales of CD-ROM/R/RW drives and DVD-ROM drives have shown a decrease. This reflects great demand for DVD recording of personalized content using PCs, and the tendency of PC makers to include recordable DVD

4943

~~drives in PC systems as part of their sales strategies to differentiate their PC lineups. This sales trend is expected to continue.~~

In fiscal 2004, we launched recordable DVD drives for PCs, which are compatible with DVD-R, -RW, +R and +RW discs, to worldwide markets, and also models enabling high-speed recording of up to 8X write speed with DVD-R and +R and up to 4X with DVD-RW and +RW discs.
~~Plasma displays.~~The large-screen display market for plasma displays has been expanding in recent years, and several manufacturers in Japan and South Korea have started mass production of plasma displays that compete with our products. Each company is increasing investment and expanding production. As the number of companies entering this market increases, it is expected that the unit price will continue to decrease due to intensifying competition. In particular, in the market for displays under the 40-inch size, plasma displays are subject to increasingly intense competition from liquid crystal displays. As a result of this trend, we plan to expand production of our plasma display line, while focusing on new products such as 50- and 43-inch models, which have higher resolution.
~~Car Electronics~~
~~Severe competition in the car electronics business worldwide has led to strong downward pressure on prices. However, the popularity of~~OEM car navigation ~~systems, which~~system business, we ~~believe is a major area of~~are increasing our operations, continues to increase. For example, sales 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, we remain a leader infocus on the ~~car navigation market; however, our competitors have started commercializing models that are similar to our products. In Japan, the increase in demand~~growing market for car navigation systems ~~has~~offered as dealer options in Japan. In parallel, we aim to capture new orders by offering new proposals to OEM customers that leverage our own product planning capabilities, which have been ~~conspicuous, and the markets~~proven in ~~North America and Europe show signs of expansion. We introduced~~consumer markets. Meanwhile, in the ~~spring of 2004 in both markets compact 1-DIN-sized units featuring all car navigation system functions as well as those for CD/MP3/DVD-Video playback. Also in the~~OEM car audio products business, we ~~plan~~aim to ~~widen our market share with new products and innovations, such as car CD players with OLED displays.~~
~~There is also a trend~~make the most of its strengths in ~~the car electronics industry that OEM sales~~consumer markets to ~~car manufacturers are increasing. We intend to increase our efforts to market ourselves towards such car manufacturers and strengthen our foothold in OEM sales as well.~~
drive further business expansion.

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~~Purchase prices generally are increasing because of the growing importance of such intellectual property.
~~Our~~

We expect that our royalty revenue from the worldwide licensing of patents relating to laser optical disc technologies ~~has declined substantially from previous years,~~will continue to decline, as a significant portion of our patents in Japan and Europe has expired ~~during fiscal 2003~~ and ~~2004. We intend~~some portion of those in North America started to attempt to reduce the decline in royalty revenue by acquiring patents from third parties and licensing such patents. We do not, however, expect that the revenue, if any, from such new patents will be sufficient to offset the decrease in royalty revenue resulting from the expiration of our existing patents. expire.

See “Item 4.B. Business ~~overview—~~overview–Nature of ~~operations—~~operations–Patent licensing” for more information on our patent licensing business.
50

Others

OLED displays. With the entry of other companies, market competition in OLED displays is becoming even more intense, while each company in this market is proceeding with the development of full-color OLED displays. To meet the competition, 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 to develop and manufacture active-matrix full-color OLED displays.

E. Off-balance sheet arrangements

We ~~are~~provide guarantees covering a ~~party to off-balance sheet arrangements by providing guarantees~~one-year period to third parties who provide loans to our affiliated companies. ~~For each guarantee, we would have to pay the guaranteed amount, if~~If our affiliated companies were to default on a payment within the contract ~~periods~~period of one year, we would have to ~~nine years.~~pay the guaranteed amount. The maximum potential amount of undiscounted future payments we could be required to make under the guarantee is ~~¥25.5~~¥0.2 billion ~~as of~~at March 31, ~~2004.~~
~~Also,~~2006.

We have the following accounts receivable securitization programs:

In the United States of America, we have ~~equity ownership~~established PUSA Receivables Funding Corporation, Inc., a wholly owned, bankruptcy remote-special purpose entity and established an accounts receivable securitization program of eligible trade accounts receivable. A bankruptcy-remote subsidiary is a company that has been structured to make it highly unlikely that it would be drawn into a bankruptcy of a parent company, or any of its subsidiaries. Through this program, we can securitize and sell, without recourse, on a revolving basis, an undivided interest up to $100,000 thousand in ~~ELDis, Inc., which is 45%~~that pool of receivables to third party conduits owned by ~~Tohoku Pioneer Corporation, our 67% owned subsidiary, and is~~a bank. These securitization transactions are accounted for byas sales in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” because we have surrendered control over the ~~equity method. At~~receivables. We sold a total of ¥97 billion of receivables under this program for the year ended March 31, ~~2004, it is reasonably possible that Tohoku Pioneer Corporation is~~2006.

In Japan, we set up several accounts receivable sales programs of eligible trade accounts receivable. Through these programs, we can sell receivables, without recourse, to financial institutions. These transactions are accounted for as sales in accordance with SFAS No. 140, because we have surrendered

control over the ~~primary beneficiary or holds~~receivables. We sold a ~~significant variable interest in ELDis, Inc. ELDis, Inc. is a development state enterprise and established~~total of ¥56 billion of receivable under this program for the year ended March 31, 2006.

We utilize this program to ~~manufacture and market new products such as thin film transistor substrates for active-matrix OLED. The related disclosure is provided in Note 21 in “Notes~~diversify our options to ~~Consolidated Financial Statements.”~~
increase the flexibility of our cash flow control. Our cash flow management does not get critically effected without this program.

F. Tabular disclosure of contractual obligation

The following summarizes our contractual obligations at March 31, ~~2004.~~2006.


			Payment Due by Period
			Less than										Payment Due by Period
	Total		1 year		1-3 years		3-5 years		More than 5 years				Less than						More than
											Total		1 year		1–3 years		3–5 years		5 years
	(In billions of yen)										(In billions of yen)
Contractual obligations:
Long-term debt		92.1		4.5		16.1		10.5		61.0	¥	98.7	¥	7.2	¥	20.3	¥	6.6	¥	64.6
Operating leases		7.9		2.5		2.5		1.1		1.8		8.4		2.5		3.4		1.3		1.2
Purchase commitment		3.1		3.1								26.1		26.1		—		—		—
Interest payments												4.4		1.2		2.0		1.1		0.1
Contribution to defined benefit plans												6.7		6.7		—		—		—

~~Notes:~~
Notes: 1.		Total long-term debt of ~~¥92.1~~¥98.7 billion does not include ~~¥2.1~~¥1.5 billion unamortized issue premium on convertible bonds.

2.	2.	Long-term debt includes capital lease obligations.

3.		Contractual obligations do not include ~~¥0.3~~¥0.2 billion deferred income which is presented as other long-term liabilities on the consolidated balance ~~sheet.~~sheets.

4.		The amount that we will contribute under our defined pension plans is based on a number of factors, primarily rate of salary increase and the number of employees. As such, we have estimated the amount of such contribution for the year ending March 31, 2007 and not the contribution for the years thereafter.

The ~~¥3.1~~¥26.1 billion purchase commitment outstanding ~~as of~~at March 31, ~~2004~~2006 was for raw material, property, plant and equipment and advertising. This included a part of our ~~¥68.0~~¥54.0 billion capital expenditure plan in fiscal ~~2005.~~2007. The planned increase in capital ~~expenditure in fiscal 2005~~expenditures from ~~¥58.0~~¥40.3 billion in fiscal ~~2004~~2006 mainly reflects ~~expansion~~investments needed to concentrate planning, development and design personnel currently based at three separate locations in a single site for the Home Electronics business.

New Accounting Standards

Inventory Costs

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—an amendment of ~~plasma display production facilities.~~
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 us effective April 1, 2006. The adoption of this standard is not expected to have any material impact on our consolidated statements of operations or financial position.

5145

~~New Accounting Standards~~

~~Employers’ Disclosures about Pensions and Other Postretirement Benefits~~Exchanges of Nonmonetary Assets

In December ~~2003,~~2004, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued SFAS No. ~~132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.~~153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29,” ~~The revised~~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. ~~132 retains~~153 eliminates the ~~disclosure~~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 our consolidated statements of operations or financial position.

Share-Based Payment

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” or SFAS No. 123R. SFAS No. 123R 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. SFAS No. 123R is effective at the beginning of the first interim and annual reporting period beginning after June 15, 2005. The adoption of this standard is not expected to have any material impact on our consolidated statements of operations or financial position because we account for its stock-based compensation agreements using the fair value based method, not the intrinsic value method prescribed by APB Opinion No. 25.

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 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 ~~original statement and requires additional disclosures about pension plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The new disclosures are~~unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for ~~financial statements with~~accounting changes and corrections of errors made in fiscal years ~~ended~~beginning after December 15, ~~2003. However,~~2005. The adoption of this standard is not expected to have any material impact on our consolidated statements of operations or financial position.

Accounting for Electronic Equipment Waste Obligations

In June 2005, the ~~revised SFAS No. 132~~FASB issued FSP 143-1, “Accounting for Electronic Equipment Waste Obligations” (“FSP 143-1”). FSP 143-1 provides ~~that disclosures~~guidance on the accounting for certain obligations associated with the Waste Electrical and Electronic Equipment Directive (the “Directive”) adopted by the European Union (“EU”). Under the Directive, the waste management obligation for historical equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the customer replaces the equipment. FSP 143-1 is required to be applied to the later of ~~information about foreign plans and estimated future benefit payment shall be effective for fiscal years~~the first reporting period ending after June ~~15, 2004. See Note 9 in “Notes~~8, 2005, or the date of the Directive’s adoption into law by the applicable EU-member countries. We adopted FSP 143-1 during the year ended March 31, 2006 and has determined that its effect did not have a material impact on its consolidated results of operations and financial position.

The Meaning of Other-Than-Temporary Impairment and Its Application to ~~Consolidated Financial Statements” for these disclosures.~~
~~Impairment of~~Certain Investments ~~in Securities~~

In November ~~2003,~~2005, the ~~EITF reached a consensus~~FASB staff issued FASB Staff Position or FSP on ~~Issue No. 03-1 (“EITF No. 03-1”),~~Statements 115 and 124, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain ~~Investments,” as it relates~~Investments” (“ FSP 115-1”), which effectively replaces EITF Issue No. 03-1. FSP 115-1 contains a three-step model for evaluating impairments and carries forward the disclosure requirements in EITF Issue No. 03-1 pertaining to ~~disclosures~~securities in an unrealized loss position is considered impaired; an evaluation is made to determine whether the impairment is other-than-temporary; and, if an impairment is considered other-than-temporary, a realized loss is recognized to write the security’s cost or amortized cost basis down to fair value. FSP 115-1 references existing other-than-temporary impairment guidance for determining when impairment is other-than-temporary and clarifies that subsequent to the recognition of an other-than-temporary impairment loss for debt securities, an investor shall account for the security using the constant effective yield method. FSP 115-1 is effective for reporting periods beginning after December 15, 2005, with earlier application permitted. The adoption of this standard is not expected to have any material impact on our consolidated statements of operations or financial position.

Accounting for Certain Hybrid Financial Instruments

In February 2006, the FASB issued SFAS No. ~~115. In addition to the disclosures already required by~~155, “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. ~~115, EITF~~133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. ~~03-1~~140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting for these instruments. Specifically, SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of this standard is not expected to have any material impact on our consolidated statements of operations or financial position.

Accounting for Servicing of Financial Assets

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 156 was issued to simplify the accounting for servicing assets and servicing liabilities and reduce the volatility that results from the use of different measurement attributes for servicing rights and the related financial instruments used to hedge risks associated with those servicing rights. SFAS No. 156 clarifies when to separately account for servicing rights, requires ~~both quantitative~~separately recognized servicing rights to be initially measured at fair value, and ~~qualitative disclosures~~provides the option to subsequently account for ~~marketable equity~~those servicing rights at either fair value or under the amortization method previously required under SFAS No. 140, “Accounting for Transfers and ~~debt securities. The new disclosure~~Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 156 is effective for fiscal years ~~ended after December 15, 2003. See Note 4 in “Notes to Consolidated Financial Statements” for this disclosure.~~
In March 2004, EITF reached another consensus on EITF No. 03-1 which presents the guidance for the assessment of other-than-temporary impairment. The guideline should be used to determine whether an investment is other-than-temporarily impaired and provides 3 steps for assessment. The guidance is applicable for investments in debt and equity securities that are within the scope of SFAS No. 115, and cost method equity investments. The investor should make an evidenced-based judgment about a market price recovery of investment by considering the severity (extent to which fair value is below cost) and the duration (period of time that a security has been impaired) of impairment in relation to the forecasted market price recovery. An other-than-temporary impairment should be recognized in earnings in an amount equal to the difference between the investor’s adjusted cost basis and its fair value at the balance sheet date of the reporting period for which the assessment is made. The guidance is required to be applied for fiscal years beginning after ~~June~~September 15, ~~2004.~~2006. The adoption of ~~the guidance will~~this standard is not expected to have aany material impact on our consolidated ~~financial position, result of operation or cash flow.~~
~~Transfer to the Japanese Government of the Substitutional Portion of Employer Pension Fund Liabilities~~
In January 2003, the EITF reached a consensus on Issue No. 03-2 (“EITF No. 03-2”), “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employer Pension Fund Liabilities.” EITF No. 03-2 addresses accounting for the transfer to Japanese government of a substitutional portion of a domestic contributory welfare pension plan, which is a defined benefit pension plan established by the Welfare Pension Insurance Law. EITF No. 03-2 requires employers to account for the entire separation process of a substitutional portion from an entire plan (including a corporate portion) upon completion of the transfer to the government of the substitutional portion of the benefit obligation and related plan assets as a culmination of a series of steps in a single settlement transaction. Under this approach, the difference between the fair value of the obligation and the assets required to be transferred to the government should be accounted for and separately disclosed as a subsidy.
October 29, 2003, we received approval from the government for an exemption from the obligation to pay benefits for future employee service related to the substitutional portion. In addition, we will submit another application to separate the remaining substitutional portion related to past service by our
52

employees. We are expected to receive final approval from the government for our second application during the year ending March 31, 2005. Upon receipt of the final approval, we will be relieved of all obligations pertaining to the substitutional portion by transferring the benefit obligation and the related government-specified portion of the plan assets, which will be computed by the government. The related gain or loss, which is expected to be recorded during the year ending March 31, 2005 based on completion of the entire process, has not yet been determined because the amount of the benefit obligation and the related plan assets to be transferred to the government may change significantly.

~~Revenue Recognition~~

In December 2003, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletins (“SAB”) No. 104, “Revenue Recognition,” which supersedes SAB No. 101, “Revenue Recognition in Financial Statements,” and updates portions of the interpretative guidance included in Topic 13 of the codification of SAB in order to make this interpretative guidance consistent with current authoritative accounting guidance. SAB No. 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (“FAQ”) issued with SAB No. 101 that had been codified in SAB Topic 13. Selected portions of the FAQ have been incorporated into SAB No. 104. The revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104. The adoption of SAB No. 104 did not have an effect on our consolidated resultsstatements of operations or financial position.

~~Consolidation of Variable Interest Entities~~

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletins No. 51, Consolidated Financial Statements,” and subsequently revised in December 2003 with the issuance of FIN 46 (revised 2003). This interpretation 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. We are required to apply this interpretation for periods ending after April 1, 2004. We are currently evaluating the impact of the adoption of the revised FIN 46 on our financial position and results of operations. It is reasonably possible that we are a primary beneficiary of or hold a significant variable interest in a variable interest entity. See Note 21 in “Notes to Consolidated Financial Statements” for the required disclosures.

~~Earnings per Share~~

In March 2004, the EITF reached a consensus on Issue No. 03-06 (“EITF No. 03-06”), “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share.” EITF No. 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and our earnings when, and if, it declares dividends on its common stock. The Issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF No. 03-06 is effective for fiscal periods beginning after March 31, 2004. We are evaluating the potential impact of the Issue on our financial statements.

5347

Item 6. Directors, Senior Management and Employees

A. Directors and senior management

Pioneer’s Directors, Executive Officers and Corporate Auditors as of July 1, ~~2004,~~2006, 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~~Tamihiko Sudo (Apr. 28, 1947)	~~Chairman~~President and Representative ~~Director~~Director; Chief Executive Officer (June 2007)	June ~~1996:~~
~~(June 12, 1930)~~	~~(June 2005)~~	2005: Executive Vice ~~Chairman~~President and Representative ~~Director~~Director; Chief Financial Officer; and in charge of Corporate Strategy Planning Group, Corporate Management Group, Export Management and Quality Control in general

~~Kaneo Ito~~	~~President and Representative~~	~~June 1991:~~
~~(Apr. 30, 1936)~~	~~Director; Chief Executive Officer~~Hajime Ishizuka (~~June 2005)~~May 3, 1947)	Senior Managing Director and Representative Director; ~~General Manager~~ Chief Financial Officer; in charge of ~~International~~Corporate Management Group, export management in general, and Procurement Group (June 2007)	July 2005: Senior Managing Director and Representative Director; President of Pioneer’s Home Entertainment Business ~~Group;~~Company and AV Business Company; and in charge of ~~overseas operations and Public Relations Division~~Procurement Group

~~Akira Niijima~~	~~Senior Managing Director and Representative~~	~~June 2002:~~
Osamu Yamada (Mar. 9,16, 1944)	~~Director; Chief Financial Officer; and in charge of administration and export control in general~~ ~~(June 2005)~~	Senior Managing Director; ~~President~~ General Manager of ~~Pioneer’s Home Entertainment Company~~Research & Development Group and Corporate Research & Development Laboratories (June 2007)	June 2003: Managing Director; General Manager of Research & Development Group and Corporate Research & Development Laboratories

~~Takashi Kobayashi~~	~~Senior Managing Director and~~	~~June 2002:~~
~~(Sept. 27, 1940)~~	~~Representative Director; in charge of Corporate Communications Division, Customer Satisfaction Planning and Coordination Division, Intellectual Property Division, and Business Development Division~~Satoshi Matsumoto ~~(June 2005)~~	~~Senior Managing Director; in charge of Corporate Communications Division, Customer Satisfaction Planning and Coordination Division, Intellectual Property Division, and Business Development Division~~

~~Tamihiko Sudo~~	~~Senior Managing Director and~~	~~June 2003:~~
(Apr. ~~28, 1947)~~	~~Representative Director; President of Pioneer’s Mobile Entertainment Company~~ ~~(June 2005)~~15, 1954)	Managing Director; ~~President~~ in charge of ~~Pioneer’s Mobile Entertainment Company~~Quality Control Division (June 2007)	Nov. 2003: Managing Director; General Manager of Environmental Preservation Group and Environmental Preservation Division

5448


Name	Current Position
(Date of birth)	(Month and year of expiration)	Prior Position
~~Hajime Ishizuka~~Akira Haeno (Feb. 14, 1949)	~~Senior~~ Managing ~~Director and~~Director; General Manager of Mobile Entertainment Business Group (June 2007)	June ~~2003:~~
~~(May 3, 1947)~~	~~Representative Director; President~~2004: Executive Officer; Plant Manager of Kawagoe Plant; and General Manager of Production Division of Kawagoe Plant of Pioneer’s ~~Home~~Mobile Entertainment ~~Business~~ Company ~~(June 2005)~~	~~Director; President of Pioneer’s Components Business Company; and in charge of International Business Division~~

~~Tadahiro Yamaguchi~~Shinji Yasuda (June 10, 1945)	Managing Director; ~~Executive~~	~~June 2002:~~
~~(Mar. 24, 1946)~~	~~Vice President of Pioneer’s Plasma Display Business Company (in charge of technologies and production; and Plant Manager of Ohmori Plant~~ ~~(June 2005)~~	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; and Plant Manager of Tokorozawa Plant

~~Satoshi Matsumoto~~	~~Managing Director; General~~	~~June 2002:~~
~~(Apr. 15, 1954)~~	~~Manager of Environmental Preservation Group~~ ~~(June 2005)~~	~~Managing Director;~~ General Manager of ~~Division of Environmental Preservation~~

~~Osamu Yamada~~	~~Managing Director; General~~	~~Apr. 2002:~~
~~(Mar. 16, 1944)~~	~~Manager of Research and Development Group;~~Home Entertainment Business Group and General Manager of ~~Corporate Research and Development Laboratories~~Omori Plant (June ~~2005)~~2007)	Jan. 2006: Senior Executive Officer; General Manager of ~~Research~~Home Entertainment Business Group and ~~Development Group~~

~~Koichi Shimizu~~	~~Managing Director; in charge~~	~~June 2003:~~
~~(Feb. 3, 1944)~~	~~of technologies, production and quality control in general;~~ General Manager of ~~Procurement Center; and in charge of Strategic IT Division~~ ~~(June 2005)~~	~~Director; General Manager of Production Management and Coordination Division; General Manager of Procurement Center; and in charge of Strategic IT Division~~Omori Plant

Tatsuhiro Ishikawa (Apr. 4, 1939)	Director (June 2007)	Dec. 2001 to present:
~~(Apr. 4, 1939)~~	~~(June 2005)~~	Attorney-at-Law

Shunichi Sato	~~Director~~	~~Apr. 2000:~~
(Feb. 10, 1941)	Director (June ~~2005)~~2007)	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~~	~~Senior Managing Executive Officer;~~	~~June 2003:~~
~~(Aug. 20, 1944)~~	~~President of Pioneer’s Plasma Display Business Company~~ ~~(June 2005)~~	~~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~~

~~Kazunori Yamamoto~~	~~Senior Managing Executive Officer;~~	~~June 2001:~~
~~(Oct. 21, 1942)~~	~~General Manager of International Business Group~~ ~~(June 2005)~~	~~Senior Executive Officer; President of Pioneer North America, Inc.~~

~~Kiyoshi Uchida~~	~~Senior Executive Officer;~~	~~Feb. 2003:~~
~~(Mar. 28, 1951)~~	~~President of Pioneer’s Industrial Solutions and Entertainment Company~~ ~~(June 2005)~~	~~Senior Executive Officer; in charge of Business Systems Division~~

~~Seiichiro Kurihara~~	~~Senior Executive Officer;~~	~~June 2001:~~
~~(Mar. 15, 1943)~~	~~General Manager of Intellectual Property Division~~ ~~(June 2005)~~	~~Executive Officer; General Manager of Intellectual Property Division~~

Masao Kawabata	~~Senior Executive Officer; General Manager~~	~~June 2001:~~
(Aug. 10, 1948)	Senior Executive Officer; General Manager of Corporate Branding and Communications Division (June ~~2005)~~2007)	June 2001: Executive Officer; General Manager of Corporate Communications Division

Yoshio Taniyama	~~Senior Executive Officer;~~	~~June 2001:~~
(Nov. 9, 1948)	Senior Executive Officer; General Manager of Corporate Planning Division (June ~~2005)~~2007)	June 2001: Executive Officer; General Manager of Finance Division

Hideki Okayasu	~~Senior Executive Officer; General Manager~~	~~June 2001:~~
(May 12, 1950)	Senior Executive Officer; General Manager of Finance and Accounting Division (June ~~2005)~~2007)	June 2001: Executive Officer; General Manager of Accounting Division

5649


Name	Current Position
(Date of birth)	(Month and year of expiration)	Prior Position
~~Koki Aizawa~~Buntarou Nishikawa (Mar. 24, 1946)	Senior Executive Officer; ~~General~~ in charge of OEM Sales Division and Domestic Sales Division of Mobile Entertainment Business Group, and in charge of Pioneer Marketing Corporation and Pioneer Solutions Corporation (June 2007)	June 2001:
~~(Dec. 19, 1944)~~	~~Manager of External Relations Division~~ ~~(June 2005)~~	Executive Officer; ~~Deputy~~ General Manager of ~~Research and Development Group; and General Manager~~Domestic Sales Division of ~~Corporate Research and Development Laboratories~~Pioneer’s Mobile Entertainment Company

~~Toshihiko Norizuki~~Yoichi Sato	Senior Executive Officer; ~~Managing~~	June ~~2001:~~2005:
(~~May 23, 1945)~~Jan. 15, 1950)	~~Director of Pioneer China Holding Co., Ltd.~~ ~~(June 2005)~~	Chief Technology Executive, ~~Officer;~~Deputy General Manager of ~~Business Systems Division and Plant~~Research & Development Group, General Manager of ~~Ohmori Plant~~
PDP Development Center, and in charge of Plasma Panel Engineering Division of Home Entertainment Business Group (June 2007)
~~Buntarou Nishikawa~~	~~Executive Officer; Executive Vice President~~	~~June 2001:~~
~~(Mar. 24, 1946)~~	Managing Director; Deputy General Manager of ~~Pioneer’s Mobile Entertainment Company;~~Research & Development Group; and General Manager of ~~OEM Sales Division~~ ~~(June 2005)~~	~~Executive Officer; General Manager of Domestic Sales Division of Pioneer’s Mobile Entertainment Company~~

~~Osamu Takada~~	~~Executive Officer; General~~	~~June 1998:~~
~~(July 27, 1948)~~	~~Manager of Personnel Division~~ ~~(June 2005)~~	~~General Manager of Personnel Division~~PDP Development Center

Sumitaka Matsumura	~~Executive Officer; Deputy~~	~~Jan. 2001:~~
(Oct. 10, 1948)	~~General Manager of Research and Development Group; and in charge of AV & Recording Systems Development Center~~Executive Officer; ~~(June 2005)~~	Deputy General Manager of Research ~~and~~& Development Group; General Manager of Optical Disc & Systems Development Center; and in charge of Standards & Copyright Management Center (June 2007)	Jan. 2001: Deputy General Manager of Research & Development Group; and General Manager of AV & Network Development Center

~~Chojuro Yamamitsu~~	~~Executive Officer; Deputy~~	~~Sep. 2002:~~
~~(Mar. 26, 1946)~~	~~General Manager of Environmental Preservation Group (in charge of Eco Products)~~ ~~(June 2005)~~	~~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~~

Kenji Sato	~~Executive Officer; General~~	~~June 1998:~~
(Aug. 29, 1947)	Executive Officer; General Manager of General Administration Division (June ~~2005)~~2007)	June 1998: General Manager of General Administration Division

Susumu Kotani (Apr. 12, 1950)	Executive Officer; General Manager of International Business Division (June 2007)	Sept. 2002: Managing Director of Pioneer Europe NV

Tsutomu Haga (June 2, 1948)	Executive Officer; President & Chief Operating Officer of Pioneer North America, Inc. (June 2007)	July 2003: President & Chief Operating Officer of Pioneer Electronics (USA) Inc.

