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, 2006

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

For the transition period from                                         to                                          

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                                         

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
None		None

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

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		(Japan time)
Common Stock		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.

Yes þ      No o

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.

Yes o       No þ

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.

Yes þ       No o

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 filer þ		Accelerated filer o		Non-accelerated filer o

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

Item 17 þ       Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

 

 

TABLE OF CONTENTS

		Page
Certain Defined Terms			3
Cautionary Statement with Respect to Forward-Looking Statements			3
PART I
Item 1. Identity of Directors, Senior Management and Advisers			3
Item 2. Offer Statistics and Expected Timetable			3
Item 3. Key Information			4
Item 4. Information on the Company			12
Item 4A. Unresolved Staff Comments			24
Item 5. Operating and Financial Review and Prospects			25
Item 6. Directors, Senior Management and Employees			48
Item 7. Major Shareholders and Related Party Transactions			55
Item 8. Financial Information			56
Item 9. The Offer and Listing			58
Item 10. Additional Information			59
Item 11. Quantitative and Qualitative Disclosures About Market Risk			77
Item 12. Description of Securities Other than Equity Securities			79
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies			80
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			80
Item 15. Controls and Procedures			80
Item 16. [Reserved]			81
Item 16A. Audit Committee Financial Expert			81
Item 16B. Code of Ethics			81
Item 16C. Principal Accountant Fees and Services			82
Item 16D. Exemptions from the Listing Standards for Audit Committees			83
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			83
PART III
Item 17. Financial Statements			84
Item 18. Financial Statements			84
Item 19. Exhibits			84
EX-1.01 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
EX-12.02 CERTIFICATION
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, 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 statements of operations data for each of the three years in the period ended March 31, 2006 and the consolidated balance sheet data as of March 31, 2005 and 2006 from our audited consolidated financial statements included elsewhere herein. We derived the consolidated statement of operations data for each of the two years in the period ended March 31, 2003 and the consolidated balance sheets data as of March 31, 2002, 2003 and 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
		2002				2003				2004				2005				2006
		(In millions of yen, except per share data)
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			40.37				84.35				110.95				(57.65	)			(491.66	)
Diluted			40.36				84.35				110.09				(57.65	)			(491.66	)
Net income (loss):
Basic			44.70				90.24				141.58				(50.11	)			(487.23	)
Diluted			44.69				90.24				140.52				(50.11	)			(487.23	)
Consolidated Balance Sheets Data:
Total assets		¥	645,129			¥	647,029			¥	722,542			¥	725,167			¥	678,046
Short-term borrowings			45,867				29,893				23,327				33,152				23,205
Current portion of long-term debt			2,551				974				4,510				19,276				7,165
Long-term debt, less current portion			35,677				32,196				89,691				81,219				92,970
Shareholders’ equity			347,003				318,393				332,938				332,239				273,250
Common stock			49,049				49,049				49,049				49,049				49,049
Number of shares issued (in thousands)			180,064				180,064				180,064				180,064				180,064

		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

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 ¥115.65 = US$1.00 on July 5, 2006.

		Average				High				Low				Period-end
Year ended March 31
2002		¥	125.64			¥	115.89			¥	134.77			¥	132.70
2003			121.10				115.71				133.40				118.07
2004			112.75				104.18				120.55				104.18
2005			107.28				102.26				114.30				107.22
2006			113.67				104.41				120.93				117.48
2006
January							113.96				117.55
February							115.82				118.95
March							115.89				119.07
April							113.79				118.66
May							110.07				113.46
June							111.66				116.42

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 sales and 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 sales and 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 sales and 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 — currently including plasma 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, 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:

•		We may be unable to obtain adequate funding and resources necessary for investments in new products and technologies.
•		Our long-term investments and commitment of significant resources may not result in successful new products or technologies.
•		We may not be able to anticipate successfully the new products and technologies which will gain market acceptance and that such products can be successfully marketed.
•		Our newly developed products or technologies 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.

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.

Competition generally, and especially on the basis of price and standardization of products, may adversely affect our results 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 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, we 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 results 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 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 next generation optical disc format to gain broad market acceptance may adversely affect our business and results of operations

Currently, there are two generally recognized competing formats for the next generation optical discs, Blu-ray Disc and HD DVD. Each of the disc formats makes use of its own distinct technology and is incompatible with the other format.

We are focusing on the Blu-ray Disc format as the next generation optical discs and are developing products that are compatible with such format.

The question of which format will prevail as the industry standard is not yet settled. Should our adopted format fail to be accepted as the de facto industry standard, or otherwise fail to gain wide acceptance, our business strategy and results of operations may be adversely affected.

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 profitability

The licensing of our patent and other intellectual property rights makes a significant contribution to our net income since costs related to patent licensing are limited principally to amortization of patent rights and expenses for 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 our patent rights relating to laser optical disc technologies have expired in Europe and Japan and some portion of those in North America started to expire. As a result, our royalty revenue is expected to decline in the future. This decline in royalty revenue may in turn have an adverse impact on our 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–Nature of operations.”

If we are unable to successfully manage the risks inherent in our international activities and our overseas expansion, our results of operations and 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 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 results of operations.

Our dependence on certain third-party manufacturers and suppliers for parts and components could adversely affect our production capacity and results 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 secure supply where necessary through strategic alliances and other measures, we may face shortages of key components, reflecting changes in the 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 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 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.

