Better Products

Greater Trust

Co-Existence and Co-Prosperity

Since its establishment, Funai Electric has built considerable trust in the consumer electronics field by
providing superior electronic goods with a focus on functionality and by promoting Funai product costperformance.
Our unique production system, the "Funai Production System," our technical strength in mechatronics
and our optimized global production/sales system, in addition to a slim corporate profile and speedy
management, are vital management resources that have been nurtured throughout the company's
history. Funai believes that these resources will become our greatest assets as we battle for survival
in an increasingly competitive industry and during the increasing promulgation of digital/IT
technologies.
Funai Electric's desire is to bring the entire Group together, improve quality, delivery and cost evenfurther, and provide the world with products that meet the demands of the times.

BeliefDream

Action

C

O

N

T

E

N

T

S

Financial Highlights··································································1
To Our Shareholders ································································2Interview with the President ·······················································3Topics at FY March 2007··························································6Corporate Governance and CSR ···············································8Management discussion and analysis ······································10Global Network / Directory ····················································16
Members of the Board and Officers ·········································18

Financial Highlights

Years ended March 31, 2007 and 2006

FUNAI ELECTRIC CO., LTD. and its Consolidated Subsidiaries(Millions of yen) (Thousands of U.S.dollars)

2007/3

2006/3

2007/3¥396,712¥360,885$3,360,542

Operating Income

20,76623,305

175,909

Net Income (loss)(3,666)

21,596(31,055)

Net Income (loss)¥(107.01)¥620.02$(0.91)

Cash Dividends

55.00

55.00

$0.47

Net Assets¥187,362¥198,205$1,587,141

Total Assets

272,811

288,524

2,310,978

3,319

4,025

---

Financial Year :Net Sales

Per Share (yen and U.S.dollars) :End of Financial Year :Number of Employees

Note-1 : The exchange rate of ¥118.05=U.S.$1.00 (as of March 31, 2007 in the Tokyo foreign exchange market) is used for the above calculations.
Note-2 : The figure for total number of employees does not include those employees of outsourced production facilities located in China.

●Net Sales●Operating Income(¥ million)

500,000

40,000(¥ million)

383,034

33,348400,000

396,712

383,034

30,000360,885
300,000

23,305
20,76620,000200,000

10,000100,000

00March '05

March '06

March '07

●Net Income (loss)
30,000March '05

March '06

March '07

●Net Income (loss) per Share(¥ million)

800

(¥)
719.61

25,00025,723620.02600

21,59620,000400

15,00010,000

200

5,000
0
0

-5,000-3,666
3,666-3,666
March '05

March '06

March '07

-107.01-200
March '05

March '06

March '07

Funai Electric Co., Ltd. Annual Report 20071

T o Our Shareholders
The electronics industry is now facing a time of extremely volatilechanges and intense competition is unfolding globally in thedigital home appliance market. As the role of market impetus
rapidly moves from DVDs to flat-panel TVs, the businessenvironment is becoming increasingly volatile. The flat-panel TV
has shown increasing global demand while the increased
competition has invited even steeper plunges in product prices.

Based on our independently developed production improvement
system F.P.S. (Funai Production System), Funai and the entire
Funai Group have come together to construct a new business organization centered on the LCD(Liquid Crystal Display) TV. As a result, changes in consolidated results for the fiscal year ended
March 2007 included a 9.9% increase in net sales compared to the previous year and a 10.9%
decrease in operating income.

However, Funai Electric's true value has shown through in this environment of volatile pricecompetition and we have the perfect opportunity to aggressively spread the "Funai" brand throughout
the world. The Funai Group plans to use bold management while maintaining a constant medium/longterm view to steadily expand Funai's presence throughout the world.

Although the business environment is expected to be volatile for the near term, Funai and the entire
Funai Group will work diligently to improve shareholder value. We ask for continued understanding andsupport from our shareholders with regard to Funai's management.

President and CEO

Tetsuro Funai
July 2007

2

Funai Electric Co., Ltd. Annual Report 2007

Interview with the PresidentManagement Environment
in the Fiscal Year under Review

its procurement system, beginning with aggressive
strengthening of the Huang Jiang Plant, a Chineseconsignment processing plant, in order to optimally

Funai created a new business structured
around the LCD TV.

position its production plants throughout the world.

Last year, Funai introduced a new growth strategy
centered on the LCD TV. The Funai Group's

LCD TV Business Strategy

management resources were concentrated on the LCD

In the fiscal year ended March 2007, the explosive

A subsidiary production company wasestablished in Poland and expansion of
LCD TV business in Europe continues inearnest.

growth in the flat-panel TV market that began aroundIn the past, Funai's primary market has been in North

2005 grew even stronger. On the other hand, the past

America and primary production in Asia (China, inyear saw rapid shrinking of the market for CRT TVs,

particular). As a result, sales have expanded andfrom which Funai has derived residual income, andincome increased. However, Funai was aware of

CRT TVs have been replaced virtually worldwide.

important business issues, such as the "country risk"

Funai has established a plan to raise the number ofarising from over-focusing on sales in North America

LCD TVs sold during the fiscal year ended March 2007

and production in China.

to approximately four times (2,000,000 units) that of theFunai sees the current global spread of LCD TVs as an

number sold in the fiscal year ended March 2006

important opportunity and is addressing this

(540,000 units). As a result of this plan, Funai

management topic. One result of this is Funai's

successfully sold 2,060,000 units and Funai believes

continuing success in Europe.

this is the most important point for evaluating the fiscal

In 1980, Funai established a sales base in Hamburg,

year ended March 2007.

Germany, Funai Electric Trading (Europe) GmbH, andWith such rapid increases in the number of LCD TVs

began construction of sales channels in Europe. The

being sold, reliable supply procurement and production

European market had many high hurdles that madesystems must be maintained. However, securing themarket entry difficult for external companies and for a

procurement of LCD panel, that is a vital, has become

long time, Funai was unable to overcome these

extremely difficult in this rapidly growing market. In

challenges.

addition to a collaboration with Taiwan's Chi Mei Group,

advertising/sales promotion strategy to increase

which includes several of the world-class LCD panel

recognition and trust for the "Funai" brand from amanufacturers, Funai has also secured procurement

medium/long-term perspective. After transitioning fromroutes through several famous manufacturers and isa sales system that used agents to a direct-sales

working to strengthen its procurement system.

system making use of a Funai sales subsidiary last

Furthermore, Funai has worked to organize and expand

year, Funai has aggressively worked toward securing

TV business in order to achieve growth by accurately
grasping the needs of expanding markets throughout
the world.

However,

Funai

continued

its

Funai Electric Co., Ltd. Annual Report 20073

T o Our Shareholders
major distributors.
As a result, the number of trading

Product Development Strategy

partners has clearly increased

approximately 20% of those soldStrengthening of DVD-related products inaddition to LCD TVs and solidification of
growth base.

by the entire Funai Group.

A company's product lineup is not only a source ofand the number of LCD TVs soldin Europe now account forIn the future, Funai expects rapid expansion of sales tosales but also a base for growth. In the near term,

include Europe's largest retail chains, Carrefour

Funai is promoting a growth strategy centering on LCD(France) and Metro AG (Germany). Additionally, plants

TVs and is pouring its strength into the development ofat FUNAI ELECTRIC (POLSKA) Sp.z o.o., a production

DVD-related products, the markets for which are

subsidiary established in Poland in October 2006, went

expected to expand in connection with the LCD TV

online in June 2007 and production capabilities in anmarket.

early stage are forecast at approximately 100,000 unitsFirst, the 32" LCD TV is expected to have the greatest

per month. The distribution process from production to

demand within the LCD TV market and as such, Funai

retail sales in the European market was long in theis developing a deep selection of small to medium

fiscal year ended March 2007. Funai was unable tosized products and will continue to promote further

completely compensate for the rapid drop in retail sales

sales expansion. Funai will also introduce a wide lineup

prices and this was a major factor in the decline inof its strongest combination (DVD player-equipped LCD

overall profits. However, with lead-time reduced due toTVs) from 15" to 37" and will respond to newly arising

the new Poland plant, Funai will be able to challengeneeds. A 42" full high-vision product is also planned for

the European market with a system highly capable ofintroduction in the American market in Autumn 2007

adjusting to price changes.

and will be targeted at the wealthy. On the other hand,

Funai plans to approximately double the number ofOEMs are forecasted to increase due to dropping

LCD TVs sold worldwide in the fiscal year ended March

prices, and Funai is planning for an increase in orders-2007 to 4,000,000 units in the fiscal year ending March

received and will connect this trend to an actual●Number of Funai LCD TVs sold4,000,000
units

2,060,000
units

540,000
units

2008. Approximately

increase in world share.

600,000 of these

Next, Funai has built up a strong position in terms ofunits are planned for

DVD players/DVD recorders sold, with more than asale in the European

50% share of the North American market and moremarket and Funai's

than a 10% share of the world market. However, Funai

globalexpansion

will aggressively develop our sales network in Europe

efforts will now bein an effort to further increase world market share.

reflected in actual

Funai plans to introduce a DVD player in the end ofsales figures.

2007 capable of playing next-generation "Blue-Ray
discs" as a response to the increasing demand for2006/3
2007/3
2008/3（Actual Results）（Actual Results） （Planned）

4

Funai Electric Co., Ltd. Annual Report 2007

Interview with the President

high-quality that has accompanied the spread of large

Funai marked the start of a strong brand campaign by

LCD TVs, in addition to the introduction of DVD

signing an exclusive partnership contract with the homerecorders equipped with terrestrial digital tuners.

of Major League Baseball pitcher Daisuke Matsuzaka,
the Boston Red Sox, that started from Spring 2007.
With regard to the nurturing of technology seeds, Funai

Medium-Term Vision

is now seeing concrete results from the next-generation
technology development projects that it has undertaken

Taking a deep look at the future, andworking to improve brand value andfoster technical seeds.

for several years with the Japan Science andLooking back, the decision to enter the LCD TV

optical technology,

business was made in 2002 when sales of Funai DVD

Controller, the result of joint research with the Nara

players were rising rapidly. During the 5 years since,

Institute of Science and Technology, has garnered

Funai's LCD TV business has grown to become ourconsiderable attention. Funai will continue toprimary business and an impetus for growth in theaggressively collaborate on projects with the Japan

entire Funai Group. It was this effort to reconstruct the

Science and Technology Agency, and continue

Funai business base in order to make the transition

technology and intellectual property development overfrom analog to digital, spanning several years before

the long-term.

and after 2000, which made this great leap-forward

It is Funai's sincerest wish that company shareholders

possible in such a short time. The prior investment

look forward to future Group results.

Technology Agency. For example, the announcementof a next-generation technology that makes use of"OptoNavi" Multi Remotemade during this time has become the foundation ofmodern Funai.
Funai has heretofore simultaneously promoted plans torealize current growth and make future growth possible
and this management method will remain unchanged.
We believe that management that takes a long-termview of future business risks and opportunities will
support continued corporate development.
Taking a medium to long-term outlook, Funai iscurrently pouring its strength into increasing the "Funai"
brand value and fostering technology seeds.
Last year, Funai was aggressive in promoting
awareness of the "Funai" brand and activities in the
United States included sponsoring a PGA golf
tournament (the Funai Classic) and advertising at
Yankee Stadium during Major League Baseball events.

