UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2004

2007

Commission file number 1-6439

Sony Kabushiki Kaisha
(Exact name of Registrant as specified in its charter)

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

JAPAN
(Jurisdiction of incorporation or organization)

7-35, KITASHINAGAWA 6-CHOME, SHINAGAWA-KU,

7-1, KONAN 1-CHOME, MINATO-KU,
TOKYO 141-0001,108-0075, JAPAN
(Address of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act.
   
Title of each class
Name of each exchange on which registered
American Depositary Shares* New York Stock Exchange
Pacific Stock Exchange
Chicago Stock Exchange
Common Stock** New York Stock Exchange
Pacific Stock Exchange
Chicago Stock Exchange

 *American Depositary Shares evidenced by American Depositary Receipts.
Each American Depositary Share represents one share of Common Stock.

Each American Depositary Share represents one share of Common Stock.

**No par value per share.
Not for trading, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the New York Stock Exchange.

Not for trading, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the relevant exchanges.

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

None
(Title of Class)

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

None
(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
     
Outstanding as of
March 30, 2007
March 29, 2007
March 31, 2004
March 30, 2004
Title of Class
(Tokyo Time)
(New York Time)
Common Stock 926,418,280
Subsidiary Tracking Stock3,072,0001,002,062,405  
American Depositary Shares   115,546,136176,704,973

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ      No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o      No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ
      No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Refer to definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):
   
YesLarge Accelerated Filer  þ
 NoAccelerated Filer  oNon-Accelerated Filer  o

Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o
      Item 18 þ
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).
Yes o      No þ
Item 17 o
Item 18. þ

In this document, Sony Corporation and its consolidated subsidiaries are together referred to as “Sony.” In addition, sales and operating revenue is referred to as “sales” in the narrative description except in the Consolidated Financial Statements.

The noon buying rate for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on June 21, 200420, 2007 was 108.57123.60 yen = 1 U.S. dollar.

As of March 31, 2004,2007, Sony Corporation had 1,048960 consolidated subsidiaries (including variable interest entities). It has applied the equity accounting method inwith respect to its 6662 affiliated companies.

Cautionary Statement

Statements made in this annual report with respect to Sony’s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of Sony. Forward-looking statements include, but are not limited to, those statements using words such as “believe”, “expect”, “plans”, “strategy”, “prospects”, “forecast”, “estimate”, “project”, “anticipate”, “aim”,“believe,” “expect,” “plans,” “strategy,” “prospects,” “forecast,” “estimate,” “project,” “anticipate,” “aim,” “may” or “might” and words of similar meaning in connection with a discussion of future operations, financial performance, events or conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Sony cautions you that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not rely on any obligation of Sony to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Sony disclaims any such obligation. Risks and uncertainties that might affect Sony include, but are not limited to (i) the global economic environment in which Sony operates, as well as the economic conditions in Sony’s markets, particularly levels of consumer spending; (ii) exchange rates, particularly between the yen and the U.S. dollar, the euroEuro and other currencies in which Sony makes significant sales or in which Sony’s assets and liabilities are denominated; (iii) Sony’s ability to continue to design and develop and win acceptance of, as well as achieve sufficient cost reductions for, its products and services, including newly introduced platforms within the Game segment, which are offered in highly competitive markets characterized by continual new product introductions, rapid development in technology and subjective and changing consumer preferences (particularly in the Electronics, Game Music and Pictures segments)segments, and the music business); (iv) Sony’s ability and timing to recoup large-scale investments required for technology development and increasing production capacity; (v) Sony’s ability to implement successfully personnel reduction and other business reorganization activities in its Electronics Music and Pictures segments; (v)segment; (vi) Sony’s ability to implement successfully its network strategy for its Electronics, Music,Game and Pictures segments, and All Other, segmentsincluding the music business, and to develop and implement successful sales and distribution strategies in its MusicPictures segment and Pictures segmentsthe music business in light of the Internet and other technological developments; (vi)(vii) Sony’s continued ability to devote sufficient resources to research and development and, with respect to capital expenditures, to correctly prioritize investments (particularly in the Electronics segment); (vii)(viii) Sony’s ability to maintain product quality (particularly in the Electronics and Game segments); (ix) the success of Sony’s joint ventures and alliances; (x) the outcome of pending legal and/or regulatory proceedings; and (viii)(xi) shifts in customer demand for financial services such as life insurance and Sony’s ability to conduct successful Asset Liability Management in the risk of being able to obtain regulatory approval and successfully form a jointly owned recorded music company with BMG.Financial Services segment. Risks and uncertainties also include the impact of any future events with material unforeseenadverse impacts.

Important information regarding risks and uncertainties is also set forth elsewhere in this annual report, including in “Risk Factors” included in “Item 3.Key Information”Information,,” “Item 4.Information on the Company”Company,” “Item 5.Operating and Financial Review and Prospects”Prospects,,” “Legal Proceedings” included in “Item 8.Financial Information”Information,,” Sony’s Consolidated Financial Statements referenced in “Item 8.Financial Information”Information,,” and “Item 11.Quantitative and Qualitative Disclosures Aboutabout Market Risk”Risk..”


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TABLE OF CONTENTS
     
Item 1.Identity of Directors, Senior Management and Advisers
  5 
Item 2.Offer Statistics and Expected Timetable
  5 
Item 3.Key Information
  5 
Selected Financial Data
  5 
Capitalization and Indebtedness
8
Reasons for the Offer
8
Risk Factors
  8 
Item 4.Information onReasons for the CompanyOffer and Use of Proceeds
  158 
History and Development of the CompanyRisk Factors
  158 
Item 4.  Principal Capital InvestmentsInformation on the Company
16
Business Overview and Organizational Structure
17
Products and Services
  18 
SalesHistory and DistributionDevelopment of the Company
  2218 
Overseas OperationsPrincipal Capital Investments
  2419 
Sources of SupplyBusiness Overview
  2419 
After-Sales ServiceImportant Changes during the Fiscal Year
  2519 
PatentsProducts and LicensesServices
  2521 
CompetitionSales and Distribution
  2523 
Government RegulationsSources of Supply
  26 
After-Sales Service
26
Property, PlantPatents and EquipmentLicenses
26
Competition
  27 
Government Regulations
28
Organizational Structure
28
Property, Plant and Equipment
28
Item 4A.  Unresolved Staff Comments
31
Item 5.Operating and Financial Review and Prospects
  2931 
OPERATING RESULTSOperating Results
  2931 
Operating Results for the Fiscal Year Ended March 31, 20042007 compared with the Fiscal Year Ended March 31, 20032006
  2931 
Operating Results for the Fiscal Year Ended March 31, 20032006 compared with the Fiscal Year Ended March 31, 20022005
  4443 
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
  7570 
RESEARCH AND DEVELOPMENTResearch and Development
  7872 
TREND INFORMATIONTrend Information
  7973 
Issues Facing Sony and Management’s Response to those Issues
  7973 
Critical Accounting Policies
 76
Forecast of Consolidated ResultsRecently Adopted Accounting Standards
80
Recent Pronouncements
  81 
CRITICAL ACCOUNTING POLICIESItem 6.  Directors, Senior Management and Employees
  83 
RECENTLY ADOPTED ACCOUNTING STANDARDSDirectors and Senior Management
  8883 
Compensation
89
RECENT PRONOUNCEMENTSBoard Practices
  90 
Item 6.Directors, Senior Management and Employees
  9092 
Directors and Senior ManagementShare Ownership
  90
Compensation
99
Board Practices
99
Employees
102
Share Ownership
10393 
Item 7.7.  Major Shareholders and Related Party Transactions
  10594 
Major Shareholders
  10594 
Related Party Transactions
  105
Interests of Experts and Counsel
10695 


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Item 8.Interests of Experts and CounselFinancial Information
  10695 
Item 8.  Financial Information
95
Consolidated Statements and Other Financial Information
  10695 
Legal Proceedings
  10695 
Dividend Policy
  10696 
Significant Changes
96
Item 9.  The Offer and Listing
96
Offer and Listing Details
96
Plan of Distribution
96
Markets
96
Trading Markets
96
Trading on the TSE and NYSE
97
Selling Shareholders
98
Dilution
98
Expenses of the Issue
98
Item 10.  Additional Information
98
Share Capital
98
Memorandum and Articles of Association
98
Material Contracts
  106 
Item 9.Exchange ControlsThe Offer and Listing
  106 
Offer and Listing DetailsTaxation
106
Plan of Distribution
106
Markets
106
Trading Markets
106
Trading on the TSE and NYSE
  107 
Selling ShareholdersDividends and Paying Agent
  108109 
DilutionStatement by Experts
  108109 
Expenses of the IssueDocuments on Display
  108109 
Item 10.AdditionalSubsidiary Information
  108110 
Share CapitalItem 11.  Quantitative and Qualitative Disclosures about Market Risk
  108
Memorandum and Articles of Association
108
Material Contracts
118
Exchange Controls
118
Taxation
119
Dividends and Paying Agent
122
Statement by Experts
122
Documents on Display
122
Subsidiary Information
123110 
Item 11.12Quantitative and Qualitative Disclosures About Market Risk
123
Item 12..  Description of Securities Other Than Equity Securities
  124111 
Item 13.13.  Defaults, Dividend Arrearages and Delinquencies
  124111 
Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds
  124111 
Item 15.Controls and Procedures
  124111 
Item 16.[Reserved]
  125112 
Item 16A.Audit Committee Financial Expert
  125112 
Item 16B.  CCodeode of Ethics
  125113 
Item 16C.Principal Accountant Fees and Services
  125113 
Audit and Non-Audit Fees
  125113 
Audit Committee’s Pre-Approval Policies and Procedures
  125113 
Item 16D.Exemptions Fromfrom the Listing Standards for Audit Committees
  126114 
Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  126114 
Item 17.Financial Statements
  126114 
Item 18.Financial Statements
  126114 
Item 19.Exhibits
  126115 
 EX-1.1 ARTICLESEX-12.1 CERTIFICATION PURSUANT TO SECTION 302 OF INCORPORATIONTHE SARBANES-OXLEY ACT OF 2002
 EX-1.2 REGULATIONSEX-12.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE BOARDSARBANES-OXLEY ACT OF DIRECTORS2002
 EX-31 CERTIFICATIONSEX-13.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 EX-32 SECTION 1350 CERTIFICATIONSEX-15.1(a) CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EX-15.1(b) CONSENT OF INDEPENDENT ACCOUNTANTS


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Item 1. Identity of Directors, Senior Management and Advisers

ITEM 1.

Identity of Directors, Senior Management and Advisers

Not Applicable

Item 2. Offer Statistics and Expected Timetable

ITEM 2.

Offer Statistics and Expected Timetable

Not Applicable

Item 3. Key Information

ITEM 3.Key Information

Selected Financial Data
                       
Year Ended March 31
20002001200220032004
(Yen in millions, Yen per share amounts)
Income Statement Data:
                    
 Sales and operating revenue  6,686,661   7,314,824   7,578,258   7,473,633   7,496,391 
 Operating income  223,204   225,346   134,631   185,440   98,902 
 Income before income taxes  264,310   265,868   92,775   247,621   144,067 
 Income taxes  94,644   115,534   65,211   80,831   52,774 
 Income before cumulative effect of accounting changes  121,835   121,227   9,332   115,519   90,628 
 Net income  121,835   16,754   15,310   115,519   88,511 
Per Share Data of Common Stock*:
                    
 Income before cumulative effect of accounting changes                    
  — Basic  144.58   132.64   10.21   125.74   98.26 
  — Diluted  131.70   124.36   10.18   118.21   93.00 
 Net income                    
  — Basic  144.58   18.33   16.72   125.74   95.97 
  — Diluted  131.70   19.28   16.67   118.21   90.88 
 Cash dividends declared                    
  Interim  12.50   12.50   12.50   12.50   12.50 
   (12.01 cents)  (11.15 cents)  (10.07 cents)  (10.50 cents)  (11.37 cents)
  Year-end  12.50   12.50   12.50   12.50   12.50 
   (11.58 cents)  (10.01 cents)  (9.78 cents)  (10.53 cents)  (11.26 cents)
Depreciation and amortization**:
  306,505   348,268   354,135   351,925   366,269 
Capital expenditures (additions to fixed assets):
  435,887   465,209   326,734   261,241   378,264 
Research and development costs:
  394,479   416,708   433,214   443,128   514,483 
                     
  Fiscal Year Ended March 31
  2003 2004 2005 2006 2007
  (Yen in millions, Yen per share amounts)
 
Income Statement Data:
                    
Sales and operating revenue  7,506,008   7,530,635   7,191,325   7,510,597   8,295,695 
Operating income  217,815   133,146   145,628   226,416   71,750 
Income before income taxes  247,621   144,067   157,207   286,329   102,037 
Income taxes  80,831   52,774   16,044   176,515   53,888 
Income before cumulative effect of accounting changes  115,519   90,628   168,551   123,616   126,328 
Net income  115,519   88,511   163,838   123,616   126,328 
Data per Share of Common Stock:
                    
Income before cumulative effect of accounting changes                    
— Basic  125.74   98.26   180.96   122.58   126.15 
— Diluted  118.21   89.03   162.59   116.88   120.29 
Net income                    
— Basic  125.74   95.97   175.90   122.58   126.15 
— Diluted  118.21   87.00   158.07   116.88   120.29 
Cash dividends declared                    
Interim  12.50   12.50   12.50   12.50   12.50 
   (10.50 cents)  (11.37 cents)  (12.12 cents)  (10.36 cents)  (10.78 cents)
Fiscal year-end  12.50   12.50   12.50   12.50   12.50 
   (10.53 cents)  (11.26 cents)  (11.29 cents)  (11.04 cents)  (10.24 cents)
Depreciation and amortization*
  351,925   366,269   372,865   381,843   400,009 
Capital expenditures (additions to fixed assets)
  261,241   378,264   356,818   384,347   414,138 
Research and development costs
  443,128   514,483   502,008   531,795   543,937 


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Year Ended March 31
20002001200220032004
(Yen in millions, Yen per share amounts)
Balance Sheet Data:
                    
 Net working capital  861,674   830,734   778,716   719,166   381,140 
 Long-term debt  813,828   843,687   838,617   807,439   777,649 
 Stockholders’ equity  2,182,906   2,315,453   2,370,410   2,280,895   2,378,002 
 Total assets  6,807,197   7,827,966   8,185,795   8,370,545   9,090,662 
 Number of shares issued at year-end (thousands of shares of common stock)  453,639   919,617   919,744   922,385   926,418 
 Stockholders’ equity per share of common stock*:  2,409.36   2,521.19   2,570.31   2,466.81   2,563.67 
                   
Average***HighLowPeriod-End
(Yen)
Yen Exchange Rates per U.S. Dollar:
                
 Year ended March 31                
  2000  110.02   101.53   124.45   102.73 
  2001  111.65   104.19   125.54   125.54 
  2002  125.64   115.89   134.77   132.70 
  2003  121.10   115.71   133.40   118.07 
  2004  113.07   120.55   104.18   104.18 
 2003                
  December      109.6   106.9   107.1 
 2004                
  January      107.2   105.5   105.8 
  February      109.6   105.4   109.3 
  March      112.1   104.2   104.2 
  April      110.4   103.7   110.4 
  May      114.3   108.5   110.2 
  June (through June 21)      111.3   108.6   108.6 

                     
  Fiscal Year Ended March 31
  2003 2004 2005 2006 2007
  (Yen in millions, Yen per share amounts)
 
Balance Sheet Data:
                    
Net working capital  719,166   381,140   746,803   569,296   994,871 
Long-term debt  807,439   777,649   678,992   764,898   1,001,005 
Stockholders’ equity  2,280,895   2,378,002   2,870,338   3,203,852   3,370,704 
Total assets  8,370,545   9,090,662   9,499,100   10,607,753   11,716,362 
Number of shares issued at                    
fiscal year-end (thousands of shares of common stock)  922,385   926,418   997,211   1,001,680   1,002,897 
Stockholders’ equity per share of common stock  2,466.81   2,563.67   2,872.21   3,200.85   3,363.77 
* Depreciation and amortization includes amortization expenses for intangible assets and for deferred insurance acquisition costs.
                 