Kaoru Sato (July 27, 1948)	Executive Officer; General Manager of Tokorozawa Plant of Home Entertainment Business Group (June 2007)	June 2004: President of Components Business Company of Home Entertainment Business Company

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Name	Current Position
(Date of birth)	(Month and year of expiration)	Prior Position
~~Yoichi Sato~~Keiichi Yamauchi (Apr. 12, 1952)	Executive Officer; ~~Deputy General Manager~~	~~June 2003:~~
~~(Jan. 15, 1950)~~	in charge of ~~Research~~software and ~~Development Group and General Manager~~platform development of ~~PDP Development Center~~Home Entertainment Business Group; ~~(June 2005)~~	~~Executive Officer;~~and General Manager of Engineering Division of ~~Display Business~~Tokorozawa Plant (June 2007)	Nov. 2003: General Manager of Mobile Systems Development Center of Research & Development Group

Kazumi Kuriyama (Sept. 12, 1953)	Executive Officer; General Manager of Intellectual Property Division (June 2007)	July 2005: Deputy General Manager of ~~Pioneer’s Home Entertainment Company~~Corporate Research & Development Laboratories of Research & Development Group

Toshiyuki Ito	~~Executive Officer; Managing~~	~~July 2002:~~
(Oct. 17, 1950)	~~Director of Pioneer Electronics Asiacentre, Pte. Ltd.~~Executive Officer; ~~(June 2005)~~	Chairman & Managing Director of Pioneer ~~Electronics Asiacentre, Pte. Ltd.~~Europe NV (June 2007)	Apr. 2005: Managing Executive Officer of Tohoku Pioneer Corporation

~~Susumu Kotani~~Tatsuo Takeuchi (Oct. 23, 1950)	Executive Officer; ~~Managing~~ General Manager of Personnel Division (June 2007)	~~Sept. 2002:~~
~~(Apr. 12, 1950)~~	~~Director of Pioneer Europe NV~~Dec. 2004: ~~(June 2005)~~	Managing Director of Pioneer ~~Europe NV~~Electronics Asiacentre, Pte. Ltd.

~~Ryoji Menjo~~Masanori Kurosaki (Aug. 12, 1952)	Executive Officer; ~~General~~	~~Sep. 1997:~~
~~(Nov. 22, 1947)~~	~~Manager of Customer Satisfaction Planning and Coordination Division~~ ~~(June 2005)~~	General Manager of ~~Customer Satisfaction Planning and Coordination~~OEM Sales Division
of Mobile Entertainment Business Group (June 2007)
~~Tsutomu Haga~~	~~Executive Officer; President~~	~~July 2003:~~
~~(June 2, 1948)~~	~~of Pioneer North America, Inc.~~Nov. 2002: ~~(June 2005)~~	~~President of Pioneer Electronics (USA) Inc.~~

~~Akira Haeno~~	~~Executive Officer; Plant~~	~~July 2000:~~
~~(Feb. 14, 1949)~~	~~Manager of Kawagoe Plant and~~ General Manager of ~~Production~~Planning & Coordination Division of ~~Pioneer’s~~ Mobile Entertainment Company ~~(June 2005)~~	~~Managing Director of Pioneer Technology Belgium NV~~

Corporate Auditors


Name	Current Position
(Date of birth)	(Month and year of expiration)	Prior Position
Makoto Koshiba (Nov. 21, 1943)	Corporate Auditor (full time)	~~Sept. 1999:~~
~~(Nov. 21, 1943)~~	(June 2007)	Sept. 1999: Director; General Manager of Accounting Division; in charge of Finance Division

~~Shinji Yasuda~~	~~Corporate Auditor (full time)~~	~~July 2001:~~
~~(June 10, 1945)~~	~~(June 2007)~~	~~Director; Managing Director of Pioneer China Holding Co., Ltd.~~

~~Terumichi Tsuchida~~	~~Corporate Auditor~~	~~July 1998 to present:~~
~~(Aug. 22, 1921)~~	~~(June 2008)~~	~~Advisor of Meiji Yasuda Life Insurance Company~~

Isao Moriya (Sept. 5, 1937)	Corporate Auditor (June 2007)	Mar. 1968 to present:
~~(Sept. 5, 1937)~~	~~(June 2007)~~	Certified Public Accountant

Keiichi Nishikido (May 2, 1953)	Corporate Auditor (June 2007)	Jan. 1994 to present:
~~(May 2, 1953)~~	~~(June 2007)~~	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.

None of the persons listed above was selected as a director, corporate auditor or member of senior management pursuant to an arrangement or understanding with our major shareholders, customers, suppliers or others.
~~Mr. Kanya Matsumoto is the uncle of~~

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

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 ~~2004~~2006 totaled ~~¥1,238~~¥974 million. Also, as part of Pioneer’s incentive compensation, ~~arrangements for Directors and Executive Officers,~~ Pioneer has issued bonds with detachable warrants in Japan in fiscal 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 sharestock 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.
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The aggregate amount set aside as lump-sum severance indemnities by Pioneer during fiscal ~~2004~~2006 for Directors, Executive Officers and Corporate Auditors of Pioneer totaled ~~¥500~~¥75 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 912 in “Notes to Consolidated Financial Statements.”)

C. Board practices

Under the Company Law, Pioneer has elected to structure its corporate governance system as a company with a board of corporate auditors as set forth below.

Pioneer’s Articles of Incorporation provide for ~~a Board of Directors of~~ three or more ~~members~~Directors 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~~a Director expires at the conclusion of the ~~ordinary general meeting~~Ordinary General Meeting of ~~shareholders~~Shareholders held with respect to the last ~~closing of accounts~~business year ending within one year after their ~~assumption of office~~election and in the case of a Corporate ~~Auditors,~~Auditor, within four years after their ~~assumption of office;~~election; however, Directors and Corporate Auditors may serve any number of consecutive terms. For 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.”

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 represent Pioneer in the conduct of its affairs.

Pioneer introduced ~~a Corporate~~an 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~~Officer expires at the conclusion of the ordinary general meeting of shareholders held with respect to the last ~~closing of accounts~~business year ending within one year after their assumption of office. For 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 operate businesses of which he or she is in charge under the control of the Board of Directors and Representative Directors.
~~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, 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~~are required to be persons who have not been a director, accounting counselor, corporate executive officer, general manager or any other 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,~~a director, accounting counselor, corporate executive ~~officers,~~officer, general ~~managers~~manager or ~~employees~~any other employee 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 our annual consolidated and non-consolidated financial statements and business ~~report~~reports proposed to be submitted by a Representative Director at the general meeting of ~~shareholders.~~shareholders and, based upon such examination and a report of the Accounting Auditor referred to below, to individually prepare their audit reports. They shall attend meetings of the Board of Directors but are not entitled to vote. In addition to Corporate Auditors, an independent certified public
60

~~accountants~~ accountant or an audit corporation must be appointed by general meetings of ~~shareholders.~~shareholders as the Accounting Auditor of Pioneer. Such ~~independent certified public accountants or audit corporation have,~~Accounting Auditor has, as ~~their~~its primary statutory duties, the ~~duties~~duty to examine ~~the~~our annual consolidated and non-consolidated financial statements proposed to be submitted by a Representative Director at general meetings of shareholders and to report their opinion thereon to certain Corporate Auditors designated by the Board of Corporate Auditors to receive such report (if such Corporate Auditors are not designated, all Corporate Auditors) and the ~~Representative Director.~~

Directors designated to receive such report (if such Directors are not designated, the Directors who are responsible for preparing the financial statements).

The Corporate Auditors constitute the Board of Corporate Auditors. The Board of Corporate Auditors has athe statutory duty to, based upon the reports prepared by respective Corporate Auditors, prepare and submit its audit report to ~~a Representative Director each year.~~the accounting auditor and certain Directors designated to receive such report (if such Directors are not designated, the Directors who are responsible for preparing the financial statements and the business report). A Corporate Auditor may note his or her opinion in the audit report if his or her opinion expressed in his or her audit report is different from the opinion expressed in the audit report. The Board of Corporate Auditors shall elect one or more full-time Corporate Auditors from among its members. 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.”

~~Significant Differences in Corporate Governance Practices Between Pioneer Corporation and U.S. Companies Listed on the NYSE~~

Pursuant to home country practices exemptions granted by the NYSE, Pioneer is permitted to follow certain corporate governance practices complying with Japanese laws, regulations and stock exchange rules in lieu of NYSE’s listing standards. Pioneer’s corporate governance practices and those followed by U.S. companies under the NYSE listing standards (“NYSE Corporate Governance”) have the following significant differences:

~~Directors~~

Pioneer currently has two (2) non-management 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 never been a director responsible for the execution of business operations, an executive officer, a manager, or other 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 of Pioneer. Pioneer, consistent with other Japanese companies with boards of corporate auditors, but unlike NYSE Corporate Governance, does not have specified committees,

6153

~~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 appointment of directors for shareholder approval. The shareholders vote on such nomination at Pioneer’s general meeting of shareholders. The Code requires that the respective total amount of remuneration to be paid to all directors and 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 Pioneer’s board of directors and the distribution of remuneration among corporate auditors is determined by consultation among Pioneer’s corporate auditors.

~~Audit Committee~~

Pioneer plans to avail 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 to a foreign private issuer 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 through a resolution adopted at a general meeting of shareholders. Pioneer currently has five (5) corporate auditors, which exceeds a minimum of three (3) corporate auditors required pursuant to 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 registered public accounting firms.

Pioneer currently has three (3) corporate auditors who satisfy the requirements of “outside auditors” under the Special Exception Law. Unlike NYSE Corporate Governance, under the Code, at least one of the corporate auditors of Pioneer must be an “outside” person, who was not a director, executive officer, manager, or employee of Pioneer or any of its subsidiaries during the five-year period prior to such corporate auditor’s election. 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, manager, or employee of Pioneer or any of its subsidiaries at any time prior such corporate auditor’s election. Corporate auditors may not at the same time be directors, executive officers, managers, or employees of Pioneer or any of its subsidiaries.

~~Corporate Governance Guidelines~~

Unlike NYSE Corporate Governance, Pioneer is not required to adopt or disclose corporate governance guidelines under Japanese laws and regulations, including the Code and the Securities and Exchange Law of Japan or stock exchange rules. 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 law (including the Code and the Securities and Exchange Law of Japan), and stock exchange rules, Pioneer is not required to adopt and disclose a code of business conduct and ethics for directors, officers and employees. However, Pioneer maintains a “Pioneer Group Code of Conduct” which we believe is consistent with the Code of Ethics described under Section 406 of the Sarbanes-Oxley Act. 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 under which stock acquisition rights are granted on specially favorable terms to the recipients under the plan, 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.

D. Employees

The following table sets forth the number of our employees at the end of the period indicated.

Year ended March 31
2002
2003
2004
Number of employees 31,220 34,656 36,360

Year ended March 31
2004 2005 2006
Number of employees 32,526 33,409 38,826

Pioneer and ~~six~~nine 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.

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, 2004~~June 30, 2006 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	~~4,323,042~~484,000 shares*		~~2.46~~0.27%	%


*		~~Except for Mr. Kanya Matsumoto, Chairman of Pioneer, who owns 3,785,359 shares of common stock, which constitutes 2.15% of all outstanding shares as of March 31, 2004, none~~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.~~
63

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)
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.~~

~~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 ¥2,951 —

2005 350 From July 3, 2006 to June 30, 2009 ¥2,944 —

Total number of
shares covered by Current Number of shares
Fiscal year option exercise price exercised
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, 2004, Pioneer holds 4,632,962 shares as treasury stock with the purchase of 5,002 shares and disposal of 1,068 shares both in the market in fiscal 2004.~~

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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, ~~2004~~2006 on the register of shareholders were as follows:

Number of shares

Percentage of

Number of shares

Percentage of

Title of class

Name

(in thousands)

outstanding shares

Name

(in thousands)

outstanding shares

Common Stock

Japan Trustee Services Bank, Ltd.
(Trust Account)

16,366

9.32%

The Master Trust Bank of Japan, Ltd. (Trust Account)

11,980

6.65

Common Stock

The Master Trust Bank of Japan, Ltd.
(Trust Account)

14,196

8.09%

Japan Trustee Services Bank, Ltd. (Trust Account)

11,020

6.12

~~Japan Trustee Services Bank, Ltd. and~~

The Master Trust Bank of Japan, Ltd. and Japan Trustee Services Bank, Ltd. are securities processing services companies. 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.

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, ~~2004,~~2006, there were ~~175,430,874~~174,421,890 shares of common stock outstanding, of which ~~2,086,930~~401,534 shares ~~(1.18%~~(0.22%) were held in the form of American Depositary Receipts ~~(ADRs)~~(“ADRs”) and ~~19,552,181~~14,106,845 shares ~~(11.1%~~(7.83%) 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)~~Depositary Trust Company) was ~~87,~~85, 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 ~~76.~~
70. See “Item 9.C. Markets,” regarding the market for Pioneer’s shares.

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

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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~~results of operations.

Pioneer Electronics Deutschland GmbH (“PED”), a wholly owned subsidiary, received ~~a notice of proposed~~an assessment from the German tax authorities ~~for approximately EUR21~~in December 2000, which stated income adjustment of EUR44.4 million (¥2,706 million translated at the current foreign exchange rate at March 31, 2004) 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, 2004. In the opinion of management, it is not possible at this time to determine the ultimate resolution of this matter.
~~In June 2004, we received preliminary information from the United States Internal Revenue Service (“IRS”) proposing additional taxes of approximately US$58 million (¥6,148~~6,341 million translated at the foreign exchange rate at March 31, ~~2004) relating~~2006) covering the fiscal years ended March 31, 1993 to 1995, concerning its intercompany purchase prices from Pioneer Europe NV, a wholly owned subsidiary in Belgium. PED, in 2001, contested the assessment and has requested the German and the Belgian tax authorities to try to reach an ~~adjustment to~~agreement (through an arbitration proceeding) on the arm’s length transfer prices ~~between affiliated companies~~and avoid double taxation. The German tax authorities notified PED in February 2006 that they were not able to reach an agreement with the Belgian tax authorities. PED has requested the German and Belgian tax authorities to continue the arbitration proceeding to resolve the issue. PED, in February 2006, received a tax audit memo (which outlines its preliminary views but does not yet constitute an assessment) from the German tax authorities which stated income adjustment of EUR50.7 million (¥7,240 million) covering the fiscal years ended March 31, 1996 to 1999. PED made objection to the German tax authorities regarding the basis of this memo. The German tax authorities have not yet issued an assessment for the fiscal years covered in the said tax audit memo. Also, PED understands that the German tax authorities have completed transfer pricing audit for the fiscal years ended March 31, 2000 ~~through 2002.~~to 2004. The result of the audit has not been communicated to PED. We, ~~intend~~at the date of this report, are unable to ~~contest the adjustment. In the opinion of management, it is not possible at this time to~~reasonably determine the ~~ultimate outcome~~resolution and is unable to currently estimate the amount of ~~this matter.~~
~~We were a defendant in legal proceedings in which Gemstar-TV Guide International, Inc. (“Gemstar”),~~the loss, if any, associated with the foregoing assessment, tax audit memo and certain of its affiliates alleged that we had infringed certain of their patents. On February 24, 2004, we fully settled all disputes and legal proceedings with Gemstar and we made a payment of US$14 million to Gemstar.
completed transfer pricing audit.

Dividend policy

Pioneer normally pays cash dividends twice per year. Pioneer’s Board of Directors recommends year-end dividends to be paid in the form of distribution of surplus following the end of each fiscal year. This recommended year-end dividend must then be approved by shareholders at the ~~ordinary general meeting~~Ordinary General Meeting of ~~shareholders~~Shareholders usually held in June of each year. Immediately following approval of the dividend at the shareholders’ meeting, Pioneer pays the dividend to shareholders and ~~pledges~~pledgees 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~~distribution of surplus 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.”

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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				Dividend per share
Record date	Yen		Dollars		Yen		Dollars
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		7.50		0.06
September 30, 2002		7.50		0.06		7.50		0.06
March 31, 2003		10.00		0.08		10.00		0.08
September 30, 2003		12.50		0.12		12.50		0.12
March 31, 2004		12.50		0.11		12.50		0.11
September 30, 2004						12.50		0.12
March 31, 2005						12.50		0.11
September 30, 2005						7.50		0.06
March 31, 2006						2.50		0.02

~~Pioneer’s policy on dividends allows for continued and stable~~

Pioneer sets dividend ~~payment. In addition, Pioneer determines the appropriate dividend amount taking into consideration~~payments appropriately in light of its financial ~~condition,~~position, consolidated ~~business~~operating results, and other ~~factors.~~
factors, but has a basic policy of maintaining stable dividends.

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”) 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
	Tokyo Stock Exchange				New York Stock Exchange				Price per share of Common Stock				Price per share of ADS
	Price per share of Common Stock				Price per share of ADS				(yen)				(U.S. dollars)
	(yen)				(U.S. dollars)				High		Low		High		Low
Annual highs and lows	High		Low		High		Low
Year ended March 31,
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	¥	4,250	¥	2,150	$	34.70	$	16.75
2003		2,860		1,805		21.98		14.83		2,860		1,805		21.98		14.83
2004		3,370		2,225		31.25		18.90		3,370		2,225		31.25		18.90
2005										3,390		1,820		30.85		17.11
2006										2,040		1,410

Quarterly highs and lows
Fiscal 2003
Fiscal 2005
1st quarter		2,860		1,981		21.65		16.75		3,390		2,635		30.85		23.75
2nd quarter		2,260		1,900		18.60		16.00		2,850		2,215		25.90		20.30
3rd quarter		2,490		1,805		19.50		14.83		2,430		1,820		21.85		18.05
4th quarter		2,620		2,070		21.98		17.95		2,055		1,827		19.90		17.11
Fiscal 2004

Fiscal 2006
1st quarter		2,840		2,225		23.75		18.90		2,040		1,655		18.82		15.15
2nd quarter		3,030		2,515		25.75		20.85		1,785		1,604		16.10		14.23
3rd quarter		2,995		2,505		28.31		23.30		1,764		1,410		15.03		12.22
4th quarter		3,370		2,875		31.25		27.01		1,989		1,530		—		—
Fiscal 2005

Fiscal 2007
1st quarter		3,390		2,635		30.85		23.75		2,120		1,628		—		—

Monthly highs and lows
2004
2006
January		3,370		2,875		31.25		27.24		1,695		1,530		—		—
February		3,270		2,930		30.16		27.01		1,952		1,682		—		—
March		3,250		2,890		30.00		27.04		1,989		1,792		—		—
April		3,390		3,000		30.85		28.55		2,120		1,888		—		—
May		3,120		2,660		28.80		23.76		2,120		1,828		—		—
June		2,880		2,635		26.46		23.75		1,963		1,628		—		—
July	2,850		2,310		25.90		21.20

B. Plan of distribution

Not applicable

6858

C. Markets
~~The primary market for shares of~~

Pioneer’s common stock ishas been listed on the Tokyo Stock Exchange (“TSE”). since October 1961.

On December 8, 2005, Pioneer’s ~~shares~~Board of Directors approved a resolution to withdraw its common stock ~~have been listed on the TSE since October 1961 and~~from listing on the Osaka Securities Exchange, ~~since April 1968.~~
~~Since December 1976, Pioneer’s~~its ADSs ~~have been listed and traded on~~from the New York Stock Exchange (“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,~~and its Curaçao Depositary Shares offrom the Euronext Amsterdam. These delistings were completed on January 27, 2006, January 23, 2006 and January 2, 2006, respectively. Pioneer’s ADR program was terminated effective March 10, 2006. Pioneer ~~evidenced by~~is currently considering options to terminate its Curaçao Depositary ~~Receipts, have been listed and traded on the Euronext Amsterdam since February 1969.~~
Receipt program.

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~~Company Law~~(shoho)~~(Kaishaho)of Japan. It is registered in the Commercial Register(shogyo tokibo)maintained by the Meguro Branch Office of the Tokyo Legal Affairs Bureau.

Objects and purposes
~~Article 2 of the~~

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;

•		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 woodwork;

•		manufacture and sale of agricultural products and plants for their cultivation;

• 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 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,~~Company Law, 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~~General Meeting of ~~shareholders.~~
Shareholders.

Except as stated below, neither the ~~Commercial Code~~Company Law 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), ~~their~~the Directors’ or Corporate Auditors’ retirement age or requirement to hold any shares of capital stock of Pioneer. The ~~Commercial Code~~Company Law 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 branch ~~offices.~~offices, to determine conditions concerning offering of corporate bonds, and to establish and maintain an internal control system. The Regulations of the Board of Directors of Pioneer require a resolution of the Board of Directors for Pioneer to borrow a substantial amount of money or to give guarantees in a substantial amount. There is no written rule as to what constitutes a “substantial” amount in these contexts. However, it has been the general practice of Pioneer’s Board of Directors to adopt a resolution for borrowing or guaranteeing in an amount not less than ¥100 million or its equivalent.

Common ~~stock~~Stock

General
~~Set~~

Unless indicated otherwise, set forth below is information relating to Pioneer’s ~~Common Stock,~~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~~Company Law, which came into effect on May 1, 2006, and related legislation.
In

All issued shares are fully-paid and non-assessable, and are in registered form. Transfer of shares is effected by delivery of share certificates, but 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 assert shareholders’ rights to Pioneer.

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
70

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 book 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 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. 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~~

Under 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, ~~2004,~~2006, 180,063,836 shares of ~~common stock~~Common Stock were issued (including ~~4,632,962~~5,641,946 shares held as treasury stock).

All shares of ~~common stock~~Common Stock of Pioneer have no par value.

~~Dividends~~
~~The Articles~~Distribution of ~~Incorporation~~Surplus

General—

Under the Company Law, distributions of cash or other assets by joint stock corporations to their shareholders, so called “dividends”, are referred to as “distributions of Surplus” (“Surplus” is defined in “Restriction on Distributions of Surplus—”). Pioneer ~~provide that the accounts shall be closed on March 31~~may make distributions of each year. Year-end 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 submittedSurplus to the ~~Board~~shareholders any number 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 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. In addition to year-end 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 September 30 of eachtimes per business year, ~~without shareholders’ approval, but~~ subject to ~~the~~certain limitations described ~~below.~~
~~The Commercial Code provides that a company may not make any distribution~~in “Restriction on Distributions of ~~profit by way~~Surplus—.” Distributions of ~~dividends or interim dividends for any fiscal period unless it has set aside~~Surplus are required 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 is at least one-quarter of its stated capital on a non-consolidated basis. 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 are set out in an ordinance of the Ministry of Justice.~~
71

In the case of interim dividends, the net assets are calculated by reference to the non-consolidated balance sheet as at the last date of the preceding fiscal year, but adjusted to reflect; (a) the legal reserveprinciple to be ~~set aside in respect of interim dividends; (b) any subsequent payment~~authorized by way of appropriation of retained earnings and transfer to legal reserve in respect thereof; (c) any subsequent transfer of retained earnings to stated capital; (d) if Pioneer has been authorized, pursuant to a resolution of ~~an ordinary general meeting~~a General Meeting of ~~shareholders,~~Shareholders, but may also be made pursuant to a resolution of the Board of Directors ~~or both, to purchase shares~~if (a) Pioneer’s Articles of ~~its common stock (see “~~~~Acquisition by Pioneer~~Incorporation so provide; (b) the normal term of ~~its common stock~~~~” below), the total amount~~office of the ~~purchase price of such shares so authorized~~Directors is no longer than one year; and (c) its non-consolidated annual financial statements and certain documents for the last business year fairly present its assets and profit or loss, as required by ~~such resolution that may be paid by Pioneer; and (e) such other amounts as are set out in an ordinance~~ordinances of the Ministry of ~~Justice, provided that (x)~~Justice.

Moreover, even if the requirements described in (a) through (c) are not met, Pioneer ~~reduces its stated capital, additional paid-in capital or accumulated legal reserve after~~may make distributions of Surplus in cash to the ~~end~~shareholders by resolutions of the ~~preceding~~Board of Directors once per fiscal ~~year,~~year. Such distribution of Surplus is called “interim dividends.”

Distributions of Surplus may be made in cash or in kind in proportion to the ~~amount so reduced, less~~number of shares of common stock held by each shareholder. A resolution of a General Meeting of Shareholders or the ~~amount paid~~Board of Directors authorizing a distribution of Surplus must specify the kind and aggregate book value of the assets to be distributed, the manner of allocation of such assets to shareholders, ~~upon such reduction~~ and ~~certain other amounts, and (y) such other amounts as are set out in an ordinance~~the effective date of the ~~Ministry~~distribution. If a distribution of ~~Justice, shall~~Surplus is to be ~~added~~made in kind, Pioneer may, pursuant to a resolution of a General Meeting of Shareholders or (as the case may be) the Board of Directors, grant a right to the ~~amount distributable as interim dividends as described above. Interim dividends may not~~shareholders to require Pioneer to make such distribution in cash instead of in kind. If no such right is granted to shareholders, the relevant distribution of Surplus must be ~~paid if it is anticipated that~~approved by a special shareholders resolution at ~~the end~~a General Meeting of ~~the fiscal year net assets, on~~Shareholders (see “Voting Rights” with respect to a ~~non-consolidated basis, will be less than~~“special shareholders resolution”).

Under the ~~aggregate of the amounts referred to in (i) through (v) above.~~
~~Under its~~ Articles of Incorporation of Pioneer, year-end dividends and interim dividends may be distributed to shareholders of record as of March 31 and September 30 each year, respectively, in proportion to the number of shares of common stock held by each shareholder following approval by the General Meeting of Shareholders or the Board of Directors. Pioneer is not ~~obligated~~obliged to pay any dividends ~~which are left~~ unclaimed for a period of three years after the date on which they first became payable.

In Japan, the ex-dividend date and the record date for dividends precede the date of determination of the amount of the dividends to be paid. The price of the shares of common stock generally becomes ex-dividend on the third business day prior to the record date.

Restriction on distribution of Surplus—

In making a distribution of Surplus, Pioneer must, until the sum of its additional paid-in capital and legal reserve reaches one-quarter of its stated capital, set aside in its additional paid-in capital and/or legal reserve an amount equal to one-tenth of the amount of Surplus so distributed.

The amount of Surplus at any given time must be calculated in accordance with the following formula:

A + B + C + D - (E + F + G)

In the above formula:

“A” = the total amount of other capital surplus and other retained earnings, each such amount being that appearing on the non-consolidated balance sheet as of the end of the last business year

“B” = (if Pioneer has disposed of its treasury stock after the end of the last business year) the amount of the consideration for such treasury stock received by Pioneer less the book value thereof

“C” = (if Pioneer has reduced its stated capital after the end of the last business year) the amount of such reduction less the portion thereof that has been transferred to additional paid-in capital or legal reserve (if any)

“D” = (if Pioneer has reduced its additional paid-in capital or legal reserve after the end of the last business year) the amount of such reduction less the portion thereof that has been transferred to stated capital (if any)

“E” = (if Pioneer has cancelled its treasury stock after the end of the last business year) the book value of such treasury stock

“F” = (if Pioneer has distributed Surplus to its shareholders after the end of the last business year) the total book value of the Surplus so distributed

“G” = certain other amounts set forth in ordinances of the Ministry of Justice, including (if Pioneer has reduced Surplus and increased its stated capital, additional paid-in capital or legal reserve after the end of the last business year) the amount of such reduction and (if Pioneer has distributed Surplus to the shareholders after the end of the last business year) the amount set aside in additional paid-in capital or legal reserve (if any) as required by ordinances of the Ministry of Justice.

