UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

OR

OR

Commission file number 1-7616

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

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

JAPAN
(Jurisdiction of incorporation or organization)

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

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

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

None

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

None

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.

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 which financial statement item the registrant has elected to follow.

Item 17 þ Item 18 o

TABLE OF CONTENTS

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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 and subjective and changing consumer preferences; (iv) our ability to implement successfully our business strategies; (v) our ability to compete and develop and implement successful sales and distribution strategies in light of technological developments in and affecting our businesses; (vi) our continued ability to devote sufficient resources to research and development, and capital expenditure; (vii) our ability to continuously enhance our brand image; (viii) the success of our joint ventures and alliances; and (ix) the outcome of contingencies.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

          Not applicable

Item 2. Offer Statistics and Expected Timetable

          Not applicable

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Item 3. Key Information

A. Selected financial data

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

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Exchange rates (yen per U.S. dollar)

The exchange rate between the yen and the U.S. dollar, based upon the noon buying rate in yen for cable transfers in New York City as certified for customs purposes by the Federal Reserve Bank of New York, was ¥110.60 = US$1.00 on August 3, 2004.

For purposes of preparing our financial statements, we use rates obtained from the Tokyo foreign exchange market, which differ from the rates listed above.

B. Capitalization and indebtedness

          Not applicable

C. Reasons for the offer and use of proceeds

          Not applicable

D. Risk factors

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

Economic conditions may adversely affect our business results and financial condition

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

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

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

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:

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Our failure to anticipate adequately changes in the industry and the market, and to develop attractive new products, including any of the risks described above, may reduce our future growth and profitability and may adversely affect our business results and financial condition.

Benefits may not be gained from the acquisition of the shares in NEC Plasma Display Corporation (“NPD”), the subsidiary of NEC Corporation (“NEC”), and related intellectual property rights held by NEC

On July 1, 2004, Pioneer and NEC concluded the stock transfer agreement under which NEC will transfer to Pioneer 100% of the issued share capital of its subsidiary, NPD, and the intellectual property rights relating to plasma displays held by NEC. See “Item 4.A. History and development of the Company—Principal capital expenditures, investments and divestitures.”

The expected acquisition of the shares in NPD and related intellectual property right held by NEC may not yield expected benefits to us. Achieving these benefits depends on the timely, efficient and successful execution of a number of post-acquisition events, including integrating the business of NPD into our operations, distribution networks, marketing programs and information systems. Our ability to integrate the operations of NPD may be adversely affected by many factors, including information system integration and employee relations. In addition, NPD may not perform as we expect.

Furthermore, a significant portion of NPD’s customers for original equipment manufacturer (“OEM”) products are major players in the electronics industry who are in direct competition with us. There can be no assurance that such customers will not cease to utilize NPD’s services.

Any failure to realize the benefits expected from the acquisition, or the failure of NPD to perform as we anticipate, could have a material adverse effect on our business results and financial condition.

As our exposure to the PDP market as a result of the acquisition of NPD will increase significantly, lack of growth in the PDP market may adversely affect our business results and financial condition

The acquisition of NPD will increase our production capacity significantly. In addition, we are focusing on the plasma display business to establish it as a core of our business. If the plasma display market does not grow as we anticipate, such increased production capacity may not be used efficiently or in a cost-effective manner. There can be no assurance that the PDP market will continue to grow. Any such lack of growth may adversely affect our business results and financial condition.

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

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

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operate. Our competitors include manufacturers and distributors, some of which have greater capital resources available for research, development, production and marketing. In addition, as new technology develops and as new electronics products gain increased market acceptance, it is possible that new competitors or alliances among existing competitors may emerge and rapidly acquire significant market share. While we believe we are one of the leading innovators of advanced, high-quality and value-added electronics products, there can be no assurance that we will be able to compete effectively in the future. Pricing pressures or loss of potential customers resulting from our failure to compete effectively may adversely affect our business results and financial condition.

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

Failure of our DVD-recorder format to gain broad market acceptance may adversely affect our business results and financial condition

Currently, there are a number of competing recording formats for digital versatile discs (“DVDs”): the DVD-RW, the DVD-RAM, and the DVD+RW, as rewritable formats, and the DVD-R and the DVD+R, as write-once formats. Each of the recording disc formats makes use of its own distinct technology and is generally incompatible with other formats.

Our DVD recorders for home-use adopt DVD-RW and DVD-R formats, while our recordable DVD drives for PCs support DVD-RW/+RW and DVD-R/+R format recording and DVD-RAM format playback.

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

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

The licensing of our patent and other intellectual property rights make a significant contribution to our net income. Although less than 2% of our revenue in fiscal 2004 was generated by our worldwide patents relating to laser optical disc technologies, these rights were responsible for approximately 26% of our operating income in fiscal 2004. The legal protections afforded these rights have a limited duration under applicable laws, and the length of protection varies from country to country or region. A significant portion of such patent rights have expired in Europe and Japan during fiscal 2003 and 2004. As a result, our royalty revenue has declined substantially from previous years and may continue to decline in the future. This decline in royalty revenue may in turn have an adverse impact on our business results. At the same time, we are working to acquire patents owned by third parties and licensing such patents. We do not expect that the revenue, if any, from such new patents will be sufficient to offset the decrease in royalty revenue resulting from the expiration of our existing patents. 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.”

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If we are unable to manage successfully the risks inherent in our international activities and our overseas expansion, our business results and financial condition 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:

In order to produce our products competitively and to reduce costs, we aim to continue expanding our production and parts procurement in the Shanghai and Guang Dong areas of the People’s Republic of China (“China”). Nevertheless, we may experience difficulties in managing a production facility and entering into business arrangements in China in light of unexpected events, including political or legal changes, labor shortages or strikes or changes in economic conditions in China. Furthermore, the outbreaks of epidemics such as SARS (“Severe Acute Respiratory Syndrome”) or avian influenza in China may, depending on how they develop, adversely impact our operations in China, including delays in production due to travel restrictions on employees, as well as disruptions in parts procurement and factory operations. Accordingly, such incidents could have an adverse impact on our business results and financial condition. For information on our China plants, see “Item 4.A. History and development of the Company—Principal capital expenditures, investments and divestitures.”

Our dependence on certain third-party manufacturers and suppliers for parts and components could adversely affect our business results and financial condition

While we strive to produce key components and parts internally, we are dependent on a number of outside manufacturers and suppliers. Third parties manufacture some of our most important components and parts, including semiconductors. Our arrangements with third-party manufacturers and suppliers are generally on a renewable short-term basis. While we have sought to assure supply where necessary through strategic alliances and other measures, there can be no assurance that we will not face shortages of key components from time to time. See “Item 4.B. Business overview—Raw materials and sources of supply” for a discussion of our outside manufacturers and suppliers. If we are forced to change our contracted manufacturers and suppliers, this could result in a reduction in the availability of components and parts essential to us or in an increase of our costs. In addition, in periods of high demand for consumer electronics products and when new components such as next generation semiconductors are introduced, producers of components and parts may not be able to produce enough components to meet our demand on a timely basis. We may also experience shortages or other material disruptions in our supply of components and parts due to natural disasters or other events beyond our control. Shortages of key components could result in increases in their prices, insufficient supply and quality control problems, and could adversely affect our business results and financial condition, as well as lead to strained relationships with our OEM customers.

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

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

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

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

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

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

While we have developed technology and expertise which differentiate our products from those of our competitors, some of our unique technology and expertise is either not fully capable of being protected by intellectual property rights or protected only to a limited extent pursuant to legal limitations in certain jurisdictions. Although we have the ability to diminish 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 impact on our reputation and adversely affect our business results and financial condition

We manufacture various products at our plants worldwide in accordance with internationally accepted quality-control standards. We cannot be certain, however, that all of our products are defect-free and may not be recalled at some later date. Furthermore, although we maintain insurance against product liability claims, we cannot be certain that such insurance can adequately satisfy the liabilities ultimately incurred. In addition, insurance may not continue to be available on terms acceptable to us. A large-

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scale product recall or a successful products liability claim against us could result in significant costs or have a negative impact on our reputation, which may in turn lead to a decrease in sales, adversely affecting our business results and financial condition.