  Average* High Low Period-End
  (Yen)
 
Yen Exchange Rates per U.S. Dollar:
                
Fiscal year ended March 31
2003		  121.94   115.71   133.40   118.07 
2004  113.07   120.55   104.18   104.18 
2005  107.49   114.30   102.26   107.22 
2006  113.15   120.93   104.41   117.78 
2007  116.92   121.81   110.07   117.56 
2007                
January  —   121.81   118.49   121.02 
February  —   121.77   118.33   118.33 
March  —   118.15   116.01   117.56 
April  —   119.84   117.69   119.44 
May  —   121.79   119.77   121.76 
June (through June 20)  —   123.67   121.08   123.60 
The noon buying rate for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on June 21, 200420, 2007 was 108.57123.60 yen = U.S. 1 dollar.

  * Per share data prior to the year ended March 31, 2001 have been adjusted to reflect the two-for-one stock split that took effect on May 19, 2000. However, no adjustment to reflect such stock split has been made to the number of shares issued prior to the year ended March 31, 2001.
 ** Depreciation and amortization includes amortization expenses for intangible assets and for deferred insurance acquisition costs.
*** The average yen exchange rates represent average noon buying rates on the last business day of each month during the respective period.

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U.S.dollar.

* The average yen exchange rates represent average noon buying rates of all the business days during the respective year.
Notes to Selected Financial Data:

1. In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARBAccounting Research Bulletin (“ARB”) No. 51”.51.” FIN No. 46 addresses the consolidation by a primary beneficiary of a Variable Interest Entityvariable interest entity (“VIE”). For VIEs created or acquired prior to February 1, 2003, Sony early adopted the provisions of FIN No. 46 on July 1, 2003, prior to required compliance. Under FIN No. 46, any difference between the net amount added to the balance sheet and the amount of any previously recognized interest in the VIE shall be recognized as a cumulative effect of accounting change.2003. As a result of adopting the original FIN No. 46, Sony recognized a one-time charge with no tax effect of 2.1 billion2,117 million yen as a cumulative effect of accounting changeschange in the consolidated statement of income, and Sony’s assets and liabilities increased by 95.3 billion95,255 million yen and 98.0 billion97,950 million yen, respectively. These increases were treated as non-cash transactions in the consolidated statementsstatement of cash flows. In addition, cash and cash equivalents increased by 1.5 billion1,521 million yen. In December 2003, the FASB issued a revised version of FIN No. 46 (“FIN No. 46R”), which replaced FIN No. 46. Sony subsequently early adopted the provisions of FIN No. 46R, which replaced FIN No. 46, upon its issuance prior to required compliance.

6

in December 2003. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or inimpact the way Sony had previously accounted for VIEs.
2. In November 2002, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. Sony adopted EITF Issue No. 00-21 on July 1, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on Sony’s results of operations and financial position as of and for the year ended March 31, 2004.
3. In May 2003, the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. Sony adopted FAS No. 150 during the first quarter of the year ended March 31, 2004. The adoption of FAS No. 150 did not have an impact on Sony’s results of operations and financial position as of and for the year ended March 31, 2004.
4. In June 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which nullified EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. Sony adopted FAS No. 146 on January 1, 2003. The adoption of this statement did not have a material effect on Sony’s results of operations and financial position.
5. On April 1, 2001, Sony adopted FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by FAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities — an Amendment of FASB Statement No. 133”. As a result, Sony’s operating income, income before income taxes and net income for the year ended March 31, 2002 decreased by 3.0 billion yen, 3.4 billion yen and 2.2 billion yen, respectively. Additionally, Sony recorded a one-time non-cash after-tax unrealized gain of 1.1 billion yen in accumulated other comprehensive income in the consolidated balance sheet, as well as an after-tax gain of 6.0 billion yen in the cumulative effect of accounting changes in the consolidated statement of income. In April 2003, the FASB issued FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. Sony adopted FAS No. 149 on July 1, 2003. The adoption of FAS No. 149 did not have an impact on Sony’s results of operations and financial position.
6. In July 2001, the FASB issued FAS No. 142, “Goodwill and Other Intangible Assets”. Sony adopted FAS No. 142 retroactive to April 1, 2001. As a result, Sony’s operating income and income before income taxes for the year ended March 31, 2002 increased by 20.1 billion yen and income before cumulative effect of accounting changes as well as net income for the year ended March 31, 2002 increased by 18.9 billion yen.
7. In June 2000, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 00-2,03-1, “Accounting and Reporting by ProducersInsurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.”SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or Distributorsannuity receivable options. Additionally,SOP 03-1 provides guidance for the presentation of Films”.separate accounts. Sony adoptedSOP 00-2 retroactive to03-1 on April 1, 2000.2004. As a result of the adoption ofSOP 03-1,Sony’s operating income decreased by 5,156 million yen for the fiscal year ended March 31, 2005. Additionally, on April 1, 2004, Sony recognized a charge of 4,713 million yen (net of income taxes of 2,675 million yen) as a cumulative effect of an accounting change.
3. In July 2004, the Emerging Issues Task Force (“EITF”) issued EITF IssueNo. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.” In accordance with Statement of Financial Accounting Standards (“FAS”) No. 128, “Earnings per Share”, Sony had not previously included in the computation of diluted earnings per share (“EPS”) the number of potential common stock issuable upon the conversion of contingently convertible debt instruments (“Co-Cos”) that had not met the conditions to exercise the stock acquisition rights. EITF IssueNo. 04-8 requires that the maximum number of common stock that could be issued upon the conversion of Co-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise the stock acquisition rights have been met. Sony adopted EITF IssueNo. 04-8 during the quarter ended December 31, 2004. As a result of the adoption of EITF IssueNo. 04-8, Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the fiscal year ended March 31, 2004 were restated. Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the fiscal year ended March 31, 2005 decreased by 7.26 yen and 7.06 yen, respectively, as a result of adopting EITF IssueNo. 04-8.
4. Effective April 1, 2006, Sony adopted FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123(R)”). This statement requires the use of the fair value based method of accounting for employee stock-based compensation and eliminates the alternative to use the intrinsic value method prescribed by Accounting Principle Board Opinion (“APB”) No. 25. With limited exceptions, FAS No. 123(R) requires that the grant-date fair value of share-based payments to employees be expensed over the period the service is received. Sony had accounted for its employee stock-based compensation in accordance with the provisions prescribed by APB No. 25 and its related interpretations and had disclosed the net effect on net income and net income per share (“EPS”) allocated to the common stock as if Sony had applied the fair value recognition provisions of FAS No. 123 to stock-based compensation as described in Note 2 to the Consolidated Financial Statements, “Significant accounting policies — Stock-based compensation.” Sony has elected the modified prospective method of transition prescribed in FAS No. 123(R), which requires that compensation expense be recorded for all unvested stock acquisition rights as the requisite service is rendered beginning with the first period of adoption. As a result of the adoption of FAS No. 123(R), Sony’s operating income decreased by 3,670 million yen for the fiscal year ended March 31, 2007.
5. In February 2006, the FASB issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of FAS No. 133 and FAS No. 140. This statement permits an entity to elect fair value remeasurement for any hybrid financial instrument if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under FAS No. 133. The election to measure the hybrid instrument at fair value is made on aninstrument-by-instrument basis and is irreversible. The statement is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s fiscal year beginning after September 15, 2006, with earlier adoption permitted as of the beginning of the fiscal year, provided that financial statements for any interim period of that fiscal year have not been issued. Sony early adopted FAS No. 155 on April 1, 2006. As a result of the adoption of FAS No. 155, Sony’s operating income increased by 3,828 million yen for the fiscal year ended March 31, 2007. Additionally, on April 1, 2006, Sony recognized a net charge of 3,785 million yen (net of income taxes of 2,148 million yen) as a cumulative-effect adjustment to beginning retained earnings, which consisted of 1,754 million yen (net of income taxes of 996 million yen) of gross gains and 5,539 million yen (net of income taxes of 3,144 million yen) of gross losses.


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6. incomeIn September 2006, the FASB issued FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” an amendment to FASB Statements No. 87, 88, 106 and 132(R). FAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit pension and other postretirement benefit plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. FAS No. 158 was adopted by Sony in the financial statements for the year ended March 31, 2001 included a one-time, non-cash charge with no tax effect2007. FAS No. 158 also requires companies to measure the funded status of 101.7 billion yen, primarily to reduce the carrying valueplan as of the date of its film inventory.fiscal year-end, effective for years ending after December 15, 2008. Sony expects to adopt the measurement provisions of FAS No. 158 effective March 31, 2009. The impact of adopting FAS 158 was a 9,508 million yen reduction in accumulated other comprehensive income. Refer to Note 14 to the Consolidated Financial Statements, “Pension and severance plans,” for further details.
 
8.7. Effective April 1, 2006, Sony reclassified royalty income as a component of sales and operating revenue, rather than as a component of other income as previously recorded. In December 1999,connection with this reclassification, sales and operating revenue, operating income and other income for the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”. Sony adopted SAB No. 101 in the fourth quarterfiscal years ended March 31, 2001 retroactive2003, 2004, 2005 and 2006 have been reclassified to April 1, 2000. As a result, a one-time non-cash cumulative effect adjustmentconform with the presentation of 2.8 billionthese items for the fiscal year ended March 31, 2007. The amounts of royalty income reclassified from other income to sales and operating revenue for the fiscal years ended March 31, 2003, 2004, 2005 and 2006 were 32,375, 34,244, 31,709, and 35,161 million yen, was recorded inrespectively. In addition to the income statement directly above, certain reclassifications of the caption of “net income”financial statements for a change in accounting principle. In Decemberthe fiscal years ended March 31, 2003, SAB No. 101 was amended by SAB No. 104, “Revenue Recognition”. The amendment did not2004, 2005 and 2006 have an impact on Sony’s results of operations and financial position.been made to conform to the presentation for the fiscal year ended March 31, 2007.

Capitalization and Indebtedness

Not Applicable

Reasons for the Offer and Use of Proceeds

Not Applicable

Risk Factors

This section contains forward-looking statements that are subject to the Cautionary Statement appearing elsewhere inon page 2 of this annual report. Risks to Sony are also discussed elsewhere in this annual report, including without limitation in the other sections of this annual report referred to in the Cautionary Statement.
 
Sony must overcome increasingly intense pricing competition, especially in the Electronics and Game segments.

Sony’s Electronics and Game segments producesegments.

Sony’s Electronics segment produces consumer products that compete against products sold by an increasing number of competitors on the basis of several factors including price. In order to produce products that appeal to changing and increasingly diverse consumer preferences, and to overcome the fact that a relatively high percentage of consumers already possess products similar to those that Sony offers, Sony’s Electronics and Game segments must develop superior technology, anticipate consumer tastes and rapidly develop attractive products. In the Electronics segment, in the face ofSony faces increasingly intense pricing pressure from Korean and Chinese competitors in a variety of consumer product areas, Sony is focusing its resources on developing, manufacturing and marketing higher value-added products. Examples in both the Electronics and Game segments include displays equipped with proprietary high resolution circuitry systems, devices designed for use with secured media distribution services, optical media devices and new microprocessors and system large scale integration (“LSI”) for the next generation computer entertainment system and broadband network products.areas. Sony’s sales and operating income depend on Sony’s ability to continue to develop and offer Electronics and Game products at competitive prices that meet changing and increasingly diverse consumer preferences.
Sony is subject to competition from firms that may be more specialized or have greater resources.
Sony’s businesses, primarily within the Electronics segment, face a broad range of competitors, from large international companies to an increasing number of relatively small, rapidly growing, and highly specialized organizations. Sony has a portfolio of businesses in different industries while many of its competitors specialize in one or more of these business areas. As a result, Sony may not fund or invest in certain of its businesses to the same degree that its competitors do, and these competitors may have greater financial, technical, and marketing resources available to them than the businesses of Sony against which they compete. The Financial Services segment faces


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increasing competition in Japan due to ongoing deregulation that is eliminating barriers among the insurance, banking and securities industries. In addition, Sony’s financial services businesses may not be able to compete effectively, especially against established competitors with greater financial, marketing and other resources.
Sony may not be able to recover its increasingly diverse and increasingly expensive investments in technology development and production capacity.
Sony’s businesses, particularly the Electronics and Game segments, compete in intensely competitive markets characterized by changing consumer preferences at competitive prices.
Sony’s sales and profitability are sensitive to economic trends in Sony’s major markets.

     A consumer’s decisionand rapid technological innovation. In order to purchase productsbe profitable in such as those offeredmarkets, Sony is continuing to invest heavily in research and development and semiconductor fabrication equipment. Recent examples of such expenditures include research and development investment in 65 nanometer semiconductor process technology and related capital expenditures with IBM Corporation and Toshiba Corporation for production of the Cell Broadband EngineTM (“Cell/B.E.”) within the Electronics segment for sale primarily to the Game segment, and an investment in a joint venture, S-LCD Corporation (“S-LCD”), with Samsung Electronics Co., Ltd. (“Samsung”) to produce 7th generation amorphous thin film transistor (“TFT”) liquid crystal display (“LCD”) panels. In addition, by Sony’s Electronics, Game, Music and Pictures segments is to a very significant extent discretionary. Accordingly, weakening economic conditions or outlook can reduce consumption in anythe end of Sony’s major markets, causing material declines in Sony’s sales and operating income. In the fiscal year ending March 31, 2008, Sony and Samsung are scheduled to complete the investment in S-LCD regarding the manufacture of 8th generation TFT LCD panels at S-LCD. The total amount of the investment for the 8th generation panels is expected to be approximately 200 billion yen (approximately 50 percent of which will be contributed by Sony). Sony may not be able to recover these investments, in part or in full, or the recovery of these investments may take longer than expected. As a result, the carrying value of the related assets may be subject to an impairment charge, which could adversely affect Sony’s mid-term profitability. (Refer to “Trend Information” in “Item 5.Operating and Financial Review and Prospects.”)

Sony’s business reorganization efforts are costly and may not attain their objectives.
Sony has engaged in significant reorganization initiatives in an effort to allocate managerial resources into core areas and improve operating efficiency and profitability. These efforts have included the concentration of resources into profitable, growth businesses by withdrawing from or downsizing selected businesses. Other efforts include the execution of a plan to reduce costs including a reduction in the number of Sony’s employees around the world.
On September 22, 2005, Sony announced its mid-term corporate strategy for the three fiscal years ending March 31, 2006 through March 31, 2008. This mid-term corporate strategy includes restructuring initiatives focused on the reduction in the number of business categories and the number of product models, the rationalization of manufacturing sites, the streamlining of administrative and headquarter functions, as well as the sale of non-core assets.
In association with these restructuring initiatives, 138.7 billion yen and 38.8 billion yen of restructuring charges were recorded for the fiscal years ended March 31, 2004, 29.6 percent, 28.3 percent2006 and 23.6 percent2007, respectively. Sony anticipates the recording of approximately 35 billion yen in restructuring charges for the fiscal year ending March 31, 2008.
Restructuring charges are recorded in cost of sales, selling, general and administrative expenses and loss on sale, disposal or impairment of assets, net and thus decrease Sony’s consolidated operating and net income. Moreover, due to internal or external factors, the improved efficiencies and cost savings projected may not be realized as scheduled and, even if those benefits are realized, Sony may not be able to achieve the level of profitability expected due to a worsening of market conditions beyond expectations. Such possible internal factors could include, for example, a decision to implement new restructuring initiatives not already planned or a decision to increase research and development outlays or other expenditures beyond currently projected levels, either of which might increase total costs. Possible external factors could include, for example, increased burdens from regional labor regulations and labor union agreements that could prevent Sony from executing its restructuring initiatives as planned. Therefore, such reorganizations may not result in improved efficiency, increased ability to respond to market changes or reallocation of resources to more profitable activities. The inability to fully and successfully implement restructuring programs may cause Sony to have insufficient financial resources to carry out its research and development plans and to invest in targeted growth business areas.