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

We provide our OEM products to automobile manufacturers, electronics manufacturers, personal computer (“PC”) makers and other large-scale businesses worldwide. The products we supply include car stereo products, car navigation systems, DVD drives, plasma displays and 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 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 results 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

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; 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. 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 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 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 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-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 results of operations.

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

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

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 results of operations. See “Item 4.B. Business 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

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. However, we may not completely prevent or mitigate the effect of a disaster, outage or other disruption at our production facilities. For example, our plasma display panels are currently manufactured at our Shizuoka, Yamanashi and Kagoshima plants in 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 in Japan.

Employee retirement benefit costs and obligations may adversely affect our results of operations

Pioneer is obligated to pay certain employee retirement benefit costs and obligations to 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 declines of discount rates and lower returns on pension plan assets may adversely affect our results of operations.

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 systems.

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 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.

Principal capital expenditures, investments and divestitures

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

paid principally out of our internally generated working capital. The facilities for production comprised those for 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 2006, through a management buyout, we sold all of our shares in Pioneer Digital Technologies, Inc., a wholly-owned subsidiary engaged in the development of operating software for cable TV set-top boxes in the United States. We recognized a gain on the sale of ¥282 million, net of taxes, in the year ended March 31, 2006.

In fiscal 2006, we 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 ELDis, Inc., 47.5% owned by Tohoku Pioneer Corporation, a 67% owned subsidiary. We recorded equity in losses of affiliated companies of ¥24,139 million for the year ended March 31, 2006. ELDis, Inc. was liquidated in March, 2006.

In order to improve management efficiency by concentrating resources in strategic business, on March 31, 2006, we reached a preliminary agreement with OMRON Corporation concerning the transfer of all of the shares of Pioneer Precision Machinery Corporation, a 99.5% owned subsidiary, which is engaged in the manufacturing and marketing of high-precision parts for electronic equipment.

B. Business overview

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. We are also one of the leading manufacturers of car audio products 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 offices in Japan and through sales subsidiaries of Pioneer and independent distributors outside of Japan. In addition, on an OEM basis, we market certain products, such as car electronics products, recordable DVD drives, plasma displays and OLED displays to other companies.

In fiscal 2006, we sold Pioneer Digital Technologies, Inc., a subsidiary engaged in the development of cable TV software, and reached a preliminary agreement on the sale of Pioneer Precision Machinery Corporation involved in the electronic components business. Consequently, the operating results of these subsidiaries, and the gain on the sale are presented as income from discontinued operations in this report. Corresponding figures for the previous fiscal years have been reclassified accordingly.

Also, in fiscal 2006, we changed our business segment classification for certain businesses. Results related to plasma displays for business use and disc jockey (“DJ”) equipment have been moved from “Others” to “Home Electronics.” Corresponding figures for the previous fiscal years have been reclassified accordingly. (The consolidated financial statements included in this annual report and the financial information 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
		2004								2005								2006
		(In millions of yen, except for percentage amounts)
Home Electronics
Domestic		¥	82,580				12.1	%		¥	90,838				12.8	%		¥	81,998				10.9	%
Overseas			223,625				32.6				231,933				32.6				272,692				36.1
Total		¥	306,205				44.7	%		¥	322,771				45.4	%		¥	354,690				47.0	%
Car Electronics
Domestic		¥	121,708				17.8	%		¥	120,260				16.9	%		¥	117,560				15.6	%
Overseas			170,479				24.9				183,150				25.8				212,962				28.2
Total		¥	292,187				42.7	%		¥	303,410				42.7	%		¥	330,522				43.8	%
Others
Domestic		¥	44,502				6.5	%		¥	37,653				5.3	%		¥	33,208				4.3	%
Overseas			30,034				4.4				36,971				5.2				28,004				3.8
Total		¥	74,536				10.9	%		¥	74,624				10.5	%		¥	61,212				8.1	%
Patent Licensing		¥	11,821				1.7	%		¥	10,237				1.4	%		¥	8,540				1.1	%
Total Operating Revenue		¥	684,749				100.0	%		¥	711,042				100.0	%		¥	754,964				100.0	%

Home Electronics:

This segment includes plasma displays, DVD recorders, DVD players, DVD drives, stereo systems, individual stereo components, DJ equipment, telephones and equipment for cable TV systems.

Plasma displays worldwide accounted for the largest sales in this segment for fiscal 2006. In addition, DVD drives also contributed significantly to sales in this segment.

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. The market for DVD products and plasma displays are growing, but prices are falling rapidly. In 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 promising next generation optical disc products. In our plasma display business, we continue to promote vigorously 40-inch and larger models of high-definition plasma displays in the worldwide market. 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.

Car Electronics:

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

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

Both in Japan and outside Japan, sales in this 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 is helping us maintain our leading market share of car electronics products in a global 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 intend to actively press ahead with business expansion in Europe and North America, where full-fledged consumer markets for car navigation systems are emerging. In fiscal 2006, we introduced our first car navigation systems to the 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.

Patent Licensing:

This segment includes the licensing of patents related 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. A significant portion of these patents have expired in certain countries/regions such as Japan and Europe and some portion of those in North America started to expire. As a result, our royalty revenue is expected to decline in the future.

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

Others:

This segment includes products primarily for business use, such as OLED display panels, FA systems, electronics devices and parts and business-use AV systems.

Electronics devices and parts, including devices for cellular phones, accounted for the largest sales in this segment for fiscal 2006. FA systems also contributed materially to sales in this segment.