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

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

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

Pioneer’s business and operations are subject to various forms of government regulation in countries in which we do business, including required business/investment approvals, as well as export regulations based on national security or other reasons and other export/import regulations such as tariffs. In addition, commercial, antitrust, patent, consumer, taxation, exchange control and environment/recycling laws and regulations also apply. If we are unable to comply with these regulations, they can serve to limit our activities. In addition, compliance with these regulations could result in increased costs. Accordingly, these regulations could adversely affect our business results and financial condition. 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, and adversely affect our business results and financial condition

We periodically carry out disaster prevention checks and facility maintenance at all of our facilities to minimize potential negative impact caused by disruptions on our manufacturing lines. There can be no assurance, however, that we can completely prevent or mitigate the effect of a disaster, outage or other disruption at our production facilities. For example, our plasma display products are currently manufactured mainly at our Shizuoka and Yamanashi plants, and we are in the process of expanding our manufacturing lines there. Accordingly, our plasma display panel production capacity could be significantly reduced in the event of a major earthquake or other disruption of operations at the Shizuoka and Yamanashi plants.

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

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

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

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

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

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Item 4. Information on the Company

A. History and development of the Company

History

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

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

In the 1980s, we began to expand our business base to include audio/video (“AV”) equipment. We started marketing laser disc (“LD”) players and LDs, and commenced our own music and video software business in Japan. Also, we introduced the world’s first car compact disc (“CD”) players. We also broadened our business base in commercial and industrial markets with such products as optical memory disc drives for use in computers, laser karaoke (sing-along) systems and multiscreen video systems.

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

In fiscal 2001, we started supplying to PC makers recordable DVD drives that can record up to seven times as much data as conventional CD-R/RW drives. In fiscal 2002, we introduced to the Japanese consumer market hard disk drive (“HDD”) car navigation systems with faster search and display of routes to designated destinations. In fiscal 2003, we launched in Japan DVD recorders equipped with large-capacity HDDs, as well as car navigation systems incorporating a data communication module for access to the latest map data. Also, in June 2003, we began introducing recordable DVD drives for PC use, which are compatible with DVD-R, -RW, +R and +RW discs, to worldwide markets. In fiscal 2004, we started supplying passive-matrix full color OLED display panels in cellular phones.

Registered office

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

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Principal capital expenditures, investments and divestitures

In fiscal 2002, 2003 and 2004, our capital expenditures consisted principally of facilities and molds for production and totaled ¥46,909 million, ¥40,493 million and ¥57,978 million, respectively. They were paid principally out of our internally generated working capital. The facilities for production comprised those for OLED displays and DVD pickups, and plants and machinery for plasma displays. See the table in “Item 4.D. Property, plants and equipment,” for a list of our principal plants.

In fiscal 2004, in order to meet fast-growing demand for DVD recorders and recordable DVD drives, we invested ¥1.3 billion in building the second manufacturing line for optical pickups, which are key parts of DVD recorders and recordable DVD drives, at Guang Dong Plant in China. This line started its operation in November 2003 and our overall production capacity for optical pickups reached one million units per month.

To address expanding demand for plasma displays, in fiscal 2004, we invested ¥22 billion in building a more efficient production system, including the building of new manufacturing lines at our plants in Shizuoka and Yamanashi, in Japan. Our overall production capacity increased about 67% to 250 thousand units annually through the expansion of the Shizuoka Plant, which was completed in August 2003. The ongoing building of a new line of the Yamanashi Plant is expected to be completed by fall of 2004 and increase our total production capacity to 600 thousand units annually. In fiscal 2005, we plan to spend approximately ¥30 billion, including ¥6.2 billion paid by June 30, 2004, in relation to PDP-related capital expenditure not including investment related to the acquisition of NPD as described below.

On July 1, 2004, Pioneer and NEC concluded the stock transfer agreement under which NEC will transfer to Pioneer 100% of the issued share capital of its plasma display manufacturing subsidiary, NPD, and the intellectual property rights relating to plasma displays held by NEC. We expect to invest approximately ¥40 billion in the acquisition of NPD and NEC’s intellectual property rights in fiscal 2005. This acquisition is expected to be completed by September 30, 2004. With this acquisition and the new line of the Yamanashi Plant as described above, our total capacity is expected to add up to more than one million units a year. In order to carry out this investment, on March 5, 2004 we issued the aggregate principal amount of ¥60,000 million of its Euro Yen Zero Coupon Convertible Bonds due 2011. See “Item 4.B. Business overview—Strategic Focus—‘Pioneer Group Vision’.”

In order to improve management efficiency by concentrating resources in strategic businesses, in July 2003 we reached agreements to sell 100% of our shares in two of its wholly-owned subsidiaries, Pioneer LDC, Inc. (“PLDC”) and Pioneer Entertainment (USA) Inc. (“PEUSA”), to Dentsu Inc. (“Dentsu”), Japan’s largest comprehensive advertising agency. These subsidiaries were engaged in the AV software businesses in Tokyo, Japan and in California, U.S.A., respectively. The transfer of all the shares of PLDC, and 90% of the shares of PEUSA owned by us was completed by fiscal 2004. The remaining shares of PEUSA owned by us are expected to be transferred to Dentsu by September 30, 2006.

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

The amount paid to us in respect of these sales of subsidiaries that are engaged in the audio/video business was ¥4.9 billion in fiscal 2004. See Note 3 in “Notes to Consolidated Financial Statements.”

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B. Business overview

Strategy

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

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

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

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

Enhance our brand recognition and promote customer satisfaction

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

Leverage our leadership position in the car electronics business

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

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Focus on our strategic products targeting global markets

We focus on our strategic products where we are more likely to secure the “first-mover advantage” as a means of establishing market leadership. As part of our efforts to secure these leading market positions, we strive to play a major role in setting product standards. For example, we are promoting the DVD-RW format in DVD recorders and recordable DVD drives. This format has already gained support from other major consumer electronics companies such as Sony Corporation and Sharp Corporation (“Sharp”). We also aim to differentiate ourselves by introducing to targeted markets innovative plasma displays, OLED displays and car navigation systems. We market these strategic products on a global basis. Although certain technological customization is required, most of our key products are currently sold in virtually all major economies in the world.

Adopt optimal production methods to maximize profitability

We strive to adopt ideal production methods catered to each type of product and market demand. While we focus on reducing manufacturing and operating costs, our goal is to achieve overall efficiency in production by, for example, taking into account the proximity of the end-market, production facilities and labor costs. Consequently, we have increased the proportion of our production in China. To meet the fast-growing demand for plasma displays, we have built a more efficient production system at our plasma display panel manufacturing subsidiary. We are in the process of building our fourth production line in Japan, which is expected to start operation by fall of 2004. Moreover, the acquisition of NPD is expected to be completed by September 2004. Following these measures, we plan to establish in fall 2004 an overall production system capable of yielding more than one million panels annually. To enhance cost competitiveness and achieve economies of scale, we sell our key products on an OEM basis to other manufacturers. In addition, we introduced supply chain management to optimize efficiency of inventory control worldwide.

Strategic Focus—“Pioneer Group Vision”

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

Financial targets for the fiscal year ending March 2006:

Business targets

(i) No. 1 in DVD worldwide

We believe the DVD format will remain the dominant high-density, high-capacity medium for sound, video and data recording, storage and playback for the foreseeable future. As one of the leaders in this field, we have introduced attractive models of consumer-use DVD recorders, DVD home theater systems, DVD car navigation systems as well as recordable DVD drives for PC use. Pioneer believes that these DVD products have a competitive edge in design, function and price, contributing to the expansion of its DVD business.

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

We believe plasma displays offer significant advantages over cathode ray tubes (“CRTs”) and liquid crystal displays (“LCDs”). Among other advantages, it is technically easier to enlarge plasma displays than CRTs and LCDs. Thus, we expect that plasma display panels in the future will capture a substantial portion of the larger-screen TV market, which is expanding with the advent of high-quality pictures such as DVD and digital TV broadcast. Since introducing the first plasma displays in fiscal 1998, we have established a solid presence both in consumer and commercial markets worldwide as a result of our excellent reputation for the large-screen high-resolution images of our plasma displays.

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

(iii) From stand-alone to network

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

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

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

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

Nature of operations

We develop, design, manufacture and sell electronics products such as audio, video and car electronics on a global scale. We are one of the leading innovators of DVD products and plasma displays. We are also one of the leading manufactures of car audio products and car navigation systems in the consumer market.

Our principal production activities are carried out in Asia, including Japan. Our products are generally sold under our own brand names, principally “Pioneer.” Our primary markets are Japan, North America, Europe and Asia and we sell our products to customers in consumer and business markets through sales

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offices in Japan, and through sales subsidiaries of Pioneer and independent distributors outside of Japan. In addition, on an OEM basis, we market certain products, such as car electronics products, recordable DVD drives, digital broadcast set-top boxes and OLED displays to other companies.