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Foreign exchange rate fluctuations can affect financial results because a large portion of Sony’s sales and operating revenue were attributable to Japan,assets are denominated in currencies other than the U.S. and Europe, respectively. If economic conditions in Japan, the U.S. and Europe deteriorate, or if the effects of international political and military instability depress consumer confidence, Sony’s short- to mid-term sales and profitability may be significantly adversely affected.

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yen.

 
Foreign exchange rate fluctuations can affect financial results because a large portion of Sony’s sales and assets are denominated in currencies other than the yen.

Sony’s consolidated statements of income are prepared from the local currency-denominated financial results of each of Sony Corporation’s subsidiaries around the world which are translated into yen at the monthly average market rate during each financial period.currency exchange rate. Sony’s consolidated balance sheets are prepared using local currency-denominated assets and liabilities and stockholders’ equity of each of Sony Corporation’s subsidiaries around the world, which are translated into yen at the market exchange rate at the end of each financial period. A large proportion of Sony’s consolidated financial results, assets liabilities and stockholders’ equityliabilities is accounted for in currencies other than the Japanese yen. For example, only 29.625.6 percent of Sony’s sales and operating revenue in the fiscal year ended March 31, 20042007 were originally recorded in Japan. Accordingly, Sony’s consolidated financial results, assets liabilities and stockholders’ equityliabilities in Sony’s businesses that operate internationally, principally in its Electronics, Game Music and Pictures segments, may be materially affected by changes in the exchange rates of foreign currencies when translating into Japanese yen. In the fiscal yearsyear ended March 31, 2001 and 2003,2007, for example, Sony’s consolidated operating income prepared on the basis of Generally Accepted Accounting Principlesgenerally accepted accounting principles in the U.S. (“U.S. GAAP”) in yen increaseddecreased from the preceding fiscal year by 1.068.3 percent and 37.7 percent, respectively; however,to 71.8 billion yen. However, if Sony’s consolidated operating income had been prepared on a local currency basis, it would have increased by 48 percent and decreased 5 percent in those two fiscal years, respectively (refer to Operating Results in Item 5.Operating and Financial Review and Prospects).been an operating loss of 20.3 billion yen. Operating results on a local currency basis described herein reflect sales and operating revenue and operating income obtained by applying the yen’s monthly average exchange rate in the previous fiscal year to local currency-denominated monthly sales, cost of sales, and selling, general and administrative expenses in the current fiscal year. Foreign exchange rate fluctuations may have a negative impact on Sony’s results in the future, especially if the yen strengthens significantly against the U.S. dollar or euro.the Euro.
 
Foreign exchange fluctuations can affect Sony’s results of operations due to sales and expenses in different currencies.

Foreign exchange fluctuations can affect Sony’s results of operations due to sales and expenses in different currencies.
Exchange rate fluctuations affect Sony’s operating profitability because many of Sony’s products are sold in countries other than the ones in which they were manufactured. The concentration of research and development, administrative functions and manufacturing activities within the Electronics and Game segments aresegment largely in Japan, makes this segment particularly sensitive to the yen’s appreciation because research and development, production activities and administrative functions are largely located in Japan so thatas the ratio of yen-denominated costs to total costs is higher than the ratio of yen-denominated revenue to total revenue. Mid-Volatile mid- to long-term volatile changes ofin exchange rate levels such as the decade-long strengthening of the yen against major currencies between 1985 and 1995 when it strengthened against the U.S. dollar from over 260 yen to less than 80 yen, may interfere with Sony’s global allocation of resources and hinder Sony’s ability to execute procurement, production, logistics, and sales activities in a manner that is profitable after the effect of such exchange rate changes.

Although Sony hedges the net foreign currency exposure resulting from import and export transactions shortly before they are projected to occur, such hedging activity cannot entirely eliminate the risk of adverse exchange rate fluctuations.
 
Sony may not be able to recover its increasingly diverse and increasingly expensive investments in technology development and production capacity.

     Sony’s businesses, particularly the Electronics and Game segments, compete in markets characterized by ever-shortening product life cycles caused by changing consumer preferences and rapid technological innovation. In order to be profitable in such markets, Sony must continually develop a wide rangeefficiently manage its procurement of new technologies and invest in production capacity to create new products. Examples of such new technologies include a new microprocessor and other system LSIs forparts, the next generation computer entertainment system and for digital consumer electronics and technologies for organic electro-luminescent displays and liquid crystal displays (“LCDs”). However, Sony may not be able to recover its development costs or

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production capacity investments in any one of these technologies and its mid-term profitability could be adversely affected as a result.

Moreover, through the implementation of Transformation 60 (see below), Sony plans to continue to expend significant sums on research and development and semiconductor fabrication equipment. Recent examples of such expenditures include an investment for research and development into 65 nanometer semiconductor process technology along with IBM Corporation and Toshiba Corporation and an investment in a joint venture with Samsung Electronics Co., Ltd. (“Samsung”) to produce 7th generation amorphous thin film transistor (“TFT”) LCD panels. Sony may not be able to recover these investments, in part or in full, and its mid-term profitability could be adversely affected as a result.

Sony’s business reorganization efforts are costly and may not attain their objectives.

     Sony has engaged in significant reorganization efforts in the past in an effort to allocate managerial resources into core areas and improve operating efficiency and profitability. These efforts have included the concentration of resources into profitable businesses by withdrawing from or downsizing selected businesses. Other efforts have been made to reduce fixed costs including a reduction in the number of Sony’s employees around the world.

     Since the fiscal year ended March 31, 2004, Sony has been implementing Transformation 60, a three-year program scheduled to end March 31, 2006 that consists of a series of fundamental reforms including strengthening core businesses, increasing investments in research and development and undertaking restructuring initiatives such as a reduction in personnel, withdrawal from selected businesses and implementation of other programs to reduce fixed costs.

     Restructuring charges recorded on a consolidated basis for the fiscal years ended March 31, 2002, 2003 and 2004 were 107.0 billion yen, 106.3 billion yen and 168.1 billion yen, respectively. The 168.1 billion yen recorded in the fiscal year ended March 31, 2004 included charges incurred from restructuring activities that were started (but not completed) in previous fiscal years. Sony expects to incur restructuring charges totaling approximately 335 billion yen through the implementation of Transformation 60, including the 168.1 billion yen of restructuring charges incurred in the fiscal year ended March 31, 2004. The details of the restructuring plans for the remaining two fiscal years have yet to be determined in full.

Restructuring charges are recorded in cost of sales, selling, general, and administrative expense and loss on sale, disposal or impairment of assets, net and thus decrease Sony’s consolidated net income. Moreover, due to internal or external factors, the improved efficiencies and cost savings projected may not be realized as scheduled or at all and, even if those benefits are realized, Sony may not be able to achieve the level of profitability expected due to a worsening of market conditions beyond expectations. Such possible internal factors include a decision to implement restructuring initiatives in addition to those already planned or a decision to increase researchfor which are volatile, and development outlays or other investments beyond currently projected levelscontrol its inventory of products and parts, the demand for which could increase total costs of the program, while possible external factors include regional labor regulations and union contracts that could prevent Sony from executing restructuring initiatives as planned. Therefore such reorganizations may not result in reductions in expenses, improved efficiency, increased ability to respond to market changes or reallocation of resources to more profitable activities. The inability to fully and successfully implement the restructuring programs may cause Sony to have insufficient financial resources to carry out its research and development plans and to invest in targeted growth business areas.is volatile.

 
Sony must efficiently manage its procurement of parts, the market conditions for which are volatile, and control its inventory of products and parts, the demand for which is volatile.

In the Electronics and Game segments, Sony places orders for components, determines production and plans inventory in advance based on its forecast of consumer demand, which is highly volatile and difficult to predict. In the past Sony has experienced both a shortage of semiconductors, that caused Sony to be unablewhich resulted in Sony’s inability to meet demand for its personal computers (“PCs”) and AVaudio visual products, as well asand a surplus in certain

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semiconductors that resulted in the recordingrecognition of losses when semiconductor prices fell. Fluctuations in the semiconductorSony consumes a tremendous volume of parts and components for its products such as semiconductors and LCD panels. Consequently, market fluctuations may cause a shortage of supply of semiconductorsparts and components, and may affect Sony’s production and/or the cost of goods sold, because Sony consumes a tremendous volumeas could price fluctuations of semiconductor parts and components for its products.the underlying raw or basic materials. Sony’s profitability may also be adversely affected by supply or inventory shortages delays in cost reductions or inventory adjustments that, as a result of efforts to reduce inventory by temporarily halting production or by reducing the price of goods, will lead to an increase in the ratio of cost of sales to sales. Sony writes down the value of its inventory when components or products have become obsolete, exceedwhen inventory exceeds the amount expected to be used, or arewhen the value of the inventory is otherwise recorded at morea higher value than net realizable value. Such inventory adjustments have had and, if Sony is not successful in managing its inventory may in the future, will have a material adverse affecteffect on Sony’s operating income and profitability. (For more information on sources of supply refer to “Sources of Supply” in “Item 4.Information on the Company.”)


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Sony’s sales and profitability are sensitive to economic and other trends in Sony’s major markets.
 
Sony’s Game and Electronics segments are particularly sensitive to year-end holiday season demand.

A consumer’s decision to purchase products such as those offered by Sony in its Electronics, Game and Pictures segments, as well as by companies within All Other, is to a very significant extent discretionary. Accordingly, weakening economic conditions or outlook can reduce consumption in any of Sony’s major markets, causing material declines in Sony’s sales and operating income. In the fiscal year ended March 31, 2007, 25.6 percent, 26.9 percent and 24.6 percent of Sony’s sales and operating revenue were attributable to Japan, the U.S. and Europe, respectively. If economic conditions in Japan, the U.S. or Europe deteriorate, or if the effects of international political and military instability depress consumer confidence, Sony’s short- to mid-term sales and profitability may be significantly adversely affected. In addition, since Sony’s sales in Other Areas are growing, its sales and profitability may also be affected by future political, economic and military uncertainties surrounding those areas.
Large-scale investment is required within the Game and Electronics segments, particularly during the development and introductory period of a new gaming platform.
Within the Game segment, providing and developing products that maintain competitiveness over an extended life-cycle requires large-scale investment relating to research and development, particularly during the development and introductory period of a new platform. In addition, large-scale investment relating to capital expenditures and research and development is also required within the Electronics segment for the fabrication and manufacture of key components, including semiconductors supplied to the Game segment, which are used in products within the Game segment. Moreover, it is particularly important in the Game segment that these products are provided to consumers at competitive prices to ensure the favorable market penetration of the platform. Should the platform fail to achieve such favorable market penetration, there is a risk that this investment, or a part thereof, will not be recouped and the carrying value of the related assets will be subject to an impairment charge, resulting in a significant negative impact on Sony’s mid-term profitability. In addition, even if Sony is able to sufficiently recoup its investment, it is probable
that a significant negative impact on Sony’s operating results could occur during the introductory period of the platform. Further, if the platform is ultimately successful, it may take longer than expected to recoup the investment, resulting in a negative impact on Sony’s profitability.
An example of such a significant negative impact during the introductory period of the platform is the PLAYSTATION®3 (“PS3”)-related charges which resulted in a loss of 232.3 billion yen within the Game segment for the fiscal year ended March 31, 2007. This loss reflected a negative margin arising from the sale of the PS3 at strategic price points lower than its production cost during the introductory period. (Refer to “Game” section of “Operating Performance by Business Segment” at “Operating Results” in “Item 5.Operating and Financial Review and Prospects.”)
Sony’s Game and Electronics segments are particularly sensitive to year-end holiday season demand.
Since the Game segment offers a relatively small range of hardware products (PS one hardware,(including PlayStation®2, hardwarePSPTM (PlayStation®Portable), and related software)the PS3) and a significant portion of overall demand is dependent uponweighted towards the year-end holiday season, demand, factors such as changes in the competitive environment, changes in market conditions, delays in the release of highly anticipated software titles and insufficient supply of hardware at this time of yearduring the year-end holiday season can negatively impact the financial performance of both the segment.

Game and the Electronics segments. For example, in the fiscal year ended March 31, 2007, the introduction of the PS3 in Europe was delayed from the scheduled date of November 2006 to March 2007 because of a delay in improvements in the mass production yield of the blue-violet laser diode, a key device for the Blu-ray disc drive equipped in the PS3, which was designed, developed and manufactured internally at Sony. Also, a supply shortage of the PS3 arose during the 2006 year-end holiday season in Japan and North America.

The Electronics segment is also dependent upon year-end holiday season demand and, to a lesser extent than the Game segment, is susceptible to weak sales and supply shortages that may prevent it from meeting demand for its products during this season.


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The sales and profitability of Sony’s Game segment depends on the penetration of its gaming platforms, which is sensitive to softwareline-ups, including software published by third parties.
 
Sony’s Music and Pictures segments are subject to digital piracy, and this risk grows more acute as new technologies develop.

In Sony’s Musicthe Game segment, the penetration of gaming platforms is a significant factor for sales and Pictures segments, technological developments have created new risks with respect to Sony’sprofitability, which may be affected by the ability to protect its intellectual property. Advances in technology that enable the transfer and downloading of digital music and AV files from the Internet without authorization from the owners of rights to such content have threatened the conventional copyright-based business modelprovide customers with sufficient softwareline-ups, including software published by making it easier to create and redistribute unauthorized music and AV files. Such unauthorized distribution has adversely affectedthird parties. Softwareline-ups affect not only software sales and operating results withinprofitability, as in many other content businesses, but also affect the Music segment and threatens to adverselypenetration of gaming platforms, which can affect hardware sales and operating income inprofitability.
Operating results for Sony’s Pictures segment vary according to the cost of productions, customer acceptance, and competing products.
Operating results for the Pictures segment. These technological advances include new digital devices such as hard disk drive video and audio recorders, CD and DVD recorders and peer-to-peer digital distribution services. As a result, Sony has incurred and will continue to incur expenses to develop new services for the authorized digital distribution of music, moviessegment’s motion picture and television programsproductions can materially fluctuate depending primarily upon the cost of such productions and acceptance of such productions by the public, which are difficult to combat unauthorized digital distributionpredict. In addition, the commercial success of its intellectual property. These initiatives will increase Sony’s near-term expensesthe Pictures segment’s motion picture and may not achieve their intended result.television productions depend upon the acceptance of other competing productions by the public, and the availability of alternative forms of entertainment and leisure activities.
 
Sony’s Music segment is dependent on establishing new artists, and Sony’s Music and Pictures segments are subject to increasing prices for talent.