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
		2004								2005								2006
		(In millions of yen, except for percentage amounts)
Japan		¥	248,790				36.3	%		¥	248,751				35.0	%		¥	232,766				30.8	%
North America			170,702				24.9				174,106				24.5				201,378				26.7
Europe			146,250				21.4				150,770				21.2				171,912				22.8
Other Regions			119,007				17.4				137,415				19.3				148,908				19.7
Total		¥	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 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.

Raw materials and sources of supply

We purchase a variety of raw materials and parts for use in the manufacture of our products. We maintain two or more suppliers in principle to prevent a shortage of raw materials and parts. Furthermore, in accordance with corporate policy, we develop 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 9% of total supply purchases in fiscal 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 2006 (on a yen basis), representing approximately 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 depend on a single supplier, we seek to strengthen our partnership with such supplier to reduce the risk of shortages of key parts and, if necessary, take other measures such as placing our order earlier than our usual practice. We purchase a portion (approximately 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 at favorable prices.

The rising price of crude oil has caused an increase in the price of plastic materials used in our products. In addition, the rapid economic growth in China has caused an increase in the price of steel materials and nonferrous metals. Although these conditions have not made a significant impact on our current operations, we are continuing our efforts to procure a stable supply of these materials and maintain costs at appropriate levels.

Patents and licenses

We hold a variety of patents, including those relating to laser optical disc technology, in Japan and other countries, while we in turn are licensed to use a number of patents owned by third parties. We consider certain patents licensed from third parties to be important to our business. In particular, the patents licensed from Dolby Laboratories Licensing Corporation, U.S.A. for such devices as noise reduction, from Koninklijke Philips Electronics N.V., the Netherlands for CD products and LD products, from Thomson Licensing S.A., France for CD products and LD products, 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.

Competition

Our products, especially plasma displays and DVD-related products, 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 South Korea, some of which are large, integrated home electric or electronic appliance manufacturers having substantially larger capital resources than we do. The electronics industry in general has been subject to substantial price competition as part of efforts by electronics manufacturers to increase their market share. In addition, electronics companies in Asia, particularly those from China and 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–Competition generally, and especially on price and standardization of products, may adversely affect our results 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.

C. Organizational structure

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

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

				Ownership
		Country of		interest and
Name of subsidiary		incorporation		voting interest				Principal business
Tohoku Pioneer Corporation		Japan			67.0	%		Manufacture of car electronics products, FA systems and OLED display panels
Pioneer Display Products Corporation		Japan			100.0	%		Manufacture of plasma displays
Pioneer Plasma Display Corporation		Japan			100.0	%		Manufacture of plasma displays
Pioneer North America, Inc.		U.S.A.			100.0	%		Coordination of the activities of Pioneer’s North American subsidiaries and affiliates
Pioneer Electronics (USA) Inc.		U.S.A.			100.0	%		Distribution of electronics products
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

D. Property, plants and equipment

Our manufacturing operations are conducted principally in Japan, Southeast Asia and China. The following table sets forth information, as of March 31, 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
Kagoshima Plant		Izumi, Kagoshima			1,281,000			Plasma displays
(Pioneer Plasma Display Corporation)
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, China			458,000			Car speakers
(Shanghai Pioneer Speakers Co., Ltd.)
Mexico Plant		Baja California,			397,000			Car speakers
(Pioneer Speakers,		Mexico
S.A. de C.V.)
Shanghai Plant		Shanghai, China			374,000			DVD Recorders, Car AV systems, Car stereos
(Pioneer Technology					[22,000]
(Shanghai) Co., Ltd.)
Thailand Plant		Ayutthaya, Thailand			300,000			Car stereos, Stereo systems
(Pioneer Manufacturing (Thailand) Co., Ltd.)
Malaysia Plant		Johor, Malaysia			262,000			Stereo systems, Car stereos
(Pioneer Technology (Malaysia) Sdn. Bhd.)
Guang Dong Plant		Guang Dong, China			255,000			Recordable DVD drives, DVD Recorders
(Pioneer Technology
(Dongguan) Co., Ltd.)
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		Ohio, U.S.A.			157,000			Car stereos
(Pioneer Automotive Technologies, Inc.)

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

As of March 31, 2006, we owned our 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 298,000 square feet.

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

We are reviewing our global production systems. For the past several years, we have been accelerating the shift to overseas production. We currently plan to shift from our emphasis on overseas manufacturing and focus more on an efficient response to fast-changing markets. As part of this plan, in fiscal 2006, we closed a car electronics plant in Mexico and decided to close a car electronics plant in Belgium.

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

During fiscal 2006, the global economy continued steady growth, in part by robust consumer spending, despite concerns over surging prices of raw materials, including crude oil and certain metals. In Japan, our largest market, the economy continued to recover due to 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 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 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 2006 was approximately 5% weaker against the U.S. dollar and approximately 2% weaker against the euro compared with fiscal 2005.

In those business circumstances and economic conditions, our operating revenue for fiscal 2006 was ¥755.0 billion, up 6.2% from fiscal 2005. However, we recorded a net loss of ¥85.0 billion, compared with a net loss of ¥8.8 billion posted in fiscal 2005.

We classify our business groups into four segments: “Home Electronics,” “Car Electronics,” “Patent Licensing” and “Others.” The primary products in each segment are as follows: “Home Electronics” includes plasma displays, DVD-related products, home telephones, computer peripheral equipment, devices and others. “Car Electronics” includes 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 FA system, parts, and others. The following is a summary of operating revenues by business segment for the years ended March 31, 2004, 2005 and 2006.