As a result of the sale of subsidiaries in the audio/video software business in fiscal 2004, the gain from such sale, as well as the operating results of the discontinued operations, are presented net of tax as a separate line item in the consolidated statement of income in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Also, in fiscal 2004, we changed our business segment classification for certain businesses. Results related to DVD drives for PCs have been moved from “Others” to “Home Electronics,” and results related to plasma displays for business use have been moved from “Home Electronics” to “Others.” Corresponding figures for the previous fiscal years have been restated accordingly. (The consolidated financial statements included in this annual report and the financial information below are prepared in accordance with U.S. GAAP, except for segment data which is prepared in accordance with relevant regulations under the Securities and Exchange Law of Japan. Specifically, such segment information is required to be reported by reportable industrial segment, whereas segment information is required to be reported by reportable operating segment under U.S. GAAP.)

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

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

Operating Revenue from Unaffiliated Customers by Business Segments

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Home Electronics:

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

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

We believe the traditional home audio markets of Japan, North America and Europe have matured and accordingly, price competition in these markets is strong. We do not expect the traditional home audio markets in these regions to grow substantially. We believe growth will come from new products, such as DVD-related products and plasma displays. In our DVD business, we are shifting the emphasis from price-competitive DVD players to higher value-added DVD recorders and DVD home theater systems. Moreover, our DVD-related products as computer peripherals have shifted from DVD-ROM drives to recordable DVD drives. In our plasma display business, we continue to promote vigorously 50- and 43-inch models of high-definition plasma displays in the worldwide market. Japan Electronics and Information Technology Industry Association (“JEITA”) forecasts an approximately 37% increase in consumer DVD player and DVD recorder sales worldwide, from 62 million units in 2003 to 85 million in 2008, and strong growth in recordable DVD drives from 23 million units in 2003 to 88 million units in 2006 worldwide. It also forecasts that sales of plasma displays worldwide will increase approximately 8 times, from 1 million units in 2003 to 8 million in 2008.

Car Electronics:

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

Overall, car stereos accounted for the largest sales in this segment for fiscal 2004. In Japan, our car navigation systems accounted for the largest sales, while overseas car stereos accounted for the largest sales in this segment. Sales based on OEM accounted for 32.3% in this segment.

Both in Japan and outside Japan, sales in this group are generally made in the consumer market and to automobile manufacturers on an OEM basis for installation in new cars on production lines or as optional parts. Sales in this category are gradually shifting from the consumer market to the OEM market, as automobile manufacturers place greater emphasis on differentiation of their cars. Our strong brand recognition in both markets is helping us maintain our leading market share of car electronics products on a global basis. 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 by offering affordably-priced and easy-to-operate DVD-ROM and advanced HDD-equipped models. We plan to expand this business in Europe and North America, where the markets are expanding recently. JEITA forecasts that sales of car navigation systems worldwide will increase approximately 2 times, from 5.2 million units in 2003 to 10 million in 2008. In November 2002, we released in the consumer market the world’s first car navigation system that incorporates a data communication module for access to the latest map data. 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.

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Patent Licensing:

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

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

Revenue from the Patent Licensing segment is substantially less than from our other segments, constituting less than 2% of operating revenue for fiscal 2004. However, the contribution of this segment to our operating income is significant compared to its contribution to our operating revenue, constituting approximately 26% of our operating income in fiscal 2004.

Others:

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

Devices and parts, including semiconductors related to laser pickups, accounted for the largest sales in this segment for fiscal 2004. Factory automation systems and business-use plasma displays also contributed materially to sales in this segment.

OLED displays, which are particularly well-suited for small size displays, such as cellular phone displays are expected to become the next generation display. In fiscal 2000, we were the first in the world to mass-produced four-color OLED displays. In fiscal 2004, we started supplying passive-matrix full color OLED display panels in cellular phones. To strengthen our market position, in fiscal 2001, Tohoku Pioneer Corporation, Pioneer’s majority-owned subsidiary, established a joint venture company, ELDis, Inc., in fiscal 2001 with Semiconductor Energy Laboratory Co., Ltd. and Sharp to develop and manufacture active-matrix full-color OLED displays.

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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

Seasonality

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

Marketing channels

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

After-sales service

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

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

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Raw materials and sources of supply

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

No single source accounted for more than 5% of total supply purchases in fiscal 2004. We have not experienced any material difficulties in obtaining raw materials, parts and products and believe that we will continue to be able to obtain them to meet our needs.

Semiconductors account for the largest percentage of parts purchased in fiscal 2004 (on a yen basis), representing approximately 40% of our total purchases. We purchase semiconductors from various suppliers, mainly pursuant to the terms of our basic supply agreement. Our basic supply agreement generally has a term of one year, with an automatic renewal clause. Where we do not have two or more suppliers, we seek longer term contracts or bulk purchases and place our order three to four months earlier than our usual practice to reduce the risk of being unable to obtain key parts. We purchase a portion (approximately 10%) 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.

The political instability in the Middle East affects the stable supply of petroleum which may cause an increase in the price of plastic materials used in our products. In addition, the rapid economic growth in China may cause a shortage of steel materials and nonferrous metals. We continue our effort to procure a stable supply of these materials and maintain costs at appropriate levels.

To date, the prices of parts and other principal raw materials used by us to produce its products have remained relatively stable.

We plan to increase the percentage of raw materials and parts we purchase through online network systems, including the Internet. We believe this will contribute to more timely manufacturing and a decrease in production costs.

Patents and licenses

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

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Competition

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

Import restrictions

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

Governmental regulation

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

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C. Organizational structure

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

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

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D. Property, plants and equipment

Our manufacturing operations are conducted principally in Japan, Southeast Asia and China. Of the total of 34 plants, 16 plants are in Japan and the remaining 18 are outside Japan. The following table sets forth information, as of March 31, 2004, with respect to our principal plants.

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

As of March 31, 2004, 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 294,000 square feet.

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

In fiscal 2004, in order to meet fast-growing demand for DVD recorders and recordable DVD drives, we invested ¥1.3 billion in building the second manufacturing line for optical pickups, which are key parts of DVD recorders and recordable DVD drives, at Guang Dong Plant in China. This line started November 2003 and our overall production capacity for optical pickups reached one million units per month.

To address expanding demand for plasma displays, in fiscal 2004, we invested ¥22 billion in building a more efficient production system, including the building of new manufacturing lines at our plants in Shizuoka and Yamanashi, in Japan. Our overall production capacity increased about 67% to 250 thousand units annually through the expansion of the Shizuoka Plant completed in August 2003. The ongoing building of a new line of the Yamanashi Plant is expected to be completed by fall of 2004 and increase our total production capacity to 600 thousand units annually. In fiscal 2005, we plan to spend approximately ¥30 billion in relation to PDP-related capital expenditure not including investment related to the acquisition of NPD as described below.

On July 1, 2004, Pioneer and NEC concluded the stock transfer agreement under which NEC will transfer to Pioneer 100% of the issued share capital of its plasma display manufacturing subsidiary, NPD and the intellectual property rights relating to plasma displays held by NEC. We expect to invest approximately ¥40 billion in the acquisition of NPD and NEC’s intellectual property rights in fiscal 2005. This acquisition is expected to be completed by September 30, 2004. NPD’s plant has an approximate aggregate floor space of 867,000 square feet in Izumi, Kagoshima, Japan. With this acquisition and the

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

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

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

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

Item 5. Operating and Financial Review and Prospects

Overview

We develop, design, manufacture and sell home electronics products such as audio, video and car electronics products on a global scale. We are one of the leading innovators of DVD products, plasma displays and car navigation systems. We are also one of the leading manufactures in the world consumer market of car audio products and car navigation systems. In addition, we derive revenue from the manufacture and sale of industrial electronics, such as factory automation systems and parts and from the licensing of patents that we own.

During fiscal 2004, the global economy was supported by continued expansion of the U.S. economy, despite uncertainties in Iraq and other parts of the world. In Japan, where we have the largest sales, the economy exhibited signs of recovery. However, uncertainties remain as to whether this trend will lead to a sustainable growth. In the consumer electronics market, the popularity of newer products, such as flat panel TVs and DVD recorders, rose, while price competition for these products intensified worldwide. In foreign exchange markets, the average value of the yen during fiscal 2004 was approximately 8% higher against the U.S. dollar and approximately 9% lower against the euro compared with fiscal 2003. In these economic conditions, our operating revenue for fiscal 2004 was ¥700.9 billion, up 3.5% from fiscal 2003. Operating income was ¥43.7 billion, a 42.1% increase from ¥30.8 billion recorded in fiscal 2003, and net income increased to ¥24.8 billion, a 54.5% increase from ¥16.1 billion posted in fiscal 2003.