The aggregate book value of Surplus distributed by Pioneer may not exceed a prescribed distributable amount (the “Distributable Amount”), as calculated on the effective date of such distribution. The Distributable Amount at any given time shall be equal to the amount of Surplus less the aggregate of the followings:

(a) the book value of its treasury stock;

(b) the amount of consideration for any of treasury stock disposed of by Pioneer after the end of the last business year; and

(c) certain other amounts set forth in ordinances of the Ministry of Justice, including (if the sum of one-half of goodwill and the deferred assets exceeds the total of stated capital, additional paid-in capital and legal reserve, each such amount being that appearing on the non-consolidated balance sheet as of the end of the last business year) all or certain part of such exceeding amount as calculated in accordance with the ordinances of the Ministry of Justice.

If Pioneer has become at its option a company with respect to which consolidated balance sheets should also be considered in the calculation of the Distributable Amount (renketsu haito kisei tekiyo kaisha), Pioneer shall further deduct from the amount of Surplus the excess amount, if any, of (x) the total amount of stockholders’ equity appearing on the non-consolidated balance sheet as of the end of the last business year and certain other amounts set forth by an ordinance of the Ministry of Justice over (y) the total amount of stockholders’ equity and certain other amounts set forth by an ordinance of the Ministry of Justice appearing on the consolidated balance sheet as of the end of the last business year.

If Pioneer has prepared interim financial statements as described below, and if such interim financial statements have been approved by the Board of Directors or (if so required by the Company Law) by a General Meeting of Shareholders, then the Distributable Amount must be adjusted to take into account the amount of profit or loss, and the amount of consideration for any of the treasury stock disposed of by Pioneer, during the period in respect of which such interim financial statements have been prepared. Pioneer may prepare non-consolidated interim financial statements consisting of a balance sheet as of any date subsequent to the end of the last business year and an income statement for the period from the first day of the current business year to the date of such balance sheet. Interim financial statements so prepared by Pioneer must be audited by the Corporate Auditors and the independent auditor, as required by ordinances of the Ministry of Justice.

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~~General Meeting of ~~shareholders,~~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,~~

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 ~~specifying~~that, within a period of not less than one month specified in the ~~number~~notice, share certificates must be submitted to Pioneer for exchange. A Representative Director of Pioneer must disclose the reason for the consolidation of shares ~~to which such shareholder is entitled by virtue~~at the General Meeting of ~~the stock split.~~
Shareholders.

General meeting of shareholders

The ~~ordinary general meeting~~Ordinary General Meeting of ~~shareholders~~Shareholders of Pioneer ~~for each fiscal year~~ is held in June in each ~~year in or near Meguro-ku or in Minato-ku, Tokyo, Japan.~~year. In addition, Pioneer may hold an ~~extraordinary general meeting~~Extraordinary General Meeting of ~~shareholders~~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,~~General Meeting of Shareholders, 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~~Ordinary General Meeting of ~~shareholders~~Shareholders is March 31 of each year.

Any shareholder or group of shareholders holding at least 3% of the total number of voting rights for a period of six months or more may require the convocation of a ~~general meeting~~General Meeting of ~~shareholders~~Shareholders for a particular purpose. Unless such shareholders’ meeting is convened promptly or a convocation notice of
72

a meeting which is to be held not later than eight weeks from the day of such demand is dispatched, the requiring shareholder may, upon obtaining a court approval, convene such shareholders’ meeting.

Any shareholder or group of shareholders holding at least 300 voting rights or 1% of the total number of voting rights for a period of six months or more may propose a matter to be considered at a ~~general meeting~~General Meeting of ~~shareholders~~Shareholders by submitting a written request to a Representative Director at least eight weeks prior to the date set for such meeting.

If the Articles of Incorporation so provide, any of the minimum voting rights or percentages, time periods and number of voting rights necessary for exercising the minority shareholder rights described above may be decreased or shortened.

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~~or certain other entity more than one-quarter of whose total voting rights are directly or indirectly owned by Pioneer may not exercise its voting rights with respect to shares of ~~common stock~~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~~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~~General Meeting of ~~shareholders~~Shareholders by a majority of the number of voting rights of all the shareholders present at the meeting. The ~~Commercial Code~~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~~Company Law and Pioneer’s Articles of Incorporation ~~provide that~~require 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~~ a ~~substantial part of the business, the taking over of the whole of the business of any other corporation pursuant to a certain exception under~~resolution 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 issue of new shares at a “specially favorable” price (or any issue of share acquisition rights to subscribe for or acquire shares of capital stock (“share acquisition rights”) or bonds with share acquisition rights at “specially 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 of the voting rights of all the shareholders represented at the meeting is ~~required (the “special~~required. The instances requiring a special shareholders ~~resolutions”).~~
resolution include:

(1)		acquisition of its own shares from a specific party other than its subsidiaries;

(2)		consolidation of shares;

(3)		any offering of new shares at a “specially favorable” price (or any offering of stock acquisition rights to 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 Corporate Auditor;

(5)		the exemption of liability of a Director, Corporate Auditor or independent auditor with certain exceptions;

(6)		a reduction of stated capital with certain exceptions in which a shareholders’ resolution is not required;

(7)		a distribution of in-kind dividends which meets certain requirements;

(8)		dissolution, merger, consolidation, or corporate split 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; or

(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.

Issue of additional shares and pre-emptive rights

Holders of Pioneer’s shares of ~~common stock~~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 issue of new shares at a “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
73

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.

Subject to certain conditions, Pioneer may issue ~~share~~stock acquisition rights or bonds with ~~share~~stock acquisition rights by a resolution of the Board of Directors. Holders of ~~share~~stock acquisition rights or bonds with ~~share~~stock 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~~stock acquisition rights and bonds with ~~share~~stock acquisition rights. Upon exercise of ~~share~~stock acquisition rights, Pioneer will be obliged to issue the necessary number of new shares or alternatively to transfer the relevant number of shares held by 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, liquidation expenses and taxes will be distributed among shareholders in proportion to the respective numbers of shares of ~~common stock~~Common Stock held by them.

Record date

As mentioned above, 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 units of shares in Pioneer’s register of shareholders and/or that of beneficial shareholders at the end of each March 31 are entitled to exercise shareholders’ rights at the ~~ordinary general meeting~~Ordinary General Meeting of ~~shareholders~~Shareholders with respect to the ~~fiscal~~business 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~~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-dividends 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.

Acquisition by Pioneer of its ~~common stock~~Common Stock

Under the Company Law and the Articles of Incorporation of Pioneer, Pioneer may acquire ~~its own~~ shares ~~through a~~of common stock ~~exchange on which~~(i) by soliciting all the shareholders to offer to sell shares held by them (in this case, certain terms of such acquisition, such as the total number of shares ~~are listed (pursuant~~ to be purchased and the total amount of consideration, shall be set by an ordinary resolution of ~~an ordinary general meeting~~a General Meeting of ~~shareholders or~~Shareholders in advance, and acquisition shall be effected pursuant to a resolution of the Board of Directors), ~~by way of tender offer (pursuant to an ordinary resolution of an ordinary general meeting of shareholders or a resolution of the Board of Directors), by purchase~~(ii) from a specific ~~party~~shareholder other than ~~a subsidiary~~any of ~~Pioneer~~its subsidiaries (pursuant to a special resolution of ~~an ordinary general meeting~~a General Meeting of ~~shareholders) or~~Shareholders), (iii) from ~~a subsidiary~~any of ~~Pioneer~~its subsidiaries (pursuant to a resolution of the Board of Directors)~~. If~~, or (iv) by way of purchase on any Japanese stock exchange on which Pioneer’s shares ~~are purchased~~of common stock is listed or by ~~Pioneer~~way of tender offer (in either case pursuant to an ordinary resolution of a General Meeting of Shareholders or a resolution of the Board of ~~Directors, then~~Directors). In the ~~reason for the purchase, as well as the kind, number and aggregate purchase price~~case 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,(ii) above, 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~~that such other shareholder be included as a seller in the proposed ~~purchase. Any~~purchase, provided that no such ~~acquisition of shares must satisfy certain requirements, including that, in cases~~right will be available if the purchase price or any other ~~than~~consideration to be received by the ~~acquisition by Pioneer of its own shares pursuant to a resolution~~relevant specific shareholder will not exceed the last trading price of the ~~Board of Directors,~~shares on the relevant stock exchange on the day immediately preceding the date on which the resolution mentioned in (ii) above was adopted (or, if there is no trading in the shares on the stock exchange or if the stock exchange is not open on such day, the price at which the shares are first traded on such stock exchange thereafter).

The total amount of the purchase price of shares of common stock may not exceed the ~~amount~~Distributable Amount, as described in “Distributions of ~~the retained earnings available for dividend payments after taking into account any reduction, if any,~~Surplus — Restriction on distributions of ~~the stated capital, additional paid-in capital or legal reserve~~
Surplus—.”

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(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 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) to “~~Dividends~~~~” above, Pioneer may not acquire such shares.~~

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~~stock 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.~~
1,000.

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.
Moreover, holders of shares constituting less than one unit will have no other shareholder rights, except that such holders may not be deprived of certain rights specified in the Company Law or an ordinance of the Ministry of Justice or Pioneer’s Articles of Incorporation, including the right to receive distribution of Surplus and the right to receive an allotment of offered shares and offered stock acquisition rights in proportion to the number of shares held.

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.

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.~~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~~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
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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~~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.

Sale by Pioneer of shares held by shareholders whose location 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~~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~~distributions of Surplus 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 may hold or deposit 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-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~~stock 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.~~
listed.

Except for the general ~~limitation~~limitations 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~~Company Law 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~~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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~~C. Material contracts~~

~~None~~

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~~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 are not resident in Japan; and~~
• ~~corporations whose principal offices are located outside Japan.~~

individuals who are not resident 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;~~
• ~~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.

individuals who are exchange 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.

In general, the acquisition of shares of a Japanese company (such as the shares of ~~common stock~~Common Stock of Pioneer) by an exchange non-resident from an 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 an exchange resident of Japan transfers shares of a Japanese company (such as the shares of ~~common stock~~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~~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~~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 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. 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) and/or to differing interpretations.
U.S. Holders should note that the United States and Japan ratified the new income tax convention (the “New Treaty”), which is to replace its predecessor income tax convention signed on March 8, 1971 (the “Prior Treaty”). The New Treaty entered into force on March 30, 2004 and shall be applicable in Japan, in place of the Prior Treaty, (i) with respect to taxes withheld at source, for amounts taxable on or after July 1, 2004, and (ii) with respect to taxes on income which are not withheld at source and the enterprise taxes, as regards income for any taxable year beginning on or after January 1, 2005 (subject to certain transitional rules with respect to both items (i) and (ii) above). The Prior Treaty shall cease to have effect in relation to any tax from the date on which the New Treaty shall be applicable (subject to certain transitional rules allowing for exceptions). Where relevant, U.S. Holders are urged to confirm whether they are entitled to the treaty benefit provided under the Prior Treaty or the New Treaty, as the case may be, with their tax advisors. In addition, 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.

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 ~~Prior~~ Treaty, ~~or the New Treaty, as applicable from time to time,~~

•		does not maintain a permanent establishment ~~or fixed base~~ in Japan to(i) with which shares of common stock or ADSs are ~~attributable~~effectively connected and through which the U.S. ~~Holder~~holder carries on or has carried on business ~~(or, in~~or (ii) of which shares of common stock or ADSs form part of the ~~case of an individual, performs or has performed independent personal services),~~business property, and

•		is ~~otherwise~~ eligible for benefits under the ~~Prior~~ Treaty ~~or the New Treaty, as applicable,~~ with respect to income and gain derived in connection with the shares of common stock or ADSs.

The U.S. federal income tax consequences of a partner in a partnership holding shares of common stock or ADSs generally 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 advisors. 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.

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.

In general, ~~taking into account the earlier assumption,~~ for purposes of the ~~Prior~~ Treaty ~~and the New Treaty, as applicable,~~ 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 holders of shares of common stock of Pioneer or ADRs evidencing ADSs representing shares of common stock of 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 are, in ~~themselves are~~general, not ~~subject to Japanese income tax.~~
a taxable event.

In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of Japanese withholding tax 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,~~, provided, with respect to dividends paid on listed shares issued by a Japanese corporation (such as the shares of common stock of Pioneer) to any non-resident corporate or individual shareholders (including those shareholders who are ~~non-Japanese corporations or~~
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~~Japanese non-resident individuals, such as~~ non-resident Holders)~~, except for~~ other than any individual shareholder who holds 5% or more of the total issued shares of the relevant Japanese corporation, the aforementioned 20% withholding tax rate is reduced to (i) 7% for dividends due and payable on or before March 31, 2008, and (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 ~~Prior~~ Treaty, 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 was limited to 15% of the gross amount actually distributed. However, under the New Treaty which would become applicable to dividends declared by Pioneer on or after July 1, 2004, 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 ~~limited~~reduced to 10% of the gross amount actually distributed, 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

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 is lower than the withholding tax 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 (together with any other required forms and documents) 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 ADSs, this reduced rate or exemption is applicable if the Depositary or its agent submits 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 non-resident Holder of ADSs 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. A non-resident Holder who is entitled, under an applicable tax treaty, to a reduced treaty rate lower than the withholding tax rate otherwise applicable under Japanese tax law or an exemption from the withholding tax, but failed 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 applicable 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 an applicable tax treaty but do not follow the required procedures as stated above.

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

Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired shares of common stock or ADSs as a legatee, heir or donee even though neither the individual nor the deceased nor donor is a Japanese resident.
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Holders of shares of common stock of Pioneer or ADSs should consult their tax advisors regarding the effect of these taxes and, 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).

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 under U.S. federal income tax principles. 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 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. Dividends paid by us will not be eligible for the dividends received deduction generally allowed to U.S. corporations in respect of dividends 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 will be subject to U.S. federal 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 in proposed form pursuant to which shareholders (and intermediaries) will be permitted to rely on certifications from issuers to establish that dividends qualify for the reduced rate of U.S. federal income taxation. Because such proposed certification 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 determined 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 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 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 thereafter as U.S. source capital gain.

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.
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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 with~~subject 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 U.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. Additionally, special rules may apply to

individuals 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,~~

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. U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances. 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 ~~and Losses~~

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). Subject to the passive foreign investment company rules discussed below, such gain 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. Certain U.S. Holders, including individuals, are eligible for preferential rates of U.S. federal income tax in respect of 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. sources for U.S. foreign tax credit purposes.

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
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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 may apply to the portion of the U.S. federal income tax liability 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 ~~distribution~~dividend or the preceding taxable year (and instead will be taxable at rates applicable to ordinary income).

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

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 a trade or business within the United States, and the distributions are effectively connected with that trade or business.

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 also 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~~earnings and profits 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 a lower rate that may be prescribed by an applicable income tax treaty.
83

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 identification

number or to report interest and dividends required to be shown on its U.S. federal income tax returns or makes other appropriate certifications in the 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. Holders generally are exempt from information reporting and backup withholding. However, a Non-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. ~~Back up~~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 NATIONAL 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 Fifth~~100 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

8476

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.

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 ~~purchase~~purchase- and ~~write currency~~write-currency options. Written options are entered into only with purchased options.

The following ~~table provides~~tables provide information about our derivative financial instruments related to foreign currency exchange transactions as of March 31, ~~2004,~~2006, 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, ~~2004.~~2006. All of the contracts and the options mature within one year. ~~There are no~~

Forward exchange contract

Yen Yen Yen Yen A$ EUR
Functional currency US$/ Yen/ EUR/ THB/ A$/ EUR/
Sell/Buy Yen US$ Yen Yen US$ GBP Total
(In millions of yen except average rates)
Contract amounts ¥ 12,652 ¥ 446 ¥ 23,053 ¥ 144 ¥ 1,290 ¥ 1,279 ¥ 38,864
Average contractual exchange rates 116.28 114.29 139.72 2.8900 0.7495 0.6970
Fair value ¥ 28 ¥ 3 ¥ (336 ) ¥ (5 ) ¥ 62 ¥ 1 ¥ (247 )

Currency option ~~contracts outstanding as of March 31, 2004.~~
~~Forward exchange contract as of March 31, 2004~~

Functional currency Yen
Sell/Buy US$/Yen Yen/US$ Total
(In millions of yen except average rates)
Notional amount ¥ 9,128 ¥ 9,128 ¥ 18,256
Average execution rates 115.44 115.44
Fair value ¥ (37 ) ¥ 46 ¥ 9

Functional currency Yen
EUR
A$
THB
NT$
SEK

Sell/Buy
US$/Yen
EUR/Yen
A$/US$
THB/US$
US$/NT$
NOK/SEK
Total
(In millions of yen except average rates)

Contract amounts ¥ 5,409 ¥ 12,338 ¥ 1,041 ¥ 870 ¥ 744 ¥ 103 ¥ 20,505
Average contractual exchange rates 110.40 134.10 0.6894 39.5017 33.23 1.0588
Fair value ¥ 248 ¥ 542 ¥ (87 ) ¥ (2 ) ¥ (6 ) ¥ 0 ¥ 695

8577

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, ~~the~~ U.S. ~~dollar~~dollars floating interest rate of intercompany borrowings into yen ~~fixed and floating interest rate borrowings and euro~~ fixed interest rate borrowings. The foreign exchange risk inherent in our currency swap as of March 31, ~~2004 is~~2006 are summarized as follows:
~~Currency swap as of March 31, 2004~~
Currency swap as of March 31, 2006

Expected maturity date
Contract amounts
(year ending March 31)
Expected maturity date
Buy Sell 2005 2006 2007 Total Fair value Contract amounts (year ending March 31)

Buy Sell 2007 2008 2009 Total Fair value
(Millions except average rates) (In millions except average rates)
Functional currency: Yen ¥24,540 US$200 ¥18,665 ¥5,875 ¥24,540 ¥ (3,106 ) ¥ 55,667 US$ 490 ¥ 49,148 ¥ 6,519 ¥ 55,667 ¥ (2,581 )
Average contractual exchange rate 124.43 117.50 114.30 108.65
Functional currency: Euro EUR82 US$100 ¥10,566 ¥10,566 ¥(73 )
Average contractual exchange rate 1.220

With respect to interest rate risk inherent in our currency swaps as of March 31, ~~2004,~~2006, see “Interest rate risk” below.

Interest rate risk

The following table provides information about interest rate risk inherent in the aforementioned currency swaps as of March 31, ~~2004. Variable interest rates are determined using formulas such~~2006.

Currency swap as ~~LIBOR+a.~~
~~Currency swap as of March 31, 2004~~
of March 31, 2006

Expected maturity date
Contract amounts (year ending March 31)
Buy Sell 2007 2008 2009 Total Fair value
(In millions except average rates)
Functional currency: Yen
Fixed (US$) to Fixed (Yen) ¥ 55,667 US$ 490 ¥ 49,148 ¥ 6,519 ¥ 55,667 ¥ (2,581 )
Average pay rate (0.37 )% (0.24 )%
Average receive rate 3.73 % 3.43 %

Expected maturity date
Contract amounts
(year ending March 31)

Buy Sell 2005 2006 2007 Total Fair value

(Millions except average rates)
Functional currency: Yen
Variable (US$) to Fixed (Yen) ¥12,590 US$100 ¥12,590 ¥12,590 ¥(2,028 )
Average pay rate 0.41 %
Average receive rate 1.18 %
Fixed (US$) to Fixed (Yen) ¥11,950 US$100 ¥ 6,075 ¥5,875 ¥11,950 ¥(1,078 )
Average pay rate (0.65 )% (1.35 )%
Average receive rate 2.88 % 1.21 %
Functional currency: Euro
Variable (US$) to Fixed (Euro) EUR82 US$100 ¥10,566 ¥10,566 ¥(73 )
Average pay rate 2.13 %
Average receive rate 1.12 %

86

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, ~~2004.~~2006. 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 of March 31, 2006

Functional Expected maturity date (year ending March 31)
Currency 2007 2008 2009 2010 2011 Thereafter Total Fair value
(In millions of yen except average rates)
Fixed rate (Yen) Yen ¥ 4,064 4,064 13,064 2,664 2,664 65,327 ¥ 91,847 ¥ 86,279
Average interest rate 2.03 % 2.03 % 2.70 % 2.57 % 2.57 % 0.15 % 0.82 %
Interest free loan (EUR) EUR 7 7 23 37 37

Total ¥ 4,071 4,071 13,087 2,664 2,664 65,327 ¥ 91,884 ¥ 86,316


~~Long-term debt (including due within one year) as of March 31, 2004~~

Expected maturity date (year ending March 31)

Functional
Currency 2005 2006 2007 2008 2009 Thereafter Total Fair value

(In millions of yen except average rates)
Fixed rate (Yen) Yen ¥4,507 15,314 248 247 10,244 63,063 ¥93,623 ¥88,929
Average interest rate 3.87 % 2.37 % 3.77 % 3.77 % 2.82 % 0.06 % 0.95 %
Variable rate (US$) US$ 528 528 528
Average interest rate 1.29 % 1.29 %
Interest free loan (US$) US$ 3 6 2 11 11
Interest free loan (EUR) EUR 9 5 25 39 39

Total ¥4,510 15,857 255 272 10,244 63,063 ¥94,201 ¥89,507

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, ~~2004.~~2006.


	2004				2006
	Cost		Fair value		Cost		Fair value
	(In millions of yen)				(In millions of yen)
Debt securities (by contractual maturities)
Maturing over one year	¥	106	¥	107	¥	94	¥	124
Equity securities	¥	6,520	¥	24,409	¥	4,627	¥	24,609

Item 12. Description of Securities Other than Equity Securities

Not applicable

~~Not applicable~~

8779

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

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 2006. 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 are 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 Tamihiko Sudo, Pioneer’s Chief Executive Officer and Hajime Ishizuka, 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. Sudo and Mr. Ishizuka 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, 2006 that have materially affected, or are reasonably likely to materially affect, Pioneer’s internal control over financial reporting.

~~(a)~~ As of the end of the period covered by this annual report, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Disclosure controls and procedures are designed to ensure that the material financial and non-financial information required to be disclosed in Form 20-F and filed with the Securities and Exchange Commission is recorded, processed, summarized and reported in a timely manner. The evaluation was performed under the supervision of Kaneo Ito, Pioneer’s Chief Executive Officer, and Akira Niijima, 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.
~~(b)~~ During the annual period covered by the annual report, there have been no significant changes in Pioneer’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation of such internal controls. Therefore, no corrective actions were taken.

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~~Company Law ~~concerning Exceptional Measures to the Commercial Code with respect to Auditing, etc.~~ of Joint Stock Corporations (the “Special Exception Law”). Rule 10A-3(c)(3) under the Exchange Act prescribes a general exemption from the audit committee member independence requirements for a foreign private issuer maintaining, among others, a board of corporate auditors established and selected pursuant to home country laws.Japan. Pioneer’s Board of Corporate Auditors is comprised of ~~five~~three Corporate Auditors, ~~three~~two of whom are outside Corporate Auditors. Each Corporate Auditor has been appointed at its shareholders’ meetings and has certain statutory powers ~~independently,~~under the Company Law, including auditing the business affairs and accounts of Pioneer.
88

~~At the present time,~~ 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 ~~delineated~~specified in the ~~Code and the Special Exception~~Company Law are different from those anticipated for ~~any~~ 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 ~~in Pioneer’s best interest~~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 ~~fully~~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.~~http://pioneer.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.

Item 16C. Principal Accountant Fees and Services

Aggregate fees billed to the Company for the fiscal years ended March 31, ~~2003~~2005 and ~~2004~~2006 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				Year ended March 31
	2003		2004		2005		2006
	(In millions of yen)				(In millions of yen)
Audit Fees (1)		¥329		¥339	¥	343	¥	417
Audit-Related Fees (2)		13		42		48		96
Tax Fees (3)		39		43		58		74
All Other Fees (4)		46		7		42		46

Total		¥427		¥431	¥	491	¥	633


(1)		Includes fees for the audit of our annual financial statements included in our Form 20-F and for services ~~that normally would be~~ provided in connection with statutory and regulatory filings or engagements. This ~~category~~ also ~~may include services that generally only the independent accountant reasonably can provide, such as~~includes fees billed for issuance of comfort letters ~~statutory audits, attest services, consents~~ and ~~assistance with and review of documents filed with the SEC.~~consent letters.

(2) Includes fees for assurance and related services that ~~traditionally~~ are performed by the independent accountant which include employee benefit plan audits, ~~due diligence related to mergers and acquisitions,~~ accounting consultations and audits in connection with ~~acquisitions,~~ internal control reviews, attest services that are not required by statute or regulation and consultation concerning financial accounting and reporting standards.

(3) Includes fees for ~~all services performed by professional staff in the independent accountant’s tax division except those~~ services related to ~~the audit, such as review of the tax provision (which would be included in the Audit Fee category). Typically, it would include fees for~~ tax compliance, including the preparation of tax returns and claims for refund, tax planning and tax advice. Tax compliance generally involves preparation of original and amended tax returns, claims for refund and tax payment-planning services. Tax planning and tax advice encompass a diverse range of services, including assistance with tax audits and appeals, tax advice related to mergers and acquisitions, employee benefit plans and requests for rulings or technical advice from taxing authorities.

(4) Includes fees for other than the services reported in paragraphs (1) through (3). ~~All other fees for fiscal 2003 include consulting services relating to reorganization of our subsidiaries and the management of software development process.~~

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.

None of the services provided by the auditor in fiscal ~~2003~~2005 and ~~2004~~2006 were waived from the pre-approval requirement pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

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 2006 ended March 31, 2006.

(c) Total Number (d) Maximum
of Shares Number of
Purchased as Shares that May
(a) Total Part of Publicly Yet Be
Number of (b) Average Announced Purchased Under
Shares Price Paid per Plans or the Plans or
Period Purchased Share Programs Programs
April 1 to April 30, 2005 287 ¥ 1,909.01 — —
May 1 to May 31, 2005 208 ¥ 1,759.39 — —
June 1 to June 30, 2005 241 ¥ 1,702.98 — —
July 1 to July 31, 2005 982 ¥ 1,651.51 — —
August 1 to August 31, 2005 1,142 ¥ 1,695.36 — —
September 1 to September 30, 2005 638 ¥ 1,716.43 — —
October 1 to October 31, 2005 442 ¥ 1,637.51 — —
November 1 to November 30, 2005 678 ¥ 1,542.05 — —
December 1 to December 31, 2005 798 ¥ 1,646.15 — —
January 1 to January 31, 2006 625 ¥ 1,596.48 — —
February 1 to February 28, 2006 592 ¥ 1,789.29 — —
March 1 to March 31, 2006 559 ¥ 1,832.59 — —

Total 7,192 ¥ 1,688.21 — —


Note:		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 Company Law of Japan. All purchases in the above table were made in accordance with such requests.