Funai Electric Co., Ltd. Annual Report 2007

5

T opics at FY March 2007
Began work on serious development of the Japanese market.
In an effort to penetrate the "Funai" brand into the Japanese market, Funai
simultaneously began domestic sales of new products, large-scale advertising

In October 2006, Funai establishedand sales-promotions at the county's largest home appliance retailer beginning

FUNAI ELECTRIC (POLSKA) Sp.z o.o.,July 2006.

a production subsidiary in Poland, and20" and 32" wide-screen LCD TVs went on sale in Japan in July 2006 and inbegan production of LCD TVs in June

December of the same year, a new product with the convenient Power Swing

2007. The establishment of thisfunction for 32” wide-screen LCD TVs was introduced:

production subsidiary was in response

The Chinese popular musical group "12 Girls Band" was used in advertising as

to a forecasted expansion of sales in thethe new Funai character and advertising was also placed in all forms of media,

European market. Activities such as

including magazines and the Internet.

producing locally to reduce lead-times

Additionally, Funai created a strong sales channel by collaborating withand creating a production system that

Yamada-Denki Co., Ltd., Japan's largest home appliance volume retailer. The

includes the LCD module process to

new "Funai" brand LCD TVs previously mentioned went on sale with co-make supply of cost-competitive

promotion by retailers and combined with the "12 Girls Band" image appeal,

products possible, are aimed athave strengthened the "Funai" brand's position in retail outlets.

expanding Funai's LCD TV business in

From
July
2006

October
2006

Announced the "OptoNavi" Multi Remote Controller, the resultof joint research with the Nara Institute of Science and Technology.
Funai announced the results of collaborations with institutions such as the Nara Instituteof Science and Technology, and the Japan Science and Technology Agency, at CEATEC
JAPAN 2006, held at Mukuhari Messe in October 2006.
The theme of this joint research has been the "development of optical navigation systems
to be used in portable information devices." The October 2006 announcement served topropose and demonstrate the use of a revolutionary multi-remote control, dubbed the"OptoNavi". The OptoNavi uses optical IDs in a device recognition system that allows
users to instinctually control multiple devices. Devices equipped with appropriate
automatic recognition systems will automatically recognize the remote when it is simply
pointed at the equipment. This technology has great potential in the future.

6

Established a production
subsidiary in Poland.

Funai Electric Co., Ltd. Annual Report 2007

October
2006the European market.
A monthly production capacity of
200,000 LCD TVs will be realized once

Concluded a Partnership Contract
with the Boston Red Sox.

the 2nd construction phase is completed

On February 15, 2007, Funai concluded an exclusive partnership(planned for 2008) and it is believed that

contract with Major League Baseball team, the Boston Red Sox.

this will further strengthen European

Daisuke Matsuzake and Hideki Okajima both play as pitchers for themarket development.

Red Sox and the team is attracting considerable attention both in the
United States and Japan.
The principal details of this contract involve display of the Funai logo
and advertisements, such as displaying the Funai logo alongside the
Red Sox logo on banners and backgrounds in special rooms when
Japanese Red Sox players give interviews to Japanese mass media.
Funai hopes that this partnership agreement between Funai Electricand the Boston Red Sox will further establish and increase awarenessof both parties' brands in Japan and the United States.

▲Poland Plant (Planned Completed Design)

February
2007

February
2007

Received FY 2007 Billion Dollar Supplier award
from America's Wal-Mart.
On February 1, 2007, Funai's sales subsidiary in the United States, Funai
Corporation, Inc., received a FY 2007 (February 2006 - January 2007) "Billion
Dollar Supplier" award from Wal-Mart, which has the world's highest sales
within the distribution industry. This award is given only to those companies
that supply Wal-Mart with more than one billion dollars in goods over a single
year. Of the approximate 61,000 companies with which Wal-Mart does
business, only 26 exceeded this one billion dollar mark and Funai Corporation
Inc., was the only company within the audiovisual equipment field to receive
the award.

Funai Electric Co., Ltd. Annual Report 2007

7

C orporate Governance and CSR
The Funai Group operates with the utmost awareness of its corporate social
responsibilities. Taking this to heart, the Company promotes a management
approach that always keeps in mind its responsibility towards all stakeholders,internal and external, ranging from shareholders and customers to vendors,neighboring communities and employees.

Corporate GovernanceFunai believes that the most important management

Company continues to implement an officer system thattheme is to continuously increase corporate value by

has been in place since 2002 with the aim ofincreasing the soundness and efficiency of its

establishing a system in which management decisions

management, enable rapid decision making to respondand immediate action can be taken in a flexible manner.

to changes in the marketplace and maintain a highly

As of the end of July 2007, there are 12 officers in thetransparent management.

Funai Group.

In response to rapidly changing social trends, theCompany adopted a Committee System in June 2005 toensure that the Group manages it business in a
dynamic and flexible manner that allows rapid decision
making. As of the end of July 2007, the Funai Grouphas 11 directors, of which 7 are outside directors.

di
Au

Au

di

t

●Summary of Committee Systemt

Furthermore, the

Ap

po

in
tm

en
t

A
Di pp
sm oi
iss ntm
al e
/A nt
ud /
it

Audit
Committee

Board ofDirectors

CEO/
Corporate
Officers

Nomination
Committee

Au

Compensation
Committeethbu orisin zaes tiosd nt
ec o m
isi a
on ke
s

GeneralShareholders'Meeting

8

Funai Electric Co., Ltd. Annual Report 2007

Officers

Environmental Activities
The Funai Group acknowledges the issue of the global

Environmental Charter. As part of these activities, we

environment as an important management topic andare aiming to increase the recycle rate to comply withhas established an Office of Environmental Affairs within

the Electric Appliance Recycle Law. In June 2005, we

the head office in order to take action in response toalso participated in the "Team Minus 6%*" campaign, an

environmental issues. In addition, we are working

effort to aggressively curb greenhouse gas emissions.

towards the acquisition of ISO14001 certification (aninternational

standard

for

an*The Kyoto Protocol which the world cooperated in making

environmental

and aims for a resolution to the serious global warming

management system). Starting with the Dong Guan

problem was put into effect in February 2005. Japan's

plant (Guang Dong, China), many of the Company's

promised goal to the world is "reducing its greenhouse gas

facilities in and outside of Japan are being certified.

emissions by 6%." The "Team Minus 6%" campaign is a

In addition, the Company carries out activities that aim

national project to realize this goal.

to protect the global environment as outlined in theFunai Electric's "Environmental Charter"
Basic Philosophy
Under the Company Motto which is "to make better
products, build greater trust, and establish a moremeaningful coexistence with society," we at the Funai
Group promise to implement business activities thatconsider their environmental consequences with theunderstanding that every single employee is responsible
for protecting the global environment. Funai is working
to realize a coexistence between nature and society byproviding simple, high-quality products to customers,
effectively using resources, eliminating waste andreducing environmental burden.

Environmental Policies
1. Ensuremanagement

compliance(statutecompliance).
2. Voluntarily remove dangerous materials and provide
environment-friendly products.
3. Establish design targets that keep the environment inmind and provide earth-friendly products.
4. Promote improvement activities to achieve zero
emissions.
5. Establish necessary environmental targets andconduct on-going improvements with regular reviews.
6. Educate all employees about the environment andwork to improve the environment.

Information Security Activities
Funai has become aware of the increasing dependence

Scheme for Information Security Management Systems

on information systems in business trading. After(Ver.2.0)."

determining that it is the Company’s duty to stakeholders

Additionally, in November 2006 Funai's Information

to provide information security, Funai worked to create an

Security Division also received both the international

information security management system.

information security management system standard,

On November 15, 2005, Funai's Information Security"ISO/IEC 27001:2005," and the domestic standard, "JISDivision received both Britain's information security

Q 27001:2006."The Division now uses the new standards

management system certification, "BS7799-Part2:2002"

and will continue to make further improvements in theirand Japan's certification, the "Conformity Assessment

standards in the future.

Funai Electric Co., Ltd. Annual Report 20079

M anagement discussion and analysis
FUNAI ELECTRIC CO., LTD. and its Consolidated Subsidiaries

Basic Management Policy
Based on the company policy of: "better products","greater trust" and "co-existence and co-prosperity", ourbasic management policy aims to achieve mutual
prosperity with our stakeholders by building a firm
relationship of trust through a more efficientdevelopment/production/sales system and stable supplyof high-quality products at affordable prices.

Basic policy concerning profit distribution
Funai Electronic acknowledges that providing return toshareholders in connection with the distribution of profit is
one of the most important management issues and whileplanning the strengthening of its management, Funai
Electronic places its basic policy on the distribution ofdividend at a stable level to shareholders. The basic
measure of 1.0% Consolidated Dividend on Equity Ratio
is used as a concrete criteria, and the results ofoperations and its environments are taken into
consideration in order to further implement an aggressive
dividend policy.
Based upon the policy described above, term-end
dividends for the fiscal year ended March 2007 were set
at 55 yen per share (annual dividends of 55 yen).
Regarding retained earnings, we further strengthen theconstitution of management by appropriating its financial
resources in order to maintain future stable shareholders
profits and develop its mid-to long-term businessstrategies.
At the meeting of the Board of Directors held on June 5,
2006, it was resolved that the Company will purchase its
own shares (up to 400,000 shares or 5 billion yen) inorder to allow the management to carry out capital
policies with agility in response to changing businesssituations. The Company has purchased 309,400 sharesof its common stock at ¥3,121 million by March 31, 2007
(total of 2,010,535 shares or 5.9% to the outstanding
issued shares excluding treasury stock as of the end of
March 2007).

10

Funai Electric Co., Ltd. Annual Report 2007

Issues and Medium-termManagement Strategy
Rapid product development has become vital in theelectronics industry due to new consumer needs arisingfrom the spread of digital products and the trend of evershortening product life-cycles. Additionally, pricecompetition is intensifying with the rise of Asian
manufacturers, particularly in China.
In such an environment, the Funai Group's current issues
and measures against these are as follows.
① Active development and reinforced production
system for digital products
With the aim of intensifying its business activities in thefield of digital products, Funai has pursued industrial links
with partners such as Mitsubishi Electric (collaboration on
DVD related products), Eastman Kodak (collaboration on
digital still cameras) and Thomson Group(comprehensive business alliance in the digital TV field
including exclusive licensing of certain patents and joint
development). In FY March 2007, Funai formed analliance with the Chi Mei Group of Taiwan with theintention of securing a stable supply of TFT-LCD panels
for TVs making stable procurement of LCD panels
possible, and introduced TVs ranging from 15" to 37" inboth domestic and overseas markets. In addition, efforts
are being made to expand future capabilities in elemental
technology through collaboration with academic institutes
such as Kyoto University (joint collaboration on
construction of next-generation optical disk system) andthe University of Electro-Communications (frameworkagreement for collaboration on digital products).
Funai will continue to further strengthen its productdevelopment system centered on the digital product field,
based on improved technological capability throughhuman resource development, business alliance,
academic alliance and possibly M&A.
② Avoid country risks
Funai Group's overseas sales constitute a large portion of
its overall figure, especially that of North America. In
order to disperse the risk associated with the current
situation, our European sales subsidiary FUNAI EUROPE
GmbH has established branch offices in London andWarsaw in July and October 2005 respectively, and in
Paris in July 2006, thereby expanding its sales network.