We classify our business groups into four segments: “Home Electronics,” “Car Electronics,” “Patent Licensing” and “Others.” Main products in each segment are as follows: “Home Electronics” includes the manufacture and sale of audio/video equipment for home use, equipment for cable-TV systems, digital broadcast set-top boxes, home telephones, computer peripheral equipment, devices and others. “Car Electronics” includes the manufacture and sale of car audio products, car navigation systems, and others. “Patent Licensing” includes the licensing of patents related to optical disc recording and playback equipment, and others. “Others” includes manufacture and sale of factory automation system, parts, and others. The following are operating revenue and operating income by business segment for the three years ended March 31, 2004. “Car Electronics” is our largest segment by revenue, accounting for 41.7% of operating revenue in fiscal 2004.

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Operating Revenue and Operating Income by Business Segments

Note:    Operating revenue represents revenue from unaffiliated customers.

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

Operating Revenue by Geographic Market

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

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Home Electronics, Car Electronics and Others

In our home electronics business, we experienced significant price competition for conventional DVD players due to increasing competition. At the same time, we continue to see strong growth in demand within the Japanese market and overseas for DVD recorders and recordable DVD drives, although sales of our CD-ROM/R/RW drives and DVD-ROM drives have shown a decrease. Demand for plasma displays, which has been conspicuous in Japan, is expanding in the overseas market. In our car electronics business, severe worldwide competition has led to strong downward pressure on prices. However, the popularity of our car navigation systems, which we believe is a major area of our operations, continues to increase. Our royalty revenue from the licensing of worldwide patents for our laser optical disc technologies has started to decline substantially as a significant portion of our patents in Japan and Europe expired during fiscal 2003 and 2004.

The electronics industry is characterized by rapid technological changes, and our ability to introduce attractive new products to the market significantly affects the operating results of our electronics businesses. Our sales of new products such as DVD-related products, including DVD recorders and recordable DVD drives for PCs, plasma displays, car navigation systems and OLED displays have grown rapidly. In fiscal 2004, sales of such new products accounted for approximately 47% of our total sales. We expect to continue concentrating our resources on these strategic products in order to further expand sales.

The electronics industry is also characterized by continuing sales price decreases in most product categories, making it important for us to continually improve the efficiency of our manufacturing, distribution, service and administrative functions. As an example of our effort, we have increased the percentage of our manufacturing outside Japan from 51% in fiscal 2000 to 65% in fiscal 2004 in terms of the yen value of cost of goods produced, mainly by expanding production facilities in Southeast Asia and China.

As a result of the sale of subsidiaries in the audio/video software business in fiscal 2004, the gain from such sale, as well as the operating results of the discontinued operations, are presented net of tax as a separate line item in the consolidated statement of income in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” See Note 3 in “Notes to Consolidated Financial Statements.”

Also, in fiscal 2004, we changed our business segment classification for certain businesses. Results related to DVD drives for PCs have been moved from “Others” to “Home Electronics”, and results related to plasma displays for business use have been moved from “Home Electronics” to “Others.” Corresponding figures for the previous fiscal years have been restated accordingly.

Patent Licensing

Our royalty revenue from Patent Licensing depends to a material extent on the sales of patented products by our licensees, making it difficult for us to predict actual royalty revenue each year. Therefore, trends in the PC market have an influence on our royalty revenue. In addition, a significant portion of our patent rights in Japan and Europe relating to laser optical disc technologies expired during fiscal 2003 and fiscal 2004. Accordingly, we have started to experience a substantial decrease in operating revenue and operating income from this segment. We are currently working to acquire patents held by third parties and licensing such patents. Although these operations may generate additional revenue to help offset a portion of this expected decline, we do not expect that the revenue, if any, from such new patents will be sufficient to offset the decrease in royalty revenue resulting from the expiration of our existing patents.

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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 balance sheet date and all revenue and expense accounts are translated using 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 we manufacture our products may be different from the currencies we sell our products in different countries.

Derivative financial instruments are utilized by us to reduce risks from the fluctuations in foreign exchange rates but are not held or issued for trading purposes. To hedge certain purchase and sale commitments anticipated and not yet committed transactions denominated other than functional currencies, we enter into forward exchange contracts and purchases and writes currency options. Written options are entered into only with purchased options in order to reduce the hedging cost.

Critical accounting policies and estimates

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

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

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

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Revenue recognition

Sales are generally recorded when merchandise is shipped to customers based on purchase orders or when services are rendered to the third parties. In certain cases, terms of the contract require the product to pass customer inspection after shipment and we record the sale upon satisfactory customer acceptance. Royalty revenue is recognized based on royalty statements from licensees. Estimated reductions to revenue are recorded for customer incentive offerings. Sales incentives that are dependent on future customer performance such as volume incentive rebates or co-operative advertising are accrued based on estimates when the original sale is recorded. Rebates and incentives given directly to consumers are accrued earlier of when the program becomes effective or the program is announced, to the extent related sales have been recognized. Estimates of future customer performance such as purchase volume, early payments and consumer rebate redemption rate are based on experience and such estimates are reviewed monthly, quarterly or annually depending on the type of incentive. Should a greater proportion of customers redeem incentives than we estimate, additional reductions to revenue may be required.

Allowances for doubtful accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The changes of allowance for doubtful accounts are disclosed in Note 19 to consolidated financial statements.

Warranties

We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates and service costs including parts and labor that may be incurred in correcting a product failure. The estimate of warranty cost is based on historical information, and should actual product failure rates or service costs differ from our estimates, revisions to the estimated warranty liability may be required. Our warranty reserve as of March 31, 2004 is ¥5.4 billion.

Inventories

We write down inventory for estimated obsolescence in amounts equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. As of the end of fiscal 2004, such inventory reserve amounted to ¥8.3 billion. If future demand or market conditions are less favorable than those projected by the management, additional inventory write-downs may be required.

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Impairment of investments

We hold minority interests in customers and financial institutions for the purpose of maintaining long-term relationships, some of which are in publicly traded companies whose share prices are highly volatile and some of which are in non-publicly traded companies whose value is difficult to determine. We record an impairment charge when we believe an investment has experienced a decline in value that is other than temporary. For investments in publicly traded companies, we assume the decline is other than temporary when market value is less than cost for a period of six to nine months, or sooner depending on severity of decline or other factors. For investments in non-publicly traded companies, an impairment is presumed to be other than temporary when net assets of the investee decline generally by 30% to 50% due to losses incurred. Such presumption may be overcome if there is evidence to support the judgment that the decline in net assets of the investee is temporary. The factors that are considered in the judgment include business plans and estimated future cash flows of the investee. Impairment losses recognized in income during fiscal 2004 as a result of decline in prices of stocks in our portfolio was ¥0.2 billion. The unrealized losses in the portfolio at the end of fiscal 2004 were immaterial. Future adverse changes in stock market conditions or poor operating results of underlying investments could result in losses that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Deferred tax assets

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

Pension benefit costs

Employee retirement benefit costs and obligations are dependent on assumptions used in the actuarial calculations. These assumptions include discount rates, future compensation levels, retirement rates and mortality rates which are based upon current statistical data, as well as long-term returns on plan assets and other factors.

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

For pension plans in Japan, the discount rates are based on the market yield from Japanese Government Bonds adjusted for the assumed duration of the pension benefit payment for current employees. The discount rate for our domestic contributory welfare pension plan is further adjusted to reflect pension obligations that can be transferred to the Japanese government. To determine the expected long-term rates of return on our pension plan assets, we consider mainly the current and target asset allocations, as

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well as historical and expected returns on various categories of plan assets. 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.

As of March 31, 2004, the actual asset allocation was equity securities 46%, debt securities 30%, other 24%, compared with target asset allocation of equity securities 56%, debt securities 41%, other 3%. The higher actual allocation for other assets resulted from our temporary shift from market sensitive assets to highly liquid assets as we plan to apply for transfer of pension obligations and assets for a substitutional portion of our contributory welfare pension plan.