Operating Revenue by Business Segments

		Year ended March 31
		2004								2005								2006
		(In millions of yen, except for percentage amounts)
Home Electronics		¥	306,205				44.7	%		¥	322,771				45.4	%		¥	354,690				47.0	%
Car Electronics			292,187				42.7				303,410				42.7				330,522				43.8
Patent Licensing			11,821				1.7				10,237				1.4				8,540				1.1
Others			74,536				10.9				74,624				10.5				61,212				8.1
Total		¥	684,749				100.0	%		¥	711,042				100.0	%		¥	754,964				100.0	%

Note: Operating revenue represents revenue from unaffiliated customers.

Our products are generally sold under our own brand names, principally “Pioneer.” Our primary markets are Japan, North America, Europe and Asia. We sell our products to customers in consumer and business markets through sales offices in Japan, and through sales subsidiaries of Pioneer and independent distributors outside Japan. In addition, on an OEM basis, we market certain products, such as car electronics products, recordable DVD drives, plasma displays and OLED displays to other companies. The following is a summary of operating revenues from unaffiliated customers by geographic market for the years ended March 31, 2004, 2005 and 2006.

Operating Revenue by Geographic Market

		Year ended March 31
		2004								2005							2006
		(In millions of yen, except for percentage amounts)
Japan		¥	248,790				36.3	%		¥	248,751				35.0	%		¥	232,766				30.8	%
North America			170,702				24.9				174,106				24.5				201,378				26.7
Europe			146,250				21.4				150,770				21.2				171,912				22.8
Other Regions			119,007				17.4				137,415				19.3				148,908				19.7
Total		¥	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.

Home Electronics, Car Electronics and Others

Although we continue to see strong growth in demand for plasma displays, DVD recorders and recordable DVD drives in worldwide markets, in our home electronics business we are exposed to significant price competition for plasma displays and DVD-related products, which 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 continues to increase.

The electronics industry is characterized by rapid technological changes, and our ability to introduce attractive new products to the market significantly affects the operating results of our electronics businesses.

The electronics industry is also characterized by continuing sales price decreases in most product categories, making it important for us to continually improve the efficiency of our manufacturing, distribution, service and administrative functions.

In fiscal 2006, we changed our business segment classification for certain businesses reflecting the changes of the market and product usage. Results related to plasma displays for business use and DJ equipment have been moved from “Others” to “Home Electronics.” Corresponding figures for the previously reported operating revenue by segment and segment information have been 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 relating to laser optical disc technologies in Japan and Europe has expired and some portion of those in North America started to expire. Accordingly, we have experienced a substantial decrease in operating revenue and segment income from this segment.

Currency fluctuations

We are affected to some extent by fluctuations in foreign currency exchange rates. We are principally exposed to fluctuations in the value of the Japanese yen against the U.S. dollar, euro and, to a much lesser extent, other currencies of countries where we conduct our business. Our consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations through both translation risk and transaction risk.

Translation risk is the risk that our consolidated financial statements for a particular period or for a particular date will be affected by changes in the prevailing exchange rates of the currencies in which our subsidiaries prepare their financial statements against the Japanese yen. The functional currency for all of our significant foreign operations is the local currency. Generally, all asset and liability accounts of foreign operations are translated into Japanese yen using the exchange rates at the balance sheet date and all revenue and expense accounts are translated using the weighted average exchange rates for the periods. Even though the fluctuations of currencies against the Japanese yen can be substantial and, therefore, significantly impact comparisons with prior periods and among various geographic markets, the translation effect is a reporting consideration, included in the other comprehensive income, and does not reflect our underlying results of operations.

Transaction risk is the risk that the currency structure of our costs and liabilities will deviate from the currency structure of sales proceeds and assets. Transaction risk mainly derives from the fact the currencies of the countries where we manufacture our products may be different from the currencies where we sell our products.

Derivative financial instruments are utilized by us to reduce the risks from fluctuations in foreign exchange rates but are not held or issued for trading purposes. To hedge certain purchase and sale commitments for anticipated but not yet committed transactions that are denominated in other than functional currencies, we enter into forward exchange contracts and purchases and 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 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 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, warranty obligations, retirement benefits, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amount of revenue and

expenses that are not readily apparent from other sources. Actual results may differ from these estimates due to the inherent uncertainty involved in making estimates.

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

Revenue recognition

Sales are generally recorded when merchandise is shipped or delivered to customers. Recognition of sales occurs when title and risks and rewards of ownership are transferred to customers based on the 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 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 of revenue are recorded for costs incurred by us in connection with sales incentive 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 are estimated and recorded at the later of when the original sale is recorded or when the incentive is offered. Estimates of future customer performance such as purchase volume, early payments and consumer rebate redemption rate are based on historical experience. Should a greater proportion of customers redeem incentives than we estimate, additional reductions of revenue may be required.

Promotional discounts are offered on specified products for 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 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 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 the purpose of supporting dealers’ sales promotions of our 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 dealers as reductions from sales, except for the 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 products, we assume, based on historical experience, that almost all dealers will eventually perform such sales promotions and submit claims for reimbursement. Other allowances, whose amounts are not determined by sales factors, are recorded when the subsidy is offered and the amount becomes reasonably determinable. Examples for this type of allowance are display allowances determined by the number of units displayed on the sales floor, and allowances based on agreements to share costs incurred by dealers for 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. Warranty reserve at March 31, 2006 was ¥6.6 billion.

Inventories

The majority of our products are produced for the consumer electronics market, and our inventory is 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.