Sony’s MusicPictures segment is highly dependent on establishing artists that appealsubject to customers, and the competition with other entertainment companies for such talent is intense. Therefore, if the Music segment is unable to find and establish new talented artists, this segment’s sales and operating income may be adversely affected. In addition, with respect to both the Music and Pictures segments, Sony has experienced and may continue to experience significant increases in talent-related spending.labor interruption.

 
Sony’s Pictures segment is subject to labor interruption.

The Pictures segment is directly or indirectly dependent upon highly specialized union members who are essential to the production of motion pictures and television programs. A strike by one or more of these unions could delay or halt production activities. Such a delay or halt, depending on the length of time involved, could cause delay or interruption in the release of new motion pictures and television programs and thereby could adversely affect revenues and cash flows in the Pictures segment.

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Sony’s Financial Services segment is subject to variability in claims, valuation losses, and shifts in customers’ demand and a need for prudent and foresightful Asset Liability Management (“ALM”) as well as mandatory contributions to a policy holder insurance fund.

Sony’s Financial Services segment facesoperates in a highly regulated environment and new regulations and regulatory initiatives could adversely affect the flexibility of its business operation.

Sony’s Financial Services segment operates in industries subject to comprehensive regulation and supervision, including the Japanese insurance and banking industries. Future developments or changes in laws, regulations or policies and their effects are unpredictable increases inand could lead to increased compliance expenses or limitations on operations. For example, Japan’s Financial Services Agency recently required all life and non-life insurance companies to perform and report on systematic reviews of non-payment of insurance claims, and shiftsthe results of which could lead to additional rulemaking.
In conducting prudent asset liability management, Sony’s Financial Services segment is subject to risks from market fluctuations in the value of investments, changes in customer demand from more profitable products such as life guarantees to less profitable products such as annuities. Thisand potential variability in insurance claims.
If Sony’s Financial Services segment also may incur valuation losses if the value of securities purchased for investment purposes decreases. In addition, if it fails to conduct ALM in a prudent and foresightful mannereffective asset liability management (“ALM”) to pursue optimal combination ofbalance possible risks and expected returns on investment assets with its financing liabilities and underwriting risks on insurance policy benefits, Sony’s Financial Services segment may not be ableits ability to keep providingprovide competitive products and services to customers on a long-term basis. Sony’s Financial Services segment is also subject to mandatory contributed reserves for the Life Insurance Policyholders Protection Corporation of Japan (“PPC”). The PPC was established in 1998 to provide financial support to insolvent life insurance companies,may deteriorate and all life insurers in Japan, includingits profitability may decline. Sony Life Insurance Co., Ltd. (“Sony Life”), are memberswhich constitutes the largest portion of this segment, has liabilities to policyholders with a long average duration, making ALM more challenging. This segment also may incur losses from decreases in the value of securities and other financial instruments purchased for investment purposes resulting from fluctuations in interest rates or in equity markets. In addition, Sony’s Financial Services segment faces a risk of changes in customer demand including a change from more profitable protection-orientated products, such as term insurance, to less profitable savings-oriented products, such as individual annuities, as well as a risk of unpredictable increases in insurance claims.
Differences between actual and assumed policy benefits and claims may require Sony’s Financial Services segment to increase policy reserves in the future.
Sony’s life insurance and non-life insurance businesses establish policy reserves for future benefits and claims based on regulatory guidelines and estimates of future payment obligations made by qualified actuaries. The


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insurance businesses calculate these reserves based on many assumptions and estimates, including the frequency and timing of the PPCevent covered by the policy, the amount of benefits or claims to be paid and the investment returns on the assets they purchase with the premiums received. These assumptions and estimates are inherently uncertain, and the insurance businesses cannot determine with precision the ultimate amounts that they will be required to pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow at the level they assume prior to the payment of benefits or claims. The frequency and timing of the event covered by the policy and the amount of benefits or claims to be paid are subject to assessment bya number of risks and uncertainties, many of which are outside of the PPC based on their respective share of insurance industry premiums and policy reserves. Since some life insurers have become insolvent since 1998, the PPC’s financial resources have already been reduced because it has had to provide financial support to those companies. If there are further bankruptcies of life insurers, solvent life insurers including Sony Life may be required to contribute additional financial resources. Sony Life’s estimated required future contribution based on the assessments made by the PPC is incorporated in other expenses in Sony Life’s statements of income and long-term liabilities in its balance sheets.businesses’ control, including:
 
•  Sony may not be successfulchanges in implementing its broadband network strategy.trends underlying the insurance businesses’ assumptions and estimates, such as mortality and morbidity rates and automobile accident rates;
•  the availability of sufficient reliable data and the insurance businesses’ ability to correctly analyze the data;
•  the insurance businesses’ selection and application of appropriate rating and pricing techniques; and
•  changes in legal standards, claim settlement practices, medical care expenses and automobile repair costs.
If the actual experience of the insurance businesses is less favorable than their assumptions or estimates, reserves may be inadequate. In addition, any changes in regulatory guidelines or standards with respect to the required level of policy reserves may require that the insurance businesses establish policy reserves based on more stringent assumptions, estimates or actuarial calculations. Such events could result in a need to increase provisions for policy reserves, which may have a significant adverse effect on the financial condition and results of operations of the Financial Services segment.
Sony’s Music business, Sony’s investment in SONY BMG MUSIC ENTERTAINMENT, and the Pictures segment are subject to digital piracy, which may become increasingly prevalent with the development of new technologies.
In Sony’s Music business, including its investment in SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), as well as in the Pictures segment, the development of digital technology has created new risks with respect to Sony’s ability to protect its copyrights. Advances in technology that enable the transfer and downloading of digital audio and visual files from the Internet without authorization from the owners of rights to such content threaten the conventional copyright-based business model by making it easier to create and redistribute unauthorized audio and visual files. Such unauthorized distribution has adversely affected sales and operating results within the Music business, as well as in Sony’s investment in SONY BMG, and threatens to adversely affect sales and operating income in the Pictures segment. These technological advances include new digital devices such as hard disk drive video and audio recorders, CD, DVD, and Blu-ray Disc recorders andpeer-to-peer digital distribution services. As a result, Sony has incurred and will continue to incur expenses to develop new services for the authorized digital distribution of music, movies and television programs and to combat unauthorized digital distribution of its copyrighted content. These initiatives will increase Sony’s near-term expenses and may not achieve their intended result.
Sony’s Music business and Sony’s investment in SONY BMG are dependent on establishing new artists, and together with Sony’s Pictures segment are subject to increases in talent-related costs.
The success of Sony’s Music business and Sony’s investment in SONY BMG is highly dependent on establishing artists that appeal to customers, and the competition with other entertainment companies for such talent is intense. If the Music business and SONY BMG are unable to find and establish new talented artists, sales, operating income and equity in net income (loss) of affiliated companies may be adversely affected. In addition, with respect to the Music business and the Pictures segment, as well as SONY BMG, Sony has experienced and may continue to experience significant increases in talent-related spending.


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SONY BMG is subject to renewed regulatory approval from the European Commission competition authorities.
In August 2004, Sony combined its recorded music business outside of Japan with the recorded music business of Bertelsmann AG, forming SONY BMG, after approval from, among others, the European Commission competition authorities. On December 3, 2004, Impala, an international association consisting of 2,500 independent recorded music companies, applied for annulment of the decision to clear the merger. On July 13, 2006, the European Court of First Instance overruled the Commission’s decision to allow the merger to go forward, requiring the Commission to re-examine the merger. The transaction was renotified on January 31, 2007, in accordance with applicable EU merger control rules, and an in-depth investigation was opened on March 1, 2007. While the Commission completes its reexamination, Sony continues to account for the results of Sony BMG under the equity method. If the Commission does not approve the merger and the previously combined company is forced to unwind the merger, Sony may incur significant costs and may not be able to achieve its objectives with respect to its recorded music business.
Sony may not be successful in implementing its hardware, software and content integration strategy.
Sony believes that the utilization ofutilizing broadband networks to facilitate the integration of hardware, software and content is essential tofor differentiating itself in the marketplace. Sony also believes that this strategy will eventually lead to consistent revenue streams. However, this strategy depends on the development (both inside and outside of Sony) of certain network technologies, coordination among Sony’s various business units, and the standardization of technological and interface specifications across business units and within industries. If Sony is not successful in implementing this strategy, it could adversely affect Sony’s mid- to long-term competitiveness.
 
Sony’s cooperation and alliances with, and strategic investments in, third parties may not produce successful results.

Sony’s utilization of joint ventures and alliances within strategic business areas may not be successful.
The composition of Sony increasingly relies on alliances,during the last several years has reflected a shift towards the establishment of joint ventures and strategic alliances in order to supplement or replace functions that were previously performed by divisions of Sony Corporation or wholly-owned subsidiaries, to mitigate the burden of substantial investments includingand to achieve operating efficiencies through cooperation with other companies.
Sony currently has investments in suchseveral joint ventures, asincluding Sony Ericsson Mobile Communications, AB (“Sony Ericsson”), S.T. Liquid Crystal Display Corporation (“ST-LCD”) and other companies, in order to develop and introduce new products and services, mitigate the burden of substantial investments and achieve operating efficiencies through cooperation.. In April 2004, Sony established S-LCD, a joint venture in partnership with Samsung for the production of 7th generation amorphous TFT LCD panels. In December 2003,August 2004, Sony also announced that it has signed a binding letter of intent to form a jointly-ownedcombined its recorded music companybusiness outside of Japan with the recorded music business of Bertelsmann AG, to be called Sonyforming the jointly-owned company, SONY BMG. The formation of the joint venture is dependent upon regulatory approval in the United States and the European Union. If this or any alliances and joint ventures cannot be implemented due to lack of regulatory approval, Sony may not be able to achieve its objectives. In addition, if, in the case of existing alliances, joint ventures and strategic investments, Sony and its partners are not able to reach their common financial objectives successfully, Sony’s financial performance as a whole may be adversely affected. Sony’s financial performance may also be temporarily adversely affected bytemporarily or in the establishmentmedium-term during the investment period of those alliances, joint ventures and strategic investments even if Sony and its partners areremain on a course to achieve theirthose common objectives. Recent examplesA recent example of how Sony’s financial performance has been adversely affected in the course of these types of relationships areis the equity in net loss of Sony Ericsson incurred inlosses recorded for S-LCD during the fiscal year ended March 31, 2003, totalling 20.82006 of 7.2 billion yen (Sony Ericsson turned profitableyen. Managing the growing number of joint ventures and strategic alliances, and, in particular, dealing with the fiscal year ended March 31, 2004),legal and cultural differences that can arise in such relationships, represents a risk. In addition, by participating in joint ventures or strategic alliances, Sony may encounter conflicts of interest, may not maintain sufficient control over the equity in netjoint venture or strategic alliance, including over cash flow, and may be faced with an increased risk of the loss of Crosswave

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Communications Inc. amounting to 1.4 billion yen in the fiscal year ended March 31, 2004, which commenced reorganization proceedings under the Corporate Reorganization Law of Japan.proprietary technology or know-how.
 
Sony’s physical facilities and information systems are subject to damage as a result of disasters, outages, malfeasance or similar events.
Sony’s physical facilities and information systems are subject to damage as a result of disasters, outages, malfeasance or similar events.

     Sony headquarters, some of Sony’s major data centers and many of Sony’s most advanced device manufacturing facilities, including those for semiconductors, are located in Japan, where the possibility of disaster or damage from earthquakeearthquakes is generally higher than in other parts of the world. In addition, Sony’s offices and facilities, including those used for research and development, material procurement, manufacturing, motion picture and television production, logistics, sales and services are located throughout the world and are subject to possible


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destruction, temporary stoppage or disruption as a result of any number of unexpected events. Furthermore,If any of these facilities or offices were to experience a significant loss as a result of any of the above events, it could disrupt Sony’s operations, delay production, shipments and revenue, and result in large expenses to repair or replace these facilities or offices.
In addition, as network and information systems have become moreincreasingly important to Sony’s operating activities, network and information system shutdowns caused by unforeseen events such as power outages, disasters, terrorist attacks, hardware or software defects, computer viruses and computer viruseshacking pose increasing risks. Such an event could also result in the disruption of Sony’s operations, delay production, shipments and recognition of revenue, and result in large expenditures necessary to repair or replace such network information systems. Furthermore, Sony’s operating activities could be subject to risks as do possiblecaused by misappropriation, misuse, leakage, falsification, and disappearance of internal databases,information, including customerthat of customers and vendor data.

vendors. Judging from the experience of other similarly situated companies, it is possible that Sony could be exposed to significant monetary liability if such risks were to materialize, and it is also possible that such events could harm Sony’s reputation and credibility. Considering the increasing social awareness concerning the importance of personal information and relevant legislation (Refer to “Government Regulations” in “Item 4.Information on the Company”), such risks are increasing particularly for businesses that handle a large amount of customer and consumer data. Although Sony continues to take precautions against such unforeseen risks, such as by maintaining backup and other redundancies for major data centers and undertaking efforts to educate operators and administrators who have access to databases about appropriate ways to protect such information, these measures may be inadequate,insufficient, and Sony may be unable to avoid or prevent such events. If such an event weresituations.

Sony is subject to occur, it could impair Sony’s operational activities, generate expenses relatingfinancial and reputational risks due to physical or personal damage, or hurt Sony’s brand image.product quality and liability issues.
 
Sony is subject to financial and reputational risks due to product quality and liability issues.

Sony products, such as software (including software for mobile phone handsets) and electronic devices including semiconductors are becoming increasingly sophisticated and complicated as rapid advancements in technologies occur, and as demand increases for digital equipment. At the same time, product quality and liability issues present greater risks. In the first half of the fiscal year ended March 31, 2002, Sony recalled products in the mobile phone handset business for quality reasons, which resulted in increased after-sales service expenses of 18.6 billion yen. Sony’s efforts to manage the rapid advancements in technologies and increased demand, as well as to control product quality, may not be successful, and if they are not, Sony may incur expenses such as thosein connection with, for example, product recalls, service and lawsuits, and Sony’s brand image and reputation for qualityas a producer of high-quality products may suffer. These issues are not only relevant to the final Sony products that are sold directly to customers but also to the final products of other companies that are equipped with Sony’s components, such as the semiconductors mentioned above. An example of these issues is the recording of a 51.2 billion yen provision during the fiscal year ended March 31, 2007 that related to the recalls by Dell Inc., Apple Inc. and Lenovo, Inc. of notebook computer battery packs that use lithium-ion battery cells manufactured by Sony as well as the subsequent global replacement program initiated by Sony for certain notebook computer battery packs used by Sony and several other notebook computer manufacturers that use lithium-ion battery cells manufactured by Sony (refer to “Performance by Product Category” for “Electronics” within “Operating Results for the Fiscal Year Ended March 31, 2007” in “Item 5.Operating and Financial Review and Prospects”).
 
Sony may be adversely affected by its employee benefit obligations.

Sony may be adversely affected by its employee benefit obligations.

Sony recognizes anthe unfunded pension obligation (in an amount equal toas consisting of the (i) its Projected Benefit Obligation (“PBO”) less (ii) the fair value of pension plan assetsassets. Actuarial gains and accruedlosses are included in pension and severance costs) as a pension costexpenses in a systematic and gradual manner over employees’ average remaining service periods as required underin a manner consistent with FAS No. 87, “Employers’ Accounting for Pensions”.Pensions,” FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” and the related amendments to those standards. Any decrease of the pension asset value due to low returnreturns from investments or increase ofincreases in the PBO due to a lower discount rate, mayincreases in rates of compensation and certain other actuarial assumptions would increase the unfunded pension obligations, resultingand could, subject to the provisions of FAS No. 87, result in an increase in pension expenses recorded as cost of sales or as a selling, general and administrative expense. Refer to Note 1314 of Notes to Consolidated Financial Statements for more information regarding Sony’s pension and severance plans. Also refer to “Critical Accounting Policies” in “Item 5.Operating and Financial Review and Prospects”.Prospects.