~~Not applicable~~

9083

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	~~Page~~

Index to Consolidated Financial Statements		F-1
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of March 31, ~~2003~~2005 and ~~2004~~2006		F-3
Consolidated Statements of ~~Income~~Operations for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006		F-5
Consolidated Statements of Shareholders’ Equity for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006		F-6
Consolidated Statements of Cash Flows for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006		F-7
Notes to Consolidated Financial Statements		F-8

~~Exhibits~~


Exhibits
	1.01			The Articles of Incorporation, as amended and currently in effect (English translation)

1.02		Regulations of the Board of Directors, as amended and currently in effect (English translation)
	~~12.01~~
2.01		Share Handling Regulations, as amended and currently in effect (English translation)

12.01		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


12.02			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	~~13.(a)~~
13.01		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

9184

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)

~~PIONEER CORPORATION~~
~~(Registrant)~~Date: July 7, 2006 By /s/ Hajime Ishizuka
Hajime Ishizuka
~~Date: August 6, 2004~~ By ~~/s/ Akira Niijima~~
~~Akira Niijima~~
Chief Financial Officer

9285

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page

Consolidated financial statements

Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of March 31, ~~2003~~2005 and ~~2004~~ 2006		F-3
Consolidated Statements of ~~Income~~Operations for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~ 2006		F-5
Consolidated Statements of Shareholders’ Equity for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~ 2006		F-6
Consolidated Statements of Cash Flows for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~ 2006		F-7
Notes to Consolidated Financial Statements		F-8

F-1

~~F-1~~

Report of Independent 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, ~~2003~~2005 and ~~2004,~~2006, 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, ~~2004~~2006 (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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 includes~~statements, 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, ~~2003~~2005 and ~~2004,~~2006, and the results of their operations and their cash flows for each of the three years in the period ended March 31, ~~2004,~~2006, 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~~
~~May 3, 2004, except for Note 23.a and b, as to which the dates are~~


/s/ Deloitte Touche Tohmatsu
Deloitte Touche Tohmatsu
Tokyo, Japan

June 29, ~~2004 and July 1, 2004, respectively.~~
2006

F-2

~~F-2~~

Consolidated Balance Sheets

Pioneer Corporation and Subsidiaries

March 31


							Thousands of									Thousands of
							U.S. Dollars									U.S. Dollars
	Millions of Yen						(Note 1)			Millions of Yen						(Note 1)
Assets	2003			2004			2004			2005			2006			2006

Current assets:
Cash and cash equivalents—
Cash, including time deposits of ¥88,425 million— $834,198 thousand (¥44,413 million in 2003)	¥	142,480		¥	192,419		$	1,815,274
Cash, including time deposits of ¥48,211 million— $412,060 thousand (¥52,275 million in 2005)										¥	116,681		¥	121,680		$	1,040,000
Trade receivables—
Notes		5,252			2,988			28,189			2,516			1,729			14,778
Accounts		113,135			112,411			1,060,481
Allowance for doubtful notes and accounts (Note 19)		(4,519	)		(3,344	)		(31,547	)
Inventories (Note 5)		93,620			107,806			1,017,038
Deferred income taxes (Note 10)		29,958			28,886			272,509
Accounts (Note 6)											132,110			108,893			930,709
Allowance for doubtful notes and accounts (Note 23)											(2,450	)		(3,059	)		(26,145	)
Inventories (Note 7)											109,015			104,226			890,820
Deferred income taxes (Note 13)											25,519			27,802			237,624
Assets held for sale (Note 4)											—			25,577			218,607
Prepaid expenses and other current assets		36,056			38,622			364,358			43,505			41,824			357,470

Total current assets		415,982			479,788			4,526,302			426,896			428,672			3,663,863


Investments and long-term receivables:
Available-for-sale securities (Note 4)		14,831			24,516			231,283
Investments in and advances to affiliated companies (Note 6)		7,841			5,573			52,575
Sundry investments (Note 17)		2,907			3,383			31,915
Long-term receivables, less allowance for doubtful accounts of ¥190 million—$1,792 thousand (¥112 million in 2003) (Note 19)		292			253			2,387
Available-for-sale securities (Note 5)											22,268			24,733			211,393
Investments in and advances to affiliated companies (Note 8)											2,987			1,705			14,573
Sundry investments (Notes 5 and 21)											3,388			3,189			27,257
Long-term receivables, less allowance for doubtful accounts of ¥106 million—$906 thousand (¥160 million in 2005) (Note 23)											185			145			1,239

Total investments and long-term receivables		25,871			33,725			318,160			28,828			29,772			254,462

Property, plant and equipment(Note 8):

Property, plant and equipment(Note 10 and 11):
Land		25,548			25,050			236,321			32,965			30,611			261,633
Buildings		107,309			113,863			1,074,179			136,372			119,312			1,019,761
Machinery and equipment		237,086			239,081			2,255,481			293,359			243,811			2,083,855
Construction in progress		6,132			7,568			71,396			1,056			1,999			17,085

Total		376,075			385,562			3,637,377			463,752			395,733			3,382,334
Accumulated depreciation		(230,376	)		(229,361	)		(2,163,783	)		(253,607	)		(235,502	)		(2,012,838	)

Net property, plant and equipment		145,699			156,201			1,473,594			210,145			160,231			1,369,496


Other assets:
Intangible assets (Note 7)		15,619			18,966			178,925
Deferred income taxes (Note 10)		35,734			24,276			229,019
Intangible assets (Note 9)											24,052			20,576			175,863
Deferred income taxes (Note 13)											25,420			28,933			247,291
Other		8,124			9,586			90,434			9,826			9,862			84,290

Total other assets		59,477			52,828			498,378			59,298			59,371			507,444


Total assets	¥	647,029		¥	722,542		$	6,816,434		¥	725,167		¥	678,046		$	5,795,265

See notes to consolidated financial statements.

F-3


							Thousands of									Thousands of
							U.S. Dollars									U.S. Dollars
	Millions of Yen						(Note 1)			Millions of Yen						(Note 1)
Liabilities and Shareholders’ Equity	2003			2004			2004			2005			2006			2006

Current liabilities:
Short-term borrowings (Note 8)	¥	29,893		¥	23,327		$	220,066
Current portion of long-term debt (Note 8)		974			4,510			42,547
Short-term borrowings (Note 11)										¥	33,152		¥	23,205		$	198,333
Current portion of long-term debt (Note 11)											19,276			7,165			61,239
Trade payables		67,173			79,439			749,425			96,335			102,082			872,496
Accrued liabilities—
Taxes on income		8,653			9,341			88,123			4,938			6,987			59,718
Payroll		17,616			17,604			166,075			17,203			16,640			142,222
Royalty		14,111			18,688			176,302			14,811			17,579			150,248
Other		36,784			35,626			336,094			36,843			56,656			484,239
Warranty reserve (Note 19)		6,493			5,419			51,123
Warranty reserve (Note 23)											5,722			6,603			56,436
Dividends payable		1,754			2,193			20,689			2,180			436			3,727
Liabilities held for sale (Note 4)											—			17,863			152,675
Other current liabilities		23,079			27,151			256,141			20,710			17,076			145,949

Total current liabilities		206,530			223,298			2,106,585			251,170			272,292			2,327,282


Long-term liabilities:
Long-term debt (Note 8)		32,196			89,691			846,142
Accrued pension and severance cost (Note 9)		70,800			57,143			539,085
Deferred income taxes (Note 10)		496			1,327			12,519
Long-term debt (Note 11)											81,219			92,970			794,615
Accrued pension and severance cost (Note 12)											40,022			23,475			200,641
Deferred income taxes (Note 13)											1,630			1,718			14,684
Other long-term liabilities		335			301			2,839			719			232			1,983

Total long-term liabilities		103,827			148,462			1,400,585			123,590			118,395			1,011,923

Commitments and contingent liabilities(Note 20)

Commitments and contingent liabilities(Note 24)

Minority interests		18,279			17,844			168,340			18,168			14,109			120,590

Shareholders’ equity(Note 11):
Common stock, No par value
Authorized—400,000,000 shares
Issued—180,063,836 shares—2003 and 2004		49,049			49,049			462,726

Shareholders’ equity(Note 14):
Common stock, no par value
Authorized— 400,000,000 shares
Issued—180,063,836 shares—2005 and 2006											49,049			49,049			419,222
Capital surplus		82,159			82,464			777,962			82,735			82,910			708,632
Retained earnings		253,266			273,718			2,582,245			260,556			173,826			1,485,692
Accumulated other comprehensive loss (Note 13)		(55,629	)		(61,829	)		(583,292	)
Treasury stock, at cost 4,629,028 shares—2003 and 4,632,962 shares—2004		(10,452	)		(10,464	)		(98,717	)
Accumulated other comprehensive loss (Note 16)											(47,669	)		(20,092	)		(171,726	)
Treasury stock at cost, 5,635,190 shares—2005 and 5,641,946 shares—2006											(12,432	)		(12,443	)		(106,350	)

Total shareholders’ equity		318,393			332,938			3,140,924			332,239			273,250			2,335,470


Total liabilities and shareholders’ equity	¥	647,029		¥	722,542		$	6,816,434		¥	725,167		¥	678,046		$	5,795,265

See notes to consolidated financial statements.

F-4

Consolidated Statements of ~~Income~~Operations

Pioneer Corporation and Subsidiaries
~~Year~~

Years ended March 31

Thousands of
U.S. Dollars
Millions of Yen
(Note 1)

2002 2003 2004 2004

Operating revenue:

Net sales ¥ 612,189 ¥ 664,675 ¥ 689,064 $ 6,500,604
Royalty revenue 17,588 12,584 11,821 111,519

Total operating revenue 629,777 677,259 700,885 6,612,123

Operating costs and expenses:

Cost of sales 442,924 473,239 487,297 4,597,142
Selling, general and administrative 166,862 168,736 166,415 1,569,953
Loss on sale and disposal of fixed assets 3,331 4,519 3,454 32,585

Total operating costs and expenses 613,117 646,494 657,166 6,199,680

Operating income from continuing operations
16,660 30,765 43,719 412,443
Other income (expenses):

Interest income 2,985 2,153 1,420 13,396
Gain on sale of subsidiaries’ stock — 768 — —
Foreign exchange gain (loss) 295 (2,045 ) (1,244 ) (11,736 )
Interest expense (3,314 ) (2,814 ) (2,154 ) (20,321 )
Other—net (Note 14) (2,154 ) (748 ) 107 1,010

Total other income (expenses) (2,188 ) (2,686 ) (1,871 ) (17,651 )

Income from continuing operations before income taxes
14,472 28,079 41,848 394,792
Income taxes(Note 10):

Current 10,795 14,477 17,829 168,198
Deferred (4,379 ) (5,445 ) 758 7,151

Total income taxes 6,416 9,032 18,587 175,349

Income from continuing operations before minority interest and equity in losses
8,056 19,047 23,261 219,443
Minority interest in losses (earnings) of subsidiaries
(504 ) 21 (654 ) (6,170 )
Equity in losses of affiliated companies(Note 6)
(70 ) (3,126 ) (2,244 ) (21,170 )

Income from continuing operations 7,482 15,942 20,363 192,103
Income from discontinued operations, net of tax (Note 3) 565 136 4,475 42,217

Net income
¥ 8,047 ¥ 16,078 ¥ 24,838 $ 234,320

Thousands of
U.S. Dollars
Millions of Yen (Note 1)
2004 2005 2006 2006

Revenues:

Operating revenue:
Net sales ¥ 672,928 ¥ 700,805 ¥ 746,424 $ 6,379,692
Royalty revenue 11,821 10,237 8,540 72,991

Total operating revenue 684,749 711,042 754,964 6,452,683
Interest income 1,420 1,929 2,658 22,718
Other income (Notes 5 and 18) 479 3,424 6,789 58,026

Total revenues 686,648 716,395 764,411 6,533,427

Cost and expenses:

Cost of sales (Note 12) 473,972 564,457 593,238 5,070,410
Selling, general and administrative expenses (Note 12) 164,951 194,591 178,135 1,522,522
Subsidy from the government (Note 12) — (48,697 ) — —
Interest expense 2,154 1,741 1,479 12,641
Loss on sale and disposal of fixed assets 3,454 34 2,704 23,111
Other deductions (Notes 10, 17 and 18) 1,589 6,336 60,020 512,991

Total cost and expenses 646,120 718,462 835,576 7,141,675

Income (loss) from continuing operations before income taxes
40,528 (2,067 ) (71,165 ) (608,248 )
Income taxes(Note 13):

Current 17,118 7,169 8,074 69,009
Deferred 1,051 (2,882 ) (12,734 ) (108,838 )

Total income taxes 18,169 4,287 (4,660 ) (39,829 )

Income (loss) from continuing operations before minority interest and equity in losses
22,359 (6,354 ) (66,505 ) (568,419 )
Minority interest in losses (earnings) of subsidiaries
(651 ) (690 ) 4,774 40,804
Equity in losses of affiliated companies(Note 8)
(2,244 ) (3,068 ) (24,027 ) (205,359 )

Income (loss) from continuing operations 19,464 (10,112 ) (85,758 ) (732,974 )
Income from discontinued operations, net of tax (Note 4) 5,374 1,323 772 6,598

Net income (loss)
¥ 24,838 ¥ (8,789 ) ¥ (84,986 ) $ (726,376 )


		Yen									U.S. Dollars		Yen								U.S. Dollars
	2002			2003			2004			2004			2004		2005			2006			2006

Per share of common stock and per American Depositary Share(Notes 7 and 18):
Per share of common stock(Note 22):
Basic:
Continuing operations		¥	41.56		¥	89.48		¥	116.07		$	1.10	¥	110.95	¥	(57.65	)	¥	(491.66	)	$	(4.20	)
Discontinued operations			3.14			0.76			25.51			0.24		30.63		7.54			4.43			0.04

Net income		¥	44.70		¥	90.24		¥	141.58		$	1.34
Net income (loss)													¥	141.58	¥	(50.11	)	¥	(487.23	)	$	(4.16	)

Diluted:
Continuing operations		¥	41.55		¥	89.48		¥	115.18		$	1.09	¥	110.09	¥	(57.65	)	¥	(491.66	)	$	(4.20	)
Discontinued operations			3.14			0.76			25.34			0.24		30.43		7.54			4.43			0.04

Net income		¥	44.69		¥	90.24		¥	140.52		$	1.33
Net income (loss)													¥	140.52	¥	(50.11	)	¥	(487.23	)	$	(4.16	)

See notes to consolidated financial statements.

F-5

Consolidated Statements of Shareholders’ Equity

Pioneer Corporation and Subsidiaries
~~Year~~

Years ended March 31

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, 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 12) 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 loss (30,893 ) (30,893 )

Comprehensive loss (14,815 )
Value ascribed to stock options (Note 12) 149 149
Purchase of treasury stock (Note 11) (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 12) 305 305
Purchase of treasury stock (Note 11) (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


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

Balance at March 31, 2003		$	462,726		$	775,085		$	2,389,302			$	(524,802	)		$	(98,604	)		$	3,003,707			180,064	¥	49,049	¥	82,159	¥	253,266		¥	(55,629	)	¥	(10,452	)	¥	318,393
Comprehensive income (loss):
Net income									234,320												234,320									24,838									24,838
Other comprehensive loss													(58,490	)							(58,490	)
Other comprehensive loss (Note 16)																																	(6,200	)					(6,200	)

Comprehensive income																					175,830																		18,638
Value ascribed to stock options (Note 12)						2,877															2,877
Purchase of treasury stock (Note 11)																	(132	)			(132	)
Value ascribed to stock options (Note 15)																												305											305
Purchase of treasury stock (Note 14)																																				(14	)		(14	)
Sales of treasury stock																	19				19															2			2
Cash dividends ($0.24 per share)									(41,377	)											(41,377	)
Cash dividends (¥25.00 per share)																														(4,386	)								(4,386	)

Balance at March 31, 2004		$	462,726		$	777,962		$	2,582,245			$	(583,292	)		$	(98,717	)		$	3,140,924			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 (Note 16)																																	14,160						14,160

Comprehensive income																																							5,371
Value ascribed to stock options (Note 15)																												270											270
Purchase of treasury stock (Note 14)																																				(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
Comprehensive income (loss):
Net loss																														(84,986	)								(84,986	)
Other comprehensive income (Note 16)																																	27,577						27,577

Comprehensive loss																																							(57,409	)
Value ascribed to stock options (Note 15)																												175											175
Purchase of treasury stock (Note 14)																																				(12	)		(12	)
Sales of treasury stock																																				1			1
Cash dividends (¥10.00 per share)																														(1,744	)								(1,744	)

Balance at March 31, 2006																								180,064	¥	49,049	¥	82,910	¥	173,826		¥	(20,092	)	¥	(12,443	)	¥	273,250


																									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, 2005																									$	419,222	$	707,137	$	2,226,974		$	(407,427	)	$	(106,256	)	$	2,839,650
Comprehensive income (loss):
Net loss																														(726,376	)								(726,376	)
Other comprehensive income (Note 16)																																	235,701						235,701

Comprehensive loss																																							(490,675	)
Value ascribed to stock options (Note 15)																												1,495											1,495
Purchase of treasury stock (Note 14)																																				(103	)		(103	)
Sales of treasury stock																																				9			9
Cash dividends ($0.09 per share)																														(14,906	)								(14,906	)

Balance at March 31, 2006																									$	419,222	$	708,632	$	1,485,692		$	(171,726	)	$	(106,350	)	$	2,335,470

See notes to consolidated financial statements.

F-6

Consolidated Statements of Cash Flows

Pioneer Corporation and Subsidiaries
~~Year~~

Years ended March 31


										Thousands of												Thousands of
										U.S. Dollars												U.S. Dollars
	Millions of Yen									(Note 1)			Millions of Yen									(Note 1)
	2002			2003			2004			2004			2004			2005			2006			2006

Operating activities:
Net income	¥	8,047		¥	16,078		¥	24,838		$	234,320
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of tax		(565	)		(136	)		(4,475	)		(42,217	)
Net income (loss)													¥	24,838		¥	(8,789	)	¥	(84,986	)	$	(726,376	)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization		36,666			36,238			40,911			385,953			41,047			46,990			46,703			399,171
Minority interest in (losses) earnings of subsidiaries		504			(21	)		654			6,170			654			692			(4,773	)		(40,795	)
Equity in losses of affiliated companies, less dividends		79			3,184			2,248			21,208			2,248			3,072			24,031			205,393
Deferred income taxes		(4,379	)		(5,445	)		758			7,151			758			(2,846	)		(13,056	)		(111,590	)
Provision for pension and severance cost, less payments		378			3,812			3,579			33,764			3,579			2,463			(2,862	)		(24,462	)
Loss on sale and disposal of fixed assets		3,331			4,519			3,454			32,585			3,464			40			2,704			23,111
Impairment of long-lived assets														—			4,460			41,422			354,034
Write-down of available-for-sale securities and sundry investments		2,341			1,369			245			2,311			245			51			133			1,137
(Gains) losses on sale of available-for-sale securities and sundry investments		(54	)		20			(37	)		(349	)
Gain on sale of subsidiaries’ stock		—			(768	)		—			—
Gains on sale of available-for-sale securities and sundry investments, net														(37	)		(2,309	)		(5,673	)		(48,487	)
Gain on sale of discontinued operations														(1,825	)		—			(434	)		(3,709	)
Stock-based compensation expenses		346			149			305			2,877			305			270			175			1,495
Decrease (increase) in trade notes and accounts receivable		(2,134	)		8,481			(10,186	)		(96,094	)		(7,797	)		(12,322	)		19,329			165,205
Decrease (increase) in inventories		3,034			838			(20,707	)		(195,349	)		(20,724	)		6,317			9,530			81,453
Increase in prepaid expenses and other current assets		(4,097	)		(1,122	)		(12,413	)		(117,104	)		(12,688	)		(5,051	)		(7,898	)		(67,504	)
Increase in trade payables		9,879			13,221			18,989			179,142			18,289			4,405			13,941			119,154
Increase (decrease) in accrued taxes on income		(1,632	)		5,450			3,782			35,679			3,559			(4,473	)		2,069			17,684
Increase in other accrued liabilities		3,275			8,172			7,654			72,208
Increase (decrease) in other accrued liabilities														7,530			(5,898	)		22,045			188,419
Other		2,339			(2,530	)		779			7,349			(3,067	)		(7,126	)		5,929			50,676

Net cash provided by operating activities		57,358			91,509			60,378			569,604			60,378			19,946			68,329			584,009

Investing activities:
Payment for purchase of fixed assets		(46,909	)		(40,493	)		(57,978	)		(546,962	)		(57,978	)		(63,866	)		(40,325	)		(344,658	)
Payment for investment securities		(4,566	)		(1,543	)		(595	)		(5,613	)
Payment for available-for-sale securities		(2,031	)		(10	)		(53	)		(500	)
Payment for purchase of investment securities														(595	)		(510	)		(6	)		(51	)
Payment for purchase of available-for-sale securities														(53	)		—			(1	)		(9	)
Payment for purchase of a subsidiary, net of cash acquired														—			(34,015	)		—			—
Payment for other assets		(1,013	)		(568	)		(953	)		(8,990	)		(953	)		(1,252	)		(578	)		(4,940	)
Proceeds from sale of fixed assets		1,564			2,982			1,458			13,754			1,458			2,184			3,049			26,060
Proceeds from sale of discontinued operations		—			—			4,897			46,198			4,897			—			754			6,444
Proceeds from sale of investment securities		638			103			53			500			53			12			282			2,410
Proceeds from sale of available-for-sale securities		177			3,493			156			1,472			156			3,091			7,068			60,410
Decrease in loans receivable		731			169			5			47
Other		13			639			256			2,415			261			840			(2	)		(16	)

Net cash used in investing activities		(51,396	)		(35,228	)		(52,754	)		(497,679	)		(52,754	)		(93,516	)		(29,759	)		(254,350	)

Financing activities:
Proceeds from issuance of convertible bonds [net of issuance cost ¥1,586 million ($14,962 thousand)]		—			—			60,514			570,887
Proceeds from issuance of convertible bonds (net of issuance cost ¥1,586 million)														60,514			—			—			—
Payment of long-term debt		(7,560	)		(4,914	)		(934	)		(8,811	)		(934	)		(6,246	)		(26,123	)		(223,274	)
Increase (decrease) in short-term borrowings		5,866			(16,214	)		(3,509	)		(33,104	)		(3,509	)		9,025			(8,616	)		(73,641	)
Proceeds from issuance of common stock		412			—			—			—
Purchase of treasury stock (Note 11)		(159	)		(11,566	)		(14	)		(132	)
Purchase of treasury stock (Note 14)														(14	)		(1,979	)		(12	)		(103	)
Proceeds from sale of treasury stock		147			714			2			19			2			12			1			9
Dividends paid		(2,699	)		(2,688	)		(3,947	)		(37,236	)		(3,947	)		(4,386	)		(3,499	)		(29,906	)
Dividends paid to minority interests		(214	)		(12	)		(285	)		(2,689	)		(285	)		(445	)		(302	)		(2,581	)

Net cash provided by (used in) financing activities		(4,207	)		(34,680	)		51,827			488,934			51,827			(4,019	)		(38,551	)		(329,496	)

Effect of exchange rate changes on cash and cash equivalents		4,231			(6,234	)		(9,512	)		(89,736	)		(9,512	)		1,851			4,980			42,563

Net increase in cash and cash equivalents		5,986			15,367			49,939			471,123
Net increase (decrease) in cash and cash equivalents														49,939			(75,738	)		4,999			42,726
Cash and cash equivalents, beginning of year		121,127			127,113			142,480			1,344,151			142,480			192,419			116,681			997,274

Cash and cash equivalents, end of year	¥	127,113		¥	142,480		¥	192,419		$	1,815,274		¥	192,419		¥	116,681		¥	121,680		$	1,040,000

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, ~~2004~~2006 is included solely for the convenience of readers outside Japan and has been made at the rate of ~~¥106~~¥117 to U.S.$1.00, the approximate rate of exchange prevailing at the Tokyo Foreign Exchange Market at March 31, ~~2004.~~2006. 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”) 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.

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

F-8

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.~~

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~~assets and ~~payables~~liabilities are translated at year-end exchange rates and resulting exchange gains and losses are recognized in earnings currently.

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 or when services are rendered to the third parties. Because of the short delivery time, in all cases, the shipment date is equivalent to the delivery date.~~sales contracts. In certain cases, terms of the contract require the product to pass customer inspection after ~~shipment~~delivery 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, noncompliance 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.~~
~~F-8~~
historical experience.

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—

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. Such time deposits can be withdrawn at any time without diminution of the principal amount.

Available-for-Sale Securities—

Under SFAS 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 ~~income.~~

F-9

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 ~~to nine~~ months, or sooner depending on severity of decline or other factors.

Sundry Investments—

Sundry investments are stated at ~~cost and~~cost. 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, which is net realizable value. Inventories are reviewed periodically and items considered to be slow moving or obsolete are written down to market, net realizable value.

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:


		Buildings		~~15-65~~15–65 years
		Machinery and equipment		~~2-10~~2–10 years

Goodwill and Other Intangible Assets—

Under SFAS No. 142, “Goodwill and Other Intangible Assets,” acquired goodwill and other intangible assets that are determined to have an indefinite life are no longer amortized. Instead, the carrying ~~value~~values of these assets are 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 are amortized over their estimated useful lives. At March 31, ~~2004,~~2006, the Company had no goodwill. Amortization of intangible assets with definite lives is computed using the straight-line method with no residual value. The cost of patents is amortized principally over seven ~~to nineteen~~ years and software is amortized principally over two to five years.

Long-Lived Assets—
~~On April 1, 2002, the Company adopted~~

Under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived ~~Assets” which applied to all long-lived assets.~~
~~The~~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 group.
~~In fiscal 2003, the Company sold its subsidiaries’ stock and recorded gains of ¥768 million. The subsidiaries’ main operation was karaoke business.~~

Warranty Reserve—

The Company engages in extensive product quality programs and processes including actively monitoring and

F-10

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.
~~F-9~~

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—~~
Certain costs incurred by the Company in connection with the reseller’s purchase or promotion of the Company’s products are classified as a reduction of revenues in accordance with Emerging Issues Task Force (“EITF”) 01-9, “Accounting for Consideration Given by a Vendor to a Customer.”

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 ~~¥9,646~~¥11,151 million, ~~¥10,373~~¥12,502 million and ~~¥11,282~~¥16,512 million ($~~106,434~~141,128 thousand) for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004,~~2006, 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, “Accounting for Stock-Based Compensation.”

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 potential 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 ~~2004~~2006 to ~~2006,~~2008, 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.

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—an amendment of FASB Statement 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

F-11

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.

Forward exchange contracts ~~currency swaps~~ and currency ~~options~~swaps 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, ~~2003~~2004, 2005 and ~~2004.~~2006. Unrealized gains and losses on such instruments are recognized currently in earnings.

Reclassifications—
As a result of the sales of subsidiaries for the year ended March 31, 2004, the gain on such sale, as well as the business results of the discontinued operations, are presented as a separate line in consolidated statements of income. Reclassifications have been made to previously reported consolidated statements of income and consolidated statements of cash flows related to discontinued operations to conform to this presentation.
~~F-10~~

~~Other~~Certain reclassifications ~~and format changes~~ have been made to prior year amounts to conform to the current year presentation.

In 2006, the cash flows attributable to the operating, investing and financing activities of the discontinued operations were not presented separately from the cash flows attributable to such activities of the continuing operations. In prior periods, the cash flows attributable to such activities of continuing operations were reported separately from the cash flows of discontinued operations.

