Q&As on the Presentation of Financial Statements for the Third Quarter of FY2007.3

A1 : During the third quarter, pianos and digital keyboards experienced difficult operating conditions. Especially because of the decline in the number of new housing starts, sales of more expensive pianos weakened somewhat. According to U.S. import statistics, shipments into the United States were down 20% compared with the previous year, and sales of digital keyboards overall were slow. Our judgment is that, in general, the causes of this weakness were market conditions. However, when we asked the opinions of musical instrument dealers at the musical instrument trade show held in the United States in January, the general consensus was that the outlook for the U.S. musical instrument market would be firm in 2007 and that the housing market would bottom out. We are, therefore, anticipating recovery next fiscal year.

A2 : In the semiconductor business, a portion of our 0.18? production line will go into operation in the fourth quarter, and during the same quarter, we will report a full year of depreciation amounting to ¥400 million. This and other factors account for the loss forecast for the fourth quarter. Looking ahead, the outlook is for a decline in the percentage of mobile phones with LSI sound chips as well as a continued decline in unit prices of these chips, but we are going to work to expand sales of digital amplifiers and other applications other than LSI sound chips for use in mobile phones.

A3 : We realize this is an issue to be addressed going forward, but we have not made any decisions related to this matter at the present time.

A4 : Sales of LSIs for pachinko machines are expanding over the previous year's levels. Besides this, we are working on development and making preparations for digital amplifiers, silicon microphones, and rearview monitors for vehicle use as well as other LSIs. However, at present, these activities have not covered the decline in LSIs for use in mobile phones. We believe that this will take a little more time, but we would like to have these other LSIs show positive results at an early date.

A5 : Operating income generated by the musical instrument segment increased more than we had forecast in the previous outlook because of foreign exchange factors and the slippage of some selling, general and administrative expenses into the next quarter. Compared with the same quarter of the previous fiscal year, increases in costs, including steel and other materials, had a negative effect, but this was more than offset by gains on foreign exchange, changes in the composition of net sales, the positive impact of cost-cutting, and improved profitability in the professional audio equipment business.

A6 : The value of finished product inventories of musical instruments at the end of the third quarter was ¥43.4 billion. On a real basis, after excluding foreign exchange factors, this was ¥2.4 billion higher than we had forecast in our previous outlook, but we believe is almost at an appropriate level. In addition, inventories on a real basis were ¥2.3 billion lower than for the same quarter of the previous fiscal year. On the other hand, AV product inventories are somewhat high, but we believe we can adjust these to the appropriate level during the fourth quarter.

Goods in process and the inventory of raw materials are rising, and we believe these will be at an appropriate level by the end of the current fiscal year.

A7 : We believe that improving profitability in these two businesses will take somewhat more time. Looking ahead, we are aiming to put together a business model that will yield solid profits in the medium term.

A8 : We believe that the principal reason for falling short of our targets was insufficient growth in musical instrument sales. Growth in the professional audio equipment business, growth in the Chinese market, improvements in productivity at our plants, and certain other items were on target as scheduled. Also, the realignments of our offices and operating bases, including the consolidation of our domestic piano production plants and the closure and/or consolidation of overseas manufacturing plants are moving forward. We anticipate being able to show positive numerical results under our next medium-term business plan.

A9 : Market factors played a major role in preventing us from reaching our medium-term goals, but this is not necessarily true in the string and percussion instrument businesses. The markets for these instruments are expanding, but Yamaha's products and cost-competitiveness have not kept pace. These are issues we have to reflect on and address. By product, the profit margins on pianos, even from an industry perspective, are not so bad. We believe that, going forward, the benefits of consolidating our production plants and other activities to increase production efficiency will produce positive results. In the wind instrument business, we are already in a relatively strong competitive position and will be working to expand our production capacity in China. Our profit margins in electronic musical instruments are relatively high, reflecting our strengths in sound sources and keyboards. Especially in the electronic piano field, we want to take even better advantage of our strengths in piano cosmetic finishing to differentiate our products and move forward with product development. In the professional audio equipment field, we have a strong position in digital mixers but are relatively weak in amplifiers and speakers. Looking ahead, we would like to strengthen our position in these areas.

A10 : This was mainly due to an increase in equity in earnings of affiliated companies of ¥500 million and payments of ¥800 million from automobile manufacturers as compensation for changes made in production of automobile interior wood components.

A11 : Overall, we are looking for gains in sales and income. Performance of musical instruments in Europe and Asia will remain firm, and conditions in North America are showing improvement. By product, we are introducing new professional audio equipment models and would like to maintain the upward trend in sales into the next fiscal year. In addition, we believe the positive effects of cost-cutting measures will gradually bring improved results. On the other hand, we believe that recovery in performance in the semiconductor business will not be so simple. We also think that recovery in performance in the AV/IT business will take somewhat more time and we are proceeding with measures to strengthen our lineup of medium to high-end products in the home theater and hi-fi markets, while also developing versions for the flat panel TV market, and working to achieve a comeback in orders for online karaoke equipment.

A12 : In the recreation business, at the present time, we have not made the decision to withdraw from this field, but we will proceed to review individual recreation facilities. We will work to reduce losses and obtain an appropriate cash flow from this business.

A13 : We will undertake restructuring that is necessary for securing profitability and make active investments for further growth. In addition, we are giving consideration to M&A. We intend to steadily address the issues we confront, including finding businesses to replace LSI sound chips for mobile phones and responding effectively to sudden changes in the AV market. In the musical instrument business, we believe we are moving forward steadily with appropriate measures, but we think we should increase the speed of reforms, strengthen our level of craftsmanship, and make aggressive investments for further growth.