”

Most pension assets and liabilities recognized on Sony’s consolidated balance sheets relate to Japanese plans, which are subject to the Japanese WelfareDefined Benefit Corporate Pension Insurance LawPlan Act pursuant to which Sony is required to


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meet certain financial criteria including periodic actuarial revaluation and annual settlement of gain or loss of the plan. In case of a plan deficit,the eventuality that is in excess of the actuarial reserve required by the

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law overexceeds the fair value of pension assets, Sony may be required to make an additional contribution to the plan, which would reduce consolidated cash flow.
 
Sony may be accused of infringing on others’ intellectual property rights and may not be able to continue to obtain necessary licenses.

Changes in Sony’s tax rates or exposure to additional tax liabilities could adversely affect its earnings and financial condition.

Sony is subject to income taxes in Japan and numerous other jurisdictions. Significant judgment is required in determining its worldwide provision for income taxes. In the ordinary course of our business, there are many transactions, including intercompany charges, and calculations where the ultimate tax determination is uncertain. Also, Sony’s future effective tax rates could be unfavorably affected by changes in the mix of earnings in countries with differing statutory rates.
Further, Sony is subject to continuous examination of its income tax returns by tax authorities. As a result, Sony regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. However, there can be no assurance that the outcomes of these examinations will not have an adverse effect on Sony’s operating results and financial condition.
In addition, if Sony is unable to generate sufficient future taxable income in certain jurisdictions, or if there is a significant change in the actual effective tax rates or the time period within which the underlying temporary differences become taxable or deductible, Sony could be required to increase its valuation allowances against its deferred tax assets resulting in an increase in its effective tax rate and an adverse impact on future operating results.
Sony’s business could suffer as a result of adverse outcomes of current or future litigation and regulatory actions.
Sony faces the risk of litigation and regulatory proceedings in connection with its operations. Lawsuits, including regulatory actions, may seek recovery of very large, indeterminate amounts or limit Sony’s operations, and the possibility that they may arise and their magnitude may remain unknown for substantial periods of time. A substantial legal liability or adverse regulatory outcome could have a material adverse effect on Sony’s business, results of operations, financial condition, and reputation.
Sony may be accused of infringing others’ intellectual property rights and be liable for significant damages.
Sony’s products incorporate a wide variety of technologies. Claims have been and could be asserted against Sony that such technology infringes the intellectual property owned by others. Such claims might require us to enter into settlement or license agreements, to pay significant damage awards, and/or to face a temporary or permanent injunction prohibiting Sony from marketing or selling certain of its products, which could have a material adverse effect on Sony’s business, results of operations, financial condition, and reputation.
Sony is dependent upon certain intellectual property rights of others, and the outcome of anySony may not be able to continue to obtain necessary licenses to employ technology covered by such claim would be uncertain. In addition, manyrights.
Many of Sony’s products are designed to includeunder the license of patents and other intellectual property licensedrights from third parties.parties who have developed technologies that are protected by such rights. Based upon past experience and industry practice, Sony believes that it will be able to obtain or renew licenses relating to various intellectual properties useful in its business that it needs in the future; however, such licenses may not be available at all or on acceptable terms.terms, and Sony may need to redesign or discontinue marketing or selling such products as a result.
 
Increased reliance on external suppliers may increase financial, reputational and other risks to Sony.

Increased reliance on external suppliers may increase financial, reputational and other risks to Sony.

With the increasing necessity of pursuing quick business development and high operating efficiency with limited managerial resources, Sony increasingly procures from third-party suppliers components such as plasma panels and(including LCD panels for televisions,televisions), and technologies such(such as wireless technologiesoperating systems for mobile handsets and operating software for Sony’s PCs and for personal digital assistants.PCs). In addition, it consigns to external suppliers extensive activities including procurement, manufacturing, logistics, sales and other services. Reliance on outside sources increases the chanceschance that Sony will be unable to prevent products from incorporating defective or


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inferior third-party technology or components. Products with such defects can adversely affect Sony’s consolidated sales and its reputation for quality products. This reliance on external suppliers may also expose Sony to the effects of an external suppliers’ insufficient compliance with applicable regulations or infringement of third-party intellectual property rights.
 
Sony is subject to environmental and occupational health and safety regulations that can increase the costs of operations or limit its activities.

Sony is subject to environmental and occupational health and safety regulations that can increase the costs of operations or limit its activities.

Sony is subject to a broad range of environmental and occupational health and safety laws and regulations, including laws and regulations relating to matters such as reductionsair pollution, water pollution, the management, elimination or prohibitions inreduction of the use of harmfulhazardous substances, comprehensive compliance and risk management practices in manufacturing activities and products, decreases in the level of standby power of certain products, protection of natural resources and remediation as a result of certain manufacturing operations and thewaste management, recycling of products, batteries and packaging materials.materials, site remediation and worker and consumer health and safety. These regulations could become more stringent or additional regulations could be adopted in the future, which could cause us to incur additional compliance costs or limit our activities. Further, a failure to comply with applicable environmental or health and safety laws could result in fines, penalties, legal judgments or other costs or remediation obligations. Such a finding of noncompliance could also injure our brand image. Such events could adversely affect our financial performance.
We monitor and evaluate new environmental and health and safety requirements that may affect our operations. The European ParliamentUnion (the “EU”) has enacted two directives relevant to our business: the Restriction of Hazardous Substances Directive (“RoHS”) and the Council of the European Union have published directives on waste electricalWaste Electrical and electronic equipment and on the restriction ofElectronic Equipment Directive (“WEEE”). RoHS restricts the use of certain hazardous substances in electrical and electronic equipment. These directives will require electronicsequipment marketed in the EU. WEEE makes producers after August 2005of electrical and electronic equipment financially responsible for the collection of certain products from end users who wish to bear the costdispose of collection,them and for subsequent treatment, recoveryrecycling and safe disposal of future products from end-users and to ensure after June 2006 that new electrical and electronic equipment does not contain specified hazardous substances. While the cost of these directives to Sony cannot be determined beforethose products. Similar regulations are adoptedbeing formulated in individual member states, it may be substantial. Inother parts of the event it is determined that Sony has not compliedworld, including in a material way with certain environmental laws and regulations, Sony mayChina. We could incur remediation cost or sustain injury to its brand image. Sony’s activities also may be limited if Sony is unablesubstantial costs to comply with suchRoHS, WEEE and other similar programs that might be enacted in the future.
In addition, the EU’s Registration, Evaluation, Authorisation and Restriction of Chemicals program (“REACH”) came into effect as of June 2007. In general, REACH requires manufacturers, users and importers of a broad range of chemical substances to register for these chemicals and uses of chemicals up and down the supply chain and perform a range of tests and assessments on those substances and make the results available to the public and the EU regulators. Going forward, as registrations and test data are processed and evaluated under the REACH program, actions could be taken that could affect the cost and availability of certain chemicals, and users may have to shift to the use of more expensive and/or less effective substitutes. The various obligations under REACH are to be phased in over a period of time, and we will continue to evaluate the potential impact of these regulations, including whether REACH could directly or indirectly increase our costs or restrict our activities, which could adversely affect Sony’s results.have an adverse impact on our financial performance.
 
Sony is subject to the risks of operations in different countries.

     A substantial portion

Sony is subject to the risks of operations in different countries.
Most of Sony’s activities are conducted outside of Japan, including in developing and emerging markets. Sony operates its manufacturing subsidiaries in 16 countries and its sales subsidiaries in 43 countries. Countries where Sony manufactures its principal products are Japan, Malaysia, China, the U.S., the U.K., Singapore, Spain and Mexico. Sony seeks advantages from international operations, such as low-cost production and the mid- to long-term potential of consumer markets in China, particularly in the Electronics and Game segments, and the potential prolonging of product life cycles in the current hardware business through sales to markets in Eastern Europe, the Middle East and East Asia (excluding Japan) in the Game segment.

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However, internationalInternational operations bring challenges. Production in China and other Asian countries of Electronicselectronics products increases the time necessary to supply products to Europe and the U.S., which can make it more difficult to meet changing customer demand and preferences. Concentration of the production of personal computerPC components in China and Taiwan could lead to production interruptions if anothera catastrophe or widespread contagion, similar to the spread of Severe Acute Respiratory Syndrome (“SARS”), occurs in the region. Further, Sony may encounter difficulty in planning and managing operations due to unfavorable political or economic factors, such as instability in the Middle East resulting from the Iraq War, the suspension of trading of the peso and resulting disorder in Argentina, cultural and religious conflicts, foreign exchange controls, or unexpected legal or regulatory changes such as import or export controls, nationalization of assets or restrictions on the repatriation of returns from foreign investments.

Sony is subject to competition from firms that may be more specialized.


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Sony’s businesses face a broad range of competitors, from large international companies to an increasing number of relatively small, rapidly growing,American Depositary Shareholders have fewer rights than shareholders and highly specialized organizations. Sony has a portfolio of businesses in different industries while many of its competitors specialize in one or more of these business areas. As a result, Sony may not fund or invest in certain of its businessesbe able to the same degree that its competitors do, and these companies may have greater financial, technical, and marketing resources available to them than the businesses of Sony against which they compete.enforce judgments based on U.S. securities laws.
 
American Depositary Share (“ADS”) holders have fewer rights than shareholders and may not be able to enforce judgments based on U.S. securities laws.

The rights of shareholders under Japanese law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining Sony’s accounting books and records and exercising appraisal rights are available only to shareholders of record. Because the depositary, through its custodian agents, is the record holder of the shares underlying the ADSs,American Depositary Shares (“ADSs”), only the depositary can exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares underlying ADSs in accordance with the instructions of ADS holders and will pay the dividends and distributions collected from Sony. However, ADS holders will not be able to bring a derivative action, examine Sony’s accounting books and records, or exercise appraisal rights through the depositary.

Sony Corporation is incorporated in Japan with limited liability. A majority of our directors and corporate executive officers are non U.S. residents, and a substantial portion of the assets of Sony Corporation and the assets of our directors and corporate executive officers are located outside the U.S. As a result, it may be more difficult for investors to enforce against Sony Corporation or such persons the judgments obtained in U.S. courts predicated upon the civil liability provisions of the Federalfederal and state securities laws of the U.S. or judgments obtained in other courts outside Japan. There is doubt as to the enforceability in Japanese courts, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the Federalfederal and state securities laws of the U.S.

Item 4.     Information on the Company

Item 4.Information on the Company

History and Development of the Company

Sony Corporation, the ultimate parent company of the Sony, Group, was established in Japan in May 1946 as Tokyo Tsushin Kogyo Kabushiki Kaisha, a joint stock company (Kabushiki Kaisha) under the Japanese Commercial Code (Shoho).law. In January 1958, it changed its name to Sony Kabushiki Kaisha (“Sony Corporation” in English).
In December 1958, Sony Corporation was listed on the Tokyo Stock Exchange (the “TSE”). In June 1961, Sony Corporation issued American Depositary Receipts (“ADRs”) in the U.S.
In March 1968, Sony Corporation established in Japan CBS/Sony Records Inc., in Japan, currently Sony Music Entertainment (Japan) Inc. (“SMEJ”), as a 50:50 joint venture company between Sony Corporation and CBS Inc. in the U.S. In January 1988, SMEJ became a wholly-owned subsidiary of Sony Corporation. In November 1991, SMEJ was listed on the Second Section of the TSE.
In September 1970, Sony Corporation was listed on the New York Stock Exchange (the “NYSE”).
In August 1979, Sony Corporation established in Japan Sony Prudential Life Insurance Co., Ltd., in Japan, currently Sony Life Insurance Co., Ltd. (“Sony Life”), as a 50:50 joint venture company between Sony Corporation and The Prudential Insurance Company of America. In March 1996, Sony Life became

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a wholly-owned subsidiary of Sony Corporation. Corporation, and in April 2004, with the establishment of a financial holding company Sony Financial Holdings Inc. (“SFH”), Sony Life became a wholly-owned subsidiary of SFH.
In July 1984, Sony Magnescale Inc., a subsidiary of Sony Corporation and currently Sony Precision Technology Inc., was listed on the Second Section of the TSE. In July 1987, Sony Chemicals Corporation, a subsidiary of Sony Corporation, was listed on the Second Section of the TSE.
In January 1988, Sony Corporation acquired CBS Records Inc., a music business division of CBS Inc. in the U.S. In January 1991, CBS Records Inc. changed its name to Sony Music Entertainment Inc. (“SMEI”). In November 1989, Sony Corporation acquired Columbia Pictures Entertainment, Inc. in the U.S. In August 1991, Columbia Pictures Entertainment, Inc. changed its name to Sony Pictures Entertainment Inc. (“SPE”). In November 1991, SMEJ was listed on the Second Section of the TSE.
In November 1993, Sony established Sony Computer Entertainment Inc. (“SCEI”) in Japan.
In January 2000, acquisition transactions by way of exchanges of stock wherebywere completed such that SMEJ, Sony Chemicals Corporation, and Sony Precision Technology Inc. became wholly-owned subsidiaries of Sony Corporation, were completed. Corporation.


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In June 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which iswas intended to be linked to the economic value of Sony Communication Network Corporation (“SCN”). , which was renamedSo-net Entertainment Corporation(“So-net”) in October 2006. All shares of subsidiary tracking stock were terminated and converted to shares of Sony’s common stock in December 2005. SCN was listed on the Mother’s market of the TSE in December 2005. Sony Corporation continues to hold a majority of the shares ofSo-net.
In October 2001, Sony Corporation established Sony Ericsson Mobile Communications, AB (“Sony Ericsson”), as a 50:50 joint venture company between Sony Corporation and Telefonaktiebolaget LM Ericsson of Sweden. Sweden, was established.
In October 2002, Aiwa Co., Ltd. (“Aiwa”) became a wholly-owned subsidiary of Sony Corporation. In December 2002, Aiwa was merged into Sony Corporation merged with Aiwa. Corporation.
In June 2003, Sony Corporation adopted the “Company with Committees” system in line with the revised Japanese Commercial Code (referCode. (Refer to “Board Practices” in “Item 6.Directors, Senior Management and EmployeesEmployees.”).
In April 2004, Sony Corporation established Sony Financial Holdings Inc. (“SFH”)SFH in Japan. Sony Life, Sony Assurance Inc., and Sony Bank Inc. became subsidiaries of SFH.
In April 2004, S-LCD Corporation (“S-LCD”), a joint venture between Sony Corporation and Samsung Electronics Co., Ltd. of Korea for the manufacture of amorphous thin film transistor (“TFT”) liquid crystal display (“LCD”) panels, was established in Korea.

In August 2004, Sony combined its worldwide recorded music business, excluding its recorded music business in Japan, with the worldwide recorded music business of Bertelsmann AG forming the 50:50 joint venture, SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”).
In April 2005, a consortium led by Sony Corporation of America (“SCA”) and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, completed the acquisition of Metro-Goldwyn-Mayer Inc. (“MGM”).
Sony Corporation’s registered office is located at 7-35, Kitashinagawa 6-chome, Shinagawa-ku,7-1, Konan1-chome, Minato-ku, Tokyo 141-0001,108-0075, Japan, telephone +81-3-5448-2111.

+81-3-6748-2111.