▲Combination LCD TV / DVD Player(20-inch)▼ HDD / VCR / DVD Recorder

Further, "Funai" brand LCD TVs went on sale in thedomestic market following a tie-up with Japan's largest
appliance retailer Yamada-Denki in July 2006, in addition
to the strengthening of Funai subsidiary's DX AntennaCo., Ltd.'s sales system. There are also plans to enternew emerging markets such as India and Russia.
In terms of production, the Funai Group is working to
improve the price competitiveness of Funai products byconcentrating production in strategic locations andthrough volume purchases. However, there is a strong
dependence on China for production. Therefore, theFunai Group selected Poland as a strategic production
location. In October 2006, the production subsidiary
FUNAI ELECTRIC (POLSKA) Sp.z o.o. was establishedin Nowa Sol, Poland and production of LCD TVs began inJune 2007.
③ Maintain/enhance competitive edge
In order to maintain and enhance our competitive edge,
the Funai Group has been working to further promote
cost cuts through the F.P.S. (Funai Production System),as well as increasing in-house production of key partsand components, and enhancing its buying power. In
addition, we are working on further improving therelationships we have with globally competitive retailers
companies and our OEM partners, and constructing the
optimum marketing mix of proposal-based sales by●Net Sales

establishing the "Funai" brand.

Business Performance
Business environment: In the Funai Group's primarymarket, the United States, individual consumption grewsteadily. However, depression in the housing market
reflected a slowdown in the business environment. In theEuropean region, an economic recovery was seen inGermany and France with increasing exports andconsumption, and England continues to transition well. In
Asia, the business environment transitioned well,centered mainly on China where rapid growth continues.
In Japan, the slump in individual consumption continued
but increases in corporate income, primarily in the
manufacturing sector, and expanding demand caused
capital spending to transition positively and represented amodest recovery. The electronics industry saw expanding
worldwide demand for LCD TVs and plasma TVs in FY
March 2006. Overall, though, the business environment
continued to be difficult, with product prices being rapidly
driven down by increasing competition.
Net sales: The Funai Group has worked to develop andexpand sales of LCD TVs and DVD-related products. As●Operating income(¥ million)

450,000

396,712400,000
383,034

35,000●Net income(¥ million)

40,00025,00033,348(¥ million)

30,00025,72333,348360,885

350,000

21,59630,00020,000300,000
25,00023,305250,000

15,00020,76620,000200,000

10,00015,000150,000
5,000
10,000100,000

50,0005,000

00March '05

March '06

March '07

0

-5,000March '05

March '06

March '07

-3,666
3,666
March '05

March '06

March '07

Funai Electric Co., Ltd. Annual Report 200711

M anagement discussion and analysis
FUNAI ELECTRIC CO., LTD. and its Consolidated Subsidiaries

a result, net sales of digital products, such as LCD TVs
and DVD-related products, have grown. On the other
hand, net sales of analog products, such as CRT TVs
and VCRs, have fallen due to the effects of a shrinking
market. As a result of these factors, net sales totaled
396,712 million yen, a 9.9% increase compared to theprevious period.

year's adjustments) would have been 15,518 million yen,a 28.1% decrease compared to the previous period.
Note: The above appropriated 19,184 million yen in prior year's
adjustments was a supplementary tax (including penalties) assessed by the
Osaka Tax Administration for the three-year period from the fiscal year
ended in March 2002 to the fiscal year ended March 2004. The
supplementary tax assessment was based on the Osaka Tax
Administration's decision that the Funai Hong Kong subsidiary did not meet

Operating income: Amidst increasing sales volume
caused by an aggressive sales expansion policy, selling,
general and administrative (SGA) expenses weremaintained at the same standard as the previous period(12.0%) thanks to efforts to reduce costs. However, therapid drop in selling prices has caused a relative increasein the cost of goods sold and a worsening of profitability.
As a result, operating income totaled 20,766 million yen,a decrease of 10.9% compared to the previous period,
and the operating income to net sales ratio decreased by
1.3 points to 5.2%.

the conditions for exclusion under the tax system for dealing with tax

Net income: 19,184 million yen heretofore appropriatedas "suspended payments of income taxes" were
accounted for as "prior year's adjustments" last year,
resulting in a net deficit of 3,666 million yen for FY March
2007. This accounting is in accordance with the AuditingStandards Committee Statement No. 63, "AccountProcessing of Auditing and Notation Related to Taxes"
However, had the accounting been made via the method
previously used, net income (before deducting prior① Audiovisual Equipment
Main product lineup: Funai produces and sells mainly
digital devices including DVD-related products and LCD
TVs. In DVD-related products, Funai has been producing
DVD recorders since March 2004 in addition to DVD
players. Funai is developing a broad lineup of LCD
televisions, including 15", 20", 26", 32" and 37" models. Inan effort to strengthen Funai's LCD TV lineup, 26”, 32”,
and 37" models were released in overseas markets and●Cost of sales /400,000

79.7

inappropriate tax assessment based upon mistaken facts. As such, Funai
has filed an appeal with the Osaka Tax Administration. Currently, Funai isproceeding with a request for review and a lawsuit, and will continue toassert the correctness of its position.

Performance by Product Category

SGA expenses to net sales(%) 100

81.5

income taxes" was treated as such because of Funai's belief that this is an●SGA expenses /Cost of sales to net sales

500,000 (¥ million)

havens. The previous appropriation of funds as "suspended payments of

75,000 (¥ million)

82.8
80

60,000

11.6●Operating income to net sales(%) 1512.0

12.0

12 (%)

10
12
8.7
8

328,545
300,000

305,165

294,032

47,40160

45,00044,521

943,5486.5
640

200,000

30,000

5.2

6
4

20

100,000

15,00032

00March '05

12

March '06

Funai Electric Co., Ltd. Annual Report 2007

March '0700March '05

March '06

March '07

0March '05

March '06

March '07

▲

LCD TV (37-inch)▲ HDD / DVD Recorder

Funai added one 20" model and two 32" models in thedomestic lineup. In addition to these efforts to meet broad
consumer needs, a LCD TV/DVD player combination
model was introduced. Funai also supplies a wide variety
of non-TV products, such as a terrestrial/BS/110°CS
high-definition tuner capable of receiving terrestrial digital
broadcasts.
Performance results for the current term: Sales ofanalog equipment such as VCRs and CRT TVs fell due tothe effects of a shrinking market. Sales of LCD TVs, forwhich global demand is expected to grow, and DVD
recorder-related products grew in North American andEurope. As a result, net sales of video equipment total
276,911 million yen, a 17.6% increase (a 41,446 million
yen increase) compared to the previous period.
② Information Equipment
Main product lineup and new products for the current
term: In addition to inkjet printers and laser beam
printers, Funai has also been producing OEM-based
digital still cameras since April 2004 in the informationand communications equipment category. From 2003, wehave formed strategic alliance agreements with our OEM
partner and have shifted our focus from popularly priced

inkjet printers to high-end models, developing andreleasing new products into the market. Further, as a
product related to digital still cameras, Funai has beendeveloping sublimation photo printers with the aim of
improving product synergies.
Performance results for the current term: Digital stillcameras remained virtually unchanged but sales ofprinters fell due to the effects of increasing competition.
As a result, net sales of information equipment totaled
93,296 million yen, a 2.8% decrease (a 2,654 million yen
decrease) compared to the previous period.
③ Others
Other net sales totaled 26,503 million yen, a 10.1%
reduction (2965 million yen) compared to the previous
period, due to reductions in receiver-related electronicequipment.

Performance by Region
Progress by region: Funai is working towards raising theawareness of the "Funai Brand". In North America, ourmain market, Funai is working to strengthen brand appeal
in the United States and in Japan by concluding an
exclusive partnership contract with the Boston Red x,●Sales composition by

product category (March '07)

●Sales by product category

Information
Equipment
23.5%

Audiovisual Equipment

Information Equipment

Others
6.7%
Audiovisual
Equipment
69.8%

Others

29,484

March '05

252,571

383,034

100,978
29,468March '06

235,465

360,885

95,95026,503

March '07

276,9110

100,000

396,71293,296200,000

300,000

400,000(¥ million)

Funai Electric Co., Ltd. Annual Report 200713

M anagement discussion and analysis
FUNAI ELECTRIC CO., LTD. and its Consolidated Subsidiaries

home of popular Japanese Major League Baseballpitchers Daisuke Matsuzaka and Hideki Okajima, in
addition to strengthening its ties with leading retailers. In
Europe, Funai has created new business relationships
with powerful retailers such as Europe's largest retailchain, Carrefour (France), and Metro AG (Germany).
Additionally, the foundation for expanding sales wascreated with the establishment of a production subsidiary
in Poland where products for the European market will be
produced. Funai is also making preparations for its entry
into the emerging markets such as Russia with TV and
DVD-related products. In these regions, the "FUNAI"
brand will be promoted as the product brand, with the aimof increasing brand recognition.

40.3% decrease (a 5,832 million yen decrease)
compared to the previous period, and net sales in othermarkets totaled 5,326 million yen, a 9.2% decrease (a538 million yen decrease) compared to the previous
period. Net sales in Japan fell to 38,365 million yen, a
2.6% decrease (a 1,340 million yen decrease) comparedto the previous year.

Financial Condition
Assets: Current assets totaled 178,771 million yen, a28,484 million increase compared to the previous period.
Although notes and accounts receivable, and inventories,
remained virtually unchanged, cash and cash equivalentsrose by 24,733 million yen. Investments and advances
increased by 22,675 million yen from the previous period
to 67,206 million yen. The primary reason for this wasthat there was marginal change in long-term loans
receivable while securities and other investments
decreased by 19,965 million yen compared to theprevious period. Property, plant and equipment fell by
1,447 million yen compared to the previous period to
17,953 million yen. Primarily as a result of this, machineryand equipment grew by 4,949 million yen compared tothe previous period while accumulated depreciation also
increased by 6,998 million yen compared to the previous
period. Although 19,184 million yen was appropriated as

Performance results for the current term: While themarket for analog equipment such as VCRs and TV/VCR
combinations shrank in North America, there wasconsiderable growth in the market for LCD TVs and DVD
recorder-related products. In Europe, sales of audiovisualequipment, centering on LCD TVs, grew. On the other
hand, net sales fell in Asian markets, including Japan,
and other overseas markets. As a result of these factors,
net sales in the North American market totaled 277,103
million yen, a 9.5% increase (a 23,941 million yen
increase) compared to the previous period. Net sales for
the European market also grew to 67,279 million yen, a
40.2% increase (a 19,289 million yen increase). Net sales
in Asian markets, however, totaled 8,637 million yen, a●Sales composition

by region (March '07)
Europe
17.0%
Japan
9.7%
Asia
2.2%
Others
1.3%
NorthAmerica
69.8%●Sales by region
North America

EuropeAsia

Others

Japan

7,788
17,071March '05

268,073

50,870383,034

39,2295,864
14,469March '06

253,162

47,990360,885

39,399

5,326
8,637

277,104

March '07

0

14

Funai Electric Co., Ltd. Annual Report 2007

100,000

67,279200,000

300,000

38,366400,000

396,712(¥ million)

▲

LCD TV (32-inch)▲ DVD Playerinterests rose by 47 million yen compared to the previous
period to 381 million yen. As a result of these changes,
net assets totaled 187,362 million yen, a 10,843 million
yen reduction from the previous period.

suspended payments of income taxes as of the end of
the previous period, these funds were accounted for asprior year's adjustments at the end of the current period.
As a result of these factors, total assets totaled 272,811
million yen, a 15,713 million yen reduction compared tothe end of the previous period.