New Accounting Standards—

In ~~December 2003,~~November 2004, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued SFAS No. ~~132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.~~151, “Inventory Costs—an amendment of ARB No. 43, Chapter 4.” ~~The revised~~ SFAS No. ~~132 retains~~151 clarifies the ~~disclosure requirements~~language used in ~~the original statement and requires additional disclosures about pension plan assets, benefit obligations, cash flows, benefit~~Accounting Research Bulletin No. 43 with respect to accounting for abnormal amounts of idle facility expenses, freight, handling costs and ~~other relevant information. The new disclosures are effective for financial statements with fiscal years ended after December 15, 2003. However, the revised~~spoilage. SFAS No. ~~132 provides that disclosures of information about foreign plans and estimated future benefit payment shall be~~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,” or SFAS No. 123R. SFAS No. 123R 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. SFAS No. 123R is effective at the beginning of the first interim and annual reporting period beginning after June 15, 2005. 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 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 Opinion No. 20,

F-12

“Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial 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. 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 June 2005, the FASB staff issued FASB Staff Position (“FSP”) FAS 143-1, “Accounting for Electronic Equipment Waste Obligations” (“FSP 143-1”). FSP 143-1 provides guidance on the accounting for certain obligations associated with the Waste Electrical and Electronic Equipment Directive (the “Directive”) adopted by the European Union (“EU”). Under the Directive, the waste management obligation for historical equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the customer replaces the equipment. FSP 143-1 is required to be applied to the later of the first reporting period ending after June ~~15, 2004. See Note 9 to~~8, 2005, or the date of the Directive’s adoption into law by the applicable EU-member countries. The Company adopted FSP 143-1 during the year ended March 31, 2006 and has determined that its effect did not have a material impact on its consolidated results of operations and financial ~~statements for these disclosures.~~
position.

In November ~~2003,~~2005, the ~~EITF reached a consensus on Issue No. 03-1 (“EITF No. 03-1”),~~FASB staff issued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain ~~Investments,” as it relates~~Investments” (“FSP 115-1”), which effectively replaces EITF Issue No. 03-1. FSP 115-1 contains a three-step model for evaluating impairments and carries forward the disclosure requirements in EITF Issue No. 03-1 pertaining to ~~disclosures~~securities in an unrealized loss position is considered impaired; an evaluation is made to determine whether the impairment is other-than-temporary; and, if an impairment is considered other-than-temporary, a realized loss is recognized to write the security’s cost or amortized cost basis down to fair value. FSP 115-1 references existing other-than-temporary impairment guidance for ~~SFAS No. 115. In addition~~determining when impairment is other-than-temporary and clarifies that subsequent to the ~~disclosures already required by SFAS No. 115, EITF No. 03-1 requires both quantitative and qualitative disclosures~~recognition of an other-than-temporary impairment loss for ~~marketable equity and~~ debt ~~securities. The new disclosure~~securities, an investor shall account for the security using the constant effective yield method. FSP 115-1 is effective for ~~fiscal years ended~~reporting periods beginning after December 15, ~~2003. See Note 4 to the consolidated financial statements for this disclosure.~~
In March 2004, EITF reached another consensus on EITF No. 03-1 which presents the guidance for the assessment of other-than-temporary impairment. The guideline should be used to determine whether an investment is other-than-temporarily impaired and provides 3 steps for assessment. The guidance is applicable for investments in debt and equity securities that are within the scope of SFAS No. 115, and cost method equity investments. The investor should make an evidenced-based judgment about a market price recovery of investment by considering the severity (extent to which fair value is below cost) and the duration (period of time that a security has been impaired) of impairment in relation to the forecasted market price recovery. An other-than-temporary impairment should be recognized in earnings in an amount equal to the difference between the investor’s adjusted cost basis and its fair value at the balance sheet date of the reporting period for which the assessment is made. The guidance is required to be applied for fiscal years beginning after June 15, 2004.2005, with earlier application permitted. The adoption of ~~the guidance will~~this standard is not expected to have aany material impact on the Company’s consolidated statements of operations or financial ~~position, result of operation or cash flow.~~
position.

In ~~January 2003,~~February 2006, the ~~EITF reached a consensus on Issue~~FASB issued SFAS No. ~~03-2 (“EITF No. 03-2”),~~155, “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and improves the ~~Transfer~~financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the ~~Japanese Government of the Substitutional Portion of Employer Pension Fund Liabilities.”~~
~~EITF No. 03-2 addresses~~ accounting for these instruments. Specifically, SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the ~~transfer~~need to ~~Japanese government of a substitutional portion of a domestic contributory welfare pension plan, which is a defined benefit pension plan established by~~bifurcate the ~~Welfare Pension Insurance Law. EITF No. 03-2 requires employers~~derivative from its host) if the holder elects to account for the ~~entire separation process of~~whole instrument on a substitutional portion from an entire plan (including a corporate portion) upon completion of the transfer to the government of the substitutional portion of the benefit obligation and related plan assets as a culmination of a series of steps in a single settlement transaction. Under this approach, the difference between the fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of this standard is not expected to have any material impact on the ~~obligation~~Company’s consolidated statements of operations or financial position.

     In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 156 was issued to simplify the accounting for servicing assets and servicing liabilities and reduce the ~~assets required to be transferred to the government should be accounted for and separately disclosed as a subsidy.~~
     ~~October 29, 2003, the Company received approval~~volatility that results from the ~~government~~use of different measurement attributes for ~~an exemption from the obligation to pay benefits for future employee service related to the substitutional portion.~~
     In addition, the Company will submit another application to separate the remaining substitutional portion related to past service by its employees. The Company is expected to receive final approval from the government for its second application during the year ending March 31, 2005. Upon receipt of the final approval, the Company will be relieved of all obligations pertaining to the substitutional portion by transferring the benefit obligationservicing rights and the related ~~government-specified portion of the plan assets, which will be computed by the government. The related gain or loss, which is expected~~financial instruments used to hedge risks associated with those servicing rights. SFAS No. 156 clarifies when to separately account for servicing rights, requires separately recognized servicing rights to be recorded during the year ending March 31, 2005 based on completion of the entire process, has not yet been determined because the amount of the benefit obligation and the related plan assets to be transferred to the government may change significantly.
initially measured

~~F-11~~F-13

~~In December 2003,~~

at fair value, and provides the ~~Securities~~option to subsequently account for those servicing rights at either fair value or under the amortization method previously required under SFAS No. 140, “Accounting for Transfers and ~~Exchange Commission (“SEC”) issued Staff Accounting Bulletins (“SAB”)~~Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 104, “Revenue Recognition,” which supersedes SAB No. 101, “Revenue Recognition in Financial Statements,” and updates portions of the interpretative guidance included in Topic 13 of the codification of SAB in order to make this interpretative guidance consistent with current authoritative accounting guidance. SAB No. 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (“FAQ”) issued with SAB No. 101 that had been codified in SAB Topic 13. Selected portions of the FAQ have been incorporated into SAB No. 104. The revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104.156 is effective for fiscal years beginning after September 15, 2006. The adoption of ~~SAB No. 104 did~~this standard is not expected to have ~~an effect~~any material impact on the Company’s consolidated ~~results~~statements of operations or financial ~~position of the Company.~~
In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated Financial Statements,” and subsequently revised in December 2003 with the issuance of FIN 46 (revised 2003). This interpretation 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 Company is required to apply this Interpretation for periods ending after April 1, 2004. The Company is currently evaluating the impact of the adoption of the revised FIN 46 on its financial position and results of operations. It is reasonably possible that the Company is a primary beneficiary of or holds a significant variable interest in a variable interest entity. See Note 21 for the required disclosures.
position.

2. Supplemental cash flow information:

Selected cash payments and noncash activities for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 were as follows:


								Thousands of												Thousands of
	Millions of Yen							U.S. Dollars			Millions of Yen									U.S. Dollars
	2002		2003		2004			2004			2004			2005			2006			2006

Cash payment for interest	¥	3,281		¥2,654	¥	2,458		$	23,189		¥	2,458		¥	2,038		¥	1,652		$	14,120
Cash payment for income taxes		12,580		9,047		14,260			134,528			14,260			17,195			9,039			77,256
Noncash investing activities:
Acquisition of a subsidiary:
Fair value of assets, net of cash acquired												—			60,736			—			—
Liability assumed including capital lease obligation of ¥12,882 million												—			(26,721	)		—			—

Payment for acquisition of a subsidiary, net of cash acquired												—			34,015			—			—

Sales of discontinued operations:
Transferred assets		—		—		14,932			140,868			14,932			—			1,527			13,051
Transferred liabilities		—		—		(11,823	)		(111,538	)		(11,823	)		—			(1,080	)		(9,231	)
Foreign currency translation adjustments		—		—		(37	)		(349	)		(37	)		—			(127	)		(1,085	)
Gain on sales		—		—		1,825			17,217			1,825			—			434			3,709

Cash received—net		—		—		4,897			46,198			4,897			—			754			6,444
Noncash financing activities:
Assumption of long-term debts from an affiliated company												—			—			25,357			216,726

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 seven years which is based on legal provisions that may limit the useful life.

~~F-12~~F-14

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 equipment		37,426
Acquired intangible asset of patent		6,937
Other assets		2,065
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 ¥ 736,697 ¥ 731,563
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 )

3.4. Discontinued operations:

In accordance with SFAS No. 144, the Company ~~presents~~presented the results of discontinued operations (including operations of subsidiaries that either have been disposed of or are classified as held for sale) as a separate line item in the consolidated statements of ~~income~~operations under “Income from discontinued operations, net of tax.”
The cash flows attributable to the operating, investing and financing activities of the discontinued operations were not presented separately from the cash flows attributable to activities of the continuing operations.

The discontinued operations for the year ended March 31, 2004 were as follows:

Pioneer LDC, Inc. and Pioneer Entertainment (USA) Inc.—

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~~transfers 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.~~during the year ending March 31, 2007.

F-15

Q-Tec, Inc.—

In March 2004, Q-Tec, Inc., which ~~was~~had been a 99.26% owned subsidiary of the Company, became an independent company through a ~~Management Buyout~~management buyout after acquiring all of the shares owned by the Company, with a business alliance of Vision Capital Corporation and Memory-Tech Corporation. Q-Tec, Inc. is one of the larger manufacturers in the Japanese postproduction industry which offers high-quality total services including editing of video and audio products such as animation, movies, commercials, and broadcast programs, DVD encoding/authoring and pressing.

     Summarized selected financial information for the ~~years~~year ended March 31, ~~2002, 2003 and~~ 2004 for the discontinued operations reclassified during the year ended March 31, 2004 iswas as follows:

Thousands of
Millions of Yen
U.S. Dollars

2002 2003 2004 2004

Operating revenue ¥ 32,348 ¥ 35,009 ¥ 16,650 $ 157,075

Operating income ¥ 1,281 ¥ 587 ¥ 382 $ 3,604

Income before income taxes ¥ 871 ¥ 551 ¥ 340 $ 3,208
Gain on sale of discontinued operations — — 1,825 17,217
Income taxes (benefit) 306 415 (2,310 ) (21,792 )

Income from discontinued operations ¥ 565 ¥ 136 ¥ 4,475 $ 42,217

     ~~The assets and liabilities for sold subsidiaries, excluding intercompany balances, at March 31, 2003 are summarized as follows:~~

Millions of Yen
2004
~~Current assets~~
Revenues ¥ ~~15,585~~16,664
~~Property, plant~~Cost and ~~equipment, less depreciation~~expenses ~~407~~16,324
~~Other assets~~
Income before income taxes ~~558~~340
Gain on sales of discontinued operations 1,825
~~Total assets~~Income taxes benefit 2,310
Income from discontinued operations ¥ ~~16,550~~4,475
~~Current liabilities~~ ¥ ~~9,200~~
~~Long-term liabilities~~ 61
~~Total liabilities~~ ¥ ~~9,261~~

     The discontinued operations for the year ended March 31, 2006 were as follows:
Pioneer Digital Technologies, Inc.—
During the year ended March 31, 2006, the Company decided to sell 100% of its shares in Pioneer Digital Technologies, Inc. through a management buyout. Pioneer Digital Technologies, Inc. was a wholly-owned subsidiary which was engaged in development of operating software for cable TV set-top boxes in the United States. The Company sold the shares for a cash consideration of ¥754 million ($6,444 thousand) and recognized a gain on the sale of ¥282 million ($2,410 thousand), net of taxes, in the year ended March 31, 2006. The Company has no continuing involvement with Pioneer Digital Technologies, Inc.
Pioneer Precision Machinery Corporation and its subsidiaries—
In order to improve management efficiency by concentrating resources in strategic business, on March 31, 2006, the Company reached a preliminary agreement with OMRON Corporation on the transfer to OMRON of the Company’s entire shares of Pioneer Precision Machinery Corporation, a 99.5% owned subsidiary of the Company, which was engaged in manufacturing and marketing of high-precision parts for electronic equipment.
     Assets and liabilities of Pioneer Precision Machinery Corporation and its subsidiaries have been classified as held for sale at March 31, 2006. In accordance with SFAS No. 144, assets held for sale of Pioneer Precision Machinery Corporation and its subsidiaries were recorded at the lower of their carrying amount or fair value less costs to sell and no impairment adjustment was necessary.
~~F-13~~F-16

The major classes of assets and liabilities included in the consolidated balance sheet at March 31, 2006 relating to assets and liabilities held for sale of Pioneer Precision Machinery Corporation and its subsidiaries were as follows:

Thousands of
Millions of Yen U.S. Dollars
2006 2006

Current assets held for sale:

Trade receivables ¥ 10,421 $ 89,068
Inventories 1,569 13,410
Other current assets 10,775 92,094
Property, plant and equipment 2,258 19,299
Other assets 554 4,736

Total ¥ 25,577 $ 218,607

Current liabilities held for sale:

Trade payables ¥ 10,673 $ 91,222
Accrued liabilities 1,129 9,650
Other current liabilities 4,629 39,564
Other long-term liabilities 1,432 12,239

Total ¥ 17,863 $ 152,675

Summarized selected financial information for the years ended March 31, 2004, 2005 and 2006 for the discontinued operations reclassified during the year ended March 31, 2006 was as follows:

Thousands of
Millions of Yen U.S. Dollars
2004 2005 2006 2006

Revenues ¥ 16,161 ¥ 22,598 ¥ 30,282 $ 258,821
Cost and expenses 14,844 20,720 29,462 251,812

Income before income taxes 1,317 1,878 820 7,009
Gain on sales of discontinued operations — — 434 3,709
Income taxes 418 555 482 4,120

Income from discontinued operations ¥ 899 ¥ 1,323 ¥ 772 $ 6,598

F-17

4.
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, ~~2003~~2005 and ~~2004~~2006 were as follows:

Millions of Yen

2003
2004

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 ¥6,636 ¥8,187 ¥63 ¥14,760 ¥6,520 ¥17,890 ¥1 ¥24,409
Marketable debt securities:
Non-current 85 — 14 71 106 1 — 107

Total ¥6,721 ¥8,187 ¥77 ¥14,831 ¥6,626 ¥17,891 ¥1 ¥24,516

Thousands of U.S. Dollars
Millions of Yen
2004
2005 2006
Gross Gross Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Holding Holding Aggregate Holding Holding Aggregate Holding Holding Aggregate
Cost Gains Losses Fair Value Cost Gains Losses Fair Value Cost Gains Losses Fair Value

Marketable equity securities:
Non-current $61,509 $168,774 $9 $230,274 ¥ 5,734 ¥ 16,438 ¥ 2 ¥ 22,170 ¥ 4,627 ¥ 19,982 — ¥ 24,609
Marketable debt securities:
Non-current 1,000 9 — 1,009 94 4 — 98 94 30 — 124

Total $62,509 $168,783 $9 $231,283 ¥ 5,828 ¥ 16,442 ¥ 2 ¥ 22,268 ¥ 4,721 ¥ 20,012 — ¥ 24,733

     The following table presents fair value and gross 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, 2004.

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 ¥14 ¥1 $132 $9

Thousands of U.S. Dollars
2006
Gross Gross
Unrealized Unrealized
Holding Holding Aggregate
Cost Gains Losses Fair Value

Marketable equity securities:
Non-current $ 39,547 $ 170,786 — $ 210,333
Marketable debt securities:
Non-current 803 257 — 1,060

Total $ 40,350 $ 171,043 — $ 211,393

~~F-14~~
     At March 31, ~~2004,~~2006, 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 ~~¥107~~¥124 million ($~~1,009~~1,060 thousand).
     Gross realized gain on available-for-sale securities for the ~~year~~years ended March 31, 2004, ~~was~~2005 and 2006 were ¥43 million, ¥2,300 million and ¥5,626 million ($~~406~~48,085 thousand)., respectively. Gross realized losses for the years ended March 31, ~~2003~~2004 and ~~2004~~2005 were ~~¥16 million and~~ ¥6 million, ~~($57 thousand),~~¥1 million, respectively. There was no gross realized ~~gain or~~ loss on available-for-sale securities recorded for the year ended March 31, ~~2002 and no gross realized gain on available-for-sale securities was recorded for the year ended March 31, 2003.~~
2006. The Company ~~holds~~owns marketable equity securities of customers and financial institutions for the purpose of maintaining long-term relationships, whose share prices are highly volatile. The Company has one investment in Japan which was in an unrealized loss position due to the share price’s poor performance at March 31, 2004. The duration of the impairment was less than six months. The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold this investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2004. For the years ended March 31, ~~2002, 2003~~2004 and ~~2004,~~2005, losses on other than temporary impairment of marketable equity securities were ~~¥1,828~~¥27 million, ~~¥1,346~~¥3 million, respectively. There was no loss on other than temporary impairment of marketable equity securities recorded for the year ended March 31, 2006. For the year ended March 31, 2005, a loss on other-than-temporary impairment of marketable debt securities was ¥3 million. There was no loss on other than temporary impairment of marketable debt securities recorded for the years ended March 31, 2004 and 2006.
     Sundry investments consist of non-marketable equity securities and memberships. The aggregate cost of the Company’s non-marketable equity securities totaled ¥2,977 million and ~~¥27~~¥2,793 million ($~~255~~23,872 thousand), at March 31, 2005 and 2006, respectively. Investments with an aggregate cost of ¥2,970 million and ¥2,690 million ($22,991 thousand) were not evaluated for impairment because (a) it was 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.
F-18

5.
6. Accounts receivable securitization programs:
In the United States of America, the Company has established PUSA Receivables Funding Corporation, Inc., a wholly owned bankruptcy remote-special purpose entity and set up an accounts receivable securitization program of eligible trade accounts receivable. A bankruptcy-remote subsidiary is a company that has been structured to make it highly unlikely that it would be drawn into a bankruptcy of the Company, or any of its subsidiaries. Through this program, the Company can securitize and sell, without recourse, on a revolving basis, an undivided interest up to $100,000 thousand in that pool of receivables to third party conduits owned by a bank. The value assigned to undivided interests retained in securitized trade receivables is based on the relative fair values of the interest retained and sold in the securitization. The Company has assumed that the fair value of the retained interest is equivalent to its carrying value as the receivables are short-term in nature and high quality. These securitization transactions are accounted for as sales in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” because the Company has surrendered control over the receivables.
     The Company sold a total of ¥9,706 million ($82,957 thousand) of receivables under this program for the year ended March 31, 2006. The Company’s subordinated net retained interest in accounts receivable for securitization and recorded, as a component of accounts receivable, was ¥5,268 million ($45,026 thousand) at March 31, 2006. The Company recognized a loss of ¥42 million ($359 thousand) on the securitization of receivables for the year ended March 31, 2006. The Company continues to service the sold receivables and is compensated at what we believe to be market rates. Accordingly, no servicing asset or liability has been recorded.
     In Japan, the Company set up several accounts receivable sales programs of eligible trade accounts receivable. Through these programs, the Company can sell receivables, without recourse, to financial institutions. These transactions are accounted for as sales in accordance with SFAS No. 140, because the Company has surrendered control over the receivables. The Company sold a total of ¥5,636 million ($48,171 thousand) of receivable under this program for the year ended March 31, 2006. Losses from these transactions were ¥24 million ($205 thousand) for the year ended March 31, 2006. Although the Company continues servicing the sold receivables, no servicing liabilities are recorded because costs for collection of the sold receivables are immaterial.
7. Inventories:
Inventories at March 31, ~~2003~~2005 and ~~2004~~2006 comprise the following:

Thousands of Thousands of
Millions of Yen
U.S. Dollars
Millions of Yen U.S. Dollars
2003 2004 2004 2005 2006 2006

Finished products ¥50,202 ¥ 51,360 $ 484,528 ¥ 52,807 ¥ 48,622 $ 415,572
Work in process 19,158 27,956 263,736 26,330 27,175 232,265
Materials and supplies 24,260 28,490 268,774 29,878 28,429 242,983

Total ¥93,620 ¥ 107,806 $ 1,017,038 ¥ 109,015 ¥ 104,226 $ 890,820

F-19
6.
8. 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~~by the equity ~~basis~~method of accounting were ¥9¥4 million, ~~¥58~~¥4 million and ¥4 million ($3834 thousand), respectively, for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004.~~
2006.
     Retained earnings include the parent company’s and its consolidated subsidiaries’ equity in undistributed earnings of 20% to 50% owned companies accounted for ~~on an~~by the equity ~~basis~~method of accounting in the amount of ~~¥245~~¥329 million and ~~¥310~~¥339 million ($~~2,925~~2,897 thousand) at March 31, ~~2003~~2005 and ~~2004,~~2006, respectively.
     Summarized financial information of companies owned 20% to 50%, including ELDis, Inc.~~, 45%~~ which was 47.5% owned by Tohoku Pioneer Corporation, a ~~67%~~67.1% owned subsidiary, and was liquidated in March, 2006 (See Note 17), accounted for by the equity method of accounting is as follows:

Thousands of
Millions of Yen U.S. Dollars
2005 2006 2006

Current assets ¥ 8,427 ¥ 2,528 $ 21,607
Property, plant and equipment 25,326 638 5,453
Other assets 403 210 1,795

Total assets ¥ 34,156 ¥ 3,376 $ 28,855

Current liabilities ¥ 5,116 ¥ 1,110 $ 9,487
Long-term liabilities 24,736 294 2,513
Shareholders’ equity 4,304 1,972 16,855

Total liabilities and shareholders’ equity ¥ 34,156 ¥ 3,376 $ 28,855

Thousands of
Millions of Yen U.S. Dollars
Years ended March 31 2004 2005 2006 2006

Net sales ¥ 8,408 ¥ 9,229 ¥ 6,974 $ 59,607
Gross profit (loss) 1,004 (1,932 ) 941 8,043
Net loss 5,023 5,801 24,720 211,282

~~F-15~~F-20

Thousands of
Millions of Yen
U.S. Dollars

2003 2004 2004

Current assets ¥19,802 ¥10,619 $ 100,179
Property, plant and equipment 27,209 28,978 273,377
Other assets 338 393 3,708

Total assets ¥47,349 ¥39,990 $ 377,264

Current liabilities ¥  4,857 ¥  2,822 $ 26,622
Long-term liabilities 27,430 27,110 255,755
Shareholders’ equity 15,062 10,058 94,887

Total liabilities and shareholders’ equity ¥47,349 ¥39,990 $ 377,264

Thousands of
Millions of Yen
U.S. Dollars

Year ended March 31 2002 2003 2004 2004

Net sales ¥7,404 ¥7,845 ¥8,408 $79,321
Gross profit 996 808 1,004 9,472
Net loss 237 6,802 5,023 47,387

7.9. Intangible assets:
Intangible assets subject to amortization acquired during the year ended March 31, ~~2004~~2006 totaled ~~¥9,687~~¥9,223 million ($~~91,387~~78,829 thousand) and primarily ~~consist~~consisted of software of ~~¥8,860~~¥8,941 million ($~~83,585~~76,419 thousand) and patents of ~~¥240~~¥29 million ($~~2,264~~248 thousand). The ~~weighted average~~weighted-average amortization periods for software, patents and total acquired during the year ended March 31, ~~2004 are 4.0~~2006 were 3.6 years, ~~6.3~~12.6 years and ~~4.5~~3.9 years, respectively.
     Intangible assets subject to amortization are comprised of the following:

Thousands of Thousands of
Millions of Yen
U.S. Dollars
Millions of Yen U.S. Dollars
2003
2004
2004

2005 2006 2006
Gross Gross Gross Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization Amount Amortization Amount Amortization Amount Amortization

Software ¥23,726 ¥(11,441 ) ¥31,161 ¥(15,412 ) $293,972 $(145,396 ) ¥ 34,281 ¥ (19,595 ) ¥ 30,503 ¥ (17,164 ) $ 260,709 $ (146,701 )
Patents 25,472 (23,623 ) 22,798 (21,426 ) 215,075 (202,132 ) 28,107 (20,538 ) 30,319 (24,593 ) 259,137 (210,197 )
Other 2,850 (1,365 ) 2,693 (848 ) 25,406 (8,000 ) 2,737 (940 ) 2,588 (1,077 ) 22,120 (9,205 )

Total ¥52,048 ¥(36,429 ) ¥56,652 ¥(37,686 ) $534,453 $(355,528 ) ¥ 65,125 ¥ (41,073 ) ¥ 63,410 ¥ (42,834 ) $ 541,966 $ (366,103 )

     The aggregate amortization expense for intangible assets for the years ended March 31, ~~2003~~2004, 2005 and ~~2004~~2006 was ~~¥7,949~~¥6,109 million, ¥7,229 million and ~~¥6,109~~¥8,662 million ($~~57,632~~74,034 thousand), respectively. The estimated aggregate amortization expense for intangible assets for the next five years is as follows:

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

2005 ¥5,969 $56,311
2006 4,616 43,547
2007 2,955 27,877 ¥ 7,786 $ 66,547
2008 1,793 16,915 4,485 38,333
2009 1,222 11,528 3,109 26,573
2010 1,539 13,154
2011 827 7,068

~~F-16~~F-21
     ~~Amounts previously reported~~
10. Impairment losses of long-lived assets:
The Company recognized impairment losses of long-lived assets in accordance with the provisions of SFAS No. 144 during the years ended March 31, 2005 and 2006. Impairment losses are included in other deductions of cost and expenses in the consolidated statements of operations (See Note 18). See Note 17, “Restructuring plans” for ~~net income and basic and diluted earnings per share~~the impairment losses of long-lived assets recognized in connection with the restructuring plans.
     The Company recognized impairment losses of long-lived assets in the aggregate of ¥4,460 million for the year ended March 31, ~~2002 are reconciled to amounts adjusted to exclude~~2005.
     For the ~~amortization expense related to goodwill and net income and basic and diluted earnings per share for the years~~year ended March 31, ~~2003~~2005, the Company reviewed PPD’s production facilities for impairment because of the unfavorable post-acquisition changes in market conditions for plasma displays. As a result of the review, an impairment loss of ¥3,396 million 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 the present value of estimated cash flows.
     The Company recognized impairment losses of long-lived assets in the aggregate of ¥41,422 million ($354,034 thousand) for the year ended March 31, 2006.
     During the year ended March 31, 2006, the Company reviewed the production facilities of plasma display (PPD’s production facilities and ~~2004~~other) and DVD recorder related products for impairment because of significant decreases in gross profit margins for plasma display and DVD recorder related products due to a sharp decline in market prices. As a result of the review, an impairment loss of ¥31,915 million ($272,778 thousand) in plasma display and ¥8,950 million ($76,496 thousand) in DVD recorder related products were recognized as ~~follows:~~

Thousands of
Millions of Yen
U.S. Dollars
2002 2003 2004 2004

Reported net income ¥8,047 ¥16,078 ¥24,838 $234,320
Add back: Goodwill amortization 748 — — —

Adjusted net income ¥8,795 ¥16,078 ¥24,838 $234,320

the excess of the carrying value of the asset group over the estimated fair value of the asset group. Fair value was determined using the present value of estimated cash flows.