Total net periodic pension costs for our pension plans in Japan for fiscal 2002, 2003 and 2004 were ¥5.0 billion, ¥8.1 billion and ¥10.1 billion, respectively, each representing 0.8%, 1.2% and 1.4% of operating revenue. Declines of discount rates and negative returns on plan assets that continued through fiscal 2003 adversely affected our pension benefit costs. Amortization of the unrecognized net actuarial loss, which is a component of pension benefit costs and represents a systematic expense recognition of the effects of changes in assumptions and differences between assumptions and actual results, for our domestic pension plans increased to ¥4.1 billion in fiscal 2004 from ¥2.9 billion in fiscal 2003 and ¥2.0 billion in fiscal 2002, although such amortization is expected to decrease in fiscal 2005 due to higher than expected returns on plan assets during fiscal 2004. The increases in our pension costs are also attributable to increases of service cost mainly resulted from a decline of discount rate, and decreases of expected return on assets reflecting reduction of expected rate of return and decline of plan assets through the end of fiscal 2003. Lowering the discount rates for pension plans in Japan by 0.5 percentage point would have increased the projected benefit obligation at the end of fiscal 2004 by approximately ¥13 billion and would increase the pension cost for fiscal 2005 by approximately ¥1.1 billion. Lowering the expected rate of return on plan assets by 0.5 percentage point would increase the pension cost for fiscal 2005 by approximately ¥0.5 billion.

A. Operating results

Fiscal 2004 compared with fiscal 2003

Operating revenue

Operating revenue, the sum of net sales and royalty revenue, for fiscal 2004 was ¥700.9 billion, up 3.5% from fiscal 2003.

Net sales amounted to ¥689.1 billion, a 3.7% increase over fiscal 2003. Net sales in Japan came to ¥263.3 billion, up 3.4% from fiscal 2003, and overseas net sales increased 3.8% to ¥425.8 billion.

Home Electronics net sales increased 1.3% over fiscal 2003, amounting to ¥281.5 billion, primarily as a result of increased sales of plasma displays, DVD recorders and recordable DVD drives for PCs, while sales of DVD players, set-top boxes and audio products decreased. Sales of plasma displays grew overseas while sales in Japan decreased. Sales of DVD recorders, particularly models with a hard disk drive, increased both in Japan and overseas to more than twice the levels in fiscal 2003 in terms of units sold, while the amount of net sales did not grow so fast because of declining average selling prices. Consumer demand for DVD products is shifting rapidly from DVD players to DVD recorders particularly in Japan. Accordingly, our marketing effort has shifted from DVD players to DVD recorders. Sales of recordable DVD drives for PCs increased overseas. In Japan, Home Electronics sales decreased by 9.2% to ¥78.8 billion as a result of decreased sales of plasma displays and DVD players, although sales of DVD recorders increased. Overseas, sales increased by 6.0% to ¥202.7 billion. This primarily reflects a large increase in the sale of plasma displays in each overseas market, DVD recorders in North America and Europe, and recordable DVD drives for PCs in Europe and Asia, offsetting sales declines of digital cable-TV set-top boxes in North America, digital broadcast set-top boxes in Europe and audio products in

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

Car Electronics net sales rose 3.9% to ¥292.2 billion, primarily as a result of sales growth of car navigation systems. In Japan, net sales increased 15.1% to ¥121.7 billion, mainly due to increased sales of car navigation systems in the consumer market and to automobile manufacturers. Sales of car audio products to automobile manufacturers increased as well. Overseas net sales decreased 2.8% to ¥170.5 billion, primarily due to decreased sales of car audio products to automobile manufacturers in North America. Sales of car navigation systems rose in North America and Europe, and sales of car audio products increased in other areas.

Royalty revenue from Patent Licensing decreased 6.1% to ¥11.8 billion, compared to that of fiscal 2003. This was attributable to expiration of our optical disc-related patents in certain areas.

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

Operating costs and expenses

Cost of sales increased to ¥487.3 billion from fiscal 2003’s ¥473.2 billion, consistent with the increase in net sales. However, cost of sales as a percentage of operating revenue declined 0.4 percentage points to 69.5%, despite the adverse effects of keen price competition, particularly for home electronics products such as plasma displays and DVD recorders. Gross profit margin in the car electronics business improved as a result of cost reductions in car navigation systems. For recordable DVD drives, gross profit margin improved as well as a result of cost reductions, contributing to overall gross profit margin improvement in almost same significance with contribution from car electronics business. Also, exchange rate fluctuations favorably affected gross profit margin. A weaker yen against the euro increased net sales in terms of yen, and a stronger yen against currencies in Asian countries, where our major production facilities are located, reduced production costs in terms of yen.

Selling, general and administrative (“SGA”) expenses decreased by 1.4% or ¥2.3 billion over fiscal 2003 to ¥166.4 billion. This primarily reflected decreases in personnel-related expenses, special retirement allowances and various operating expenses. Personnel-related expenses in fiscal 2004 decreased by ¥1.9 billion, reflecting the sale of subsidiaries in the karaoke business in the second half of fiscal 2003. The decrease of special retirement allowances was due to ¥1.4 billion special termination benefits recorded by Tohoku Pioneer Corporation, a subsidiary in Japan, for its voluntary early retirement plan implemented in June 2002. Such benefits were not incurred in fiscal 2004. In addition to these decreases, reductions in various operating expenses led to an overall decrease of SGA expenses, offsetting the unfavorable impact of a $14 million (¥1.5 billion) one-time payment to Gemstar-TV Guide International, Inc. as part of resolving pending litigation, ¥2.0 billion provided for estimated costs for free inspection and repair of certain plasma TVs, and a ¥1.7 billion increase in advertising expenses. The ratio of SGA expenses to operating revenue decreased by 1.2 percentage points to 23.7%.

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

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

Operating income

Operating income in fiscal 2004 was ¥43.7 billion, a 42.1% increase from ¥30.8 billion recorded in fiscal 2003, mainly resulting from increased net sales, improved gross profit margins and decreased SGA expenses. Operating income for the Home Electronics segment was ¥2.1 billion in fiscal 2004 compared with ¥3.9 billion in fiscal 2003, despite increased profit from DVD drives for PCs. The decrease mainly reflected a downward trend in market product prices, slack set-top box business and increased SGA expenses, including a one-time payment to Gemstar-TV Guide International, Inc. and provisions for plasma TV service costs. Operating income for the Car Electronics segment in fiscal 2004 amounted to ¥28.9 billion, up 10.8% from fiscal 2003. Increased sales and improved gross profit margins primarily due to cost reductions in car navigation systems are the main reasons. In the Patent Licensing segment, operating income increased to ¥11.4 billion from ¥10.7 billion, despite a decrease in royalty revenue, mainly due to decreases in operating expenses. Others segment, which broke even in fiscal 2003, posted ¥1.1 billion operating income in fiscal 2004. The increases in sales of OLED display panels and other component parts as well as factory automation systems improved profitability.

Other income (expenses)

Other expense, on a net basis, decreased from an expense of ¥2.7 billion to ¥1.9 billion. Net interest (interest income, less interest expense) was almost the same as in fiscal 2003, representing an expense of ¥0.7 billion, with both interest income and interest expense decreasing. The decrease of interest income mainly reflected a decline of interest rates in the U.S. financial market, and the decrease of interest expense mainly reflected reductions of interest bearing short-term and long-term borrowings. A ¥0.8 billion gain on sale of subsidiaries’ stock posted in fiscal 2003 resulted from the sale of karaoke related subsidiaries. Foreign exchange loss decreased by ¥0.8 billion, to a ¥1.2 billion loss. The losses in fiscal 2004 primarily arose from conversion of U.S. dollar receivables into yen due to the yen’s appreciation against the U.S. dollar during fiscal 2004, although such losses decreased when compared with losses incurred in fiscal 2003. Other—net was income of ¥0.1 billion compared with expense of ¥0.7 billion. A ¥1.1 billion decrease of losses on write-down of investments to ¥0.2 billion in fiscal 2004, compared with ¥1.3 billion losses recorded in fiscal 2003, accounted for the difference in Other—net. During fiscal 2004, the prices of stock in our portfolio recovered, and significant write-downs were not recorded.

Income before income taxes

Income before income taxes in fiscal 2004 increased 49.0% to ¥41.8 billion from ¥28.1 billion in fiscal 2003, mainly due to increased operating income.

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Income taxes

Income taxes as a percentage of pre-tax income (the effective tax rate) was 44.4%, an increase of 12.2 percentage points compared with 32.2% in fiscal 2003 and was 2.4% higher than the normal statutory tax rate of 42.0% in Japan. In fiscal 2003, valuation allowances, which had been provided for a tax benefit, the realization of which had been judged as unlikely, were reversed as profitability of subsidiaries particularly in Japan improved. The reversal was the main reason for the lower effective tax rate for fiscal 2003. The 2.4% deviation from the normal statutory tax rate was due mainly to ¥0.7 billion in charges resulting from the settlement of a proposed assessment from U.S. tax authorities, and losses incurred at certain subsidiaries. Meanwhile, a 1.0% reduction of the tax rate in Japan effective from fiscal 2005 had an effect of increasing deferred income taxes by ¥0.4 billion and by ¥0.8 billion in fiscal 2004 and 2003, respectively.