The agent in the U.S. for purposes of this Item 4 is Sony Corporation of America, 550 Madison Avenue, New York, NY 10022 (Attn: Office of the General Counsel).
Principal Capital Investments
 
Principal Capital Investments

In the fiscal years ended March 31, 2002, 20032005, 2006 and 2004,2007, Sony’s capital expenditures (additions to fixed assets on the balance sheets) were 326.7356.8 billion yen, 261.2384.3 billion yen and 378.3414.1 billion yen, respectively. RegardingSony’s capital expenditures are expected to be 440 billion yen during the fiscal year ending March 31, 2008. For a breakdown of principal capital expenditures and divestitures (including interests in other companies), refer to “Item 5.Operating and Financial Review and ProspectsProspects.”. Sony invested 175approximately 150 billion yen in the semiconductor business during the fiscal year ended March 31, 2004. 1902007. Sony plans to invest approximately 130 billion yen will be invested in the semiconductor business in the fiscal year ending March 31, 2005. To finance2008. Sony issued an 80 billion yen syndicated loan in June 2006, and a 130 billion yen syndicated loan in December 2006 and has raised additional funds generated internally to be used for general corporate purposes, including capital expenditures for the development and manufacturing of semiconductors such as Cell, a highly-advanced processor that will be embedded in a broad range of next-generation digital consumer electronics products, andrelated to key devices including display devices, Sony raised 250 billion yen through the issuance of euro yen zero coupon convertible bonds in December 2003.and debt redemption. Refer to “Property, Plant and Equipment” below for a geographic distribution of these investments.
Business Overview
Important Changes during the Fiscal Year
Effective April 1, 2006, Sony reclassified royalty income as a component of sales and operating revenue, rather than as a component of other income as previously recorded. As a result, this reclassification has also been made to sales and operating revenue, operating income and other income for the fiscal years ended March 31, 2005 and 2006


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Business Overview

to conform with the presentation of these items for the fiscal year ended March 31, 2007. Royalty income for the fiscal year ended March 31, 2007 was 35.1 billion yen. Royalty income for the fiscal years ended March 31, 2005 and Organizational Structure2006 was 31.7 billion yen and 35.4 billion yen, respectively. These amounts were recorded primarily within the Electronics segment.
Effective April 1, 2005, Sony no longer breaks out its music business as a reportable segment as it no longer meets the materiality threshold. Accordingly, the results for Sony’s music business are now included within All Other and the results for the fiscal year ended March 31, 2005 have been reclassified to All Other for comparative purposes. Results for the fiscal years ended March 31, 2006 and 2007 in All Other include the results of SMEI’s music publishing business and SMEJ, excluding Sony’s Japan-based disc manufacturing business which, effective April 1, 2005, has been reclassified to the Electronics segment. However, results for the fiscal year ended March 31, 2005 in All Other include the consolidated results for SMEI’s recorded music business for the period through August 1, 2004, as well as the results for SMEI’s music publishing business and SMEJ excluding Sony’s Japan-based disc manufacturing business.
On April 8, 2005, a consortium led by SCA and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, completed the acquisition of MGM for a total purchase price of approximately 5.0 billion U.S. dollars. In conjunction with the acquisition, SPE entered into agreements to co-finance and produce new motion pictures with MGM, and to distribute MGM’s existing film and television content through SPE’s global distribution channels. In June 2006, MGM and SPE modified this arrangement with respect to the co-financing of motion pictures and further to allow MGM to bring its worldwide television distribution business in-house and to consolidate substantially all of its worldwide home entertainment distribution activities with another major studio. MGM continues to operate under theMetro-Goldwyn-Mayer

name as a private company headquartered in Los Angeles. As part of the acquisition, SCA invested 257 million U.S. dollars in exchange for 20 percent of the total equity capital. However, based on the percentage of common stock owned, Sony records 45 percent of MGM’s net income (loss) as equity in net income of affiliated companies. With respect to equity in net income of affiliated companies, MGM is expected to have no effect on equity in net income during the fiscal year ending March 31, 2008, due to the fact that Sony no longer has any book basis in MGM as of March 31, 2007.

In August 2004, Sony combined its recorded music business outside of Japan with the recorded music business of Bertelsmann AG forming SONY BMG, after approval from, among others, the European Commission competition authorities. On December 3, 2004, Impala, an international association consisting of 2,500 independent recorded music companies, applied for annulment of the decision to clear the merger. On July 13, 2006, the European Court of First Instance overruled the Commission’s decision to allow the merger to go forward, requiring the Commission to re-examine the merger. The following table sets forthtransaction was renotified, in accordance with applicable EU merger control rules, on January 31, 2007, and an in-depth investigation was opened on March 1, 2007. While the significant subsidiaries owned, directly or indirectly, byCommission completes its reexamination, Sony Corporation.
continues to account for the results of Sony BMG under the equity method.
Commencing April 1, 2006, Sony has partly realigned its product category configuration in the Electronics segment. Accordingly, results for the previous fiscal year have been reclassified. The primary changes are as shown below:
       
Country of(As of March 31, 2004)
Name of companyincorporationPercentage owned
Sony EMCS CorporationMain Product JapanPrevious Product Category New Product Category100.0
 
Sony Marketing (Japan) Inc. Low-temperature polysilicon thin film transistor LCD Japan“Semiconductors” 100.0
Sony Computer Entertainment Inc. Japan99.7*
Sony Life Insurance Co., Ltd. Japan100.0
Sony Americas Holding Inc. U.S.A.100.0
Sony Corporation of AmericaU.S.A.100.0
Sony Electronics Inc. U.S.A.100.0
Sony Computer Entertainment America Inc. U.S.A.99.7*
Sony Music Entertainment Inc. U.S.A.100.0
Sony Pictures Entertainment Inc. U.S.A.100.0
Sony Europe Holding B.V. Holland100.0
Sony Europe G.m.b.H. Germany100.0
Sony Computer Entertainment Europe Ltd. U.K.99.7*
Sony Global Treasury Services PlcU.K.100.0
Sony Holding (Asia) B.V. Holland100.0
Sony Electronics Asia Pacific Pte. Ltd. Singapore100.0

“Components”
* Chemical componentOn April 1, 2004, Sony Computer Entertainment Inc., Sony Computer Entertainment America Inc. and Sony Computer Entertainment Europe Ltd. became wholly owned subsidiaries of Sony Corporation.“Other”“Components”


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Products and Services
The following table sets forth Sony’s sales and operating revenue by operating segments. Figures in parentheses indicate percentage of sales and operating revenue.
                         
  Fiscal Year Ended March 31
  2005 2006 2007
  (Yen in millions)
 
Electronics  4,827,663   (67.1)  4,782,173   (63.7)  5,421,384   (65.4)
Game  702,524   (9.8)  918,252   (12.2)  974,218   (11.7)
Pictures  733,677   (10.2)  745,859   (9.9)  966,260   (11.7)
Financial Services  537,715   (7.5)  720,566   (9.6)  624,282   (7.5)
All Other  389,746   (5.4)  343,747   (4.6)  309,551   (3.7)
       
       
Sales and operating revenue  7,191,325   (100.0)  7,510,597   (100.0)  8,295,695   (100.0)
       
       
Electronics
The following table sets forth Sony’s Electronics segment sales and operating revenue by product categories. Figures in parentheses indicate percentage of sales and operating revenue.
                         
  Fiscal Year Ended March 31
  2005 2006 2007
  (Yen in millions)
 
Audio
  571,864   (11.8)  536,187   (11.2)  522,879   (9.7)
Video
  1,036,328   (21.5)  1,021,325   (21.4)  1,143,120   (21.1)
Televisions
  921,195   (19.1)  927,769   (19.4)  1,226,971   (22.6)
Information and Communications
  816,150   (16.9)  842,537   (17.6)  950,461   (17.5)
Semiconductors
  184,235   (3.8)  172,249   (3.6)  205,757   (3.8)
Components
  751,097   (15.6)  800,716   (16.7)  852,981   (15.7)
Other
  546,794   (11.3)  481,390   (10.1)  519,215   (9.6)
       
       
Electronics Total  4,827,663   (100.0)  4,782,173   (100.0)  5,421,384   (100.0)
       
       
Note:
Sony manages the Electronics segment as a single operating segment. However, Sony believes that the product category information in the Electronics segment is useful to investors in understanding the sales contributions of the products in this business segment.
In the Electronics segment, Sony is engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments and devices for consumer and professional markets. Sony’s principal manufacturing facilities are located in Japan, Malaysia, China, the U.S., the U.K.,Singapore, Spain and Mexico, and its products are marketed by sales subsidiaries and unaffiliated local distributors as well asand sold through direct sales via the Internet throughout the world. In addition to internationalizing its production operations, Sony has been promoting the transfer of research and development activities and management functions overseas to bring its overseas operations into closer proximity to local communities and markets.
Audio:
“Audio” includes home audio, portable audio, car audio, and car navigation systems.
Video:
“Video” includes video cameras, digital cameras, DVD-Video players/recorders, Blu-ray disc players/recorders, and video decks.


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     In

Televisions:
“Televisions” includes LCD televisions, televisions incorporating cathode ray tubes (“CRTs”), rear-projection televisions, and computer displays.
Information and Communications:
“Information and Communications” includes PCs, printer systems, broadcast- and professional-use audio, video, and monitors and other professional-use equipment.
Semiconductors:
“Semiconductors” includes LCDs, charge coupled devices (“CCDs”), CMOS image sensors, and other semiconductors.
Components:
“Components” includes optical pickups, batteries, audio/video/data recording media, and data recording systems.
Other:
“Other” includes sales to outside customers, such as sales of mobile phone handsets to Sony Ericsson by Sony EMCS Corporation (“Sony EMCS”), CD, DVD, Blu-ray disc manufacturing and physical distribution businesses, and products and services that are not included in the above categories.
Game segment,
Sony Computer Entertainment Inc. (“SCEI”) develops, produces, manufactures, markets and distributes licensesPlayStation®, PS onetm, PlayStation®2 (“PS2”), PSP® (PlayStation®Portable) (“PSP”) and publishes home-use entertainmentPLAYSTATION®3 (“PS3tm”) hardware and related software. This business is principally conducted through SCEI in Japan. Sony Computer Entertainment America Inc. (“SCEA”) in the U.S. and Sony Computer Entertainment Europe Ltd. (“SCEE”) in Europe are both wholly-owned subsidiaries of SCEI.

     In the Music segment, Sony is engaged in the development, production, manufacture, marketing and distribution of recorded music and music videos in a variety of commercial and electronic formats and across all musical genres, for the world outside of Japan through SMEI and in Japan through SMEJ.

     In the Pictures segment, Sony is engaged in the development, production, marketing, distribution, and broadcasting of image-based software, including film, video, television, and new digital entertainment technologies, principally through SPE.

     In the Financial Services segment, Sony conducts insurance operations primarily through Sony Life, a Japanese life insurance subsidiary, and Sony Assurance Inc. (“Sony Assurance”), a Japanese non-life insurance subsidiary. Sony is engaged in a leasing and credit financing business in Japan through Sony Finance International Inc. (“Sony Finance”). Sony also conducts an Internet-based banking business in Japan through Sony Bank Inc. (“Sony Bank”), which is an 80 percent directly owned subsidiary of SFH. On April 1, 2004, Sony established SFH by separating a part of Sony Corporation. SFH, which is a

17

holding company of Sony Life, Sony Assurance and Sony Bank, will integrate varied financial services including savings and loans, and offer individual customers high added-value products and high-quality services.

In the Other segment, Sony is engaged in an in-house oriented information system service business in Japan, an advertising agency business in Japan, an Internet-related service business mainly in Japan, and an Integrated Circuit (“IC”) card business in Japan.

Products and Services

     At the beginning of the fiscal year ended March 31, 2004, Sony partly realigned its business segment configuration. In the Other segment, expenses incurred in connection with the creation of a network platform business have been transferred out of the Other segment and reclassified as unallocated corporate expenses, because the expected future benefits of this business will be spread across the Sony Group. In the Music segment, certain non-core businesses of SMEJ such as media, animation, character and cosmetics, were transferred to the newly-established Sony Culture Entertainment, Inc. (“SCU”) and SCU was classified in the Other segment. In accordance with these realignments, results for the previous fiscal years have been reclassified to conform to the presentation for the fiscal year ended March 31, 2004.

At the beginning of the fiscal year ended March 31, 2004, Sony partly realigned its product category configuration in the Electronics segment. Accordingly, results of the previous years have been reclassified. The primary changes are as follows:

Main ProductPrevious Product CategoryNew Product Category
Set-top box“Televisions”“Video”
Computer display“Information and Communications”“Televisions”
LCD television“Information and Communications”“Televisions”
CRT“Components”“Televisions”

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The following table sets forth Sony’s sales and operating revenue by operating segments and product categories. Figures in parentheses indicate percentage of sales and operating revenue.

              
Year Ended March 31
200220032004
(Yen in millions)
Electronics            
 
Audio
  747,469   682,517   623,582 
   (9.9)  (9.1)  (8.3)
 
Video
  847,311   851,064   948,111 
   (11.2)  (11.4)  (12.6)
 
Televisions
  984,290   950,166   917,207 
   (13.0)  (12.7)  (12.2)
 
Information and Communications
  998,773   836,724   834,757 
   (13.2)  (11.2)  (11.1)
 
Semiconductors
  182,276   204,710   253,237 
   (2.4)  (2.7)  (3.4)
 
Components
  511,579   527,782   623,799 
   (6.8)  (7.1)  (8.3)
 
Other
  500,852   490,350   557,707 
   (6.6)  (6.6)  (7.4)
   
   
   
 
 Segment Total  4,772,550   4,543,313   4,758,400 
   (63.0)  (60.8)  (63.5)
   
   
   
 
Game  986,529   936,274   753,732 
   (13.0)  (12.5)  (10.1)
   
   
   
 
Music  541,418   512,908   487,457 
   (7.1)  (6.9)  (6.5)
   
   
   
 
Pictures  635,841   802,770   756,370 
   (8.4)  (10.7)  (10.1)
   
   
   
 
Financial Services  480,190   509,398   565,752 
   (6.3)  (6.8)  (7.5)
   
   
   
 
Other  161,730   168,970   174,680 
   (2.1)  (2.3)  (2.3)
   
   
   
 
 Sales and operating revenue  7,578,258   7,473,633   7,496,391 
   
   
   
 

Notes:

Sony manages the Electronics segment as a single operating segment. However, Sony believes that the product category information in the Electronics segment is useful to investors in understanding the sales contributions of the products in this business segment.

In the third quarter beginning October 1, 2003, regarding Sony Life, the recognition method of insurance premiums received on certain products was changed from being recorded as revenues to being offset against the related provision for future insurance policy benefits, reducing revenue in the Financial Services segment in the fiscal year ended March 31, 2004, by 30.8 billion yen. This change did not have a material effect on operating income.

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Electronics
Audio:

     “Audio” includes home audio, portable audio, car audio and car navigation systems.

Video:

     “Video” includes video cameras, digital still cameras, video decks, DVD-Video players/recorders, and set-top boxes such as digital broadcasting reception systems.

Televisions:

     “Televisions” includes televisions incorporating cathode ray tubes (“CRTs”), projection televisions, plasma televisions, liquid crystal displays (“LCDs”) televisions, computer displays, and CRTs.

Information and Communications:

     “Information and Communications” includes PCs, printer systems, personal digital assistants, and broadcast- and professional-use audio, video and monitors and other professional-use equipment.
     This category contained the results of Sony’s mobile phone handset business until the end of September 2001. On October 1, 2001, the mobile handset business was transferred to Sony Ericsson leaving only sales of mobile handsets manufactured by Sony for Sony Ericsson to appear in the Other category of Electronics. Sales figures for past fiscal years have not been restated in either category.