Cash Flow

Liabilities: Current liabilities decreased by 1,750 million
yen from the previous period to 74,746 million yen as aresult of a 20,329 million yen decrease in short-termborrowings and despite a 17,283 million yen increase inaccounts payable. Additionally, long-term debt, retirement
benefits to employees and long-term deferred tax
liabilities fell by 724 million yen, 150 million yen and 2,032
million yen, respectively. As a result, total liabilities
totaled 85,449 million yen, a 4,870 million yen reduction
compared to the previous period.

Net cash provided by operating activities totaled 46,508
million yen due to a 2,473 million yen decrease in notes
accounts receivable, a 14,129 million yen increase inaccounts payable and prior year's adjustments of 19,184
million yen, despite the appropriation of 3,666 million yen
as a net loss. While 5,583 million yen was made inpayments for purchase of property, plant and equipment,
this was offset by 10,260 million yen in proceeds fromsales of investments in securities. The result of this offset
was 3,039 million yen in net cash provided by investing
activities. Net cash used in financing activities totaled
26,564 million yen due to a 20,896 million yen decreasein short-term borrowings. As a result of these cash flows,
cash and cash equivalents at the end of year totaled
83,321 million yen, a 24,733 million yen increase
compared to the previous period.

Net assets: Shareholders' equity decreased by 8,608
million from the previous period to 179,654 million yen
due to decreases in retained earnings and increases intreasury stock. Valuation and translation adjustments
decreased by 2,282 million yen compared to the previous
period to 7,327 million yen due to decreases in net
unrealized holding gains on other securities. Minority●Net assets /(¥ million)

350,000

300,000

288,524300,000 (¥ million)

at end of year(%) 9068.2

68.6(¥ million)

120,000

101,15675

250,000
272,811250,000●Cash and cash equivalents

Shareholders' equity ratio●Total assets

68.5
90,000255,326
198,205

200,000

83,321

60
187,362

174,288

200,000
150,000

45

100,000

30

50,00015

0058,58860,000150,000

100,000
30,00050,0000March '05

March '06

March '07

March '05

March '06

March '07

0March '05

March '06

March '07

Funai Electric Co., Ltd. Annual Report 200715

G lobal Network / Directory
Funai Europe GmbH (Germany)

Dong Guan Plant 1 (China)

Dong Guan Plant 2 (China)

Dong Guan Plant 3 (China)

FUNAI ELECTRIC (POLSKA) Sp.z o.o.

Funai Electric (H.K.) Ltd. (Hong Kong)

Funai (Thailand) Co., Ltd. (Thailand)

Directory
Places of Business, Research Center
TOKYO BRANCH (JAPAN)(FUNAI TOKYO TECHNOLOGY CENTER)

16

Funai Electric Co., Ltd. Annual Report 2007

Funai Electric (Malaysia) Sdn.
Bhd. (Malaysia)

Manufacturing Subsidiaries
CHUGOKU FUNAI ELECTRIC CO., LTD. (JAPAN)
FUNAI ELECTRIC (H.K.) LTD. (HONG KONG)
Consignment manufacturing plants
DONG GUAN PLANT1,2,3 (CHINA)HUANG JIANG PLANT (CHINA)ZHONG SHAN PLANT 1 (CHINA)ZHONG SHAN PLANT 2 (CHINA)
H.F.T. INDUSTRIAL LTD. (HONG KONG)
FUNAI ELECTRIC (MALAYSIA) SDN. BHD. (MALAYSIA)FUNAI (THAILAND) CO., LTD. (THAILAND)FUNAI ELECTRIC (POLSKA) Sp.z o.o.

Huang Jiang Plant (China)

Zhong Shan Plant 1 (China)

Zhong Shan Plant 2 (China)

Funai Corporation, Inc. (U.S.A)

A total of four companies in Japan and eight overseas are
Funai Electric Co., Ltd. Head Office (Japan)

included in the Funai Group’s consolidated business resultsfor March 2006 period. In addition, the Group has twooverseas affiliates that are both accounted for by the equity
method. Funai Electric Co., Ltd. is mainly responsible for theintangible aspects of the Group’s operations (development,

Chugoku Funai Electric Co., Ltd. (Japan)

design, etc) while the subsidiaries undertake the tangible
aspects (production, sales, etc).
Funai’s manufacturing operations are characterized by global
procurement and a global production system. The company
currently operates manufacturing facilities in three countries:
China, Malaysia and Thailand. In China, production of ourleading digital devices is shared among the Dong Guan,
Huang Jiang and Zhong Shan plants. Production of audio andvideo equipment such as large-screen televisions in Thailand

Funai Electric Co., Ltd.
Tokyo Branch (Japan)

is handled by Funai (Thailand) Co., Ltd., which wasestablished in July 2003. Our Malaysian plant, which has thelongest history of all our overseas plants, mainly produces

Sales Subsidiaries
DX ANTENNA CO., LTD. (JAPAN)
FUNAI CORPORATION, INC (U.S.A)
FUNAI EUROPE GmbH (GERMANY)

Development Subsidiary
FUNAI ELECTRIC ADVANCED APPLIEDTECHNOLOGY RESEARCH INSTITUTE INC. (JAPAN)

Affiliated Subsidiary
FUNAI SERVICE CO., LTD. (JAPAN)

televisions (combination TV/VCRs).
The plants in China (commission), Malaysia and Thailand
employ a total of 18,069 persons, while the overall Group
employs 20,036 persons (both figures as of March 31, 2007).
Funai’s well-established global sales system consists of theoverseas subsidiaries Funai Corporation Inc. (USA), Funai
Europe GmbH (Germany) and DX Antenna Co., Ltd. (Japan).
Domestic sales system has been integrated into DX Antenna
since the transfer of business from Funai Sales Co., Ltd. tothe company.

Funai Electric Co., Ltd. Annual Report 200717

M embers of the Board and Officers
Members of the Board

as of June 21, 2007

Corporate Officers

Tetsuro Funai·······················Chairman of the Board,
Nomination andCompensation Committee

Tatsuro Funai ······························President and CEO

Yoshio Nakajima ·················Member of Nomination andCompensation Committee

Sanya Itoh ··································Managing Officer

Sanya Itoh···························Member of Nomination andCompensation Committee

Yoshio Nakajima ························Executive Vice President

Officers

Akitaka Inoue ······················Chairman of Audit Committee
Mitsuo Yonemoto ·················Member of Nomination andCompensation Committee
Junsho Kawasaki ·················Member of Nomination andCompensation Committee

Takashi Kiyomoto························Senior Executive Officer
Hideo Nakai·······························Senior Executive Officer
Tomonori Hayashi ·······················Senior Executive Officer

Morihiko Tashiro ·················Member of Nomination,
Audit and Compensation
Committee

Noriyuki Yamamoto ····················Executive Officer

Akira Miyazaki····················Member of Nomination andCompensation Committee

Masahiko Naito ··························Officer

Shigemichi Asakura ·············Member of Audit andCompensation Committee

18

Yoshio Kinoshita ·························Senior Executive Officer

Hiromasa Katsurayama ···············Executive Officer

Fumiaki Kidera····························Officer
Shinji Seki ··································Officer

Yasuhisa Katsuta ·················Member of Nomination,
Audit and Compensation
Committee

Sachio Kobayashi ·······················Officer

Hidetoshi Nishimura ············Member of Audit andCompensation Committee

Toshio Otaku ······························Officer

Funai Electric Co., Ltd. Annual Report 2007

Kiyoji Katakawa··························Officer

Financial Statements
F U NA I E L E C T R I C C O . , LT D .
and its Consolidated Subsidiaries

C

O

N

T

E

N

T

S

Consolidated Balance Sheets································································20
Consolidated Statements of Income ····················································22
Consolidated Statements of Changes in Net Assets ·····························23
Consolidated Statements of Cash Flows ··············································24
Notes to the Consolidated Financial Statements ··································25
Report of Independent Auditors ··························································37

Funai Electric Co., Ltd. Annual Report 200719

Consolidated Balance Sheets
FUNAI ELECTRIC CO., LTD. and its Consolidated Subsidiaries(Thousands of
U.S. dollars)(Millions of yen)

(Note 3)

March 31,

March 31,2007
ASSETS
Current assets:
Cash and cash equivalents (Note 2) ..............................................
Short-term investments (Note 4)..................................................
Notes and accounts receivable ..................................................
Inventories (Note 5) .....................................................................
Deferred tax assets (Note 12) ........................................................
Other current assets (Note 2) .......................................................
Allowance for doubtful accounts ..............................................

20¥

83,321
278
49,02435,045
3,173
8,501
(571)

2007

2006

¥

58,588297
49,41634,453
2,927
5,200
(594)

$

705,8112,355
415,282
296,866
26,87872,012(4,837)

Total current assets...............................................................

178,771

150,287

1,514,367

Investments and advances:
Investments in and advances to unconsolidated subsidiaries
and affiliates.........................................................................
Securities and other investments (Note 4) ....................................
Long-term loans receivable.......................................................

2,922
16,54547,7396,211
36,51047,16024,752
140,152
404,396

67,20689,881

569,300

Property, plant and equipment, at cost:
Land ........................................................................................
Buildings and structures ...........................................................
Machinery and equipment .......................................................
Construction in progress ..........................................................

5,260
13,254
67,128297

5,068
13,09562,17946

44,557112,274
568,640
2,517

Less: Accumulated depreciation................................................

85,939(67,986)

80,388(60,988)727,988(575,908)

17,953

19,400152,080

Patent rights................................................................................
Suspense payments of income taxes (Note 12) ...............................
Other assets.................................................................................

5,217
—
3,664

6,137
19,184
3,635

44,193—31,038

Total assets ..................................................................................

¥ 272,811¥ 288,524$ 2,310,978

Funai Electric Co., Ltd. Annual Report 2007

The accompanying notes are an(Thousands of
U.S. dollars)(Millions of yen)

(Note 3)

March 31,

March 31,

LIABILITIES AND NET ASSETS
Current liabilities:
Short-term borrowings (Note 7) ...................................................
Current portion of long -term debt (Note 7) ................................
Accounts payable ....................................................................
Accrued income taxes ...............................................................
Accrued bonuses ......................................................................
Other current liabilities ............................................................