Minority interest in losses (earnings) of subsidiaries

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

Equity in losses of affiliated companies

Equity in losses of affiliated companies was ¥2.2 billion in fiscal 2004 compared with ¥3.1 billion in fiscal 2003. The decrease in loss is mainly attributable to the decrease of research and development costs incurred by ELDis, Inc., where active-matrix full-color OLED displays are still in development.

Income from continuing operations

Income from continuing operations in fiscal 2004 increased 27.7% to ¥20.4 billion from ¥15.9 billion in fiscal 2003 mainly due to the increase in operating income.

Income from discontinued operations, net of tax

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

Net income

Net income in fiscal 2004 was ¥24.8 billion, a 54.5% increase compared with fiscal 2003’s ¥16.1 billion. Basic net income per share of common stock in fiscal 2004 was ¥141.58, compared with ¥90.24 in fiscal 2003. Diluted net income per share in fiscal 2004 was ¥140.52 compared with ¥90.24 in fiscal 2003.

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Fiscal 2003 compared with fiscal 2002

Operating revenue

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

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

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

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

Royalty revenue from Patent Licensing decreased 28.5% to ¥12.6 billion, compared to that of fiscal 2002. This was attributable to a decline in royalty revenue from digital recording products such as CD-R drives, resulting from lower PC demand, and expiration of our optical disc-related patents in some areas.

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

Operating costs and expenses

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

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SGA expenses increased by 1.1% or ¥1.9 billion over fiscal 2002 to ¥168.7 billion. Personnel-related expenses increased by ¥6.3 billion. This primarily reflected increased costs for pension plans in Japan and overseas due to declines of discount rates used in calculation of pension obligations and lower returns from pension assets as a result of poor conditions in the stock markets worldwide. On the other hand, advertising and sales promotion expense decreased compared with fiscal 2002, when we vigorously promoted the Pioneer brand name and our strategic products such as plasma displays worldwide. The ratio of SGA expenses to operating revenue decreased 1.6 percentage points to 24.9%.

Losses on sale and disposal of fixed assets increased by ¥1.2 billion. The increased losses were mainly attributable to losses incurred in conversion of optical disc production facilities at the Kofu Plant in Yamanashi, Japan into plasma display panel production facilities to satisfy growing demand for plasma displays. This conversion is in line with our policy to concentrate business resources to strategically selected business areas.

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

Operating income

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

Other income (expenses)

Other expense, on a net basis, increased from an expense of ¥2.2 billion to ¥2.7 billion. Net interest (interest income, less interest expense) was an expense of ¥0.7 billion, compared with an expense of ¥0.3 billion in fiscal 2002, mainly due to decreased interest income, which reflected declining interest rates in the U.S. financial market. Gain on sale of subsidiaries’ stock was ¥0.8 billion in fiscal 2003, while there was no gain on the sale of subsidiaries in fiscal 2002. The sale of subsidiaries, mainly in karaoke-related business, was also in line with our policy to concentrate business resources to strategically selected business areas. Foreign exchange gain (loss) swung from ¥0.3 billion gain recorded in fiscal 2002 to ¥2.0 billion loss in fiscal 2003. The losses in fiscal 2003 primarily arose from conversion of U.S. dollar deposits and receivables into yen due to the yen’s appreciation against the U.S. dollar during fiscal 2003. Other—net decreased from expense of ¥2.2 billion to expense of ¥0.7 billion. Losses on write-down of investments decreased to ¥1.4 billion in fiscal 2003, compared with ¥2.3 billion losses recorded in fiscal

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

Income before income taxes

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

Income taxes

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

Minority interest in losses (earnings) of subsidiaries

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

Equity in losses of affiliated companies

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

Income from continuing operations

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

Income from discontinued operations, net of tax

Income from discontinued operations, net of tax, which represented profit and loss of sold subsidiaries, decreased to ¥0.1 billion in fiscal 2003, compared with ¥0.6 billion in fiscal 2002.

Net income

Net income in fiscal 2003 was ¥16.1 billion, almost double that of fiscal 2002’s ¥8.0 billion. Basic net income per share of common stock in fiscal 2003 was ¥90.24, compared with ¥44.70 in fiscal 2002. Diluted net income per share in fiscal 2003 was ¥90.24 compared with ¥44.69 in fiscal 2002.

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Segment information

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

Business Segments

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Geographic Segments

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B. Liquidity and capital resources

Cash flows

Summarized Consolidated Statements of Cash Flows

Fiscal 2004 compared with fiscal 2003

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

Net cash used in investing activities was ¥52.8 billion for fiscal 2004, comprised mainly ¥58.0 billion used in payment for the purchase of fixed assets and ¥4.9 billion proceeds from sale of discontinued operation. Among the ¥58.0 billion capital expenditure, investment related to plasma displays amounted to ¥22.0 billion, investment in production facilities in China amounted to ¥5.5 billion. The net cash used in investing activities in fiscal 2004 increased by ¥17.6 billion compared to ¥35.2 billion in fiscal 2003. The investments in the expansion of the plasma display production facilities and expansion of production capacities for plants in China accounted for the most of the increase.

Net cash provided by financing activities in fiscal 2004 was ¥51.8 billion and was mainly comprised of ¥60.5 billion cash provided by issuance of convertible bonds, ¥4.4 billion used in the reduction of other short-term and long-term borrowings, and ¥3.9 billion used in dividends payment. On March 5, 2004,

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

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

Capital requirements

Our requirements for operating capital primarily are for the purchase of raw materials and parts for manufacturing our products. Operating expenses, including manufacturing expenses and SGA expenses, require a substantial amount of operating capital. Also, our capital expenditure plan for fiscal 2005 is expected to require ¥68.0 billion, a ¥10.0 billion increase from ¥58.0 billion in fiscal 2004, reflecting mainly expansion of plasma display production facilities.

On July 1, 2004, we concluded an agreement with NEC under which NEC will transfer to us 100% of the issued share capital of its plasma display manufacturing subsidiary, NPD, and the intellectual property rights relating to plasma display held by NEC. We expect to invest approximately ¥40.0 billion in the acquisitions scheduled effective as of September 30, 2004. A part of the ¥60.5 billion proceeds from issuance of convertible bonds on March 5, 2004 will be used in this investment.

We plan to apply for transfer of pension obligations and assets for substitutional portion of a contributory welfare pension plan. As of March 31, 2004 our contributory welfare pension plans maintains sufficient plan assets to complete the required transfer of plan assets, therefore, we do not expect additional cash requirement from this transfer.

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

Financial management

At present, funds required for operating capital and capital expenditure are generally financed through internally generated cash or debt financing.

With regard to debt financing, short-term debt financing with maturity of one year or less is utilized to fund operating capital requirements. Short-term borrowings are generally arranged locally in the currency in which each consolidated company carries out its operations. As of March 31, 2004, short-term borrowings of ¥23.3 billion with weighted average interest rate of 1.74% comprised bank loans in seven different currencies, principally Japanese yen. On the other hand, long-term borrowings to finance long-term funding requirements such as investment in production facilities are generally arranged in Japan on a fixed interest rate basis. As of March 31, 2004, substantially all of the long-term debt of ¥94.2 billion, including the portion due within one year, was comprised of ¥62.1 billion zero coupon convertible bonds due 2011 including ¥2.1 billion unamortized issue premium, ¥6.5 billion loans principally from banks maturing serially through 2013 with fixed interest rates ranging from 3.06% to 3.90%, ¥15.0 billion 2.35% unsecured bonds due 2005, ¥10.0 billion 2.80% unsecured bonds due 2008, and capital lease obligations and other loans arranged locally.

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As for liquidity, cash and cash equivalent amounted to ¥192.4 billion at the end of fiscal 2004, which are held principally in Japanese yen, the U.S. dollars and euro. Cash and cash equivalents comprised cash on hand, cash in banks including time deposit, and investment in highly liquid financial instruments provided by major international banks and financial institutions. In addition, uncommitted and unused credit lines amounted to ¥229.6 billion as of March 31, 2004 are available if there were needs for additional borrowings arising from a possible decrease in cash flows from operating activities due to seasonal factors such as investment in inventory for high-sales seasons, or as a result of fluctuations in customer demands.