Semiconductors:

     “Semiconductors” includes LCDs, charge coupled devices (“CCDs”) and other semiconductors.

Components:

     “Components” includes optical pickups, batteries, audio/video/data recording media, and data recording systems.

Other:

     “Other” includes Aiwa products which was merged into Sony Corporation as of December 1, 2002, sales to outside customers by Sony EMCS Corporation (“Sony EMCS”), and products and services which are not included in the above categories.
     Sales of mobile phone handsets manufactured at Sony EMCS for Sony Ericsson have been recorded in this category since October 1, 2001.

Game

SCEI develops, produces, manufactures, markets and distributes PlayStation, PS one and PlayStation 2 hardware and related software in Japan, and is developing the next-generation entertainment system. SCEA and SCEE market and distribute PlayStation, PS one, PS2, PSP and PlayStation 2PS3 hardware, and develop, produce, manufacture, market and distribute related software in the U.S. and Europe. SCEI, SCEA and SCEE enter into licenses with third-party software developers.

 
Music

     SMEI and SMEJ produce recorded music and music videos through contracts with many artists worldwide in all musical genres. SMEI and SMEJ produce, manufacture, market and distribute CDs, MDs, DVDs, Super Audio CDs, and pre-recorded audio and video cassettes and produce and manufacture CD-ROMs and DVD-ROMs.

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The Music segment has an extensive and geographically diversified software manufacturing capacity, with plants in the U.S., Austria, Japan, Brazil, Australia, India, China, Canada, Hong Kong, Chile and Mexico. Software is manufactured for the Music segment, the Game segment, the Pictures segment and third parties. In addition, the Music segment distributes digital music product through online music services and other emerging digital formats.

 
Pictures

Global operations in the Pictures segment encompass motion picture production, acquisition and distribution; television production, acquisition and distribution; home entertainment production, acquisition and distribution; television broadcasting; digital production, online distributioncontent creation and broadband services;distribution; development of new entertainment products and services, and operation of a studio facilities.

facility.

SPE’s motion picture arm, the Columbia TriStar Motion Picture Group, includes SPE’s principal motion picture production organizations, Columbia Pictures, TriStar Pictures, Screen Gems and Sony Pictures Classics, as well as Columbia TriStarSony Pictures Home Entertainment, Sony Pictures Releasing and Columbia TriStar Film DistributorsSony Pictures Releasing International. SPE is analso holds a 7.5 percent equity investorinterest in Revolution Studios and has the rights to market and distribute its motion picture product throughout most of the world. Upon delivery of Revolution Studios’ films, SPE advances a portion of the production cost and then incurs distribution and marketing costs in those markets where SPE distributes. SPE retains a fee for its distribution services in addition to its participation in Revolution Studios’ profits and losses as a result of its equity ownership stake. SPE currently expects the initial theatrical release of the final Revolution Studios’ film under this arrangement to be prior to March 31, 2008.
In conjunction with the acquisition of MGM in April 2005 by SCA and its equity partners, SPE entered into agreements to co-finance and produce new motion pictures with MGM and to distribute MGM’s existing film and television content through SPE’s global distribution channels. In June 2006, MGM and SPE modified this arrangement with respect to the co-financing of motion pictures and further to allow MGM to bring its worldwide


22

television distribution business in-house and to consolidate substantially all of its worldwide home entertainment distribution activities with another major studio.
SPE’s Television Group is primarily comprised of Sony Pictures Television and Sony Pictures Television International with various broadcast channel investments. SPE develops and produces network television series, first-run syndication programming,made-for-cable programming, daytime serials, syndicated games shows, animated series, made for television movies, miniseries and other television programming and distributes such programs to the networks, syndication market and cable markets.

market.

Sony Pictures Digital operates SPE’s digital production, onlinecontent creation and distribution and broadband servicesbusinesses including Sony Online Entertainment, as well as operating Sony Pictures Imageworks Sony Pictures Animation and Sony Pictures Digital Networks.

Animation.

SPE also manages thea studio facility, Sony Pictures Studios, which includes post production facilities, at SPE’s world headquarters in Culver City, California. A second studio facility, thatThe Culver Studios, which was owned and operated by SPE, The Culver Studios, was sold by SPE in April 2004, and2004. SPE is leasing back a portion of this facility for a two-year period.with the lease term expiring on April 30, 2008.
 
Financial Services

TheFinancial Services

In the Financial Services segment, includeson April 1, 2004 Sony established a wholly-owned subsidiary, SFH, a holding company for Sony Life, which underwritesSony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”), with the aim of integrating various financial services including insurance, policies,savings and loans, and offering individual customers high value-added products and high-quality services.
Sony conducts insurance operations primarily for individualthrough Sony Life, a Japanese life insurance products in Japan,company, and sellsSony Assurance, a Japanese non-life insurance products providedcompany, both wholly-owned by SFH. Sony Assurance; Sony Assurance, which conducts an individual automobile and medical insurance business in Japan; Sony Bank, which conductsalso operates an Internet-based banking business including personal loans, mortgage loans, investment trusts, and deposits, for individual customers in Japan; andJapan through Sony Finance,Bank, which conductsis an 88 percent owned subsidiary of SFH. Aside from SFH, Sony is also engaged in a leasing and credit financing business in Japan focusing onthrough Sony Finance International Inc. (“Sony Finance”), a new credit card business for Internet shopping, utilizing a non-contact IC card technology developed by Sony.wholly-owned subsidiary of Sony Corporation.
 
All Other
All Other

     The Other segment is mainly comprised of an in-house oriented information system serviceSMEJ, a Japanese domestic recorded music business that produces recorded music and music videos through contracts with many artists in Japan, an advertising agencyall musical genres; SMEI’s music publishing business, in Japan,which owns and acquires rights to musical compositions, exploits and markets these compositions and receives royalties or fees for their use;So-net, an Internet-related service business subsidiary operating mainly in Japan, a retail seller of imported general merchandise in Japan,Japan; an in-house facilities management business in JapanJapan; a contactless IC card business; and an IC card business.

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advertising agency business in Japan.
Sales and Distribution
 
Sales and Distribution

The following table shows Sony’s sales in each of its major markets for the periods indicated. Figures in parentheses indicate the percentage of worldwide sales and operating revenue.
              
Year Ended March 31
200220032004
(Yen in millions)
Japan  2,248,115   2,093,880   2,220,747 
   (29.7)  (28.0)  (29.6)
United States  2,461,523   2,403,946   2,121,110 
   (32.5)  (32.2)  (28.3)
Europe  1,609,111   1,665,976   1,765,053 
   (21.2)  (22.3)  (23.6)
Other Areas  1,259,509   1,309,831   1,389,481 
   (16.6)  (17.5)  (18.5)
   
   
   
 
 Sales and operating revenue  7,578,258   7,473,633   7,496,391 
   
   
   
 
revenue for which the particular market accounts.
 
Electronics
                         
  Fiscal Year Ended March 31
  2005 2006 2007
      (Yen in millions)    
 
Japan  2,132,462   (29.7)  2,203,812   (29.3)  2,127,841   (25.6)
United States  1,977,310   (27.5)  1,957,644   (26.1)  2,232,453   (26.9)
Europe  1,612,576   (22.4)  1,715,775   (22.8)  2,037,658   (24.6)
Other Areas  1,468,977   (20.4)  1,633,366   (21.8)  1,897,743   (22.9)
       
       
Sales and operating revenue  7,191,325   (100.0)  7,510,597   (100.0)  8,295,695   (100.0)
       
       


23

Electronics
Sony’s electronics products and services are marketed throughout the world under the trademark “Sony”,“Sony,” which has been registered in 204 countries and territories.

In most cases, sales of Sony’s electronics products are made to sales subsidiaries of Sony Corporation located in or responsible for sales in the countries and territories where Sony’s products and services are marketed, and thesemarketed. These subsidiaries then sell those products to local distributors and dealers. In some regions, sales of certain products and services are made directly to local distributors by Sony Corporation.

Sales in the Electronics segment are particularly dependent on seasonality, in addition toseasonal and also vary significantly with the timing of new product introductions and economic conditions of each country. Sales for the third quarter ending December 31 of each fiscal year are generally higher than other quarters of the same fiscal year due to demand in the year-end holiday season.
 
Japan:

     Sony Marketing (Japan) Inc. markets consumer electronics products through retailers and also markets professional electronics products and services. For electronic components, Sony sells products directly to wholesalers and manufacturers.

Japan:
 
United States:

     Sony markets its electronics products and services through Sony Electronics Inc. and other wholly-owned subsidiaries in the U.S.

Sony Marketing (Japan) Inc. markets consumer electronics products through retailers and also markets professional electronics products and services. For electronic components, Sony sells products directly to wholesalers and manufacturers.
 
Europe:

     In Europe, Sony’s consumer electronics products and services are marketed through sales subsidiaries including Sony United Kingdom Limited, Sony Deutschland G.m.b.H., and Sony France S.A. Sales of professional electronics products, electronic components, and services are made through several divisions, differentiated by product, covering all of Europe.

United States:
 
Other Areas:

     In overseas areas other than the U.S. and Europe, Sony’s electronics products and services are marketed through sales subsidiaries including Sony Corporation of Hong Kong Limited, Sony Gulf

22

FZE in the United Arab Emirates, Sony Electrónicos de México, S.A. de C.V., Sony of Canada Ltd., and Sony Australia Limited.

Sony markets its electronics products and services through Sony Electronics Inc. and other wholly owned subsidiaries in the U.S.
 
Game

Europe:
In Europe, Sony’s consumer electronics products and services are marketed through several sales subsidiaries including Sony United Kingdom Limited, Sony Deutschland G.m.b.H., and Sony France S.A. Sales of electronics products for professional use, electronic components, and services are made through several divisions, differentiated by product, covering all of Europe.
Other Areas:
In overseas areas other than the U.S. and Europe, Sony’s electronics products and services are marketed through sales subsidiaries including Sony Corporation of Hong Kong Limited, Sony Gulf FZE in the United Arab Emirates, Sony Electrónicos de México, S.A. de C.V., Sony of Canada Ltd., and Sony Australia Limited.
Game
SCEI, SCEA, SCEE and SCEEsubsidiaries in Asia market and distribute PlayStation, PS one, PS2, PSP and PlayStation 2PS3 entertainment hardware and related software.

Sales in the Game segment are particularly dependent on holiday season demand, in addition to the timing of the introduction of attractive software.software and a significant portion of overall demand is weighted towards the year-end holiday season.
 
Music

     SMEI and SMEJ produce, manufacture, market, and distribute CDs, MDs, DVDs, Super Audio CDs, and pre-recorded audio and video software.

SMEI and its affiliates conduct business in countries other than Japan under“Columbia Records Group”,“Epic Records Group”,“Sony Classical”,“Legacy Recordings” and other labels.Pictures

SMEJ conducts business in Japan under“Sony Records”,“Epic Records”,“Ki/oon Records”,“SMEJ Associated Records”,“Defstar Records”, and other labels.

In May 2004, Sony officially launched the Connect music store, a digital music downloading service. The Connect music store offers consumers music product from SMEI as well as other major and independent labels and independent artists.

 
Pictures

SPE, with global operations in 67 countries, generally retains all rights relating to the worldwide distribution of its internally produced motion pictures, including rights for theatrical exhibition, videocassetteDVD and DVDBlu-ray distribution, pay and free television exhibition and other markets. SPE also acquires distribution rights to motion pictures produced by other companies orand jointly produces films with other studios or production companies, and thesecompanies. These rights may be limited to particular geographic regions, or specific forms of media.media or periods of time. SPE uses its own distribution service business, Sony Pictures Releasing, for the U.S. theatrical release of its films and thosefor the theatrical release of films acquired from and produced by others.


24

Outside the U.S., SPE generally distributes and markets its films through one of its Columbia TriStar Film DistributorsSony Pictures Releasing International subsidiaries. However, inIn certain countries, however, SPE has joint distribution arrangements with other studios or arrangements with independent local distributors.

SPE’s theatrical releasingrelease strategy focuses on offering a diverse slate of films with a mix of genres, talent and budgets. For the fiscal year ending March 31, 2005, 392008, 41 films are currently slated for release by SPE, including sevennine films under the Columbia banner, sixfive films under the Screen Gems or TriStar banner, 1820 Sony Pictures Classics releases, and eightsix Revolution Studios releases.releases, and one film from Sony Pictures Animation. SPE has a motion picture library of over 4,000more than 3,500 feature films, including 12 withthat have won the Best Picture Academy Awards®Award®. Currently, SPE is converting its library (including acquired product) to a digital format and to date nearly 1,700approximately 2,200 titles (including motion picture, television and acquired product) have been converted. In addition, SPE and four other motion picture studios are equal investors in Movielink LLC.,LLC, an online movie download service offering feature films on a pay-per-viewan on-demand basis.

The worldwide home entertainment distribution of SPE’s motion pictures and television programming of SPE (and thoseprogramming acquired or licensed from others) is handled through Columbia TriStarSony Pictures Home Entertainment, except in certain countries where SPE has joint distribution arrangements with other studios or arrangements with independent local distributors. Product is distributed on both videocassetteDVD and DVDBlu-ray formats.

SPE produces originallocal language programming in twelve different languageskey markets around the world, in conjunctionsome of which are co-produced with local partners.partners and sells SPE-owned formats in over 30 countries. This programming, along with SPE’s library of television programming and motion

23

pictures, is licensed to affiliated and independent stations and broadcasters in the U.S., and to affiliated and independent international television stations and other broadcasters throughout the world. In the U.S., SPE jointly with Liberty Media Corporation, owns and operates the cable channel GSN (formerly Game Show Network). jointly with Liberty Media Corporation. SPE also has worldwide broadcasting investments in over 35more than 40 international channels.networks, which are available in more than 130 countries worldwide.
 
Financial Services

Financial Services
Sony Life conducts aits life insurance business primarily in Japan, usingJapan. Sony Life’s core business is providing death protection and other insurance products to individuals, primarily through a consulting-based sales approach utilizing Lifeplanner financial consultants to serve individual customers.®, its highly trained life insurance professionals, and through independent agencies. Sony Life provides tailor-made life insurance products that are optimized for each customer. As of March 31, 2004,2007, Sony Life employed 4,212 such consultants.3,776 Lifeplanner® life insurance professionals. Sony Life maintains an extensive service network including 8584 Lifeplanner branch offices, 2625 regional sales offices, and 2,0282,186 independent agencies in Japan. In addition, aimingSony Life has aimed to apply Sony Life’sits insurance expertise in countries other than Japan, operating Sony Life Insurance (Philippines) Corporation has operated in the Philippines since November 1999.

As part of its plan to expand its sales of individual annuity products, in January 2007 Sony Life announced its intention to establish a new Japanese joint venture with AEGON N.V. The new joint venture is expected to commence operations in 2008, subject to regulatory approval.

Sony Assurance has conducted a non-life insurance business in Japan since October 1999. Using aSony Assurance’s core business is providing automobile insurance and medical and cancer insurance to individual customers, primarily through direct marketing model that Sony believes is tailored to today’s networked society,via the company is working to build a new type of relationship between an insurertelephone and its customers.the Internet. Theone-to-one relationships Sony Assurance principally sells automobileforms with its customers help to provide Sony Assurance with a clear understanding of its customers’ opinions and medical insurance directly to individuals by telephoneneeds, which it can reflect in its product and over the Internet.