Yen
U.S. Dollars

2002 2003 2004 2004

Basic earnings per share:
Reported net income ¥44.70 ¥90.24 ¥141.58 $1.34
Goodwill amortization 4.15 — — —

Adjusted net income ¥48.85 ¥90.24 ¥141.58 $1.34

Diluted earnings per share:
Reported net income ¥44.69 ¥90.24 ¥140.52 $1.33
Goodwill amortization 4.15 — — —

Adjusted net income ¥48.84 ¥90.24 ¥140.52 $1.33

F-22
8.11. Short-term borrowings and long-term debt:
Short-term borrowings at March 31, ~~2003~~2005 and ~~2004~~2006 comprise the following:

Thousands of Thousands of
Millions of Yen
U.S. Dollars
Millions of Yen U.S. Dollars
2003 2004 2004 2005 2006 2006

Bank loans:
Weighted-average interest rate 2.01% at March 31, 2003 and 1.74% at March 31, 2004:
Weighted-average interest rate 1.25% at March 31, 2005 and 1.62% at March 31, 2006:
Uncollateralized ¥29,893 ¥23,327 $220,066 ¥ 33,152 ¥ 23,205 $ 198,333

~~F-17~~
Long-term debt at March 31, ~~2003~~2005 and ~~2004~~2006 comprises the following:

Thousands of Thousands of
Millions of Yen
U.S. Dollars
Millions of Yen U.S. Dollars
2003 2004 2004 2005 2006 2006

Loans, principally from banks, maturing serially through 2013 interest ranging from 1.85% to 3.90% at March 31, 2003 and from 3.06% to 3.90% at March 31, 2004:
Loans, principally from banks, maturing serially through 2013 interest ranging from 2.90% to 3.06% at March 31, 2005 and from 0.95% to 2.90% at March 31, 2006:
Collateralized ¥   3,048 ¥   2,804 $   26,453 ¥ 1,960 ¥ 4,916 $ 42,017
Uncollateralized 4,370 3,680 34,717 50 15,452 132,068
2.35% Uncollateralized bonds due 2005 15,000 15,000 141,509 15,000 — —
2.80% Uncollateralized bonds due 2008 10,000 10,000 94,340 10,000 10,000 85,470
Zero coupon convertible bonds due 2011, including unamortized issue premium, ¥2,079 million ($19,613 thousand) (effective annual rate 0.5%) — 62,079 585,651
Industrial development U.S. dollar revenue bonds due 2005 with fluctuating interest rates (1.59% at March 31, 2003 and 1.29% at March 31, 2004), subject to maximum rate of 15% in 2003 and 2004 and other 752 638 6,019
Zero coupon convertible bonds due 2011, including unamortized issue premium, ¥1,779 million at March 31, 2005 and ¥1,479 million ($12,641 thousand) at March 31, 2006 (effective annual rate 0.5%) 61,779 61,479 525,462
Long-term capital lease obligations, 1.25% to 3.26% at March 31, 2005 and 2006 due principally 2012 11,129 8,251 70,521
Industrial development U.S. dollar revenue bonds due 2005 with fluctuating interest rates (1.70% at March 31, 2005), subject to maximum rate of 15% in 2005 and other 577 37 316

Total 33,170 94,201 888,689 100,495 100,135 855,854
Less—Portion due within one year 974 4,510 42,547
Less — Portion due within one year 19,276 7,165 61,239

Total ¥32,196 ¥89,691 $846,142 ¥ 81,219 ¥ 92,970 $ 794,615

     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 ($37.94).~~¥4,022. Market price of common stock at the date of issuance of the Bonds was ~~¥3,220 ($30.38).~~
     ~~Parent~~¥3,220.
     The parent company may redeem all, but not some of the Bonds, with advance irrevocable notice to bondholders in each case (1) if the closing price of common stock for each of the 30 consecutive trading days is at least 120% of the conversion price on or after March 4, 2007 and prior to maturity, or (2) if the laws or regulations of Japan having power to tax is changed, or (3) if a resolution is passed at the general meeting of shareholders of the parent company to become a wholly-owned subsidiary of another company.
F-23
     The stock acquisition right is also exercisable on or after March 19, 2004 if the parent company issues an irrevocable notice to bondholders for (2) or (3) above, or if a resolution passes at a general meeting of shareholders of the parent company (a) for any consolidation or amalgamation of the parent company with any company, or (b) for any split of parent company’s business, or (c) for the parent company to become a wholly-owned subsidiary of another company.
     The parent company will redeem the outstanding Bonds at 100% of their principal amount on March 4, 2011.
     Unused lines of credit for short-term financing at March 31, ~~2004~~2006 approximated ~~¥224,631~~¥254,482 million ($~~2,119,160~~2,175,060 thousand) of which ¥30,000 million ($~~283,019~~256,410 thousand) relates to commercial paper programs. ~~Unused~~There were no unused commitments for long-term financing arrangements at March 31, ~~2004 amounted to ¥5,000 million ($47,170 thousand).~~2006. There were no commitment fees.
     Land and buildings with a book value of ~~¥11,902~~¥7,366 million ($~~112,283~~62,957 thousand) were pledged as collateral for certain long-term loans of the Company at March 31, ~~2004.~~
~~F-18~~
2006.
     The aggregate annual maturities of long-term debt during the five years ending March 31, ~~2009~~2011 and thereafter are as follows:

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

2005 ¥   4,510 $   42,547
2006 15,857 149,594
2007 255 2,406 ¥ 7,165 $ 61,239
2008 272 2,566 6,632 56,684
2009 10,244 96,642 13,694 117,043
2010 3,271 27,957
2011 3,267 27,923
2012 and thereafter 66,106 565,008

Total ¥ 100,135 $ 855,854

     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-24
9.
12. 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 sum of cumulative points. The points ~~and length~~are accumulated based on years of service, job class 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 Company also sponsors a domestic ~~contributory~~non-contributory defined-benefit Corporate Pension Fund (“CPF”) under the Defined Benefit Corporate Pension Law which covers substantially all of its Japanese employees. The benefits are based on sum of cumulative points; which are accumulated based on years of service, job class and conditions under which termination occurs.
     The Company had sponsored a domestic defined-benefit welfare pension plan (the “Welfare Pension Plan”) covering substantially all of its Japanese employees. The benefits ofunder the ~~welfare pension plan are~~Welfare Pension Plan were primarily based on years of service and on the average compensation during years of service ~~and~~ subject to governmental regulations. The ~~welfare plan consists~~Welfare Pension Plan consisted of a ~~basic component,~~substitutional portion, which ~~has~~had been contributory and specified by the Japanese government’s welfare pension regulations, and ~~components~~a corporate portion representing a non-contributory plan established by the Company. ~~During the year ended March 31, 2003, the Company established~~Management considered that a ~~new component within the welfare pension plan. The new component covers a part of the parent company’s employees. Management considers that a~~substitutional portion of the ~~contributory plan,~~Welfare Pension Plan, which iswas administered by a board of trustees composed of management and labor representatives, ~~represents a welfare pension plan~~represented the 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 of the substitutional 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 ~~additional component is approximately one-fifth~~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 for the year ended March 31, 2005. The transfer resulted in the Company recording a subsidy from the government of ¥48,697 million 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 and a settlement loss of ¥51,893 million. The total amount of derecognition of previously accrued salary progression and settlement loss is allocated to cost of sales of ¥25,339 million and selling, general and administrative expenses of ¥24,152 million.
     As a result of the transfer of the substitutional portion, in 2005, the remaining corporate portion of the Welfare Pension Plan was called the CPF since it became subject to the Defined Benefit Corporate Pension Law with reduced benefits payment rate and shorter benefit ~~obligation.~~payment period. In addition, the Company amended the CPF to introduce a “point” based retirement benefit plan. The ~~welfare~~foregoing amendment generated an unrecognized prior service gain of ¥9,602 million for the year ended March 31, 2005.
     Substantially all of the employees of U.S. and European subsidiaries are covered by defined benefit pension ~~plan~~plans. Under such plans, the related cost of benefit is funded ~~in conformity with~~or accrued. The benefits are based on the ~~funding requirements~~level of ~~applicable governmental regulations.~~salary at retirement or earlier termination of employment, the years of service and conditions under which termination occurs.
F-25
     The plan assets and pension ~~obligation~~obligations for the ~~non-contributory~~defined benefit pension plans of domestic and ~~the contributory plan of the parent company and certain subsidiaries~~foreign defined benefit pension plans are measured at March 31 in each fiscal year.
     Net periodic benefit costs for the ~~non-contributory~~domestic and foreign defined benefit pension plans ~~and the contributory plan of the parent company and certain domestic subsidiaries~~ for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 consisted of the following:

Thousands of
Millions of Yen U.S. Dollars
2004 2005 2006 2006
Domestic Foreign Domestic Foreign Domestic Foreign Domestic Foreign
Plans Plans Plans Plans Plans Plans Plans Plans

Service cost ¥ 5,752 ¥ 542 ¥ 4,540 ¥ 565 ¥ 4,552 ¥ 417 $ 38,906 $ 3,564
Interest cost 4,819 639 5,224 693 2,361 755 20,179 6,453
Expected return on assets (3,127 ) (442 ) (3,729 ) (580 ) (2,313 ) (684 ) (19,769 ) (5,846 )
Amortization of unrecognized net actuarial loss 4,060 11 3,225 52 2,211 45 18,897 385
Amortization of unrecognized net assets at date of application (504 ) — (504 ) — (504 ) — (4,308 ) —
Amortization of unrecognized prior service (gain) loss (899 ) 16 (899 ) 4 (1,573 ) 3 (13,444 ) 25
Settlement loss — — 51,893 — — — — —
Curtailment (gain) loss — (18 ) — 26 (15 ) — (128 ) —
Derecognition of previously accrued salary progression — — (2,402 ) — — — — —

Net periodic benefit cost ¥ 10,101 ¥ 748 ¥ 57,348 ¥ 760 ¥ 4,719 ¥ 536 $ 40,333 $ 4,581

Actuarial assumptions used to determine net periodic pension cost:

Discount rate 3.2 % 6.1 % 3.4 % 5.6 % 2.5 % 5.4 %
Rate of salary increase 2.6 % 3.9 % 2.6 % 4.0 % — * 4.0 %
Long-term rate of return on plan assets 3.9 % 7.6 % 3.9 % 7.0 % 3.9 % 7.2 %

* The net periodic pension costs are determined using cumulative points and not salaries. The net periodic pension costs for the year ended March 31, 2006 was calculated on the basis of an annual increase in points of 3.0%.
~~F-19~~F-26

Thousands of
Millions of Yen
U.S. Dollars

2002
2003
2004
2004

Non- Non- Non- Non-
contributory Contributory contributory Contributory contributory Contributory contributory Contributory
Plans Plan Plans Plan Plans Plan Plans Plan

Service cost ¥ 2,657 ¥ 1,288 ¥ 2,884 ¥ 2,400 ¥ 2,892 ¥ 2,860 $ 27,283 $ 26,981
Interest cost 1,662 2,926 1,695 3,195 1,518 3,301 14,321 31,142
Expected return on assets (1,907 ) (2,245 ) (1,606 ) (1,941 ) (1,386 ) (1,741 ) (13,075 ) (16,425 )
Amortization of unrecognized net actuarial loss 744 1,287 1,021 1,853 1,632 2,428 15,396 22,906
Amortization of unrecognized net assets at date of application (163 ) (344 ) (163 ) (344 ) (160 ) (344 ) (1,510 ) (3,245 )
Amortization of unrecognized prior service gain (535 ) (364 ) (535 ) (364 ) (535 ) (364 ) (5,047 ) (3,434 )

Net periodic benefit cost ¥ 2,458 ¥ 2,548 ¥ 3,296 ¥ 4,799 ¥ 3,961 ¥ 6,140 $ 37,368 $ 57,925

Actuarial assumptions used to determine net periodic pension cost:

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 % 3.9 % 3.9 % 3.9 % 3.9 %

*Non-contributory plans are not pay-related.
~~F-20~~
Reconciliations of beginning and ending balances of benefit obligations and the fair value of the plan assets of the domestic and foreign defined benefit pension plans are as follows:

Thousands of
Millions of Yen
U.S. Dollars
Thousands of
2003
2004
2004
Millions of Yen U.S. Dollars
Non- Non- Non- 2005 2006 2006
contributory Contributory contributory Contributory contributory Contributory Domestic Foreign Domestic Foreign Domestic Foreign
Plans Plan Plans Plan Plans Plan Plans Plans Plans Plans Plans Plans

Change in benefit obligation:

Benefit obligation at beginning of year ¥ 62,802 ¥ 74,305 ¥ 69,446 ¥ 80,512 $ 655,151 $ 759,547 ¥ 154,125 ¥ 12,574 ¥ 94,410 ¥ 13,595 $ 806,923 $ 116,197
Service cost 2,884 2,400 2,892 2,860 27,283 26,981 4,540 565 4,552 417 38,906 3,564
Interest cost 1,695 3,195 1,518 3,301 14,321 31,142 5,224 693 2,361 755 20,179 6,453
Plan participants’ contribution — 1,063 — 659 — 6,217 39 110 — 113 — 966
Actuarial loss (gain) 5,086 534 (3,004 ) (543 ) (28,340 ) (5,123 )
Actuarial loss 36,091 781 1,222 1,784 10,444 15,248
Lump-sum cash payments (2,607 ) — (1,429 ) — (13,481 ) — (1,878 ) — (2,462 ) — (21,043 ) —
Benefits paid (414 ) (985 ) (507 ) (1,129 ) (4,783 ) (10,651 ) (1,910 ) (228 ) (1,655 ) (298 ) (14,145 ) (2,547 )
Decrease due to sales of discontinued operations — — (451 ) — (4,255 ) —
Transfer of substitutional portion (92,219 ) — — — — —
Plan amendment (9,602 ) — (1,219 ) — (10,419 ) —
Curtailment — (1,412 ) (141 ) — (1,204 ) —
Translation adjustments — 512 — 695 — 5,940

Benefit obligation at end of year ¥ 69,446 ¥ 80,512 ¥ 68,465 ¥ 85,660 $ 645,896 $ 808,113 ¥ 94,410 ¥ 13,595 ¥ 97,068 ¥ 17,061 $ 829,641 $ 145,821

Change in plan assets:

Fair value of plan assets at beginning of year ¥ 41,167 ¥ 49,778 ¥ 35,923 ¥ 44,639 $ 338,896 $ 421,123 ¥ 95,595 ¥ 7,656 ¥ 59,325 ¥ 9,330 $ 507,051 $ 79,744
Actual return on plan assets (6,198 ) (7,963 ) 5,739 5,670 54,142 53,491 2,704 499 14,385 1,339 122,949 11,444
Employer contribution 3,975 2,746 4,040 2,381 38,113 22,462 5,895 990 7,661 726 65,479 6,205
Plan participants’ contribution — 1,063 — 659 — 6,217 39 110 — 113 — 966
Lump-sum cash payments (2,607 ) — (1,429 ) — (13,481 ) — (1,878 ) — (2,462 ) — (21,043 ) —
Benefits paid (414 ) (985 ) (507 ) (1,129 ) (4,783 ) (10,651 ) (1,910 ) (228 ) (1,655 ) (298 ) (14,145 ) (2,547 )
Decrease due to sales of discontinued operations — — (391 ) — (3,689 ) —
Transfer of substitutional portion (41,120 ) — — — — —
Translation adjustments — 303 — 538 — 4,598

Fair value of plan assets at end of year ¥ 35,923 ¥ 44,639 ¥ 43,375 ¥ 52,220 $ 409,198 $ 492,642 ¥ 59,325 ¥ 9,330 ¥ 77,254 ¥ 11,748 $ 660,291 $ 100,410

Funded status ¥ (33,523 ) ¥ (35,873 ) ¥ (25,090 ) ¥ (33,440 ) $ (236,698 ) $ (315,471 ) (35,085 ) (4,265 ) (19,814 ) (5,313 ) (169,350 ) (45,411 )
Unrecognized actuarial loss 36,474 42,383 27,476 35,483 259,208 334,745 44,957 1,814 31,770 2,775 271,538 23,719
Unrecognized net assets at the date of application (646 ) (1,297 ) (486 ) (953 ) (4,585 ) (8,991 ) (935 ) — (431 ) — (3,684 ) —
Unrecognized prior service gain (8,235 ) (4,573 ) (7,700 ) (4,209 ) (72,642 ) (39,708 )
Unrecognized prior service cost (gain) (20,612 ) 58 (20,258 ) 55 (173,145 ) 470

Net amount recognized ¥ (5,930 ) ¥ 640 ¥ (5,800 ) ¥ (3,119 ) $ (54,717 ) $ (29,425 ) ¥ (11,675 ) ¥ (2,393 ) ¥ (8,733 ) ¥ (2,483 ) $ (74,641 ) $ (21,222 )

Amounts recognized in the statement of financial position consist of:

Accrued benefit liabilities ¥ (31,037 ) ¥ (33,013 ) ¥ (23,017 ) ¥ (27,302 ) $ (217,142 ) $ (257,566 ) ¥ (32,759 ) ¥ (3,263 ) ¥ (15,893 ) ¥ (4,106 ) $ (135,838 ) $ (35,094 )
Accumulated other comprehensive income 25,107 33,653 17,217 24,183 162,425 228,141 21,084 870 7,160 1,623 61,197 13,872

Net amount recognized ¥ (5,930 ) ¥ 640 ¥ (5,800 ) ¥ (3,119 ) $ (54,717 ) $ (29,425 ) ¥ (11,675 ) ¥ (2,393 ) ¥ (8,733 ) ¥ (2,483 ) $ (74,641 ) $ (21,222 )

Accumulated benefit obligation at end of year ¥ 66,960 ¥ 77,652 ¥ 66,392 ¥ 79,522 $ 626,340 $ 750,208 ¥ 92,074 ¥ 12,344 ¥ 92,161 ¥ 15,435 $ 787,701 $ 131,923

Actuarial assumptions used to determine benefit obligations:

Discount rate 2.2 % 4.1 % 2.5 % 4.1 % 2.5 % 5.4 % 2.5 % 4.9 %
Rate of salary increase — * 2.6 % — * 2.6 % — * 4.0 % — * 2.5 %

*Non-contributory
* The benefit obligations are determined using cumulative points and not salaries. The benefit obligations at March 31, 2005 and 2006 were calculated on the basis of an annual increase in points of 3.0%.
     The aggregate projected benefit obligations and the aggregate fair value of plan assets for the domestic pension plans for which projected benefit obligations exceed plan assets are ~~not pay-related.~~
¥90,741 million ($775,564 thousand) and ¥70,872 million ($605,744 thousand) at March 31, 2006.
     The aggregate accumulated benefit obligations and the aggregate fair value of plan assets for the domestic pension plans for which accumulated benefit obligations exceed plan assets are ¥87,035 million ($743,889 thousand) and ¥70,872 million ($605,744 thousand) at March 31, 2006.
~~F-21~~F-27
     The aggregate accumulated benefit obligations and the aggregate fair value of plan assets for the U.S. and European pension plans for which accumulated benefit obligations exceed plan assets are as follows:

Thousands of
Millions of Yen U.S. Dollars
2005 2006 2006

Accumulated benefit obligations ¥ 11,474 ¥ 15,161 $ 129,581
Fair value of plan assets 8,369 11,447 97,838

     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 for the non-contributory plans and for the contributory plan.~~
     ~~To determine~~employees.
     The Company determines the expected long-term rate of return on pension plan assets ~~the Company considers the current and target asset allocations, as well as historical and~~based on weighted average of expected long-term returns on various categories of plan assets, ~~adjusted as deemed appropriate to reflect more recent capital market experiences as well as~~reflecting the ~~rate~~current and target allocations of ~~inflation and interest rates.~~
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, ~~2003~~2005 and ~~2004,~~2006, by asset category are as follows:

Asset category 2003 2004
Asset Category 2005 2006

Equity securities 44 % 46 % 53 % 57 %
Debt securities 35 % 30 % 34 35
Real estate and other 21 % 24 %
Other 13 8

Total 100 % 100 % 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 the ~~current~~ weighted-average target asset allocation for these plans at March 31, 2006 is; equity securities 56%, 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.
     Substantially all of the employees of U.S. and European subsidiaries are covered by defined benefit pension plans. The projected benefit obligation for the plans and related fair value of plan assets are as follows:

Thousands of
Millions of Yen
U.S. Dollars

2003 2004 2004

Projected benefit obligation ¥ 10,732 ¥ 12,574 $118,623
Plan assets 6,248 7,656 72,226

Actuarial assumptions used to determine benefit obligation (PBO weighted):

Discount rate 6.1 % 5.6 %
Rate of salary increase 3.9 % 4.0 %

     ~~Net periodic pension costs for these plans for the years ended March 31, 2002, 2003 and 2004 are as follows:~~

Thousands of
Millions of Yen
U.S. Dollars

2002 2003 2004 2004

Total net periodic pension cost ¥1,034 ¥872 ¥748 $7,057

Actuarial assumptions used to determine net periodic pension cost:

Discount rate 6.2 % 6.5 % 6.1 %
Rate of salary increase 4.3 % 4.3 % 3.9 %
Long-term rate of return on plan assets 7.2 % 7.5 % 7.6 %

     ~~Accumulated other comprehensive income of ¥557 million ($5,255 thousand) was recorded for European plans at March 31, 2004.~~
~~F-22~~
     With respect to directors, provision is made for lump-sum severance indemnities on a basis considered adequate for such future payments as may be approved by the shareholders.
     In February 2002, the Company announced the closure of the Hiwada plant in Fukushima, Japan because of the transfer of production sites to China. In relation to this closure, the Company recorded special termination benefits for employees’ voluntary termination of ¥906 million for the year ended March 31, 2002. In June 2002, Tohoku Pioneer Corporation implemented a voluntary early retirement plan. In relation to this plan, the Company recorded special termination benefits of ¥1,424 million. These special termination benefits were included in the selling, general and administrative expenses.
     The Company expects to contribute ~~¥5,756~~¥6,701 million ($~~54,302~~57,274 thousand) to its ~~domestic~~ defined benefit ~~plan~~plans in the year ending March 31, ~~2005.~~2007.
F-28
~~10.~~
     The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

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

2007 ¥ 9,402 $ 80,359
2008 3,435 29,359
2009 3,878 33,145
2010 4,309 36,829
2011 4,965 42,436
Years 2012 — 2016 25,830 220,769

13. 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 year ended March 31, 2004 and 41% for the years ended March 31, ~~2002, 2003~~2005 and ~~2004~~2006 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 ~~($6,434 thousand)~~ 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:

Thousands of Thousands of
Millions of Yen
U.S. Dollars
Millions of Yen U.S. Dollars
2002 2003 2004 2004 2004 2005 2006 2006

Computed tax expense at normal statutory tax rate ¥ 6,078 ¥ 11,793 ¥ 17,576 $ 165,811 ¥ 17,022 ¥ (847 ) ¥ (29,178 ) $ (249,385 )
Increase (decrease) resulting from:
Changes in valuation allowance 507 (3,007 ) (3,701 ) (34,915 )
Loss operations 1,294 6,137 39,814 340,291
Realization of tax benefit of operating loss carryforwards (395 ) (671 ) (1,005 ) (8,590 )
Expenses not deductible for tax purpose:
Domestic 713 269 280 2,642 272 243 192 1,641
Foreign 221 439 149 1,406 120 413 205 1,752
Amortization of goodwill 314 — — —
Difference in foreign and Japanese tax rates (1,934 ) (1,595 ) (1,608 ) (15,170 ) (1,535 ) (1,784 ) (1,383 ) (11,820 )
Effect of tax rate change on deferred taxes — 835 447 4,217 432 — — —
Liquidation of ELDis, Inc. — — (13,503 ) (115,410 )
Tax benefit for discontinued operations — — 3,025 28,538 3,025 — — —
Tax credit for research and development expenses (186 ) (530 ) (898 ) (8,472 ) (898 ) (232 ) (141 ) (1,205 )
Other 703 828 3,317 31,292 (1,168 ) 1,028 339 2,897

Provision for income taxes ¥ 6,416 ¥ 9,032 ¥ 18,587 $ 175,349 ¥ 18,169 ¥ 4,287 ¥ (4,660 ) $ (39,829 )

~~F-23~~F-29
Total income taxes provided for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 are as follows:

Thousands of Thousands of
Millions of Yen
U.S. Dollars
Millions of Yen U.S. Dollars
2002 2003 2004 2004 2004 2005 2006 2006

Provision for income taxes on income from continuing operations ¥ 6,416 ¥ 9,032 ¥ 18,587 $ 175,349
Provision for income taxes (benefit) on income from continuing operations ¥ 18,169 ¥ 4,287 ¥ (4,660 ) $ (39,829 )
Provision for income taxes (benefit) on income from discontinued operations 306 415 (2,310 ) (21,792 ) (1,892 ) 555 482 4,120
Shareholders’ equity—directly charged (credited):
Shareholders’ equity — directly charged (credited):
Minimum pension liability adjustments (6,460 ) (8,927 ) 6,953 65,594 6,953 8,225 5,505 47,051
Net unrealized gains on securities (1,502 ) (899 ) 4,009 37,821 4,009 (593 ) 1,460 12,479

Total ¥ (1,240 ) ¥ (379 ) ¥ 27,239 $ 256,972 ¥ 27,239 ¥ 12,474 ¥ 2,787 $ 23,821

Income from continuing operations before income taxes and income ~~tax expense~~taxes comprised the following components:

Thousands of Thousands of
Millions of Yen
U.S. Dollars
Millions of Yen U.S. Dollars
2002 2003 2004 2004 2004 2005 2006 2006

Income (loss) from continuing operations before income taxes:
Domestic ¥ (4,187 ) ¥ 10,137 ¥ 18,481 $ 174,349 ¥ 16,737 ¥ 2,649 ¥ (69,834 ) $ (596,872 )
Foreign 18,659 17,942 23,367 220,443 23,791 (4,716 ) (1,331 ) (11,376 )

Total ¥ 40,528 ¥ (2,067 ) ¥ (71,165 ) $ (608,248 )
¥ 14,472 ¥ 28,079 ¥ 41,848 $ 394,792

Income taxes—Current:
Income taxes — Current:
Domestic ¥ 3,684 ¥ 6,643 ¥ 10,799 $ 101,877 ¥ 9,935 ¥ 6,260 ¥ 5,232 $ 44,718
Foreign 7,111 7,834 7,030 66,321 7,183 909 2,842 24,291