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

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

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

Our R&D activities have played a crucial role in the development of our business. Our R&D program currently centers on high-density recording, flat-panel displays, digital signal processing, information/communications, and core LSIs. In fiscal 2002, 2003, and 2004 our R&D expenses were ¥39,050 million, ¥45,388 million and ¥51,483 million respectively, or 6.2%, 6.7% and 7.3%, respectively, of our operating revenue. We currently plan to continue to spend more than 6% of operating revenue on R&D each year.

Our research and development of new technologies is carried out mainly in Japan at the Corporate Research & Development Laboratories, as well as the AV & Recording Systems Development Center, Information & Communication Development Center and PDP Development Center. In November 2003, we established the Mobile Systems Development Center in Japan to develop advanced car electronics-related technologies, such as next-generation car navigation systems. At Pioneer Research Center USA, Inc. (“PRA”), one of our overseas wholly-owned subsidiaries, we are also actively engaged in research of new technologies, and development of system software related to digital TV and of digital network technologies. At another wholly-owned overseas subsidiary in the United Kingdom, Pioneer Digital Design Centre, Ltd., we are researching cutting-edge technologies related to digital TV for use in Europe. Product development and production improvement activities are the responsibility of each business unit, and are carried out in our various manufacturing facilities both in Japan and overseas.

Multiple-Layer Optical Discs

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

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

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

Home AV Network

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

D. Trend information

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

Home Electronics

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

DVD players and recorders. As a result of the dramatic expansion of the market for DVD players, they have become commodity products and suffer from significant price competition. DVD has been one of our fastest growing product areas during the past several fiscal years, and we believe we are well-positioned to face the competition because of our accumulated expertise through LD development, our expected reduction of costs as a result of shifting production to China and our efforts to introduce new innovative, value-added products such as DVD recorders. Recently, demand for the DVD recorders, especially those with HDDs for long-time recording, has rapidly expanded, and these products have started to replace VCRs. There are, however, a number of competing digital recording disc formats: the DVD-RW, the DVD-RAM, the DVD+RW, as rewritable formats, and the DVD-R, the DVD+R formats, as write-once formats.

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

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drives in PC systems as part of their sales strategies to differentiate their PC lineups. This sales trend is expected to continue. In fiscal 2004, we launched recordable DVD drives for PCs, which are compatible with DVD-R, -RW, +R and +RW discs, to worldwide markets, and also models enabling high-speed recording of up to 8X write speed with DVD-R and +R and up to 4X with DVD-RW and +RW discs.

Plasma displays. The large-screen display market for plasma displays has been expanding in recent years, and several manufacturers in Japan and South Korea have started mass production of plasma displays that compete with our products. Each company is increasing investment and expanding production. As the number of companies entering this market increases, it is expected that the unit price will continue to decrease due to intensifying competition. In particular, in the market for displays under the 40-inch size, plasma displays are subject to increasingly intense competition from liquid crystal displays. As a result of this trend, we plan to expand production of our plasma display line, while focusing on new products such as 50- and 43-inch models, which have higher resolution.

Car Electronics

Severe competition in the car electronics business worldwide has led to strong downward pressure on prices. However, the popularity of car navigation systems, which we believe is a major area of our operations, continues to increase. For example, sales of our advanced HDD models and our affordable, easy-to-operate DVD models remain strong. These new models have been well received by consumers due to their attractive and convenient features. With its outstanding technologies, we remain a leader in the car navigation market; however, our competitors have started commercializing models that are similar to our products. In Japan, the increase in demand for car navigation systems has been conspicuous, and the markets in North America and Europe show signs of expansion. We introduced in the spring of 2004 in both markets compact 1-DIN-sized units featuring all car navigation system functions as well as those for CD/MP3/DVD-Video playback. Also in the car audio business, we plan to widen our market share with new products and innovations, such as car CD players with OLED displays.

There is also a trend in the car electronics industry that OEM sales to car manufacturers are increasing. We intend to increase our efforts to market ourselves towards such car manufacturers and strengthen our foothold in OEM sales as well.

Patent Licensing

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

Our royalty revenue from the worldwide licensing of patents relating to laser optical disc technologies has declined substantially from previous years, as a significant portion of our patents in Japan and Europe has expired during fiscal 2003 and 2004. We intend to attempt to reduce the decline in royalty revenue by acquiring patents from third parties and licensing such patents. We do not, however, expect that the revenue, if any, from such new patents will be sufficient to offset the decrease in royalty revenue resulting from the expiration of our existing patents. See “Item 4.B. Business overview—Nature of operations—Patent licensing” for more information on our patent licensing business.

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Others

OLED displays. With the entry of other companies, market competition in OLED displays is becoming even more intense, while each company in this market is proceeding with the development of full-color OLED displays. To meet the competition, Tohoku Pioneer Corporation, Pioneer’s majority-owned subsidiary, established a joint venture company, ELDis, Inc., in fiscal 2001 with Semiconductor Energy Laboratory Co., Ltd. and Sharp to develop and manufacture active-matrix full-color OLED displays.

E. Off-balance sheet arrangements

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

Also, we have equity ownership interest in ELDis, Inc., which is 45% owned by Tohoku Pioneer Corporation, our 67% owned subsidiary, and is accounted for by the equity method. At March 31, 2004, it is reasonably possible that Tohoku Pioneer Corporation is the primary beneficiary or holds a significant variable interest in ELDis, Inc. ELDis, Inc. is a development state enterprise and established to manufacture and market new products such as thin film transistor substrates for active-matrix OLED. The related disclosure is provided in Note 21 in “Notes to Consolidated Financial Statements.”

F. Tabular disclosure of contractual obligation

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

The ¥3.1 billion purchase commitment outstanding as of March 31, 2004 was for property, plant and equipment and advertising. This included a part of our ¥68.0 billion capital expenditure plan in fiscal 2005. The planned increase in capital expenditure in fiscal 2005 from ¥58.0 billion in fiscal 2004 mainly reflects expansion of plasma display production facilities.

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New Accounting Standards

Employers’ Disclosures about Pensions and Other Postretirement Benefits

In December 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised SFAS No. 132 retains the disclosure requirements in the original statement and requires additional disclosures about pension plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The new disclosures are effective for financial statements with fiscal years ended after December 15, 2003. However, the revised SFAS No. 132 provides that disclosures of information about foreign plans and estimated future benefit payment shall be effective for fiscal years ending after June 15, 2004. See Note 9 in “Notes to Consolidated Financial Statements” for these disclosures.

Impairment of Investments in Securities

In November 2003, the EITF reached a consensus on Issue No. 03-1 (“EITF No. 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” as it relates to disclosures for SFAS No. 115. In addition to the disclosures already required by SFAS No. 115, EITF No. 03-1 requires both quantitative and qualitative disclosures for marketable equity and debt securities. The new disclosure is effective for fiscal years ended after December 15, 2003. See Note 4 in “Notes to Consolidated Financial Statements” for this disclosure.

In March 2004, EITF reached another consensus on EITF No. 03-1 which presents the guidance for the assessment of other-than-temporary impairment. The guideline should be used to determine whether an investment is other-than-temporarily impaired and provides 3 steps for assessment. The guidance is applicable for investments in debt and equity securities that are within the scope of SFAS No. 115, and cost method equity investments. The investor should make an evidenced-based judgment about a market price recovery of investment by considering the severity (extent to which fair value is below cost) and the duration (period of time that a security has been impaired) of impairment in relation to the forecasted market price recovery. An other-than-temporary impairment should be recognized in earnings in an amount equal to the difference between the investor’s adjusted cost basis and its fair value at the balance sheet date of the reporting period for which the assessment is made. The guidance is required to be applied for fiscal years beginning after June 15, 2004. The adoption of the guidance will not have a material impact on our consolidated financial position, result of operation or cash flow.

Transfer to the Japanese Government of the Substitutional Portion of Employer Pension Fund Liabilities

In January 2003, the EITF reached a consensus on Issue No. 03-2 (“EITF No. 03-2”), “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employer Pension Fund Liabilities.” EITF No. 03-2 addresses accounting for the transfer to Japanese government of a substitutional portion of a domestic contributory welfare pension plan, which is a defined benefit pension plan established by the Welfare Pension Insurance Law. EITF No. 03-2 requires employers to account for the entire separation process of a substitutional portion from an entire plan (including a corporate portion) upon completion of the transfer to the government of the substitutional portion of the benefit obligation and related plan assets as a culmination of a series of steps in a single settlement transaction. Under this approach, the difference between the fair value of the obligation and the assets required to be transferred to the government should be accounted for and separately disclosed as a subsidy.