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 fair value. Fair value is determined using the present value of estimated cash flows. A weighted average cost of capital, which is derived from our capital structure, is used as a discount rate for calculating the present value of the estimated 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 assets used for manufacture of cable TV set-

top boxes. For the year ended March 31, 2006, we recorded ¥41.4 billion of impairment charges consisting of ¥31.9 billion for plasma display production facilities, ¥9.0 billion for DVD recorder-related production facilities and ¥0.6 billion for production facilities of a foreign subsidiary to be closed. While we believe that the estimates of future cash flows and fair value are reasonable, changes in estimates resulting in lower future cash flows and fair value would affect the valuations of those long-lived assets.

Deferred tax assets

We record a valuation allowance to reduce deferred tax assets to the amount that we believe is more likely than not to be realized. While we have considered future taxable income based on our short-term and 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.

For pension plans of the parent company and domestic subsidiaries, the discount rates are determined by using information about rates of return on currently available high-quality fixed-income bonds. The expected long-term rate of return on pension plan assets is based on the 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 assumed changes in discount rates and the expected long-term rate of return for pension plans in 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

Fiscal 2006 compared with fiscal 2005

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 Electronics net 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 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 Electronics net 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 from Patent Licensing decreased 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 for Others declined 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)

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 sales increased to ¥593.2 billion from fiscal 2005’s ¥564.5 billion. Cost of sales for fiscal 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 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”) expenses decreased by ¥16.5 billion to ¥178.1 billion from fiscal 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 assets increased 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 deductions increased 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 ¥700.8 billion, a 4.1% increase over fiscal 2004. Net sales in Japan came to ¥248.8 billion, almost the same as that of fiscal 2004, and overseas net sales increased 6.6% to ¥452.1 billion. Royalty revenue decreased 13.4% from fiscal 2004 to ¥10.2 billion.

Home Electronics net sales increased 5.4% over fiscal 2004, amounting to ¥322.8 billion, primarily as a result of increased sales of plasma displays and DVD recorders, while sales of recordable DVD drives for PCs, DVD players, cable TV set-top boxes and audio products decreased. Sales of plasma displays grew both in Japan and overseas, and sales of DVD recorders increased overseas. In Japan, sales rose 10.0% to ¥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 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 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 sales worldwide of plasma displays and DVD recorders, despite a decrease in sales of audio products and DVD players worldwide, recordable DVD drives in Europe and North America and DVD-ROM drives in Europe, as well as our decision to no longer sell cable TV set-top boxes in North America. In general, the market is shifting from DVD players to DVD recorders worldwide.

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

Royalty revenue from Patent Licensing decreased 13.4% to ¥10.2 billion, compared to that of fiscal 2004. This was attributable to expiration of patents included in a larger portfolio of patents licensed to the optical disc industry.

Net sales for Others increased 0.1% over fiscal 2004 to ¥74.6 billion, reflecting primarily increased sales of FA systems and component parts for cellular phones. In Japan, net sales decreased 15.4% to ¥37.7 billion. This primarily resulted from decrease in sales of OLED display panels, mainly for cellular phone manufacturers, and semiconductors for laser pickups, despite an increase in sales of FA systems. Decrease in sales of semiconductors for laser pickups is due to a sales shift from Japan to China. Overseas, net sales were up 23.1% over fiscal 2004 to ¥37.0 billion. The increase is primarily due to increased sales in China of semiconductors for laser pickups and in Asia of speaker devices for cellular phones.

Other revenues (Revenues excluding net sales and royalty revenue)

Other revenues include interest income and other income. Interest income increased from ¥1.4 billion to ¥1.9 billion due to increased return on short-term investment of proceeds from convertible bonds issued in

March 2004. Other income increased from ¥0.5 billion to ¥3.4 billion, mainly due to a ¥2.3 billion gain on sale of available for sale securities.

Cost and expenses

Cost of sales increased to ¥564.5 billion from fiscal 2004’s ¥474.0 billion. After excluding ¥25.3 billion of one-time pension cost recognized as a result of the transfer of the substitutional portion of employee welfare pension plan to the Japanese government, cost of sales represented 75.8% of operating revenue, up by 6.6 percentage points from fiscal 2004’s 69.2%. The increase is primarily due to the adverse effects of harsh price competition, particularly for Home Electronics products such as plasma displays, DVD recorders and recordable DVD drives. We estimate that the average selling prices for these products dropped 20–30% during fiscal 2005. Clearing out inventory for cable TV set-top boxes in North America at reduced prices also had an adverse effect on gross profit margin. Gross profit margin in the Car Electronics business also decreased. Gross profit margin decreased for car navigation systems in the consumer market in Japan, and the decline in sales prices of car CD players worldwide decreased gross profit margin as well. Increased provision for inventory reserve, mainly for excess stock of Home Electronics products, was another reason for the higher cost of sales.

SGA expenses increased 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 part of a sales promotion measure.

In fiscal 2005, we transferred the benefit obligation of the substitutional portion of employee welfare pension plan in Japan and related portion of the plan assets to the Japanese government. The transfer resulted in recording of a ¥48.7 billion gain as subsidy from the government. At the same time, we recognized an expense of ¥49.5 billion mainly for settlement loss of the substitutional portion, and allocated ¥25.3 billion to cost of sales and ¥24.2 billion to SGA expenses. Note 12 of the notes to consolidated financial statements provides detailed information.

R&D expenses, which are included in cost of sales and SGA expenses, increased 8.6% to ¥55.9 billion, representing 7.9% of operating revenue. The increase reflected R&D activities to enhance our technological advantage in our strategic products such as car navigation systems, plasma displays, DVD recorders and OLED displays.