Total ¥ 17,118 ¥ 7,169 ¥ 8,074 $ 69,009
¥ 10,795 ¥ 14,477 ¥ 17,829 $ 168,198

Income taxes—Deferred:
Income taxes — Deferred:
Domestic ¥ (4,490 ) ¥ (3,296 ) ¥ (385 ) $ (3,632 ) ¥ (837 ) ¥ (1,659 ) ¥ (13,854 ) $ (118,410 )
Foreign 111 (2,149 ) 1,143 10,783 1,888 (1,223 ) 1,120 9,572

Total ¥ 1,051 ¥ (2,882 ) ¥ (12,734 ) $ (108,838 )
¥ (4,379 ) ¥ (5,445 ) ¥ 758 $ 7,151

~~F-24~~F-30
The significant components of the deferred tax assets and liabilities at March 31, ~~2003~~2005 and ~~2004~~2006 are as follows:

Thousands of Thousands of
Millions of Yen
U.S. Dollars
Millions of Yen U.S. Dollars
2003
2004
2004
2005 2006 2006
Deferred Deferred Deferred Deferred Deferred Deferred Deferred Deferred Deferred Deferred Deferred Deferred
Tax Tax Tax Tax Tax Tax Tax Tax Tax Tax Tax Tax
Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities

Inventories ¥ 8,197 — ¥ 6,911 — $ 65,198 — ¥ 5,590 — ¥ 6,198 — $ 52,974 —
Marketable equity securities 3,831 ¥1,018 2,971 ¥5,017 28,028 $ 47,330 2,040 ¥ 4,445 2,092 ¥ 7,074 17,880 $ 60,461
Allowance for notes and accounts receivable 824 — 871 — 7,445 —
Accrued expenses 9,106 — 10,411 — 98,217 — 16,316 — 22,549 — 192,726 —
Warranty reserve 1,863 — 1,969 — 16,829 —
Tax loss carryforwards 11,723 — 9,297 — 87,708 — 21,232 — 52,832 — 451,556 —
Pension and severance cost 28,341 — 22,268 — 210,075 — 15,116 — 8,905 — 76,111 —
Land 2,216 — 1,840 — 17,358 —
Property 4,230 — 17,981 — 153,684 —
Depreciation 1,563 387 1,907 302 17,991 2,849 3,029 490 4,119 342 35,205 2,923
Royalty receivable 1,395 — 974 — 9,189 — 539 — 472 — 4,034 —
Other 18,384 2,863 15,574 3,408 146,925 32,151 6,539 2,469 2,275 4,718 19,445 40,325

Total 84,756 4,268 72,153 8,727 680,689 82,330 77,318 7,404 120,263 12,134 1,027,889 103,709
Valuation allowance (15,292 ) — (11,591 ) — (109,349 ) — (20,605 ) — (53,112 ) — (453,949 ) —

Total ¥ 69,464 ¥4,268 ¥ 60,562 ¥8,727 $ 571,340 $ 82,330 ¥ 56,713 ¥ 7,404 ¥ 67,151 ¥ 12,134 $ 573,940 $ 103,709

The changes in the valuation allowance for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 are as follows:

Millions of Yen

Balance at Balance at
Beginning Translation End
Valuation allowance of Period Addition Deduction Adjustments of Period

2002 ¥ 17,792 ¥ 2,720 ¥ (2,762 ) ¥   549 ¥ 18,299
2003 18,299 5,741 (8,912 ) 164 15,292
2004 15,292 1,956 (5,469 ) (188 ) 11,591

Thousands of U.S. Dollars
Balance at Balance at
Beginning Translation End
Valuation allowance of Period Addition Deduction Adjustments of Period

2004 $ 144,264 $ 18,453 $ (51,594 ) $(1,774 ) $ 109,349

Thousands of
Millions of Yen U.S. Dollars
Valuation Allowance 2004 2005 2006 2006

Balance at beginning of year ¥ 15,292 ¥ 11,591 ¥ 20,605 $ 176,111
Addition* 1,956 12,851 35,118 300,154
Deduction (5,469 ) (3,963 ) (2,948 ) (25,196 )
Translation adjustments (188 ) 126 337 2,880

Balance at end of year ¥ 11,591 ¥ 20,605 ¥ 53,112 $ 453,949

* “Addition” includes valuation allowance of ¥7,953 million 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.
     Decrease in valuation allowance for the year ended March 31, 2003 was mainly due to the reversal of valuation allowance which had been provided for a tax benefit, the realization of which had been judged as unlikely, 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 at certain subsidiaries for which the realization of the related deferred tax assets was determined not to be more likely than not. Increase in valuation allowance for the year ended March 31, 2006 was mainly due to losses incurred at the parent company and certain subsidiaries.
~~F-25~~F-31
          At March 31, ~~2004,~~2006, the Company has tax loss carryforwards which are available to reduce taxable income in subsequent periods. If not utilized, such loss carryforwards expire as follows:

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

2005 ¥ 706 $ 6,660
2006 152 1,434
2007 1,138 10,736 ¥ 542 $ 4,633
2008 1,512 14,264 624 5,333
2009 1,557 14,689 285 2,436
2010 3,196 27,316
2011 7,307 62,453
Thereafter 17,319 163,387 123,075 1,051,923

Total ¥ 22,384 $ 211,170 ¥ 135,029 $ 1,154,094

          No provision for income taxes is recognized on undistributed earnings of foreign subsidiaries that are not expected to be remitted in the foreseeable future. Undistributed earnings of foreign subsidiaries (including related foreign currency translation adjustments) at March 31, ~~2003~~2005 and ~~2004~~2006 amounted to approximately ~~¥133,923~~¥115,606 million and ~~¥116,689~~¥134,148 million ($~~1,100,840~~1,146,564 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.
~~11.~~
14. 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 ($~~1,689,396~~1,530,564 thousand) would have been transferred from retained earnings to appropriate capital accounts ~~as of~~at March 31, ~~2004.~~
2006.
          The Code requires that all shares of common stock be issued with no par value and at least 50% of the issue price of new shares is required to be recorded as common stock and the remaining net proceeds are required to be presented as additional paid-in capital, which is included in capital surplus.
Retained Earnings—
Retained earnings consist of legal reserve 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, to be designated 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, the~~ Code also ~~provided~~provides that an amount ~~at least equal to~~of 10% or more of the aggregate amount of cash dividends and certain other ~~cash payments which are made as an appropriation~~appropriations of retained earnings associated with cash payments applicable to each ~~fiscal~~ period (such as bonuses to directors) shall be appropriated ~~and set aside~~ as a legal reserve (a component of retained earnings) until the total of such reserve and additional paid-in capital 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~~and additional paid-in capital that exceeds 25% of ~~stated capital is~~the common stock may be available for appropriations by resolution of the ~~shareholders.~~
     ~~The~~shareholders after transferring such excess in accordance with the Code. In addition, the Code permits ~~companies to~~the transfer of a portion of additional paid-in capital ~~surplus~~ and legal reserve to ~~stated capital~~the common stock by resolution of the Board of Directors.
          The Code ~~also permits 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 of treasury stock. Effective October 1, 2001, the Code eliminated these restrictions allowing~~allows 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 aggregate purchased amount of treasury stock cannot exceed the
~~F-26~~F-32
amount available for future dividends plus the amount of common stock, additional paid-in capital or legal reserve that could be transferred to retained earnings or other capital surplus other than additional paid-in capital upon approval of such transfer at the general meeting of shareholders.
          In addition to the provision that requires an appropriation for a legal reserve in connection with the cash payments as described above, the Code also imposes certain limitations on the amount of capital surplus and retained earnings available for dividends. The amount of capital surplus and retained earnings available for dividends under the Code was ~~¥135,697~~¥77,625 million ($~~1,280,160~~663,462 thousand) ~~as of~~at March 31, ~~2004, that is~~2006, 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~~to 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
          On May 1, 2006, the Company Law became effective, which reformed and replaced the Code with various revisions that would, for the most part, be applicable to events or transactions which occur on or after May 1, 2006 and for the fiscal years ending on or after May 31, 2006. The significant changes in the Company Law that affect financial and accounting matters are summarized below;
(a) Dividends
Under the Company Law, companies can pay dividends at any time during the fiscal year in addition to the ~~provision~~year-end dividend upon resolution at the shareholders meeting. For companies that ~~requires an appropriation for~~meet certain criteria such as; (1) having the Board of Directors, (2) having independent auditors, (3) having the Board of Corporate Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends if the company has prescribed so in its articles of incorporation. Semiannual interim dividends may also be paid once a ~~legal reserve in connection with~~year upon resolution by the ~~cash payment as described above,~~Board of Directors if the articles of incorporation of the company so stipulate. Under the Code, ~~imposes~~ certain limitations were imposed on the amount of capital surplus and retained earnings available for dividends.
(b) Increases/decreases and transfer of common stock, reserve and surplus
The Company Law requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of aggregate amount of legal reserve and additional paid-in capital equals 25% of common stock. Under the Code, the aggregate amount of additional paid-in capital and legal reserve that exceeds 25% of the common stock may be made available for dividends by resolution of the shareholders. Under the Company Law, the total amount of additional paid-in capital and legal reserve may be reversed without limitation of such threshold. The Company Law also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders.
(c) Treasury stock and treasury stock acquisition rights
The Company Law also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by specific formula.
At the general meeting of shareholders ~~meeting~~ held on June 27, 2002, the shareholders of the parent company authorized the purchase of up to 10,000,000 shares of the parent company’s common stock. In August 2002, November 2002, ~~and~~ February 2003 and March 2005, the parent company purchased 1,610,000 shares, 2,000,000 shares, ~~and~~ 1,500,000 shares and 1,000,000 shares of ~~their~~its common stock, respectively, in the market for the aggregate cost of ~~¥11,492~~¥13,455 million as a publicly announced plan to improve capital efficiency
F-33
pursuant to a revision in the Code.
The appropriations of retained earnings for the year ended March 31, ~~2004,~~2006, which have been incorporated in the accompanying consolidated financial statements, will be proposed for approval at the general ~~shareholders’~~ meeting of shareholders to be held on June 29, ~~2004,~~2006 and will be recorded in the parent company’s general books of account after shareholders’ approval.
~~12.~~
15. Stock-based compensation plans:

The Company has ~~two types of stock-based compensation plans~~a stock option plan as an incentive ~~plans~~plan for directors, executive officers 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. These warrants vest over one year and expire in three years from the date of issuance.
~~Stock option plan—~~
In accordance with approval at ~~shareholders’ meetings~~the general meeting of shareholders on ~~June 29, 2000 and~~ June 28, 2001, the Company granted share subscription rights to employees. Also, in accordance with approval at ~~shareholders’ meeting~~the general meetings of shareholders on June 27, 2002, ~~and~~ June 27, 2003, June 29, 2004, and June 29, 2005, the Company granted share acquisition rights to directors, executive officers and certain employees of the Company. These options ~~vest over~~are vested and immediately exercisable after two ~~years and expire in five~~ years from the date of ~~grant.~~grant, and exercise periods are three years from the vesting. 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 compensation~~stock 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 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
2004 Stock option From July 1, 2005 to June 30, 2008 2,951 2,845 313

U.S. Dollars
Yen
Weighted-Average Weighted-Average Number of
Weighted-Average Grant Date Weighted-Average Grant Date Shares
Year Plan Exercisable Period Exercise Price Share Price
Years ended March 31 Plan Exercisable Period Exercise Price Share Price (Thousands)

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 2004 Stock option From July 1, 2005 to June 30, 2008 $27.84 $26.84 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
2006 Stock option From July 2, 2007 to June 30, 2010 1,828 1,658 315

~~F-27~~

U.S. Dollars
Weighted-Average
Weighted-Average Grant Date
Year ended March 31 Plan Exercisable Period Exercise Price Share Price

2006 Stock option From July 2, 2007 to June 30, 2010 $ 15.62 $ 14.17

          Remuneration ~~cost~~costs recognized for stock-based compensation plans for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 were ~~¥346~~¥305 million, ~~¥149~~¥270 million and ~~¥305~~¥175 million ($~~2,877~~1,495 thousand), respectively.
F-34
          The weighted-average fair value per share at the date of grant for the ~~warrants and the~~ stock options granted during the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 were ~~¥573, ¥704~~¥907, ¥654 and ~~¥907~~¥306 ($~~8.56)~~2.62), 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-valuation model with the following weighted-average assumptions:

2002 2003 2004 2004 2005 2006

Risk-free interest rate 0.25 % 0.24 % 0.34 % 0.34 % 0.50 % 0.23 %
Expected lives 3.48 years 3.48 years 3.48 years 3.48 years 3.48 years 3.48 years
Expected volatility 50.61 % 52.81 % 48.13 % 48.13 % 40.02 % 31.98 %
Expected dividends 0.41 % 0.69 % 0.88 % 0.88 % 0.93 % 0.90 %

          A summary of the status of the Company’s warrants, which expired through August 26, 2004, and options ~~as of~~at March 31, ~~2002, 2003~~2004, 2005 and ~~2004,~~2006, and changes during the years is as follows:

Weighted-Average Exercise Weighted-Average Weighted-Average Exercise
Weighted-Average Price per Share
Number of Shares Remaining Life Price per Share
Number of Shares Remaining Life (Thousands) (Years) Yen U.S. Dollars
(Thousands) (Years) Yen U.S. Dollars

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
Expired (98 ) 2,188

Outstanding at March 31, 2003 1,643 2.5 ¥3,441 1,643 2.5 ¥ 3,441
Granted 313 2,951 $27.84 313 2,951
Expired (284 ) 4,728 44.60 (284 ) 4,728

Outstanding at March 31, 2004 1,672 2.4 ¥3,131 $29.54 1,672 2.4 ¥ 3,131
Granted 316 2,944
Exercised (4 ) 2,477
Expired (413 ) 3,266

Exercisable at March 31, 2003 888 ¥3,977
Outstanding at March 31, 2005 1,571 2.5 ¥ 3,059 $ 26.15
Granted 315 1,828 15.62
Expired (191 ) 4,400 37.61

Exercisable at March 31, 2004 795 ¥3,664 $34.57
Outstanding at March 31, 2006 1,695 2.3 ¥ 2,679 $ 22.90

Exercisable at March 31, 2005 942 ¥ 3,133

Exercisable at March 31, 2006 1,064 ¥ 2,852 $ 24.38

F-35
~~13.~~
16. 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, 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 )
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 )

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

Balance at March 31, 2003 $ (308,255 ) $ 31,585 $ (248,132 ) $ (524,802 ) ¥ (32,675 ) ¥ 3,348 ¥ (26,302 ) ¥ (55,629 )
Adjustments for the year 91,934 54,293 (204,717 ) (58,490 ) 9,745 5,755 (21,700 ) (6,200 )

Balance at March 31, 2004 $ (216,321 ) $ 85,878 $ (452,849 ) $ (583,292 ) (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 )
Adjustments for the year 7,506 2,102 17,969 27,577

Balance at March 31, 2006 ¥ (3,680 ) ¥ 10,352 ¥ (26,764 ) ¥ (20,092 )

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, 2005 $ (95,607 ) $ 70,513 $ (382,333 ) $ (407,427 )
Adjustments for the year 64,154 17,966 153,581 235,701

Balance at March 31, 2006 $ (31,453 ) $ 88,479 $ (228,752 ) $ (171,726 )

~~F-28~~F-36
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

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 )

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 )

Thousands of U.S. Dollars
Millions of Yen
Before-Tax Tax (Expense) Minority Net-of-Tax Before-Tax Tax (Expense) Minority Net-of-Tax
Amount or Benefit Interest Amount Amount or Benefit Interest Amount

2004:
Minimum pension liability adjustments $ 158,519 $ (65,594 ) $ (991 ) $ 91,934 ¥ 16,803 ¥ (6,953 ) ¥ (105 ) ¥ 9,745
Net unrealized gains on securities:
Unrealized holding gains arising during year 92,359 (37,859 ) (151 ) 54,349 9,790 (4,013 ) (16 ) 5,761
Less—Reclassification adjustment for gains realized in net income (94 ) 38 — (56 ) (10 ) 4 — (6 )

Net unrealized gains 92,265 (37,821 ) (151 ) 54,293 9,780 (4,009 ) (16 ) 5,755
Foreign currency translation adjustments:
Foreign currency translation adjustments arising during year (217,076 ) — 8,604 (208,472 ) (23,010 ) — 912 (22,098 )
Less—Reclassification adjustment for losses realized in net income 3,755 — — 3,755 398 — — 398

Net foreign currency translation adjustments (213,321 ) — 8,604 (204,717 ) (22,612 ) — 912 (21,700 )

Other comprehensive income (loss) $ 37,463 $ (103,415 ) $ 7,462 $ (58,490 ) ¥ 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

2006
Minimum pension liability adjustments ¥ 13,171 ¥ (5,505 ) ¥ (160 ) ¥ 7,506
Net unrealized gains on securities:
Unrealized holding gains arising during year 9,534 (3,904 ) (10 ) 5,620
Less—Reclassification adjustment for gains realized in net income (5,962 ) 2,444 — (3,518 )

Net unrealized gains 3,572 (1,460 ) (10 ) 2,102
Foreign currency translation adjustments:
Foreign currency translation adjustments arising during year 18,986 — (865 ) 18,121
Less—Reclassification adjustment for gains realized in net income (152 ) — — (152 )

Foreign currency translation adjustments 18,834 — (865 ) 17,969

Other comprehensive income (loss) ¥ 35,577 ¥ (6,965 ) ¥ (1,035 ) ¥ 27,577

Thousands of U.S. Dollars
Before-Tax Tax (Expense) Minority Net-of-Tax
Amount or Benefit Interest Amount

2006
Minimum pension liability adjustments $ 112,573 $ (47,051 ) $ (1,368 ) $ 64,154
Net unrealized gains on securities:
Unrealized holding gains arising during year 81,487 (33,368 ) (85 ) 48,034
Less—Reclassification adjustment for gains realized in net income (50,957 ) 20,889 — (30,068 )

Net unrealized gains 30,530 (12,479 ) (85 ) 17,966
Foreign currency translation adjustments:
Foreign currency translation adjustments arising during year 162,273 — (7,393 ) 154,880
Less—Reclassification adjustment for gains realized in net income (1,299 ) — — (1,299 )

Foreign currency translation adjustments 160,974 — (7,393 ) 153,581

Other comprehensive income (loss) $ 304,077 $ (59,530 ) $ (8,846 ) $ 235,701

~~F-29~~F-37
17. Restructuring plans:
As part of its effort to improve the performance of the various businesses, the Company implemented a number of restructuring initiatives. The following is a summary of significant restructuring activities:
     During the year ended March 31, 2005, the Company decided to withdraw from the sale of 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 related to software used in the manufacture of cable TV set-top boxes to the U.S. market; and, in addition to the impairment loss, recorded ¥1,758 million for asset disposal and contract termination costs and ¥25 million for special termination benefits in “Other” and “Special termination benefits” of other deductions of cost and expenses in the consolidated statements of operations for the year ended March 31, 2005.
     During the year ended March 31, 2005, the Company made a decision to close a car electronics plant in Mexico as part of the integration plan in foreign manufacturing companies. As a result of this closure, this subsidiary recognized an impairment loss of ¥477 million for the year ended March 31, 2005 and recorded involuntary special termination benefits of ¥197 million ($1,684 thousand) for the year ended March 31, 2006. These were recorded in “Impairment of long-lived assets” and “Special termination benefits” of other deductions of cost and expenses, respectively. This restructuring activity was substantially completed in the year ended March 31, 2006 and no liability existed at March 31, 2006.
     During the year ended March 31, 2006, the Company decided to close a car electronics plant in Belgium as part of the integration plan in foreign manufacturing companies. As a result of this decision, this subsidiary recorded involuntary special termination benefits of ¥2,977 million ($25,444 thousand) and an impairment loss of ¥557 million ($4,761 thousand) related to the property and equipment for the year ended March 31, 2006. These were included in “Special termination benefits” and “Impairment of long-lived assets” of other deductions of cost and expenses, respectively. Furthermore, the Company recorded contract termination costs of ¥253 million ($2,162 thousand) and other associated costs of ¥595 million ($5,085 thousand) which were included in “Other” of other deductions of cost and expenses for the year ended March 31, 2006. This restructuring activity was substantially completed and the remaining liability balance at March 31, 2006 was ¥2,754 million ($23,538 thousand).
     In addition to the restructuring efforts disclosed above, the Company has undergone several head count reduction programs to further reduce operating costs. In Japan, twelve Pioneer Group domestic companies, including the parent company, implemented voluntary early retirement programs in February 2006. In relation to these programs, the Company recorded special termination benefits of ¥10,760 million ($91,966 thousand) for the year ended March 31, 2006 when employees accepted the offer and the amount could be reasonably estimated. The remaining liability balance at March 31, 2006 of ¥10,760 million ($91,966 thousand) will be paid during the year ending March 31, 2007. In addition, certain foreign subsidiaries recorded voluntary special termination benefits of ¥161 million ($1,376 thousand) for the year ended March 31, 2006. There were included in “Special termination benefits” of other deductions of cost and expenses in the consolidated statements of operations.
     In connection with the restructuring plan, during the year ended March 31, 2006, the Company decided to withdraw from the TFT substrate business which had been carried out by ELDis, Inc., an equity method investee, which was 47.5% owned by Tohoku Pioneer Corporation, a 67.1% owned subsidiary. ELDis, Inc. was liquidated in March 2006 with the Company assuming its long-term debt amounting to ¥25,357 million ($216,726 thousand). The Company recorded losses of ¥24,139 million ($206,316 thousand) in “Equity in losses of affiliated companies” in the consolidated statements of operations for the year ended March 31, 2006; which included the long-term debt assumed of ¥25,357 million and gain on disposal and others of ¥1,922 million ($16,427 thousand).
F-38
~~14.~~18. Supplemental information:
Supplemental information for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 is as follows:

Thousands of Thousands of
Millions of Yen
U.S. Dollars
Millions of Yen U.S. Dollars
2002 2003 2004 2004 2004 2005 2006 2006

Research and development expenses charged to cost and expenses ¥ 39,050 ¥ 45,388 ¥ 51,483 $ 485,689 ¥ 51,449 ¥ 55,858 ¥ 63,442 $ 542,239
Advertising costs charged to expense as incurred 12,352 11,089 12,813 120,877 12,813 11,587 10,961 93,684

     ~~Other—net as shown in other~~
     Other income ~~(expenses)~~of revenues for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 consisted of the following:

Thousands of
Millions of Yen
U.S. Dollars
2002 2003 2004 2004

Write-down of available-for-sale securities and sundry investments ¥ (2,341 ) ¥ (1,369 ) ¥ (245 ) $ (2,311 )
Gains (losses) on sale of available-for-sale securities and sundry investments 54 (20 ) 37 349
Other 133 641 315 2,972

Total ¥ (2,154 ) ¥ (748 ) ¥ 107 $ 1,010

Thousands of
Millions of Yen U.S. Dollars
2004 2005 2006 2006

Gain on sale of available-for-sale securities and sundry investments ¥ 37 ¥ 2,309 ¥ 5,711 $ 48,812
Foreign exchange gain, net — 480 — —
Dividend income 319 378 481 4,111
Other 123 257 597 5,103

Total other income ¥ 479 ¥ 3,424 ¥ 6,789 $ 58,026

     Other deductions of cost and expenses for the years ended March 31, 2004, 2005 and 2006 consisted of the following:

Thousands of
Millions of Yen U.S. Dollars
2004 2005 2006 2006

Impairment of long-lived assets — ¥ 4,460 ¥ 41,422 $ 354,034
Special termination benefits — 25 14,095 120,470
Write-down of available-for-sale securities and sundry investments ¥ 245 51 133 1,137
Foreign exchange loss, net 1,192 — 2,326 19,880
Other 152 1,800 2,044 17,470

Total other deductions ¥ 1,589 ¥ 6,336 ¥ 60,020 $ 512,991

~~15.~~19. Leased assets:
The Company leases certain land, machinery and equipment, office space, warehouses, computer equipment and employees’ residential ~~facilities primarily~~facilities.
     An analysis of assets under ~~operating leases.~~capital leases was as follows:

Thousands of
Millions of Yen U.S. Dollars
2005 2006 2006

Machinery and equipment ¥ 12,625 ¥ 13,041 $ 111,461
Accumulated depreciation (1,794 ) (5,066 ) (43,299 )

Total ¥ 10,831 ¥ 7,975 $ 68,162

F-39
     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 at March 31, 2006:

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

2007 ¥ 3,277 $ 28,009
2008 2,649 22,641
2009 650 5,555
2010 640 5,470
2011 629 5,376
2012 and thereafter 790 6,752

Total minimum lease payments 8,635 73,803

Less—Amount representing interest 384 3,282

Present value of net minimum lease payment 8,251 70,521
Less—Current obligations 3,094 26,444

Long-term capital lease obligations ¥ 5,157 $ 44,077

     Rental expenses under operating leases for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 aggregated ~~¥6,058~~¥5,991 million, ~~¥6,068~~¥8,123 million and ~~¥6,268~~¥7,520 million ($~~59,132~~64,274 thousand), respectively. Such rentals relate principally to cancelable leases which are renewable upon expiration.
F-40
     The net minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, ~~2004~~2006 are as follows:

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

2005 ¥2,467 $ 23,274
2006 1,512 14,264
2007 1,026 9,679 ¥ 2,511 $ 21,462
2008 694 6,547 1,976 16,889
2009 486 4,585 1,470 12,564
2010 849 7,256
2011 472 4,034
Thereafter 1,760 16,604 1,171 10,009

Total minimum future rentals ¥7,945 $ 74,953 ¥ 8,449 $ 72,214

~~F-30~~
~~16.~~20. 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.
     The notional amounts of forward exchange contracts ~~as of~~at March 31, ~~2003~~2005 and ~~2004~~2006 were ~~¥8,496~~¥34,950 million and ~~¥20,505~~¥38,864 million ($~~193,443~~332,171 thousand), respectively. The notional amounts of currency options purchased ~~were ¥1,558 million as of~~at March 31, ~~2003.~~2006 were ¥9,128 million ($78,017 thousand). The notional ~~amount~~amounts of currency options written ~~was ¥1,558 million as of~~at March 31, ~~2003.~~
2006 were ¥9,128 million ($78,017 thousand).
     To change currency and interest rate features of intercompany finance transactions, the Company ~~entered~~enters into currency swap contracts with banks. Currency swap contracts effectively ~~changed,~~change, in substance, the U.S. dollars floating interest rate intercompany borrowings into Japanese yen fixed and floating interest rate borrowings and euro fixed interest rate borrowings. The notional amounts of currency swap contracts ~~as of~~at March 31, ~~2003~~2005 and ~~2004~~2006 were ~~¥32,255~~¥35,489 million and ~~¥35,106 million~~¥ 55,667million ($~~331,189~~475,786 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.
F-41
~~F-31~~
~~17.~~21. Fair value of financial instruments:
The following table presents the carrying amounts and fair values of the Company’s financial instruments at March 31, ~~2003~~2005 and ~~2004:~~2006:

Thousands of
Millions of Yen
U.S. Dollars
Thousands of
2003
2004
2004
Millions of Yen U.S. Dollars
Assets (Liabilities)
Assets (Liabilities)
Assets (Liabilities)
2005 2006 2006
Carrying Fair Carrying Fair Carrying Fair Carrying Fair Carrying Fair Carrying Fair
Amounts Value Amounts Value Amounts Value Amounts Value Amounts Value Amounts Value