October 29, 2003, we received approval from the government for an exemption from the obligation to pay benefits for future employee service related to the substitutional portion. In addition, we will submit another application to separate the remaining substitutional portion related to past service by our

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

Revenue Recognition

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

Consolidation of Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletins No. 51, Consolidated Financial Statements,” and subsequently revised in December 2003 with the issuance of FIN 46 (revised 2003). This interpretation requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. We are required to apply this interpretation for periods ending after April 1, 2004. We are currently evaluating the impact of the adoption of the revised FIN 46 on our financial position and results of operations. It is reasonably possible that we are a primary beneficiary of or hold a significant variable interest in a variable interest entity. See Note 21 in “Notes to Consolidated Financial Statements” for the required disclosures.

Earnings per Share

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

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Item 6. Directors, Senior Management and Employees

A. Directors and senior management

Pioneer’s Directors, Executive Officers and Corporate Auditors as of July 1, 2004, and their pertinent information, such as position and business experience, are as follows:

Directors

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55

Executive Officers

56

57

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Corporate Auditors

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

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

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

B. Compensation

The aggregate amount of compensation (including bonuses and stock-based compensation) paid by Pioneer to all Directors, Executive Officers and Corporate Auditors of Pioneer as a group for fiscal 2004 totaled ¥1,238 million. Also, as part of Pioneer’s incentive compensation arrangements for Directors and Executive Officers, Pioneer issued bonds with detachable warrants in Japan in fiscal 2002. Upon the issuance of bonds with detachable warrants by Pioneer, it distributed the warrants at fair market value to both Directors and Executive Officers of Pioneer, and certain other executive employees as a part of their remuneration. In fiscal 2003, Pioneer changed its incentive compensation arrangements and issued share acquisition rights for its shares of common stock to Directors, Executive Officers and certain employees, and certain directors/officers of certain of its subsidiaries. See “Item 6.E. Share ownership” for further information.

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The aggregate amount set aside as lump-sum severance indemnities by Pioneer during fiscal 2004 for Directors, Executive Officers and Corporate Auditors of Pioneer totaled ¥500 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 9 in “Notes to Consolidated Financial Statements.”)

C. Board practices

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

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

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

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

Each Corporate Auditor has the statutory duty to supervise the administration by the Directors of Pioneer’s affairs and also to examine financial statements and business report to be submitted by a Representative Director at the general meeting of shareholders. They shall attend meetings of the Board of Directors but are not entitled to vote. In addition to Corporate Auditors, independent certified public

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accountants or an audit corporation must be appointed by general meetings of shareholders. Such independent certified public accountants or audit corporation have, as their primary statutory duties, the duties to examine the financial statements proposed to be submitted by a Representative Director at general meetings of shareholders and to report their opinion thereon to the Board of Corporate Auditors and the Representative Director.

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

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

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

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

Directors

Pioneer currently has two (2) non-management directors on its board of directors who satisfy the requirements of “outside directors” under the Commercial Code of Japan. “Outside director” is defined as a director who does not engage in the execution of business operations of a company and who (i) has never been a director responsible for the execution of business operations, an executive officer, a manager, or other employee of the company or any of its subsidiaries, and (ii) is not a director responsible for the execution of business operations or executive officer of any subsidiary of the company, and (iii) is not a manager or other employee of the company or any of its subsidiaries. The Commercial Code of Japan and related legislation (including the Law concerning Exceptional Measures to the Commercial Code with respect to Auditing, etc. of Joint Stock Corporations (the “Special Exception Law”), and collectively, the “Code”) do not require Japanese companies with boards of corporate auditors, such as Pioneer, to have any independent (in the meaning given by the NYSE listing standards) or outside (in the meaning given by the Code) directors on their boards of directors. Consistent with most Japanese companies but unlike NYSE Corporate Governance, Pioneer’s non-management directors do not hold regularly scheduled sessions without management. Moreover, the Code does not require, and accordingly Pioneer does not have, an internal corporate body or committee comprised of only independent or outside directors.

Committees

Under the Code, Pioneer has elected to structure its corporate governance system as a company with a board of corporate auditors, which has a statutory duty to monitor, review and report on the administration of the affairs of Pioneer. Pioneer, consistent with other Japanese companies with boards of corporate auditors, but unlike NYSE Corporate Governance, does not have specified committees,

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including those that are responsible for director nomination, corporate governance and executive compensation.

Pursuant to the Code, Pioneer’s board of directors nominates and submits a proposal for appointment of directors for shareholder approval. The shareholders vote on such nomination at Pioneer’s general meeting of shareholders. The Code requires that the respective total amount of remuneration to be paid to all directors and all corporate auditors must be determined by a resolution of the general meeting of shareholders, unless their remuneration is provided for in the Articles of Incorporation. The distribution of remuneration among directors is broadly delegated to Pioneer’s board of directors and the distribution of remuneration among corporate auditors is determined by consultation among Pioneer’s corporate auditors.

Audit Committee

Pioneer plans to avail itself of paragraph (c) (3) of Rule 10A-3 of the U.S. Securities Exchange Act of 1934 as amended, which provides a general exemption from the audit committee requirements to a foreign private issuer with a board of corporate auditors, subject to certain requirements which continue to be applicable under Rule 10A-3.

Consistent with the requirements of the Code, Pioneer elects its corporate auditors through a resolution adopted at a general meeting of shareholders. Pioneer currently has five (5) corporate auditors, which exceeds a minimum of three (3) corporate auditors required pursuant to the Code.

Unlike NYSE Corporate Governance, the Code, among others, does not require corporate auditors to have expertise in accounting or other special knowledge and experience. Under the Code, the board of corporate auditors may determine the auditing policies, method of investigating the conditions of the business and the assets of a company, and may resolve other matters concerning the execution of the corporate auditor’s duties, prepare corporate auditors’ reports and give consent to proposals of the nomination of corporate auditors and registered public accounting firms.

Pioneer currently has three (3) corporate auditors who satisfy the requirements of “outside auditors” under the Special Exception Law. Unlike NYSE Corporate Governance, under the Code, at least one of the corporate auditors of Pioneer must be an “outside” person, who was not a director, executive officer, manager, or employee of Pioneer or any of its subsidiaries during the five-year period prior to such corporate auditor’s election. After the conclusion of the ordinary general meeting of shareholders to be held with respect to the first fiscal year ending on and after May 1, 2005, at least half of the corporate auditors will be required to be persons who have not been a director, executive officer, manager, or employee of Pioneer or any of its subsidiaries at any time prior such corporate auditor’s election. Corporate auditors may not at the same time be directors, executive officers, managers, or employees of Pioneer or any of its subsidiaries.

Corporate Governance Guidelines

Unlike NYSE Corporate Governance, Pioneer is not required to adopt or disclose corporate governance guidelines under Japanese laws and regulations, including the Code and the Securities and Exchange Law of Japan or stock exchange rules. However, Pioneer is required to disclose policies and the present status of its corporate governance in its annual securities report and certain other disclosure documents in accordance with the Securities and Exchange Law of Japan and regulations thereunder, and stock exchange rules in respect of timely disclosure.

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Code of Business Conduct and Ethics

Unlike NYSE Corporate Governance, under Japanese law (including the Code and the Securities and Exchange Law of Japan), and stock exchange rules, Pioneer is not required to adopt and disclose a code of business conduct and ethics for directors, officers and employees. However, Pioneer maintains a “Pioneer Group Code of Conduct” which we believe is consistent with the Code of Ethics described under Section 406 of the Sarbanes-Oxley Act. See “Item 16B. Code of Ethics.”

Shareholder Approval of Equity Compensation Plans

Unlike NYSE Corporate Governance, in which material revisions to equity-compensation plans of the listed companies are subject to shareholder approval, pursuant to the Code, if Pioneer desires to adopt an equity-compensation plan under which stock acquisition rights are granted on specially favorable terms to the recipients under the plan, then Pioneer must obtain shareholder approval by a “special resolution” of a general meeting of shareholders, where the quorum is one-third of the total number of voting rights and the approval of at least two-thirds of the voting rights represented at the meeting is required.

D. Employees

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

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

E. Share ownership

The total number of shares of Pioneer’s common stock owned by our Directors, Executive Officers and Corporate Auditors as a group as of March 31, 2004 is as follows:

Pioneer has granted the following outstanding warrants to subscribe for shares of common stock to its Directors, Executive Officers and certain executive employees, and certain directors/officers of certain of its subsidiaries as part of their compensation.

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