Loss on sale and disposal of fixed assets decreased by ¥3.4 billion. The decrease was attributable mainly to losses recorded in fiscal 2004 for relocation and replacement of production facilities for the purpose of improving production efficiency, mainly in DVD products and plasma display panels.

Other deductions increased 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 North America any longer. ¥1.8 billion was recorded for asset disposal, employee termination benefits and contract termination costs, in addition to the impairment loss discussed above.

Income (loss) from continuing operations before income taxes

As a result of factors discussed above, we posted ¥2.1 billion loss before income taxes in fiscal 2005, compared with income of ¥40.5 billion in fiscal 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 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 were 44.8%, which was 2.8% higher than the normal statutory tax rate of 42.0% in Japan.

Equity in losses of affiliated companies

Equity in losses of affiliated companies was ¥3.1 billion in fiscal 2005, compared with ¥2.2 billion in fiscal 2004. The increase in loss is mainly attributable to the increase in loss incurred by ELDis, Inc.

Net income (loss)

Net loss in fiscal 2005 was ¥8.8 billion, compared with net income of ¥24.8 billion posted in fiscal 2004. Basic net loss per share of common stock in fiscal 2005 was ¥50.11, compared with net income per share of ¥141.58 in fiscal 2004.

Segment information

The following segment information is prepared pursuant to regulations under the Securities and Exchange Law of Japan and is not in accordance with accounting principles generally accepted in the United States of America.

Business Segments

		Year ended March 31, 2006
																		Corporate
		Home				Car				Patent								and
		Electronics				Electronics				Licensing				Others				Eliminations				Consolidated
										(In millions of yen)
Operating revenue:
Unaffiliated customers		¥	354,690			¥	330,522			¥	8,540			¥	61,212				—			¥	754,964
Inter-segment			2,123				1,579				2,048				37,645			¥	(43,395	)			—
Total		¥	356,813			¥	332,101			¥	10,588			¥	98,857			¥	(43,395	)		¥	754,964
Segment income (loss)		¥	(35,184	)		¥	17,486			¥	7,217			¥	(3,991	)		¥	(1,937	)		¥	(16,409	)
Identifiable assets		¥	177,367			¥	169,338			¥	1,474			¥	74,326			¥	255,541			¥	678,046
Depreciation and amortization		¥	20,654			¥	11,511			¥	963			¥	8,532			¥	4,897			¥	46,557
Capital expenditures (additions to fixed assets)		¥	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

Income (loss) by business segments

Home Electronics segment 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 Electronics segment 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 Licensing posted ¥7.2 billion profit, down 23.1% from ¥9.4 billion in fiscal 2005 due to a decrease in royalty revenue.

Others recorded 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, 2006
																		Corporate
						North								Other				and
		Japan				America				Europe				Regions				Eliminations				Consolidated
										(In millions of yen)
Operating revenue:
Unaffiliated customers		¥	270,771			¥	196,809			¥	163,361			¥	124,023				—			¥	754,964
Inter-area			333,878				6,161				341				209,919			¥	(550,299	)			—
Total		¥	604,649			¥	202,970			¥	163,702			¥	333,942			¥	(550,299	)		¥	754,964
Segment income (loss)		¥	(25,832	)		¥	3,368			¥	3,519			¥	3,697			¥	(1,161	)		¥	(16,409	)
Identifiable assets		¥	245,695			¥	43,317			¥	65,071			¥	119,273			¥	204,690			¥	678,046
Depreciation and amortization		¥	28,966			¥	3,109			¥	2,180			¥	7,405			¥	4,897			¥	46,557
Capital expenditures (additions to fixed assets)		¥	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

B. Liquidity and capital resources

Cash flows

Summarized Consolidated Statements of Cash Flows

		Year ended March 31
		2005				2006
		(In millions of yen)
Net cash provided by operating activities		¥	19,946			¥	68,329
Net cash used in investing activities			(93,516	)			(29,759	)
Net cash used in financing activities			(4,019	)			(38,551	)
Effect of exchange rate changes on cash and cash equivalents			1,851				4,980
Net increase (decrease) in cash and cash equivalents		¥	(75,738	)		¥	4,999

Net cash provided by operating activities in fiscal 2006 was ¥68.3 billion, an increase of ¥48.4 billion compared to fiscal 2005. Changes in operating assets and liabilities were the primary cause for the increased cash flows from operating activities. Among operating assets and liabilities, trade receivables decreased despite increased sales due to securitization of receivables. Inventories decreased primarily for plasma displays and car electronics products, reflecting our effort to control and reduce inventories.

Net cash used in investing activities was ¥29.8 billion for fiscal 2006, a decrease of ¥63.7 billion compared to ¥93.5 billion in fiscal 2005. The decrease was mainly due to payments for the acquisition of a plasma display production subsidiary of ¥34.0 billion in fiscal 2005, and a decrease in the investments for plasma display production facilities.

Net cash used in financing activities was ¥38.6 billion, an increase of ¥34.6 billion compared to ¥4.0 billion in fiscal 2005. In fiscal 2006, cash was used primarily for reducing long-term debt, short-term borrowings and payment of dividends. ¥31.2 billion cash was used for repayments of long-term debt and short-term borrowings. Cash used in dividend payments amounted to ¥3.5 billion.