¥

8,295
724
58,488
3,657
196
3,386

2007

2006

2007

¥

28,624724
41,205
2,567
196
3,180

$

70,267
6,133
495,451
30,9781,660
28,683

Total current liabilities .........................................................

74,74676,496633,172

Long-term debt (Note 7) ................................................................
Retirement benefits to employees (Note 8) ....................................
Retirement benefits to directors.................................................
Long-term deferred tax liabilities (Note 12)...................................
Other non-current liabilities......................................................

4,593
1,698
973
2,773
666

5,317
1,848
907
4,805
946

38,907
14,384
8,242
23,4905,642

Total liabilities .....................................................................

85,44990,319723,837

31,27933,244
139,468

31,241
33,205145,030

264,964
281,609
1,181,432(24,337)(21,214)(206,158)

Total stockholders’ equity.....................................................

179,654

188,262

1,521,847

Valuation and translation adjustments
Net unrealized gains on securities and other investments..........
Foreign currency translation adjustments .................................

4,039
3,288

8,504
1,105

34,21427,853

Total valuation and translation adjustments .........................

7,327

9,609

62,067

Minority interests .......................................................................

381

334

3,227

Total net assets .....................................................................

187,362

198,205

1,587,141

Total liabilities and net assets.....................................................

¥ 272,811¥ 288,524$ 2,310,978

Net assets (Note 2):
Shareholders’ equity (Note 10):
Common stock:
Authorized: 80,000,000 shares
Issued: 36,103,896 shares at March 31, 2007 and
36,095,896 shares at March 31, 2006...................
Capital surplus .........................................................................
Retained earnings.....................................................................
Treasury stock, at cost:
2,010,535 shares at March 31, 2007 and1,701,006 shares at March 31, 2006 ................................

Funai Electric Co., Ltd. Annual Report 2007

integral part of these statements.

21

Consolidated Statements of Income
FUNAI ELECTRIC CO., LTD. and its Consolidated Subsidiaries(Thousands of
U.S. dollars)(Note 3)For the years
ended March 31,

For the year
ended March 31,

2007

2006

2007

Net sales ....................................................................................
Cost of sales (Note 11) ....................................................................

¥ 396,712
328,545¥ 360,885
294,032$ 3,360,542
2,783,100

Gross profit .........................................................................
Selling, general and administrative expenses (Note 11) .................

68,16747,401

66,85343,548577,442
401,533

Operating income ................................................................
Other income (expenses):
Interest and dividend income ...................................................
Interest expenses.......................................................................
Foreign exchange gain, net .......................................................
Provision for doubtful accounts................................................
Loss on impairment of securities ..............................................
Gain on settlement of a substitutional portion of EPF, net (Note 8) ..........
Loss on liquidation of an affiliated company ............................
Other, net ................................................................................

20,76623,305

175,909

4,764(1,193)
2,377
(409)
(777)
—
(2,457)
(318)

3,311
(875)
1,658
(529)
(455)
3,056
—
(51)

40,356(10,106)
20,136(3,465)(6,582)—(20,813)(2,695)

Income before income taxes and minority interests ..............

22,75329,420192,740

Income taxes (Note 12):Current ....................................................................................
Prior years ................................................................................
Deferred...................................................................................

6,366
19,184
824

5,351
—
2,420

53,926
162,507
6,981

26,374

7,771

223,414(3,621)45

21,64953(30,674)
381

Income (loss) before minority interests.................................
Minority interests .......................................................................
Net income (loss) .................................................................

22(Millions of yen)¥

(3,666)¥

21,596$(Yen)(31,055)(Dollars)

Net income (loss) per share (Notes 2 and 16):
Net income per share— Basic...............................................
Net income per share— Diluted...........................................

¥ (107.01)—¥

620.02619.08$(0.91)—Cash dividends per share (Note 2) .................................................

¥

¥

55.00

$

0.47

55.00

Funai Electric Co., Ltd. Annual Report 2007

The accompanying notes are an integral part of these statements.

Consolidated Statements of Changes in Net Assets
FUNAI ELECTRIC CO., LTD. and its Consolidated Subsidiaries(Thousands)(Millions of yen)
Valuation andtranslation adjustments

Shareholders’ equity

Number ofshares ofcommonCommonstock
outstandingstock

CapitalsurplusRetainedearnings

Net unrealized
gains onForeignsecurities and currency
Treasuryothertranslation
investments adjustments
stock

Balance at March 31, 2005 ....... 35,369 ¥ 31,119 ¥ 33,084 ¥ 125,246 ¥ (8,872) ¥ 5,410 ¥ (11,943)
Net income.............................
———
21,596———
Cash dividends .......................
———(1,768)———Bonuses to directors andcorporate auditors...............
—
—
—
(44)
—
—
—
Shares issued under stock option plan ...
—
—
—
—
121
25
122
Net increase in treasury stock.. (1,000)——— (12,342)——
Net changes in items other thanstockholders’ equity ...............
13,048
3,094
—
—
—
—
—
Balance at March 31, 2006 ....... 34,394
Net loss...................................
—Cash dividends .......................
—
Shares issued under stock option plan ...
9
Net decrease in consolidated companies ..
—Net increase in treasury stock..
(310)
Net changes in items other thanstockholders’ equity ...............
—

Minority
interests
¥ 244
—
—
—
—
—
90

145,030 (21,214)—(3,666)—(1,892)———(4)(3,123)
—

8,504
—
—
—
—
—

1,105
—
—
—
—
—

334
—
—
—
—
—

—

(4,465)2,183

47

Balance at March 31, 2007 ....... 34,093 ¥ 31,279 ¥ 33,244 ¥ 139,468 ¥ (24,337) ¥ 4,039¥ 3,288¥ 381

Balance at March 31, 2006 ...................... $264,642 $281,279 $1,228,597 $(179,704) $ 72,037 $ 9,360
Net loss ..................................................
— (31,054)————
Cash dividends ........................................
— (16,027)————
Shares issued under stock option plan ........
330
—
—
322
—
—
Net decrease in consolidated companies......
—
—
—
—
(34)
—
Net increase in treasury stock ....................
—(26,454)————
Net changes in items other thanstockholders’ equity...............................
—— (37,823) 18,493——$ 2,829—————

Balance at March 31, 2007 ......................$264,964 $281,609 $1,181,482 $(206,158) $ 34,214$ 3,227

31,241——
38——

33,205
—
—
39
—
—

—

—

—

(Thousands of U.S. dollars)(Note 3)

$ 27,853

398

Funai Electric Co., Ltd. Annual Report 2007

The accompanying notes are an integral part of these statements.

23

Consolidated Statements of Cash Flows
FUNAI ELECTRIC CO., LTD. and its Consolidated Subsidiaries(Thousands of
U.S. dollars)(Note 3)For the years
ended March 31,

For the year
ended March 31,

2007

2006

2007

(3,666)¥ 21,596$ (31,055)

8,204
(44)
(150)
65
—
38
2,457

8,172
191
48
(19)
(3,056)
145—

69,496(373)(1,271)551—
322
20,813

2,473
545
3,074
14,129
1,810
(858)
—
19,184(753)

1,120(4,098)
1,828(11,551)(6,976)
4,299(19,184)—(6,710)20,9494,617
26,040
119,687
15,332(7,268)—
162,507(6,378)50,174(35,791)

425,024

Net cash provided by (used in) operating activities...............

46,508(14,195)

393,969

INVESTING ACTIVITIES:
Proceeds from sales of short-term investments..........................
Payments for purchase of property, plant and equipment .........
Proceeds from sales of property, plant and equipment ..............
Payments for purchase of intangibles........................................
Proceeds from sales of investments in securities ........................
Payments for purchase of investments in securities ...................
Payments for loans receivable ...................................................
Proceeds from collection of loans receivable .............................
Other .......................................................................................

274(5,583)204(445)
10,260
(773)
(581)
42
(359)

692
(3,955)662(2,368)4,438(871)(47,008)
163
636

2,321
(47,294)
1,728(3,770)86,912(6,548)(4,922)356(3,040)Net cash provided by (used in) investing activities................

3,039(47,611)25,743

FINANCING ACTIVITIES:(Decrease) increase in short-term borrowings ...........................
Repayments of long-term debt .................................................
Payments for purchase of treasury stock ...................................
Cash dividends.........................................................................
Other, net ................................................................................

(20,896)(724)(3,122)(1,892)70

23,803(724)(12,342)(1,768)235(177,010)(6,133)(26,446)(16,027)593

Net cash (used in) provided by financing activities ...............

(26,564)

9,204(225,023)

Effect of exchange rate changes on cash and cash equivalents..

1,750

10,034

14,824

Net increase (decrease) in cash and cash equivalents ................
Cash and cash equivalents at beginning of year ........................

24,73358,588(42,568)
101,156

209,513496,298

Cash and cash equivalents at end of year ......................................

¥ 83,321¥ 58,588$ 705,811

OPERATING ACTIVITIES:Net income (loss): ....................................................................
Adjustments to reconcile net income (loss) to net cash providedby (used in) operating activities:
Depreciation and amortization.............................................
Allowance for doubtful accounts ..........................................
Provision for retirement benefits to employees, net...............
Provision (reversal) for retirement benefits to directors, net ..
Gain on settlement of a substitutional portion of EPF, net ...
Loss on sales or disposals of property, plant and equipment, net ..
Loss on liquidation of an affiliated company ........................
Changes in assets and liabilities:
Decrease in notes and accounts receivable ........................
Decrease (increase) in inventories.....................................
Decrease in other assets ....................................................
Increase (decrease) in accounts payable.............................
Increase (decrease) in accrued income taxes......................
(Decrease) increase in other liabilities...............................
Payments for suspense payments of income taxes .............
Prior year’s taxes ...............................................................
Other, net ........................................................................

24(Millions of yen)¥

Funai Electric Co., Ltd. Annual Report 2007

The accompanying notes are an integral part of these statements.

Notes to the Consolidated Financial Statements
FUNAI ELECTRIC CO., LTD. and its Consolidated Subsidiaries

1.

