Q&As on the Presentation of Financial Statements for the Interim Period of FY2007.3

A1 : Higher-value-added LSI sound chips with audio and other functions, not just ring tone functions, showed a strong performance. Sales of these LSIs with audio functions were especially strong in the Japanese market.

A2 : We are expecting to show strong performances in magnetic sensors -among these products already in production- and silicon microphones and certain other products -among products at the sample shipment stage. Both of these products can be used in a variety of applications, but, at present, we think they will be used mainly in mobile phones.

A3 : Price competition started to become severer in the previous fiscal year, and prices are declining.

A4 : Commencement of shipments of these components for luxury cars, which we had expected, has been delayed. Full-scale shipments are scheduled to begin in October, in the second half of the fiscal year.

A5 : In the United States, as a result of our ambitious sales policy at the end of the previous fiscal year, inventories in the distribution chain increased, and we confronted difficult conditions early in the first half of the current fiscal year. However, we have made progress in reducing inventories and are expecting a turnaround in the second half of this fiscal year. By product, we are looking for growth in wind instruments and professional audio (PA) equipment.

In the Chinese market, we are moving forward with the introduction of new products and upgrading our sales network. We are therefore looking for increases in market share and sales.

In the European market, including the United Kingdom, conditions are recovering, and we are expecting much stronger growth in the second half of the current fiscal year in wind instruments and other products.

A6 : At the end of the previous fiscal year, we sold inventories, sacrificing profitability to some extent. As a result, at the end of the interim period of the current fiscal year, the composition of our inventories has improved.

In addition, over the past few years, we have been working to improve our information infrastructure, and we believe that, going forward, our supply chain will function effectively.

A7 : Our feeling is that conditions in the musical instruments segment now are not very different from those in the first quarter. However, we are concerned about piano sales in the U.S. market because of the slowdown in the housing-related market. In other geographical areas, we are looking for continued improvement in the latter half, with sales of wind instruments, PA equipment, and other items showing strong performances.

In Japan, annual sales of pianos peaked just above 300,000 units in 1980 and currently are running at about 1/10 of their peak level, or at approximately 30,000 units; however, they appear to be bottoming out. Going forward, we have strong hopes for expansion in sales in the Japanese market, as the base for greater interest in music seems to be forming. Evidence includes the strong popularity of a movie about high school students who form a jazz band, which led to a boom in the popularity of alto saxophones; high audience ratings for a recent television series about students attending a music conservatory; and the attention drawn by the 2006 Tsumagoi Concert of Takuro Yoshida and Kaguyahime, which rekindled interest in Japanese folk music.

A8 : There are three business units within the AV/IT products segment: audio visual products, routers, and commercial on-line karaoke equipment. Profitability in the router and commercial on-line karaoke equipment businesses is down because of stronger competition over the past year.

Going forward, we will work to strengthen the profitability of the router and on-line karaoke businesses. In the audio field, we will strive to strengthen performance in the mainstay home theater systems business; in the hi-fi speaker field, where we have recently announced a new product lineup; and in other related areas.

A9 : Unit sales of LSI sound chips for mobile phones in the second quarter were virtually level with the first quarter. The average price per chip rose slightly. In the third quarter, we believe that the average unit price will decline somewhat, because of an increase in the percentage of sales of lower-priced units and that unit sales will also drop slightly. The same trends are expected to continue in the fourth quarter.

A10 : We are moving forward with reforms in musical instrument manufacturing on two fronts. First, we are upgrading and consolidating our manufacturing bases, and, second, we are reforming and rationalizing our production processes. In the first area of upgrading and consolidating our manufacturing bases, as we have already announced, we will suspend production at our guitar plant located in Kaohsiung, Taiwan, in January 2007, and shift production to Hangzhou, China, and Indonesia. In addition, in Japan, we will consolidate our piano production facilities in Hamamatsu and Kakegawa.

In the second area of reforming and rationalizing our production processes, we are still working to achieve our objectives. Especially in the field of acoustic musical instruments, where human skills and know-how are essential to create the proper sound and performance qualities, we are proceeding with reforms while paying due attention to the transmission of the skills of our experienced craftsmen.

Overall, it is taking time to show results in reforming our musical instrument production, but we believe we are proceeding with these efforts according to schedule.

A11 : We are currently conducting serious discussions, but there are no conclusions to report at this time.

A12 : Within the LSI sound chip for mobile phone area, high-value-added semiconductors are produced mainly at external plants. At our own plant, we manufacture medium- to lower-priced chips for mobile phones and semiconductors for pachinko machines. During the latter half of this fiscal year, we believe that, overall, sales of lower-priced semiconductors will expand.

A13 : We have recently announced a new lineup of speakers. Looking ahead, we want to strengthen this product lineup.

A14 : We do not think it would be a good policy to shift to a distribution network that relies too much on one type of channel. Music store retailers are playing a role, along with Yamaha Music Schools, in further promoting in activities to popularize music. Yamaha Music Schools are proud of their role in promoting children’s character development through offering group lessons, music training involving parents and children, and parent-child music communication. For these reasons, we believe it is important to continue to take best advantage of both our sales networks where music stores promote the development of Yamaha Music Schools, and other outlets where we offer electronic pianos and guitars, which are instruments that have a positive social role to play.

A15 : In the Japanese market, we are implementing a strategy that emphasizes sound quality. In overseas markets, price competition becomes an issue, and we sometimes receive orders for lower-value-added LSIs that emit fewer tones simultaneously. This market segment is extremely difficult to predict. Looking ahead, if overseas markets become more like the Japanese market and interest shifts to sound quality, Yamaha will be well positioned to take advantage of this trend.

A16 : There are two major piano manufacturers in Korea, but, in part because of stagnant conditions in the Korean market, their activities have lost momentum. One of these piano manufacturers now has its principal manufacturing facility in Indonesia. Yamaha established a local subsidiary in Korea four years ago and is increasing its share of the Korean market.

On the other hand, the Chinese market accounts for one-half of piano sales worldwide. As the market is expected to show further growth, we believe that Chinese manufacturers will represent a competitive threat going forward. Yamaha will continue and move ahead with local production of pianos in China and endeavor to increase its competitiveness.

A17 : Our plans are to pursue further growth by adding the domain of “sound” to our mainstay domains of “music” and “musical instruments.” We will not aim for a balanced contraction of our activities but will work to increase profitability with a strong awareness of the importance of growth.