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

Capital requirements

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

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 expenditures are generally financed through internally generated cash and debt or equity financing. With regard to debt financing, short-term debt financing with maturities of one year or less is utilized to fund operating capital requirements. Short-term borrowing is generally arranged locally by each consolidated subsidiary based on its capital requirements. At March 31, 2006, short-term borrowings of ¥23.2 billion were principally in Japanese yen, U.S. dollar, and euro. On the other hand, financing of long-term funding requirements such as investments in production facilities, financing through debt and equity securities markets are arranged in Japan, and long-term borrowing from financial institutions is arranged locally by each consolidated subsidiary. At March 31, 2006, substantially all of the long-term debt of ¥100.1 billion, including the portion due within one year, was comprised of ¥61.5 billion zero coupon convertible bonds due 2011 including ¥1.5 billion unamortized issue premium, ¥10.0 billion unsecured bonds due 2008, and capital lease obligations and other loans arranged locally.

We believe that our sound financial position and ability to generate positive operating cash flows, together with uncommitted and unused credit lines of ¥254.5 billion, provide sufficient resources to fund future requirements for operating capital and for capital expenditures to sustain the growth of Pioneer. Also, the parent company and its four subsidiaries in Japan and China entered into a three-year global credit facility agreement for the amount of ¥70.0 billion effective from May 2005. This will ensure that these companies in Japan and China have an efficient and stable financing source for 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 2004, 2005 and 2006, our R&D expenses were ¥51,449 million, ¥55,858 million and ¥63,442 million, respectively, or 7.5%, 7.9% and 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 intend to reduce the ratio of R&D expenses to operating revenue 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 Optical Disc & Systems Development Center, Information & Communication Development Center, PDP Development Center and Mobile Systems Development 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.

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.

DVD products. The market for DVD 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 do not directly take advantage of our 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 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 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 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 reforming product development processes and raising their efficiency through standardization.

In the OEM car navigation system business, we are increasing our focus on the growing market for car navigation systems 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 proven in consumer markets. Meanwhile, in the OEM car audio products business, we aim to make the most of its strengths in consumer markets to 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. Purchase prices generally are increasing because of the growing importance of such intellectual property.

We expect that our royalty revenue from the worldwide licensing of patents relating to laser optical disc technologies will continue to decline, as a significant portion of our patents in Japan and Europe has expired and some portion of those in North America started to expire.

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

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.

E. Off-balance sheet arrangements

We provide guarantees covering a one-year period to third parties who provide loans to our affiliated companies. If our affiliated companies were to default on a payment within the contract period of one year, we would have to pay the guaranteed amount. The maximum potential amount of undiscounted future payments we could be required to make under the guarantee is ¥0.2 billion at March 31, 2006.

We have the following accounts receivable securitization programs:

In the United States of America, we have 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 that pool of receivables to third party conduits owned by a bank. 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 we have surrendered control over the receivables. We sold a total of ¥97 billion of receivables under this program for the year ended March 31, 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 receivables. We sold a total of ¥56 billion of receivable under this program for the year ended March 31, 2006.

We utilize this program to diversify our options to 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, 2006.

						Payment Due by Period
						Less than												More than
		Total				1 year				1–3 years				3–5 years				5 years
		(In billions of yen)
Contractual obligations:
Long-term debt		¥	98.7			¥	7.2			¥	20.3			¥	6.6			¥	64.6
Operating leases			8.4				2.5				3.4				1.3				1.2
Purchase commitment			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				—				—				—

The ¥26.1 billion purchase commitment outstanding at March 31, 2006 was for raw material, property, plant and equipment and advertising. This included a part of our ¥54.0 billion capital expenditure plan in fiscal 2007. The planned increase in capital expenditures from ¥40.3 billion in fiscal 2006 mainly reflects 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 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.

Exchanges of Nonmonetary Assets

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 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 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 our consolidated statements of operations or financial position.

Accounting for Electronic Equipment Waste Obligations

In June 2005, the FASB issued FSP 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 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 Certain Investments

In November 2005, the FASB staff issued FASB Staff Position or FSP on Statements 115 and 124, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain 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 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. 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 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 separately recognized servicing rights to be initially measured at fair value, and provides the 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 Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 156 is effective for fiscal years beginning 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.

Item 6. Directors, Senior Management and Employees

A. Directors and senior management

Pioneer’s Directors, Executive Officers and Corporate Auditors as of July 1, 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
Tamihiko Sudo (Apr. 28, 1947)		President and Representative Director; Chief Executive Officer (June 2007)		June 2005: Executive Vice President and Representative Director; Chief Financial Officer; and in charge of Corporate Strategy Planning Group, Corporate Management Group, Export Management and Quality Control in general
Hajime Ishizuka (May 3, 1947)		Senior Managing Director and Representative Director; Chief Financial Officer; in charge of 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 Company and AV Business Company; and in charge of Procurement Group
Osamu Yamada (Mar. 16, 1944)		Senior Managing Director; General Manager of 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
Satoshi Matsumoto (Apr. 15, 1954)		Managing Director; in charge of Quality Control Division (June 2007)		Nov. 2003: Managing Director; General Manager of Environmental Preservation Group and Environmental Preservation Division