Basis of presenting consolidated financial statements
The accompanying consolidated financial statements of Funai Electric Co., Ltd. (the “Company”) and its consolidated
subsidiaries (“Funai” as a consolidated group) are prepared on the basis of accounting principles generally accepted in Japan,
which are different in certain respects as to application and disclosure requirements from International Financial ReportingStandards or accounting principles generally accepted in the United States of America, and which are compiled from theconsolidated financial statements prepared by the Company as required by the Securities and Exchange Law of Japan. Overseas
consolidated subsidiaries maintain their records in conformity with accounting principles generally accepted in their respective
countries. In general, no adjustments to the accounts of overseas consolidated subsidiaries have been reflected in theaccompanying consolidated financial statements to present them in compliance with the Japanese accounting principles andpractices followed by the Company.
Certain items presented in the consolidated financial statements submitted to the Director of Kanto Finance Bureau in
Japan have been reclassified in these accounts for the convenience of readers outside Japan.
2.
(a)Summary of significant accounting policies
Principles of consolidation
The consolidated financial statements include the accounts of Funai where the Company has an ability to control acompany through its voting right or other conditions. The excess of investment cost over net assets at the date of acquisition isamortized mainly over 5 years on a straight-line basis. All significant inter-company transactions have been eliminated.
Investments in all significant affiliated companies over which the Company has a significant influence, are accounted for by
the equity method and, accordingly, stated at cost adjusted for equity in undistributed earnings and losses from the date ofacquisition.
Funai Corporation, Inc., Funai Europe GmbH, Funai Electric (H.K.) Limited, H.F.T. Industrial Limited, Funai Electric(Malaysia) Sdn. Bhd., Funai Asia Pte Ltd , Funai (Thailand) Co., Ltd. and Funai Electric (POLSKA) Sp. z.o.o. use a fiscal year
ending on December 31 of each year. DX Antenna Co., Ltd. uses a fiscal year ending on February 28 of each year. Material
differences in intercompany transactions and accounts arising from the use of the different fiscal year-ends are appropriately
adjusted in consolidation.
(b)Translation of foreign currencies
All asset and liability accounts denominated in foreign currencies are translated into Japanese yen at the exchange rates in
effect at the respective balance sheet dates and the resulting translation gain or loss is taken recorded in income currently.
All asset and liability accounts of foreign consolidated subsidiaries and affiliates denominated in foreign currencies aretranslated into Japanese yen at the exchange rates in effect at the respective balance sheet dates. Operating accounts are translated
at the average rates of exchange for the respective years. These translation adjustments, which are not included in thedetermination of income, are reported as foreign currency translation adjustments in shareholders’ equity.
(c)Cash and cash equivalents
Cash and cash equivalents include highly liquid investments purchased with an original maturity of three months or less.

(d)Short-term investments and securities and other investments
Securities are classified into trading securities, held to maturity debt securities, and other securities. Other securities withreadily determinable fair value are recorded at fair value. Unrealized gains and losses on other securities are reported as a separate
component of net assets, net of tax. Other securities without readily determinable fair value are stated at cost.
When the market price of other securities falls below 50% of the price of the securities at the time of acquisition, a realized
loss is recognized with the new cost basis being the current market price. If the market price falls 30% or more but less than 50%,
a judgment is made about the likelihood of a recovery in price and decision is taken whether to write down to fair value.
(e)Inventories
Finished goods and work in process are mainly stated at cost, determined by the average method, and materials and supplies
are mainly stated at cost, determined by the first-in first-out method, except that foreign consolidated subsidiaries state theirinventories at the lower of cost or market, cost being determined by the first-in first-out method.
(f)

Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost. Depreciation is principally computed by the declining-balance method at
rates based on the estimated useful lives of the assets, except that foreign consolidated subsidiaries calculate depreciation by thestraight-line method.

Funai Electric Co., Ltd. Annual Report 2007

25

The principal estimated useful lives used for computing depreciation are as follows:
Buildings and structures
3 to 50 years
Machinery and equipment
1 to 20 years
The cost of maintenance, repairs and minor renewals is charged to expenses in the year incurred; major renewals andbetterments are capitalized.
In general, when assets are sold or otherwise disposed of, the profits or losses thereon, computed on the basis of thedifference between depreciated costs and proceeds, are credited or charged to income in the year of disposal, costs andaccumulated depreciation are removed from the respective accounts.
(g)

Intangible assets
Computer software is amortized using the straight-line method over the estimated useful life of five years. Patent rights areamortized using the straight-line method over the economic useful life. Goodwill is amortized using the straight-line method over
five years.
(h)Allowance for doubtful accounts
The allowance for doubtful accounts is computed based on the historical write-off experience from prior periods, plus anestimate of uncollectible amounts based on the analysis of certain individual receivables.
(i)

Retirement benefits to employees and directors
Severance indemnities are accrued based on the retirement benefit obligation, considering the projected benefit obligationand fair value of plan assets at the balance sheet date. The unrecognized net transition obligation at a domestic subsidiary isamortized over 15 years using the straight line method. Past service liabilities are charged to income over the average remaining
service period of employees (10 years) using the straight line method. Actuarial gains or losses are charged to income over the
average remaining service period of employees (10 years) using the straight line method from the following year incurred.
The Company and certain domestic subsidiaries maintain the Funai Electric welfare pension fund plan and qualified
retirement-funded pension plans. Retirement benefits to employees under those plans are determined by reference to current basic
rates of pay and length of service. Certain overseas subsidiaries maintain defined contribution plans.
The Company, with respect to directors , provides for lump-sum service benefits. While the Company has no legal
obligation to do so, it is customary practice in Japan to make lump-sum payments to directors upon retirement. An annual
provision is made in the accounts for the estimated cost of this termination plan, which is not funded.
(j)Finance leases
Leases that transfer substantially all the risks and rewards of ownership of the assets are accounted for as capital leases.
Leases that do not transfer ownership of the assets at the end of the lease term are accounted for as operating leases, in accordancewith accounting principles and practices generally accepted in Japan.
(k)Research and development expenses
Research and development expenses are charged to the results of operations as incurred.

(l)Income taxes
Deferred tax assets and liabilities are recognized based on the differences between the financial statements’ carrying amounts
and the tax bases of assets and liabilities using the enacted statutory tax rates in effect at the balance sheet date. A valuation
allowance is recorded to reduce deferred tax assets when there is uncertainty regarding their realizability.
(m) Net income per share
The computation of basic net income per share is based upon the weighted average number of shares of common stock
outstanding during each period. The computation of diluted net income per share is based upon the weighted average number ofshares of common stock outstanding during each period after consideration of the dilutive effect of common stock equivalents,
which include warrants.
Cash dividends per share are those declared with respect to the earnings for the respective periods for which dividends areproposed by the Board of Directors. Dividends are charged to retained earnings in the year in which they are paid.
(n)

Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates.

26

Funai Electric Co., Ltd. Annual Report 2007

(o)New accounting standards
Effective from the year ended March 31, 2007, the Company has applied “Accounting standards for the presentation of net
assets in the balance sheet (Accounting Standards Board of Japan Statement No.5)”, and “Implementation guidance for
Accounting standards for the presentation of net assets in the balance sheet (Accounting Standards of Japan Guidance No.8)”
both issued by the Accounting Standards Board of Japan on December 9, 2005.
“Net assets” in the balance sheets for this year are presented according to the revision of “Regulations concerning the
Terminology, Form and Presentation Methods of Consolidated Financial Statements” dated on April 25, 2006.
Furthermore the company presented its net assets in the balance sheets using the new presentation as of March 31, 2006.
(p)

Other current assets
The due date of the receivables (¥2,046million) from the sales of securities contracted on March 15, 2007, has beenchanged to the end of June from the end of May which was original due date.
3.

Translation into United States dollars
The consolidated financial statements presented herein are expressed in Japanese yen and have been translated
into United States dollars, solely for the convenience of the reader, at the rate of ¥118.05 = U.S.$1, the exchange rate
prevailing at March 31, 2007. Such translations should not be construed as a representation that the yen amounts
have been, could have been or could be converted into United States dollars at that rate or any other rate.
4.

Short-term investments and securities and other investments
Securities at March 31, 2007 and 2006 included in short-term investments and securities and otherinvestments are summarized as follows:(Millions of yen)March 31,
2007

Cost
Equity securities..........................
Debt securities ............................

¥ 7,246—¥ 7,246

Unrealized Book value
gains, net (fair value)¥ 6,843—¥ 6,843

Securities for which market value
are not readily determinable..............................................

¥ 14,089—
14,0892,456¥ 16,545

Cost¥ 7,086
10,512¥ 17,598

2006
Unrealized
gains(losses), Book value
net(fair value)¥ 14,492(89)¥ 14,403¥ 21,578
10,42332,0014,800¥ 36,801(Thousands of U.S. dollars)

Cost

March 31, 2007
Unrealized Book value
gains, net (fair value)

Equity securities.......................... $ 61,381$ 57,967 $ 119,348
Securities for which market values
are not readily determinable..............................................
20,804$ 140,152

Funai Electric Co., Ltd. Annual Report 2007

27

5.

Inventories
Inventories at March 31, 2007 and 2006 were as follows:(Thousands of
U.S. dollars)(Millions of yen)

2007

2006

March 31,2007

¥ 26,795
6,870
1,380
¥ 35,045¥ 27,068
6,379
1,006
¥ 34,453$ 226,980
58,196
11,690$ 296,866

March 31,

Finished goods .........................................................................
Materials and supplies ..............................................................
Work in processes.....................................................................

6.

Leases
The following pro forma amounts represent the acquisition cost, accumulated depreciation and net book valueof the lease assets as of March 31, 2007 and 2006, which would have been reflected in the consolidated balance sheets
if finance lease accounting had been applied to the finance leases currently accounted for as operating leases in Japan:(Millions of yen)March 31,2007
Acquisition Accumulated
costs
depreciation

Machinery and equipment..........

¥ 1,822¥ 1,0802006
Acquisition Accumulated
costs
depreciation

Net book
value
¥

742

¥ 1,857¥ 1,071

Net book
value
¥

786

(Thousands of U.S. dollars)

March 31,2007

Machinery and equipment..........

Acquisition Accumulated
costs
depreciation

Net book
value$ 15,434$ 6,285$ 9,149

Future lease payments under financing leases, including amounts representing interest, at March 31, 2007 and2006 were as follows:(Thousands of
U.S. dollars)(Millions of yen)March 31,

Future lease payments:
Due within one year
Due after one year................................................................

2007

2006

¥ 298
434
¥ 732

¥ 331
412
¥ 743

March 31,2007
$ 2,524
3,676$ 6,200

Lease payments relating to finance leases accounted for as operating leases in the accompanying consolidated
financial statements amounted to ¥380 million ($3,219 thousand) and ¥393 million for the years ended March 31,
2007 and 2006, respectively.
Future lease payments under operating leases at March 31, 2007 and 2006 were as follows:(Millions of yen)March 31,

Future lease payments:
Due within one year.............................................................
Due after one year................................................................
28

Funai Electric Co., Ltd. Annual Report 2007

2007

2006

¥ 1,001
3,861¥ 4,862

¥

781
3,348
¥ 4,129(Thousands of
U.S. dollars)

March 31,2007
$ 8,479
32,706$ 41,185

7.

Short-term borrowings and long-term debt
Short-term borrowings are principally bank loans with average interest rates of 4.0% and 4.7% at March 31,
2007 and 2006, respectively.
Long-term debt at March 31, 2007 and 2006 was as follows:(Thousands of
U.S. dollars)(Millions of yen)March 31,Long term bank loans ..............................................................
Less current portion .................................................................
Average interest rate .................................................................

2007

2006

¥ 5,317(724)¥ 4,593
1.9%¥ 6,041(724)¥ 5,317
1.3%

March 31,2007
$ 45,040(6,133)$ 38,907

The aggregate annual maturities of long-term bank loans at March 31, 2007 were as follows:(Millions of yen)

Year ending March 31,
2008 ...................................................................................................
2009 ...................................................................................................
2010 ...................................................................................................

¥

724
2,533
2,060
¥ 5,317(Thousands of
U.S. dollars)$ 6,163
21,563
17,537$ 45,040

8.