Assets:
Available-for-sale securities ¥ 14,831 ¥ 14,831 ¥ 24,516 ¥ 24,516 $ 231,283 $ 231,283 ¥ 22,268 ¥ 22,268 ¥ 24,733 ¥ 24,733 $ 211,393 $ 211,393
Sundry investments 411 452 396 479 3,385 4,094
Long-term receivables 292 288 253 244 2,387 2,302 185 179 145 140 1,239 1,197
Other financial instruments:
Forward exchange contracts 13 13 790 790 7,453 7,453 50 50 105 105 897 897
Currency swap 190 190 2,706 2,706 23,128 23,128
Currency option — — 69 69 590 590
Liabilities:
Long-term debt, including current maturity (33,170 ) (34,730 ) (94,201 ) (89,507 ) (888,689 ) (844,406 ) (100,495 ) (100,135 ) (855,854 )
Less—Capital lease obligations 11,129 8,251 70,521

Long-term debt—net (89,366 ) (84,301 ) (91,884 ) (86,316 ) (785,333 ) (737,744 )

Other financial instruments:
Forward exchange contracts (250 ) (250 ) (95 ) (95 ) (896 ) (896 ) (555 ) (555 ) (352 ) (352 ) (3,009 ) (3,009 )
Currency swap (2,076 ) (2,076 ) (3,179 ) (3,179 ) (29,991 ) (29,991 ) (3,009 ) (3,009 ) (125 ) (125 ) (1,068 ) (1,068 )
Currency option (7 ) (7 ) — — — — — — (60 ) (60 ) (513 ) (513 )

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 4.
5.
     Sundry investments included non-marketable equity ~~interests in non-public companies,~~securities, amounting to ~~¥2,404~~¥2,977 million and ~~¥2,855~~¥2,793 million ($~~26,934~~23,872 thousand) at March 31, ~~2003~~2005 and ~~2004,~~2006, respectively, and memberships amounting to ~~¥503~~¥411 million and ~~¥528 million~~¥ 396million ($~~4,981~~3,385 thousand) at March 31, ~~2003~~2005 and ~~2004,~~2006, 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 estimated current replacement cost. ~~The fair values of foreign currency options were measured using valuation models.~~
     The fair values of the Company’s contingent liabilities for guarantees of loans are not significant.
F-42
~~F-32~~
~~18.~~22. Basic and diluted earnings 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, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 is as follows:

Thousands of
Millions of Yen
U.S. Dollars

2002 2003 2004 2004

Income from continuing operations ¥ 7,482 ¥ 15,942 ¥ 20,363 $ 192,103
Effect of dilution—Zero coupon convertible bonds — — (21 ) (198 )

Income from continuing operations—diluted ¥ 7,482 ¥ 15,942 ¥ 20,342 $ 191,905

Income from discontinued operations, net of tax ¥ 565 ¥ 136 ¥ 4,475 $ 42,217

Net income ¥ 8,047 ¥ 16,078 ¥ 24,838 $ 234,320
Effect of dilution—Zero coupon convertible bonds — — (21 ) (198 )

Net income—diluted ¥ 8,047 ¥ 16,078 ¥ 24,817 $ 234,122

Number of Shares (Thousands)

Weighted-average common shares outstanding 180,032 178,168 175,433
Effect of dilutive convertible bonds — — 1,115
Effect of dilutive warrants 32 2 —
Effect of stock options — 1 61

Diluted common shares outstanding 180,064 178,171 176,609

Thousands of
Millions of Yen U.S. Dollars
2004 2005 2006 2006

Income (loss) from continuing operations ¥ 19,464 ¥ (10,112 ) ¥ (85,758 ) $ (732,974 )
Effect of dilution—Zero coupon convertible bonds (21 ) — — —

Income (loss) from continuing operations—diluted ¥ 19,443 ¥ (10,112 ) ¥ (85,758 ) $ (732,974 )

Income from discontinued operations, net of tax ¥ 5,374 ¥ 1,323 ¥ 772 $ 6,598

Net income (loss) ¥ 24,838 ¥ (8,789 ) ¥ (84,986 ) $ (726,376 )
Effect of dilution—Zero coupon convertible bonds (21 ) — — —

Net income (loss)—diluted ¥ 24,817 ¥ (8,789 ) ¥ (84,986 ) $ (726,376 )

Yen U.S. Dollars

Basic net income per share:
Income from continuing operations ¥ 41.56 ¥ 89.48 ¥ 116.07 $ 1.10
Income from discontinued operations, net of tax 3.14 0.76 25.51 0.24

Net income ¥ 44.70 ¥ 90.24 ¥ 141.58 $ 1.34

Diluted net income per share:
Income from continuing operations ¥ 41.55 ¥ 89.48 ¥ 115.18 $ 1.09
Income from discontinued operations, net of tax 3.14 0.76 25.34 0.24

Net income ¥ 44.69 ¥ 90.24 ¥ 140.52 $ 1.33

Number of Shares (Thousands)

Weighted-average common shares outstanding 175,433 175,389 174,426
Effect of dilutive convertible bonds 1,115 — —
Effect of stock options 61 — —

Diluted common shares outstanding 176,609 175,389 174,426

~~F-33~~

Yen U.S. Dollars

Basic net income per share:
Income (loss) from continuing operations ¥ 110.95 ¥ (57.65 ) ¥ (491.66 ) $ (4.20 )
Income from discontinued operations, net of tax 30.63 7.54 4.43 0.04

Net income (loss) ¥ 141.58 ¥ (50.11 ) ¥ (487.23 ) $ (4.16 )

Diluted net income per share:
Income (loss) from continuing operations ¥ 110.09 ¥ (57.65 ) ¥ (491.66 ) $ (4.20 )
Income from discontinued operations, net of tax 30.43 7.54 4.43 0.04

Net income (loss) ¥ 140.52 ¥ (50.11 ) ¥ (487.23 ) $ (4.16 )

~~19.~~23. Supplemental schedule:
The changes in the allowance for doubtful receivables for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 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

2002 ¥ 9,821 ¥ (153 ) ¥ (4,660 ) ¥ 311 ¥ 5,319
2003 5,319 411 (765 ) (334 ) 4,631
2004 4,631 (667 ) (13 ) (417 ) 3,534

Thousands of U.S. Dollars

Balance at Charged (Credited) Deductions for Thousands of
Beginning to Costs and Accounts Translation Balance at End Millions of Yen U.S. Dollars
Allowance for Doubtful Receivables of Period Expenses Written Off Adjustments of Period 2004 2005 2006 2006

2004 $ 43,689 $ (6,293 ) $ (123 ) $ (3,934 ) $ 33,339
Balance at beginning of year ¥ 4,631 ¥ 3,534 ¥ 2,610 $ 22,308
Charged (credited) to costs and expenses (667 ) (515 ) 850 7,265
Deductions for accounts written off (13 ) (497 ) (517 ) (4,419 )
Translation adjustments (417 ) 88 222 1,897

Balance at end of year ¥ 3,534 ¥ 2,610 ¥ 3,165 $ 27,051

F-43
The changes in the warranty reserve for the ~~year~~years ended March 31, 2004, 2005 and 2006 are as follows:

Millions of Yen
Balance at
Beginning Translation Balance at End
Warranty Reserve of Period Provision Payments Adjustments of Period

2002 ¥ 5,478 ¥ 10,976 ¥ (10,290 ) ¥ 317 ¥ 6,481
2003 6,481 7,642 (7,374 ) (256 ) 6,493
2004 6,493 6,050 (6,669 ) (455 ) 5,419

Thousands of U.S. Dollars

Balance at Thousands of
Beginning Translation Balance at End Millions of Yen U.S. Dollars
Warranty Reserve of Period Provision Payments Adjustments of Period 2004 2005 2006 2006

2004 $ 61,255 $ 57,075 $ (62,915 ) $ (4,292 ) $ 51,123
Balance at beginning of year ¥ 6,493 ¥ 5,419 ¥ 5,722 $ 48,906
Provision 6,050 8,030 9,506 81,248
Payments (6,669 ) (7,844 ) (8,972 ) (76,684 )
Translation adjustments (455 ) 117 347 2,966

Balance at end of year ¥ 5,419 ¥ 5,722 ¥ 6,603 $ 56,436

~~F-34~~
~~20.~~24. Commitments and contingent liabilities:
Commitments outstanding at March 31, ~~2004~~2006 for the purchase of property, plant and equipment and ~~advertisement~~raw materials, and other payments approximated ~~¥3,114~~¥26,133 million ($~~29,377~~223,359 thousand).
     Contingent liabilities at March 31, ~~2004~~2006 principally for loans guaranteed in the ordinary course of business amounted to ~~¥25,634~~¥235 million ($~~241,830~~2,009 thousand).
     Loans guaranteed at March 31, ~~2004~~2006 are as follows:

Guaranteed Amount
Guaranteed Amount
Thousands of Thousands of
Guarantee for Guaranteed until Millions of Yen U.S. Dollars Guaranteed until Millions of Yen U.S. Dollars

Affiliated company May 31, 2012—October 22, 2012 ¥25,000 $235,849 April 1, 2006–March 31, 2007 ¥ 235 $ 2,009
Affiliated company October 25, 2004—March 31, 2005 502 4,736

Total ¥25,502 $240,585

     The Company entered into ~~these~~this guarantee ~~agreements~~agreement to sustain the business relationships.
     The Company will be required to pay the guaranteed amounts if the affiliated companies are unable to repay.
     ~~During the year ended March 31, 2001, the Company~~
     Pioneer Electronics Deutschland GmbH (“PED”), a wholly owned subsidiary, received ~~a notice of proposed~~an assessment from the German tax authorities ~~for approximately EUR 21~~in December 2000, which stated income adjustment of EUR44.4 million (¥~~2,706~~6,341 million translated at the foreign exchange rate at March 31, ~~2004) relating to a tax position taken in prior~~2006) covering the fiscal 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, 1993 to 1995, concerning its intercompany purchase prices from Pioneer Europe NV, a wholly owned subsidiary in Belgium. PED, in 2001, contested the assessment and has requested the German and the Belgian tax authorities to try to reach an agreement (through an arbitration proceeding) on the arm’s length transfer prices and avoid double taxation. The German tax authorities notified PED in February 2006 that they were not able to reach an agreement with the Belgian tax authorities. PED has requested the German and Belgian tax authorities to continue the arbitration proceeding to resolve the issue. PED, in February 2006, received a tax audit memo (which outlines its preliminary views but does not yet constitute an assessment) from the German tax authorities which stated income adjustment of EUR50.7 million (¥7,240 million) covering the fiscal years ended March 31, 1996 to 1999. PED made objection to the German tax authorities regarding the basis of this memo. The German tax authorities have not yet issued an assessment for the fiscal years covered in the said tax audit memo. Also, PED understands that the German tax authorities have completed transfer pricing audit for the fiscal years ended March 31, 2000 to 2004. InThe result of the ~~opinion~~audit has not been communicated to PED.
     The Company, at the date of ~~management, it~~this report, is ~~not possible at this time~~unable to reasonably determine the ~~ultimate~~ resolution and is unable to currently estimate the amount of ~~this matter.~~
the loss, if any, associated with the foregoing assessment, tax audit memo and completed transfer pricing audit.
~~21. Variable interest entity:~~
ELDis, Inc. was established in March 2001 to manufacture and market new products, thin film transistor substrates for active-matrix organic light-emitting diode. ELDis, Inc., 45% owned by Tohoku Pioneer Corporation, a 67% owned subsidiary is accounted for by equity method of accounting.
     At March 31, 2004, total assets and total of common stock and capital surplus of ELDis, Inc. was ¥35,496 million ($334,868 thousand) and ¥20,000 million ($188,679 thousand), respectively. At March 31, 2004, it is reasonably possible that Tohoku Pioneer Corporation is the primary beneficiary of or holds a significant variable interest in ELDis, Inc., a development stage enterprise. Tohoku Pioneer Corporation’s maximum exposure to loss as a result of its involvement with ELDis, Inc. at March 31, 2004 is as follows:

Thousands of
Variable interests Millions of Yen U.S. Dollars

Investments in equity ¥ 9,000 $ 84,906
Guarantee of loans 25,000 235,849

Total ¥ 34,000 $ 320,755

~~22.~~25. Remuneration of directors, executive officers and corporate auditors:
The aggregate remuneration (including bonuses and stock-based compensation [see Note ~~12]~~15]) charged to income by the parent company for directors, executive officers and corporate auditors for the years ended March 31, ~~2002, 2003~~2004, 2005 and ~~2004~~2006 totaled ~~¥876~~¥1,238 million, ~~¥965~~¥1,136 million and ~~¥1,238~~¥974 million ($~~11,679~~8,325 thousand), respectively.
~~F-35~~
~~23. Subsequent events:~~
a. In June 2004, we received preliminary information from the United States Internal Revenue Service proposing additional taxes of approximately $58 million (¥6,148 million translated at the foreign exchange rate at March 31, 2004) relating to an adjustment to transfer prices between affiliated companies for the years ended March 31, 2000 through 2002. We intend to contest the adjustment. In the opinion of management, it is not possible at this time to determine the ultimate outcome of this matter.
b. On July 1, 2004, the Company and NEC Corporation (“NEC”) concluded the stock transfer agreement under which NEC will transfer to the Company 100% of the issued share capital of its plasma display manufacturing subsidiary, NEC Plasma Display Corporation (“NPD”) and the intellectual property rights relating to plasma displays held by NEC. We expect to pay approximately ¥40,000 million ($377,358 thousand) for the acquisition of NPD and NEC’s intellectual property rights which is scheduled to be effective as of September 30, 2004.
~~F-36~~F-44

•		~~develop innovative, technologically-advanced products that meet and stimulate market demand;~~

•		~~enhance our brand recognition and promote customer satisfaction;~~

•		~~leverage our leadership position in the car electronics business;~~

•		~~focus on our strategic products targeting global markets; and~~

•		~~adopt optimal production methods to maximize profitability.~~

•		~~¥1.2 trillion of consolidated operating revenue~~

•		~~ROE (Return on Equity) in excess of 10%~~


	Effect on shareholders’ equity			Net periodic pension cost
	at March 31, 2006			for fiscal 2007
	(In billions of yen)
Discount rate:
0.5% increase		¥ 4.7			¥ (0.7	)
0.5% decrease		(5.3	)		0.7

Expected long-term rate of return:
0.5% increase		—			(0.4	)
0.5% decrease		—			0.4


	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
Operating income	¥	2,099	¥	28,936	¥	11,398	¥	1,096	¥	190		¥	43,719
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


	Year ended March 31, 2003													Year ended March 31, 2006
									Corporate and															Corporate
	Home Electronics		Car Electronics		Patent Licensing		Others		Eliminations			Consolidated		Home			Car		Patent					and
														Electronics			Electronics		Licensing		Others			Eliminations			Consolidated
	(In millions of yen)																		(In millions of yen)
Operating revenue:
Unaffiliated customers	¥	277,968	¥	281,090	¥	12,584	¥	105,617		—		¥	677,259	¥	354,690		¥	330,522	¥	8,540	¥	61,212			—		¥	754,964
Inter-segment		1,718		1,271		2,014		41,780	¥	(46,783	)		—		2,123			1,579		2,048		37,645		¥	(43,395	)		—

Total	¥	279,686	¥	282,361	¥	14,598	¥	147,397	¥	(46,783	)	¥	677,259	¥	356,813		¥	332,101	¥	10,588	¥	98,857		¥	(43,395	)	¥	754,964
Operating income	¥	3,878	¥	26,126	¥	10,736	¥	8	¥	(9,983	)	¥	30,765

Segment income (loss)														¥	(35,184	)	¥	17,486	¥	7,217	¥	(3,991	)	¥	(1,937	)	¥	(16,409	)
Identifiable assets	¥	172,316	¥	153,644	¥	4,357	¥	130,275	¥	186,437		¥	647,029	¥	177,367		¥	169,338	¥	1,474	¥	74,326		¥	255,541		¥	678,046
Depreciation and amortization	¥	11,596	¥	13,370	¥	1,550	¥	7,822	¥	1,900		¥	36,238	¥	20,654		¥	11,511	¥	963	¥	8,532		¥	4,897		¥	46,557
Capital expenditures (additions to fixed assets)	¥	16,798	¥	13,997	¥	398	¥	6,774	¥	3,004		¥	40,971	¥	16,317		¥	12,214	¥	60	¥	8,462		¥	1,973		¥	39,026


	Year ended March 31, 2005
										Corporate
	Home			Car		Patent				and
	Electronics			Electronics		Licensing		Others		Eliminations			Consolidated
						(In millions of yen)
Operating revenue:
Unaffiliated customers	¥	322,771		¥	303,410	¥	10,237	¥	74,624		—		¥	711,042
Inter-segment		2,332			1,321		1,362		36,683	¥	(41,698	)		—

Total	¥	325,103		¥	304,731	¥	11,599	¥	111,307	¥	(41,698	)	¥	711,042

Segment income (loss)	¥	(24,628	)	¥	18,591	¥	9,389	¥	61	¥	(2,722	)	¥	691
Identifiable assets	¥	240,923		¥	167,346	¥	2,852	¥	92,478	¥	221,568		¥	725,167
Depreciation and amortization	¥	22,073		¥	12,514	¥	311	¥	8,439	¥	3,478		¥	46,815
Capital expenditures (additions to fixed assets)	¥	32,769		¥	12,358		—	¥	9,501	¥	9,568		¥	64,196


	Year ended March 31, 2005
												Corporate
				North						Other		and
	Japan			America			Europe			Regions		Eliminations			Consolidated
							(In millions of yen)
Operating revenue:
Unaffiliated customers	¥	286,090		¥	171,947		¥	149,117		¥	103,888		—		¥	711,042
Inter-area		288,196			5,030			805			175,698	¥	(469,729	)		—

Total	¥	574,286		¥	176,977		¥	149,922		¥	279,586	¥	(469,729	)	¥	711,042

Segment income (loss)	¥	(7,106	)	¥	(2,738	)	¥	(308	)	¥	6,986	¥	3,857		¥	691
Identifiable assets	¥	315,252		¥	60,799		¥	60,463		¥	112,312	¥	176,341		¥	725,167
Depreciation and amortization	¥	31,819		¥	2,344		¥	2,444		¥	6,730	¥	3,478		¥	46,815
Capital expenditures (additions to fixed assets)	¥	44,658		¥	1,911		¥	1,005		¥	7,054	¥	9,568		¥	64,196


		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)
	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	—


	Total number of
	shares covered by		Current	Number of shares
Fiscal year	option		exercise price	exercised
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	—


•		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;

~~(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 are set out in an ordinance of the Ministry of Justice.~~

•		~~individuals who are not resident in Japan; and~~

•		~~corporations whose principal offices are located outside Japan.~~

•		~~individuals who are exchange 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.

•		~~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,~~


	Yen		Yen		Yen			Yen			A$		EUR
Functional currency	US$/		Yen/		EUR/			THB/			A$/		EUR/
Sell/Buy	Yen		US$		Yen			Yen			US$		GBP		Total
	(In millions of yen except average rates)
Contract amounts	¥	12,652	¥	446	¥	23,053		¥	144		¥	1,290	¥	1,279	¥	38,864
Average contractual exchange rates		116.28		114.29		139.72			2.8900			0.7495		0.6970
Fair value	¥	28	¥	3	¥	(336	)	¥	(5	)	¥	62	¥	1	¥	(247	)


Functional currency	Yen
Sell/Buy	US$/Yen			Yen/US$		Total
	(In millions of yen except average rates)
Notional amount	¥	9,128		¥	9,128	¥	18,256
Average execution rates		115.44			115.44
Fair value	¥	(37	)	¥	46	¥	9


Functional currency	Yen		EUR		A$			THB			NT$			SEK
Sell/Buy	US$/Yen		EUR/Yen		A$/US$			THB/US$			US$/NT$			NOK/SEK		Total
	(In millions of yen except average rates)

Contract amounts	¥	5,409	¥	12,338	¥	1,041		¥	870		¥	744		¥	103	¥	20,505
Average contractual exchange rates		110.40		134.10		0.6894			39.5017			33.23			1.0588
Fair value	¥	248	¥	542	¥	(87	)	¥	(2	)	¥	(6	)	¥	0	¥	695


					Expected maturity date
	Contract amounts				(year ending March 31)															Expected maturity date
	Buy		Sell		2005		2006		2007		Total		Fair value			Contract amounts				(year ending March 31)
																Buy		Sell		2007		2008	2009		Total		Fair value
	(Millions except average rates)															(In millions except average rates)
Functional currency: Yen		¥24,540		US$200				¥18,665		¥5,875		¥24,540	¥	(3,106	)	¥	55,667	US$	490	¥	49,148		¥	6,519	¥	55,667	¥	(2,581	)
Average contractual exchange rate								124.43		117.50											114.30			108.65
Functional currency: Euro		EUR82		US$100		¥10,566						¥10,566		¥(73	)
Average contractual exchange rate						1.220


	Functional	Expected maturity date (year ending March 31)
	Currency	2007			2008			2009			2010			2011			Thereafter			Total			Fair value
	(In millions of yen except average rates)
Fixed rate (Yen)	Yen	¥	4,064			4,064			13,064			2,664			2,664			65,327		¥	91,847		¥	86,279
Average interest rate			2.03	%		2.03	%		2.70	%		2.57	%		2.57	%		0.15	%		0.82	%
Interest free loan (EUR)	EUR		7			7			23												37			37

Total		¥	4,071			4,071			13,087			2,664			2,664			65,327		¥	91,884		¥	86,316

~~(a)~~		As of the end of the period covered by this annual report, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Disclosure controls and procedures are designed to ensure that the material financial and non-financial information required to be disclosed in Form 20-F and filed with the Securities and Exchange Commission is recorded, processed, summarized and reported in a timely manner. The evaluation was performed under the supervision of Kaneo Ito, Pioneer’s Chief Executive Officer, and Akira Niijima, 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.

~~(b)~~		During the annual period covered by the annual report, there have been no significant changes in Pioneer’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation of such internal controls. Therefore, no corrective actions were taken.


(2)		Includes fees for assurance and related services that ~~traditionally~~ are performed by the independent accountant which include employee benefit plan audits, ~~due diligence related to mergers and acquisitions,~~ accounting consultations and audits in connection with ~~acquisitions,~~ internal control reviews, attest services that are not required by statute or regulation and consultation concerning financial accounting and reporting standards.

(3)		Includes fees for ~~all services performed by professional staff in the independent accountant’s tax division except those~~ services related to ~~the audit, such as review of the tax provision (which would be included in the Audit Fee category). Typically, it would include fees for~~ tax compliance, including the preparation of tax returns and claims for refund, tax planning and tax advice. Tax compliance generally involves preparation of original and amended tax returns, claims for refund and tax payment-planning services. Tax planning and tax advice encompass a diverse range of services, including assistance with tax audits and appeals, tax advice related to mergers and acquisitions, employee benefit plans and requests for rulings or technical advice from taxing authorities.

(4)		Includes fees for other than the services reported in paragraphs (1) through (3). ~~All other fees for fiscal 2003 include consulting services relating to reorganization of our subsidiaries and the management of software development process.~~


					(c) Total Number		(d) Maximum
					of Shares		Number of
					Purchased as		Shares that May
	(a) Total				Part of Publicly		Yet Be
	Number of		(b) Average		Announced		Purchased Under
	Shares		Price Paid per		Plans or		the Plans or
Period	Purchased		Share		Programs		Programs
April 1 to April 30, 2005		287	¥	1,909.01		—		—
May 1 to May 31, 2005		208	¥	1,759.39		—		—
June 1 to June 30, 2005		241	¥	1,702.98		—		—
July 1 to July 31, 2005		982	¥	1,651.51		—		—
August 1 to August 31, 2005		1,142	¥	1,695.36		—		—
September 1 to September 30, 2005		638	¥	1,716.43		—		—
October 1 to October 31, 2005		442	¥	1,637.51		—		—
November 1 to November 30, 2005		678	¥	1,542.05		—		—
December 1 to December 31, 2005		798	¥	1,646.15		—		—
January 1 to January 31, 2006		625	¥	1,596.48		—		—
February 1 to February 28, 2006		592	¥	1,789.29		—		—
March 1 to March 31, 2006		559	¥	1,832.59		—		—

Total		7,192	¥	1,688.21		—		—


		PIONEER CORPORATION (Registrant)
~~PIONEER CORPORATION~~ ~~(Registrant)~~Date: July 7, 2006	By	/s/ Hajime Ishizuka
			Hajime Ishizuka
~~Date: August 6, 2004~~		By		~~/s/ Akira Niijima~~

			~~Akira Niijima~~ Chief Financial Officer


	Unaudited
	Millions of Yen
	2004		2005

Revenues	¥	736,697	¥	731,563
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	)


	Millions of Yen
	2004
~~Current assets~~
Revenues	¥	~~15,585~~16,664
~~Property, plant~~Cost and ~~equipment, less depreciation~~expenses		~~407~~16,324
~~Other assets~~
Income before income taxes		~~558~~340
Gain on sales of discontinued operations		1,825
~~Total assets~~Income taxes benefit		2,310

Income from discontinued operations	¥	~~16,550~~4,475

~~Current liabilities~~	¥	~~9,200~~
~~Long-term liabilities~~		61

~~Total liabilities~~	¥	~~9,261~~


	Thousands of U.S. Dollars								Millions of Yen
	2004								2005								2006
			Gross		Gross						Gross		Gross						Gross		Gross
			Unrealized		Unrealized						Unrealized		Unrealized						Unrealized		Unrealized
			Holding		Holding		Aggregate				Holding		Holding		Aggregate				Holding		Holding		Aggregate
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value

Marketable equity securities:
Non-current		$61,509		$168,774		$9		$230,274	¥	5,734	¥	16,438	¥	2	¥	22,170	¥	4,627	¥	19,982		—	¥	24,609
Marketable debt securities:
Non-current		1,000		9		—		1,009		94		4		—		98		94		30		—		124

Total		$62,509		$168,783		$9		$231,283	¥	5,828	¥	16,442	¥	2	¥	22,268	¥	4,721	¥	20,012		—	¥	24,733


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

2005		¥5,969		$56,311
2006		4,616		43,547
2007		2,955		27,877	¥	7,786	$	66,547
2008		1,793		16,915		4,485		38,333
2009		1,222		11,528		3,109		26,573
2010						1,539		13,154
2011						827		7,068


Asset category	2003			2004
Asset Category							2005			2006

Equity securities		44	%		46	%		53	%		57	%
Debt securities		35	%		30	%		34			35
Real estate and other		21	%		24	%
Other								13			8

Total		100	%		100	%		100	%		100	%


	Millions of Yen
	Balance at										Balance at
	Beginning							Translation			End
Valuation allowance	of Period		Addition		Deduction			Adjustments			of Period

2002	¥	17,792		¥ 2,720	¥	(2,762	)		¥ 549		¥	18,299
2003		18,299		5,741		(8,912	)		164			15,292
2004		15,292		1,956		(5,469	)		(188	)		11,591