Name		Current Position
(Date of birth)		(Month and year of expiration)		Prior Position
Akira Haeno (Feb. 14, 1949)		Managing Director; General Manager of Mobile Entertainment Business Group (June 2007)		June 2004: Executive Officer; Plant Manager of Kawagoe Plant; and General Manager of Production Division of Kawagoe Plant of Pioneer’s Mobile Entertainment Company
Shinji Yasuda (June 10, 1945)		Managing Director; General Manager of Home Entertainment Business Group and General Manager of Omori Plant (June 2007)		Jan. 2006: Senior Executive Officer; General Manager of Home Entertainment Business Group and General Manager of Omori Plant
Tatsuhiro Ishikawa (Apr. 4, 1939)		Director (June 2007)		Dec. 2001 to present: Attorney-at-Law
Shunichi Sato (Feb. 10, 1941)		Director (June 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
Masao Kawabata (Aug. 10, 1948)		Senior Executive Officer; General Manager of Corporate Branding and Communications Division (June 2007)		June 2001: Executive Officer; General Manager of Corporate Communications Division
Yoshio Taniyama (Nov. 9, 1948)		Senior Executive Officer; General Manager of Corporate Planning Division (June 2007)		June 2001: Executive Officer; General Manager of Finance Division
Hideki Okayasu (May 12, 1950)		Senior Executive Officer; General Manager of Finance and Accounting Division (June 2007)		June 2001: Executive Officer; General Manager of Accounting Division

Name		Current Position
(Date of birth)		(Month and year of expiration)		Prior Position
Buntarou Nishikawa (Mar. 24, 1946)		Senior Executive Officer; 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: Executive Officer; General Manager of Domestic Sales Division of Pioneer’s Mobile Entertainment Company
Yoichi Sato		Senior Executive Officer;		June 2005:
(Jan. 15, 1950)		Chief Technology Executive, Deputy General Manager of Research & Development Group, General Manager of PDP Development Center, and in charge of Plasma Panel Engineering Division of Home Entertainment Business Group (June 2007)		Managing Director; Deputy General Manager of Research & Development Group; and General Manager of PDP Development Center
Sumitaka Matsumura (Oct. 10, 1948)		Executive Officer; Deputy General Manager of Research & 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
Kenji Sato (Aug. 29, 1947)		Executive Officer; General Manager of General Administration Division (June 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

Name		Current Position
(Date of birth)		(Month and year of expiration)		Prior Position
Keiichi Yamauchi (Apr. 12, 1952)		Executive Officer; in charge of software and platform development of Home Entertainment Business Group; and General Manager of Engineering Division of 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 Corporate Research & Development Laboratories of Research & Development Group
Toshiyuki Ito (Oct. 17, 1950)		Executive Officer; Chairman & Managing Director of Pioneer Europe NV (June 2007)		Apr. 2005: Managing Executive Officer of Tohoku Pioneer Corporation
Tatsuo Takeuchi (Oct. 23, 1950)		Executive Officer; General Manager of Personnel Division (June 2007)		Dec. 2004: Managing Director of Pioneer Electronics Asiacentre, Pte. Ltd.
Masanori Kurosaki (Aug. 12, 1952)		Executive Officer; General Manager of OEM Sales Division of Mobile Entertainment Business Group (June 2007)		Nov. 2002: General Manager of Planning & Coordination Division of Mobile Entertainment Company

Corporate Auditors

Name		Current Position
(Date of birth)		(Month and year of expiration)		Prior Position
Makoto Koshiba (Nov. 21, 1943)		Corporate Auditor (full time) (June 2007)		Sept. 1999: Director; General Manager of Accounting Division; in charge of Finance Division
Isao Moriya (Sept. 5, 1937)		Corporate Auditor (June 2007)		Mar. 1968 to present: Certified Public Accountant
Keiichi Nishikido (May 2, 1953)		Corporate Auditor (June 2007)		Jan. 1994 to present: Attorney-at-Law; Managing Partner of Kohwa Sohgoh Law Offices, Japan

All of the above persons, with the exception of Messrs. Tatsuhiro Ishikawa, Shunichi Sato, 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. Satoshi Matsumoto is a first cousin once removed of Mr. 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 2006 totaled ¥974 million. Also, as part of Pioneer’s incentive compensation, Pioneer has issued stock acquisition rights for its shares of common stock to Directors, Executive Officers, and certain employees, and certain directors/officers of certain of its subsidiaries from fiscal 2003. See “Item 6.E. Share ownership” for further information.

The aggregate amount set aside as lump-sum severance indemnities by Pioneer during fiscal 2006 for Directors, Executive Officers and Corporate Auditors of Pioneer totaled ¥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 12 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 three or more 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 a Director expires at the conclusion of the Ordinary General Meeting of Shareholders held with respect to the last business year ending within one year after their election and in the case of a Corporate Auditor, within four years after their 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 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 Officer expires at the conclusion of the ordinary general meeting of shareholders held with respect to the last 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.

Corporate Auditors of Pioneer are not required to be certified public accountants. However, at least half of the Corporate Auditors 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 a director, accounting counselor, corporate executive officer, general manager or 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 reports proposed to be submitted by a Representative Director at the general meeting of 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 accountant or an audit corporation must be appointed by general meetings of shareholders as the Accounting Auditor of Pioneer. Such Accounting Auditor has, as its primary statutory duties, the duty to examine 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 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 the statutory duty to, based upon the reports prepared by respective Corporate Auditors, prepare and submit its audit report to 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–Directors.”

D. Employees

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

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

Pioneer and 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 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		484,000 shares*			0.27%

Pioneer has granted the following stock 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		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		—

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, 2006 on the register of shareholders were as follows:

				Number of shares				Percentage of
Title of class		Name		(in thousands)				outstanding shares
Common Stock		The Master Trust Bank of Japan, Ltd. (Trust Account)			11,980				6.65	%
Common Stock		Japan Trustee Services Bank, Ltd. (Trust Account)			11,020				6.12	%