Retirement benefits to employees
In accordance with “Defined Benefit Enterprise Pension Plan Law”, the Company and some of its domestic
subsidiaries obtained approval from Japan’s Minister of Health and Welfare for the transfer to the government of thebenefit obligation related to past employee service under the substitutional portion of Employee Pension Fund(“EPF”) on October 1, 2005, and transferred to the government the substitutional portion of EPF and the related
government-specified portion of plan assets of EPF on March 3, 2006.
The gain on settlement of a substitutional portion of EPF, net amounting to ¥3,056 million ($26,015
thousand) was recorded as other income.
Benefit obligation, plan assets and the funded status of the Company and its domestic consolidated subsidiaries
at March 31, 2007 and 2006 are as follows:(Thousands of
U.S. dollars)(Millions of yen)

2007

2006

March 31,2007

¥ (9,127)
8,907¥ (9,228)
8,672$ (77,315)
75,451

(220)
1,183
(543)
(579)
(159)
1,539
¥ (1,698)

(556)
1,308
(476)
(647)
(371)
1,477
¥ (1,848)(1,864)
10,021(4,600)(4,904)(1,347)
13,037$ (14,384)

March 31,

Benefit obligation .....................................................................
Fair value of plan assets ............................................................
Funded status:
Benefit obligation in excess of plan assets ..............................
Unrecognized net transition obligation......................................
Unrecognized actuarial loss .......................................................
Unrecognized prior service cost .................................................
Net amount recognized .............................................................
Prepaid pension cost..................................................................
Accrued pension liability recognized in the balance sheet ..........

Funai Electric Co., Ltd. Annual Report 200729

Severance and pension costs of the Company and its domestic consolidated subsidiaries were as follows:(Thousands of
U.S. dollars)(Millions of yen)March 31,2007

March 31,

2007

9.

2006

Service cost...............................................................................
Interest cost..............................................................................
Expected return on plan assets..................................................
Amortization:
Transition obligation............................................................
Prior service cost ..................................................................
Actuarial losses .....................................................................
Other ....................................................................................
Net periodic benefit cost ..........................................................

¥ 488
189
(194)

¥ 487
340
(266)

$ 4,134
1,601(1,643)

125
(68)
12
(2)
¥ 550

125
(85)
205
—
¥ 806

1,059
(576)
101
(17)
$ 4,659

Discount rate ...........................................................................
Expected long-term rate of return on plan assets ......................

1.4~2.5%
1.4~2.5%

1.4~2.5%
1.4~2.5%

Contingent liabilities
Contingent liabilities at March 31, 2007 and 2006 were as follows:(Millions of yen)(Thousands of
U.S. dollars)

March 31,

March 31,2007

Loans guaranteed (primarily of unconsolidated subsidiaries and affiliates) ......

¥—

2006
¥ 455

2007
$—

10. Net assets
Japanese Corporate Law (the”Law”) became effective on May 1, 2006, replacing the Japanese Commercial Code(the”Code”). Under the Law of Japan, the entire amount of the issue price of new shares issued is required to be capitalized asstated capital, although the Company may, by resolution of its board of directors, capitalize an amount not exceeding one-half of
the issue price of the new shares as additional paid-in capital. The Company may, by resolution of the board of directors,
distribute additional paid-in capital or the stated capital in the form of stock splits. The Law also provides that legal reserve andadditional paid-in capital are reserved until they reach 25% of the Company’s stated capital. The additional paid-in capital may
be transferred to stated capital through suitable shareholder action. The legal reserve and additional paid-in capital may be used toreduce a deficit through suitable shareholder action. Under the Law, the Company is allowed to acquire its own shares to theextent that the aggregate cost of treasury shares does not exceed the maximum amount available for dividends.
11. Supplemental expense information
Research and development expenses are included in manufacturing costs and selling, general and administrative expenses
for the years ended March 31, 2007 and 2006 amounted to ¥14,036 million ($118,899 thousand) and ¥14,103 million
respectively.

30

Funai Electric Co., Ltd. Annual Report 2007

12. Income taxes
Income taxes applicable to the Company and its domestic subsidiaries include (1) corporation tax, (2) enterprise tax and (3)inhabitants tax which, in the aggregate, result in an effective tax rate approximately equal to 40.7% for the years ended March 31,
2007 and 2006.
Reconciliation between the Japanese statutory income tax rate and effective tax rate is as follows:
2007
Japanese statutory tax rate ...............................................................................
Expenses not deductible for tax purposes ........................................................
Permanently non-taxable income ....................................................................
R&D tax credit...............................................................................................
Prior year’s taxes..............................................................................................
Overseas income taxed at lower than statutory tax rates ..................................
Valuation allowances.......................................................................................
Others ...........................................................................................................
Effective income tax rate .................................................................................

2006

40.7%
0.9
(0.8)
(2.6)
84.3
(18.8)
13.8(1.6)
115.9%

40.7%
0.4
(0.7)
(2.5)
—
(14.5)
1.1
1.9
26.4%

The components of the deferred tax assets and deferred tax liabilities at March 31, 2007 and 2006 were as follows:(Thousands of
U.S. dollars)(Millions of yen)

2007

2006

March 31,
2007

¥

693
382
662
2,706
517
512
1,744
4,620
878
1,033
13,747(9,443)¥ 4,304

¥

748
369
485
346
498
591
1,578
2,512
711
927
8,765
(3,495)¥ 5,270

$

5,870
3,236
5,608
22,922
4,380
4,337
14,77339,136
7,438
8,751
116,451(79,992)$ 36,459¥¥$

March 31,

Deferred tax assets:
Retirement benefits to employees .........................................
Retirement benefits to directors............................................
Accounts payable .................................................................
Allowance for doubtful accounts .........................................
Accrued employees’ bonuses.................................................
Intercompany profit on inventories and property, plant and equipment.....
Impairment loss on securities ...............................................
Tax losses carried forward of consolidated subsidiaries..........
Impairment loss on inventories ............................................
Other ...................................................................................
Gross deferred tax assets ...................................................
Less: Valuation allowance.................................................
Total deferred tax assets....................................................
Deferred tax liabilities:
Tax purpose reserves in accordance with Japanese tax law.....
Depreciation of overseas consolidated subsidiaries................
Net unrealized gains on other securities................................
Prepaid pension cost ............................................................
Other ...................................................................................
Total deferred tax liabilities ..............................................
Net deferred tax assets (liabilities).............................................

373
—
2,765
627
13
3,778
¥ 526

388
191
5,830
602
7
7,018
¥ (1,748)

3,160—
23,422
5,311
110
32,003$ 4,456

Funai Electric Co., Ltd. Annual Report 2007

31

On June 28, 2005, the Company received notice of a supplementary tax assessment from the Osaka Regional Taxation
Bureau (the “Bureau”) regarding aggregate taxation on the taxable income of subsidiaries in Hong Kong for the three fiscal years
ended from March 31, 2002 to March 31, 2004. In the Bureau’s assessment, taxable income earned by the Hong Kong
subsidiaries should be added to the Company’s taxable income as the subsidiaries in Hong Kong are deemed not to satisfy theconditions for exclusion from the application of the tax system for dealing with tax havens.
The additional tax payments amounted to ¥19,184 million ($163,310 thousand) including penalties. However, theCompany, having been dissatisfied with the said supplementary tax assessment order, filed its objection with the Bureau on August24, 2005. However, on June 27, 2006, the Regional Commissioner of the Bureau dismissed the objection filed by the Company.
Considering that the justification of the Bureau for the dismissal was unacceptable, the Company filed a petition with the National
Tax Tribunal (the “Tribunal”) on July 25, 2006 seeking a review of the decision made by the Regional Commissioner.
Three months have passed since the Company filed its petition with the Tribunal for a review of the supplementary tax
assessment order, and now, the circumstances have become ripe for the Company to seek a judicial remedy. Therefore, today, theCompany filed a complaint with the Osaka District court for the cancellation of the supplementary tax assessment order, pursuant
to the applicable laws and regulations on November 16, 2006. The petition and the complaint are going on at the same time.
The Company believes it will become clear that the Company has correctly reported in accordance with applicable tax rules
through the appeal process, therefore the Company accounted such payments as “Suspense payments of income taxes” on its
consolidated balance sheet as of March 31, 2006.
This “Suspense payments of income taxes” have been charged to the income and presented as “Prior year’s taxes” on its
consolidated statements of income ended March 31, 2007 in accordance with the amended Audit Committee Report No.63“Accounting Practices, Disclosure and Audit Treatment for Various Taxes.” issued by Japanese Institute of Certified Public
Accountants (Auditing and Assurance Practice Committee) on March 8, 2007. For the fiscal years subsequent to the tax
assessment, year ended from March 31, 2005 to March 31, 2007, the Company has not accrued the additional tax exposuresestimated at approximately ¥14,300 million ($121,135 thousand) based on the methodology applied by the Bureau, due to thereason described above.
13. Derivative transactions
Funai used derivative transactions only for the purpose of mitigating future risks associated with the fluctuationof foreign currency exchange rates. Funai used forward currency exchange contracts to hedge the exchange rate risk
associated with monetary receivables and payables denominated in foreign currencies.
If forward currency exchange contracts are used as hedges and meet certain hedging criteria, Fuani defers
recognition of the associated gains or losses.
Funai evaluates hedge effectiveness by comparing the cumulative changes in the hedging derivative instruments.
Funai is exposed to certain market risks arising from their forward exchange contracts. Funai is also exposed to
the risk of credit loss in the event of non-performance by the counterparties to the currency. However, Funai does not
anticipate nonperformance by any of these counterparties as they are financial institutions with high credit ratings.
Funai has established a control environment which includes policies and procedures for risk assessment and forthe approval, reporting and monitoring of transactions involving derivative financial instruments.
At March 31, 2007 and 2006, the outstanding forward currency exchange contracts, were as follows:(Millions of yen)March 31,

2007

2006

Contracted
Contracted amount - Due
Recognizedamount after one year Fair value gain, net

Contracted
Contracted amount - Due
Recognizedamount after one year Fair value gain, net

Forward currency exchange
contract: purchase ................ ¥32

Funai Electric Co., Ltd. Annual Report 2007

—

¥

—

¥

—

¥

—

¥ 428

¥

—

¥ 415

¥ (13)

(Thousands of U.S. dollars)
March 31,2007

Contracted
Contracted amount - Due
Recognized
after one year Fair value gain, net
amountForward currency exchange
contract: purchase .................. $

—

$

—

$

—

$

—

14. Stock option plan
A summary of stock option plans at March 31, 2007 is as follows:2001 stock option plan 2002 stock option plan 2003 stock option plan
Number of options outstanding as of March 31, 2007
Exercise priceContractual life

311,900 shares¥9,549From January 1, 2004
to December 31, 2010

399,600 shares¥15,150
From August 1, 2004
to July 31, 2011

378,500 shares¥13,646
From August 1, 2005
to July 31, 20122004 stock option plan 2004 stock option plan 2005 stock option plan
Number of options outstanding as of March 31, 2007
Exercise priceContractual life

359,900 shares¥16,167
From August 1, 2006
to July 31, 2013

25,600 shares¥16,836
From August 1, 2006
to July 31, 2013

346,400 shares¥12,369
From August 1, 2007
to July 31, 2014

The 2001 stock option plan provides options to purchase common shares of the Company to directors and key employeesof the Company.
The 2002, 2003, and 2004 stock option plans provide options to purchase common shares of the Company to directors,
key employees, counsel, consultants and researchers of the Company and its subsidiaries.
The 2005 stock option plan provides options to purchase common shares of the Company to directors, corporate officers,
officers, key employees, counsel, consultants and researchers of the Company and its subsidiaries.

