Sony Corp. (6758.T) posted a 68 percent rise in annual operating profit on Thursday on investment gains and robust sales of flat TVs, but forecast a sharp fall this year because of start-up costs for PlayStation 3 (PS3).

Sony has enjoyed gains on investments at its life insurance unit due to a rallying Japanese stock market, robust demand for its recently launched Bravia brand liquid crystal display (LCD) TVs, and a softer yen.

The electronics and entertainment conglomerate has also notched up healthy sales of its PlayStation Portable (PSP) handheld game console and Vaio PCs, helping offset tumbling demand for bulky traditional TVs and heavy restructuring costs.

But Sony expects its game division to rack up an operating loss of 100 billion yen ($871.6 million) this business year as it gears up to launch the PS3 in November, overshadowing an expected recovery by its core electronics unit.

We believe that we can lower costs dramatically (on the PS3) through chip shrinkage and by cutting the number of parts but there is no way to avoid high costs in the first year, Sony Senior Vice President Takao Yuhara told a news conference.

Sony forecast group operating profit will fall 48 percent to 100 billion yen ($872 million) in 2006/07, well below the market consensus of 171.2 billion yen, the average figure from 19 analysts surveyed by Reuters Estimates.

The weak outlook comes despite a sharp drop in restructuring expenses, which were front-loaded in 2005/06 -- the first year of a revival plan under which the company set out to close several factories, sell assets and cut 10,000 jobs.

But the strong result could help underscore a growing view that Sony is on a recovery path, having clawed its way out of the hole it dug for itself by falling behind Apple Computer Inc. (Nasdaq:AAPL - news) in portable music players and Sharp Corp. (6753.T) in LCD TVs.

Sony's operating profit came to 191.3 billion yen in the business year ended in March, up from 113.9 billion yen a year earlier. The result handily beat the market consensus of 130.8 billion yen and Sony's own forecast of 100 billion yen.

Sony has staged a comeback in flat-screen TVs, raising its global LCD TV market share to nearly 15 percent in the fourth quarter of 2005 from under 9 percent in the third, using panels made with partner Samsung Electronics Co. (005930.KS).

Those gains came mainly at the expense of Sharp, which did not have enough production capacity to meet demand and watched its market share slip to under 14 percent from 18 percent in the third quarter, according to research firm DisplaySearch.

Sony said it would aim to return its ailing TV division to a profit in the full year to next March. Previously it had only said it would look to return the unit to the black in the second half of the 2006/07 business year.

Shares of Sony rose 28 percent during the 2005/06 business year, underperforming Japan's electrical machinery index (.IELEC.T), which rallied 39 percent. Before the announcement, Sony's shares rose 0.67 percent to 6,030 yen.

(Additional reporting by Yukari Iwatani Kane)

($1=114.73 Yen)