Funai Electric Co., Ltd. Annual Report 200733

15. Segment Information
Funai operates in the single business segment of manufacturing and sales of electrical products in Japan andoverseas. Therefore, operating segment information is not disclosed. Information for geographic segment andoverseas sales is as follows:(1)

Geographic segments(Millions of yen)North
America

Asia

EuropeElimination

Consolidated
total

For the year ended March 31, 2007
Sales:
162,715
Sales to outside customers ¥¥193,927
195,165Inter-segment sales.......... 181,020¥¥173,442
203,388—28¥¥ 3,572
7,186
284,621297,377¥ 27,037
8,479
305
—

¥
—
(480,091)(478,425)¥¥383,034
396,712—357,880
374,947
340,562
353,932

203,388
173,470
202,197
171,176

288,193304,563
277,637
293,333

27,342
8,479
34,9098,458(480,091)(478,425)(479,359)(477,213)

396,712
383,034
375,946
349,686

17,318Operating income (loss) ... ¥¥ 21,015¥¥ 1,191
2,294¥¥ 10,556
11,230¥¥ (7,567)
21¥ (1,212)(732)¥¥ 33,348
20,766

Identifiable assets .............. ¥¥105,622
82,553¥¥ 40,137
23,867¥¥168,549
117,576¥¥ 16,689
1,718¥¥ (58,186)
29,612¥¥255,326
272,811For the year ended March 31, 2006
Sales:¥176,164
Sales to outside customers ¥193,927
157,777
Inter-segment sales.......... 181,020¥167,225¥173,442
028¥ 6,850
7,186
286,481
297,377¥ 10,646
8,479
6
—

¥
—
(444,264)(478,425)¥360,885¥383,034—

333,941
374,947
317,955
353,932

167,225
173,470
169,932
171,176

293,331304,563
280,884
293,333

10,6528,479
11,4338,458(444,264)(478,425)(442,624)(477,213)

360,885
383,034
337,580
349,686

15,986
Operating income (loss) .... ¥ 21,015¥ (2,707)
2,294¥ 12,447
11,230

¥

(781)
21

¥¥ (1,212)(1,640)23,305¥ 33,348

Identifiable assets .............. ¥¥103,684
82,553¥ 43,004
23,867¥140,279¥ 117,576¥ 11,642
1,718¥¥ (10,085)
29,612¥288,524¥255,326

Elimination

Consolidated
total

Japan

Total .............................
Operating expenses ...........

Total .............................
Operating expenses ...........

(Thousands of U.S. dollars)North
AmericaAsia$1,615,067$1,722,897
261—$ 66,915
30,2582,769,131
2,411,021

1,615,328
1,722,897
1,593,966
1,712,808

2,836,046
2,441,279
2,731,474
2,351,859

Operating income (loss)..... $$ 195,689
146,701$

21,362
10,089$ 104,572
89,420195 $$ (11,286)
310,532(6,201) $$ 175,909$ (64,100)

Identifiable assets.............. $$ 768,721
894,723$ 222,246
340,000$1,094,851$1,427,776

15,998 $$ (492,893)
275,742 $2,310,978$2,377,558$ 141,372

Japan
For the year ended March 31, 2007
Sales:
Sales to outside customers $1,805,820$1,378,357
Inter-segment sales ....... 1,685,632
1,653,240
Total ...........................
Operating expenses............

34

Funai Electric Co., Ltd. Annual Report 2007

3,491,452
3,031,597
3,295,763
2,884,896

Europe78,955 $$$3,566,757— $3,360,542$ 229,030— (4,455,024)—(4,066,845)
2,584

78,955 (4,455,024)(4,066,845)
231,61478,760 (4,443,738)(4,060,644)
295,7143,566,757
3,360,542
3,256,225
3,184,633

(2) Overseas sales(Millions of yen, except percentages)(Thousands of U.S. dollars,
except percentages)

For the years ended March 31,

For the year
ended March 31,

2007
Overseas sales .......................................
Consolidated sales ................................
Ratio of overseas sales toconsolidated sales ............................

¥

358,346
396,712

¥

90.3%

2006

2007

321,486
360,885$ 3,035,544
3,360,542

89.1%

90.3%

16. Earnings per share
Basic and diluted earnings per share were calculated as follows:(Millions of yen and shares inthousand)(Thousands of
U.S. dollars)

March 31,

March 31,

2007

2006

2007

¥

(3,666)¥ 21,596$ (31,055)

Basic weighted average number of shares outstanding...............
Dilutive effect of stock options.................................................
Diluted weighted average number of shares outstanding ..........

34,25335
34,28834,831
53
34,884

Basic earnings per share (yen and dollars) .................................
Diluted earnings per share (yen and dollars).............................

¥ (107.01)—¥ 620.02
619.08Net income(loss) ......................................................................

$(0.91)—

Diluted net income per share for the year ended March 31, 2007 is not disclosed due to the loss position.
17. Reclassifications
Certain reclassifications of previously reported amounts have been made to the consolidated balance sheet atMarch 31, 2006, the consolidated statement of income, shareholders’ equity and cash flows for the year ended
March 31, 2006 to conform to the current year presentation. Such reclassifications have no effect on previously
reported results of operations.

Funai Electric Co., Ltd. Annual Report 200735

18. Subsequent events
Appropriation of retained earnings
The board meeting of the Company held on May 10, 2007 approved the following appropriations of retained earnings forthe year ended March 31, 2007.

Cash dividends (¥55=U.S.$0.47 per share) .......................................................

36

Funai Electric Co., Ltd. Annual Report 2007

(Millions of yen)(Thousands of
U.S. dollars)¥ 1,875$ 15,883

Report of Independent Auditors
To the Board of Directors and Shareholders of
Funai Electric Co., Ltd.
We have audited the accompanying consolidated balance sheets of Funai Electric Co., Ltd.(“the Company”)
and its consolidated subsidiaries as of March 31, 2006 and 2007, and the related consolidated statements of income,changes in net assets, and cash flows for the years then ended, all expressed in Japanese yen. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Funai Electric Co., Ltd. and its consolidated subsidiaries as of March 31, 2006
and 2007, and the consolidated results of their operations and their cash flows for the years then ended inconformity with accounting principles generally accepted in Japan.
1. As described in Note 12 to the consolidated financial statements, the additional tax payments of ¥19,184
million ($163,310 thousand)including penalties were accounted for as “Suspense payments of income taxes”
on its consolidated balance sheet as of March 31,2006. This “Suspense payments of income taxes” have been
charged to the income and presented as “Prior year’s taxes” on its consolidated statements of income ended
March 31, 2007 in accordance with the amended Audit Committee Report No.63 “Accounting Practices,
Disclosure and Audit Treatment for Various Taxes.” issued by Japanese Institute of Certified Public
Accountants (Auditing and Assurance Practice Committee) on March 8, 2007.For the fiscal years
subsequent to the tax assessment, year ended from March 31, 2005 to March 31, 2007, the Company has
not accrued the additional tax exposures.
2. As described in Note 2 (P) to the consolidated financial statements, the due date of the receivables from thesales of securities has been changed to the end of June 2007.
The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader, havebeen translated on the basis set forth in Note 3 to the accompanying consolidated financial statements.

Osaka, Japan
June 21, 2007

Funai Electric Co., Ltd. Annual Report 200737

Company Data
Company Outline

Business Operations

Name
FUNAI ELECTRIC CO., LTD.
Foundation August 1961
Address
7-7-1 Nakagaito Daito city, Osaka
574-0013, JapanTel
81-72-870-4303
Fax
81-72-871-1112
URL
http://www.funaiworld.com/
Capital¥ 31,278 million
Sales¥ 396,712 million

Audio-visual Equipment
VCR, DVD player, DVD recorder,
Television, LCD TV, PDP TV, Projector
Information Equipment
Printer, Digital Still Camera(March 2007 / Consolidated)

Employees 3,319 (March 2007 / Consolidated)*The figure for total number of employees does

not include those employees (16,717) ofoutsourced production facilities located in China.

Company History
Aug. 1961 Funai Electric Co., Ltd. was established in Ikuno-ku, Osaka City capitalized at ¥20 million.
Mar. 1964 Chugoku Funai Electric Co., Ltd. was established as a manufacturing company in Fukayasu-gun(now FukuyamaCity), Hiroshima.
Sep. 1976 The head office was relocated to Daito City, Osaka.
Jun. 1980 Funai Electric Trading (Europe) GmbH (now Funai Europe GmbH), a sales firm, was established in Hamburg,
Germany.
Apr. 1989 Funai Electric (Malaysia) SDN.BHD., a manufacturing company, was established in Johor Darul Takzim, West
Malaysia.
May. 1991 Funai Corporation, Inc. was established as a sales firm in New Jersey, U.S.A.
Mar. 1992 Highsonic Industrial Ltd. (now Funai Electric (H.K.) Ltd.) was established in Hong Kong as a managementcompany of processing on commission to consignment manufacturing plants in Guang Dong province, China.
Apr. 1992 Dong Guan Plant in Dong Guan City, Guang Dong Province started operations as a consignment manufacturing
plant in China.
Aug. 1994 Zhong Shan Plant in Zhong Shan City, Guang Dong Province started operations as a consignment manufacturing
plant in China.
Jan. 1996 Funai Service Co., Ltd. was established.
May. 1996 Highsonic Industrial Ltd. (now Funai Electric (H.K.) Ltd.) established H.F.T Industrial Ltd. by joint investment
with the Japan company.
Feb. 1999 Funai Electric Co., Ltd. was listed on the Second Section of Osaka Securities Exchange.
Mar. 2000 Funai Electric Co., Ltd. was listed on the First Section of Tokyo Stock Exchange and the First Section of Osaka
Securities Exchange.
Mar. 2001 Closing date for the fiscal year ending June 15 was changed to March 31.
Nov. 2001 Got the stocks of DX Antenna Co., Ltd.
Jul. 2003 Funai (Thailand) Co., Ltd. a manufacturing company, was established in Nakornratchasima, Kingdom ofThailand.
Dec. 2003 Huang Jiang Plant in Dong Guan City, Guang Dong Province started operations as a consignment manufacturing
plant in China.
Apr. 2004 Funai Electric Advanced Applied Technology Research Institute Inc. was established.
Oct. 2006 Funai Electric (Polska) Sp.z o.o. was established as a production company in the city of Nowa Sol, Poland.
Jun. 2007 Funai Electric (Polska) Sp.z o.o. began operation.

38

Funai Electric Co., Ltd. Annual Report 2007