     Sony Finance conducts a leasing business for corporations, and a consumer financing business including “My Sony Card”, a credit card for individual customers, through Sony’s electronic retailers and other affiliated partners. Sales staff are posted at ten main branch offices and three customer centers in Japan.

service offerings.

Sony Bank has conducted banking operations in Japan since June 2001 in Japan,2001. As an Internet bank focusing on the asset management needs of individual customers, Sony Bank offers an array of products and provides its services via the Internet 24 hours a day, 365 days a year as a general rule.including yen and foreign currency deposits, investment trusts, mortgage and other individual loans, and others. By using Sony Bank’s transaction channel, the MONEYKit tool,“MONEYKit” service website, account holders can invest and manage assets according to their life plans over the Internet.
 
Overseas Operations
Sony Finance conducts a leasing business for corporations, and a consumer financing business including “Sony Card,” a credit card for individual customers, through Sony’s electronic retailers and other affiliated partners.


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     Sony has pursued a long-term strategy of actively expanding its production capabilities in each region following a general policy of seeking to manufacture its products in the

All Other
SMEJ produces, markets, in which they are sold. As of March 31, 2004, Sony operated 18 manufacturing facilitiesand distributes CDs, DVDs, and pre-recorded audio and video software. SMEJ conducts business in Japan five in the U.S., seven in Europe, and 17 in non-Japan Asiaunder “Sony Records,” “Epic Records,” “Ki/oon Records,” “SMEJ Associated Records,” “Defstar Records,” and other geographic areas (“Other Areas”) in the Electronics segment. In addition, Sony operated two CD manufacturing facilities in Japan, two in the U.S., one in Europe, and eight in Other Areas in the Music segment.

In order to be less susceptible to the impact of foreign exchange rate fluctuations and to reduce inventory and cost, Sony seeks to localize its overseas production, research and development, design, materials and parts procurement, and management.

labels.
 
Sources of Supply

SMEI owns and acquires rights to musical compositions, exploits and markets these compositions, receives royalties or fees for their use and conducts its music publishing business through a joint venture with a third party investor in countries other than Japan primarily under the Sony/ATV Music Publishing name.
So-net provides Internet broadband network services to subscribers as well as creating and distributing content through its portal service to various platforms including PCs, mobile phones and other home electronics devices including TVs and game consoles.
Sources of Supply
Sony pursues procurement of raw materials, parts and components to be used in the production of its products on a global basis on the most favorable terms that it can achieve. These items are purchased from various suppliers around the world. Generally, Sony maintains multiple suppliers for most significant categories of parts and components.

However, when raw materials, parts and components become scarce, the recentcost of production rises. For example, the market price increase of petroleum duecopper has the potential to proportionately affect the political instabilitycost of parts that utilize copper, such as printed circuit boards and power cables. The price of cobalt, which is used in applications involving lithium-ion batteries as well as a range of recording media, has also been rising and has some impact on the Middle East aftercost of those items. In addition, there is growing concern that the warprice of resin may rise, which would result in Iraqan increase in the spring of 2003 and also the price increases of other raw materials, such as steel, aluminium, rare metals, and resin, caused mainly by the strong demand from the Chinese market may affect Sony’s cost of goods sold because Sony consumes a tremendous volumeplastic parts. With respect to parts and components, LCD panels and memory devices, which are used in multiple applications, can influence Sony’s business performance when the cost of such raw materials for its products.

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parts and components fluctuates substantially.
After-Sales Service
 
After-Sales Service

In the Electronics and Game segments, Sony provides repair and servicing functions in the areas where its products are sold. Sony provides these services through its own service centers, factories, authorized independent service centers, authorized servicing dealers and its subsidiaries.

In line with the industry practicepractices of the electronics and game businesses, almost all of Sony’s products sold in Japan carry a warranty, generally for a period of one year from the date of purchase, forcovering repairs, free of charge, for malfunctions occurringin the case of a malfunction in the course of ordinary use.use of the product. In the case of broadcast-andbroadcast- and professional-use products, Sony maintains support contracts with customers in addition to warranties. Overseas warranties are generally provided for various periods of time depending on the product and the area wherein which it is marketed.

To further ensure customer satisfaction, Sony maintains customer information centers in its principal markets.
Patents and Licenses
 
Patents and Licenses

Sony has a number of Japanese and foreign patents relating to its products. Sony is licensed to use a number of patents owned by others, covering a wide range of products. Certain licenses are important to Sony’s business, such as that for optical disc related and Digital TV products. With respect to optical disc related products, Sony products that employ DVD-Video player functions, including PlayStation 2PS2 and PS3 hardware, are substantially dependent upon certain patents licensed by MPEG LA LLC, Dolby Laboratories Licensing Corporation and Nissim Corp., which cover These patents relate to technologies essential to DVD specification. Sony’s Digital TV products are substantially dependent upon certain patents licensed by Thomson Licensing Inc. Sony considers its overall license position beneficial to its operations. While Sony believes that its various proprietary intellectual property rights are important to its success, it believes that neither its business as a whole nor any business segment is materially dependent on any particular patent or license, or any particular group of patents or licenses, except as set forth above.


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Competition
 
Competition

In each of its principal product lines, Sony encounters intense competition throughout the world. Sony believes, however, that in the aggregate it competes successfully and has a major position in all of the principal product lines in which it is engaged, although the strength of its position varies with products and markets. Refer to “Risk Factors” in “Item 3.Key Information.”.

In the Electronics segment, Sony believes that its product planning and product design expertise, the high quality of its products, its record of innovative product introductions and product improvements, its price competitiveness derived from reductions in manufacturing and indirect costs, and its extensive marketing and servicing efforts are important factors in maintaining its competitive position.

The Game segment is in a historically volatile and highly dynamic industry, and Sony’sSCEI’s competitive position is affected by changing technology and product introductions, limited platform life cycles, popularity of software titles, seasonality, consumer spending and other economic trends. To be successful in the game industry, it is important to win customer acceptance of Sony’s format.

     Success in the Music segment is dependent to a large extent upon the artistic and creative abilities of employees and outside talent and is subject to the vagaries of public taste. Sony’s future competitive position depends on its continuing ability to attract and develop talent that can achieve a high degree of public acceptance. In terms of music distribution, it is important to make appropriate investments in new technologies for high-quality and secure music distribution while maintaining customer convenience.

SCEI’s platforms.

In the Pictures segment, SPE faces intense competition from other major motion picture studios and, to a lesser extent, from independent production companies, to attract the attention of the movie-going public worldwide and to obtain exhibition outlets and optimal release dates for its products.companies. SPE must also compete to obtain story rights and talent, including writers, actors, directors and producers, which are essential to the success of SPE’s products. SPE also competes with alternative forms of entertainment to attract the attention of audiences worldwide and to obtain exhibition and distribution outlets and optimal release dates for its products. Competition in television production, distribution, and syndication is also intense because available broadcast time is limited and the audience is increasingly

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fragmented among broadcast networks, cable, and other independent television stations both in the U.S. and internationally. Furthermore, broadcast networks are increasingly producing their own shows internally. This competitive environment has resulted in fewer opportunities to produce shows for networks and a shorter lifespan for ordered shows that do not immediately achieve favorable ratings.

In the Financial Services segment, Sony Life, Sony Assurance and Sony Bank have each established highly effective marketing channels. Sony Life differentiates itself through its Lifeplanner® consulting-based sales approach and the training and expertise of this sales force contributes not only to growth in new insurance policies but also to creating long-term customer relationships. Sony Assurance’s direct marketing approach makes efficient use of technology to communicate directly with customers resulting in customer-friendly and cost-effective service offerings and Sony Assurance has maintained a leading position in the direct-marketing segment of Japan’s automobile insurance market. Sony Bank has made use of the Internet to offer a steadily expanding menu of investment products and loans to individuals. Each of Sony Life, Sony Assurance, and Sony Bank proactively solicits feedback from its customers and continually strives to improve its level of service. This customer-centric service culture is reflected in high customer satisfaction rankings.
In the Financial Services segment, it is critical for Sony Life, Sony Assurance and Sony Bankimportant to maintain customer confidence because somea strong and healthy financial institutions in Japan have become insolvent in recent years. To be credible and competitive infoundation for the financial services market, it is important to offer attractive rates of return on customer investments. In addition, in orderbusiness as well as to meet diversifying customer demand, it is critical to provide attractive services to customers through unique marketing channels, such as Lifeplanner financial consultants atneeds. Sony Life and direct communications by telephone and overhas maintained a high solvency margin ratio, relative to Japanese domestic criteria that require the Internet atmaintenance of a minimum solvency margin ratio. Sony Assurance also has maintained a high solvency margin ratio relative to the aforementioned Japanese domestic criteria. Sony Bank has strengthened its financial base and Sony Bank.has maintained an adequate capital adequacy ratio relative to the Japanese domestic criteria concerning this ratio.
In addition, Sony Finance faces competitive pressure to achieve a leading position in the new arena of securedsecure payment systems on the Internet by utilizing new technology.

In

Within All Other, success at SMEJ is dependent to a large extent upon the Other segment, SCNartistic and creative abilities of employees and outside talent and is subject to the vagaries of public taste. SMEJ’s future competitive position depends on its continuing ability to attract and develop artists who can achieve a high degree of public acceptance.So-net faces competition in Japan from many existing large companies, andas well as from new entrants to the market. TelecommunicationTelecommunications companies that possess a large Internet-ready infrastructure and other entrants that compete solely with respect toon the basis of price have created a market in which competitive price reductions are the norm. Rapid technological advancement has created many new opportunities but it has also increased the rate at which new and more efficient services must be brought to market to earn customer approval. Customer price elasticity is high, and


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users are able to change Internet service providers with increasing ease. The penetration of mobile Internet services provided solely by telecommunicationtelecommunications companies poses an alternativemay also provide a substitute to the home-centric Internet service provided by SCN.So-net.
Government Regulations
 
Government Regulations

Sony’s business activities are subject to various governmental regulations in the different countries in which it operates, including regulations relating to business/investment approvals, import and export regulationstrade affairs including customs and export control, competition and antitrust, intellectual property, consumer and business taxation, foreign exchange controls, personal information protection, product safety, occupational health, and environmental and recycling requirements.
In Japan, the insurance and banking businesses are subject to approvals and oversight from the Financial Services Agency.Agency under the Insurance Business Law and the Banking Law, respectively. In addition, satellite broadcasting andthe telecommunication businesses are subject to approvals from the Ministry of Public Management, HomeInternal Affairs Posts and Telecommunications. Sony is also subject to environmental and occupational health and safety regulations in the jurisdictions in which it operates, particularly those in which it has manufacturing, research, or similar operations in its Electronics and Game businesses. ReferCommunications.
Also refer to “Risk Factors” in “Item 3.Key InformationInformation.”.
Organizational Structure

     In October 2001, SCEE temporarily halted shipments of PS one game consoles destined for

The following table sets forth the European market after Dutch authorities determined levels of cadmium were above the limits allowed under Dutch regulations. PS one shipments were resumed after confirming that there was no health risk to users during use andsignificant subsidiaries owned, directly or indirectly, by Sony worked closely with Dutch authorities to replace non-compliant components to meet their standards. Sony further addressed this issue in PS one game consoles by initiating its own program to inspect all Sony products and thereby discovered a limited number of other occurrences of potentially harmful substances. In order to prevent problems occurring with cadmium and similar chemical substances in the future, Sony initiated a comprehensive program that included revisions to specific Sony policies and standards such as its “Management Regulations for the Environment-related Substances to be Controlled which are included in Parts and Materials”, and tightening its management and control systems including the “Green Partner Environmental Quality Approval Program”, which identifies specific requirements applicable to Sony’s suppliers. On a consolidated basis, Sony recorded a total of approximately 10 billion yen in expenses, including costs of rework and other, investments in equipment, costs of revising and managing policies and programs including the above mentioned policy and program, for the two fiscal years ended March 31, 2002 and March 31, 2003.

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Corporation.

Country of
(As of March 31, 2007)
Name of company
incorporationPercentage owned
Sony EMCS CorporationJapan100.0
Sony Semiconductor Kyushu CorporationJapan100.0
Sony Marketing (Japan) Inc. Japan100.0
Sony Computer Entertainment Inc. Japan100.0
Sony Financial Holdings Inc. Japan100.0
Sony Life Insurance Co., Ltd. Japan100.0
Sony Music Entertainment (Japan) Inc. Japan100.0
Sony Americas Holding Inc. U.S.A.100.0
Sony Corporation of AmericaU.S.A.100.0
Sony Electronics Inc. U.S.A.100.0
Sony DADC US Inc. U.S.A.100.0
Sony Computer Entertainment America Inc. U.S.A.100.0
Sony Pictures Entertainment Inc. U.S.A.100.0
Sony Europe Holding B.V. Netherlands100.0
Sony Europe G.m.b.H. Germany100.0
Sony United Kingdom Ltd. U.K.100.0
Sony Computer Entertainment Europe Ltd. U.K.100.0
Sony Global Treasury Services PlcU.K.100.0
Sony Holding (Asia) B.V. Netherlands100.0
Sony Overseas S.A. Switzerland100.0
Sony Electronics Asia Pacific Pte. Ltd. Singapore100.0

Property, Plant and Equipment

Sony has a number of offices, plants and warehouses throughout the world. Most of the buildings in, and land on, which they are located are owned by Sony, free from significant encumbrances.


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The following table sets forth information as of March 31, 20042007 with respect to plants used for the manufacturing of products for the Electronics segment and entertainment hardware for the Game segment with floor space of more than 500,000 square feet:
       
Approximate
Location
floor spacePrincipal products manufactured
(square feet)
(square feet)
In Japan:
      
Nagasaki
(Sony Semiconductor Kyushu Corporation
— Nagasaki TEC)		2,232,000CMOS image sensors and other semiconductors
      
— Nagasaki TEC and SCEI)2,232,000Semiconductors
Kokubu, KagoshimaKumamoto
(Sony Semiconductor Kyushu Corporation
— Kumamoto TEC)		2,104,000LCDs, CCDs, CMOS image sensors and other semiconductors
      
Kagoshima
(Sony Semiconductor Kyushu Corporation
— KokubuKagoshima TEC)		  1,141,0001,783,000  SemiconductorsLCDs, CCDs, CMOS image sensors and other semiconductors
 
Kohda, Aichi
(Sony EMCS Corporation — Kohda TEC)		  953,000963,000  Video cameras, digital still cameras, and Memory Sticks and printers
 
Inazawa, Aichi
(Sony EMCS Corporation — Inazawa TEC)		  865,000864,000  CRTs andLCD televisions
 
Ichinomiya, Aichi
(Sony EMCS Corporation — Ichinomiya TEC)		  833,000 Televisions, display monitors, and digital still cameras
 
Kanuma, Tochigi
(Sony Chemicals & Information Device Corporation)		  824,000791,000  Magnetic tapes, adhesives, and electronic components
 
Tochigi, Tochigi
(Sony TochigiEnergy Devices Corporation)		  609,000  Magnetic and optical storage media and batteries
 
Kisarazu, Chiba
(Sony EMCS Corporation — Kisarazu TEC)		  601,000 DVD Recorders, PCs, and personal digital assistants and entertainment hardware
 
Koriyama, Fukushima
(Sony FukushimaEnergy Devices Corporation)		  580,000581,000  Batteries
 
Kosai, Shizuoka
(Sony EMCS Corporation — Kosai TEC)		  561,000566,000  Broadcast- and professional-use video equipment
 
Minokamo, Gifu
(Sony EMCS Corporation — Minokamo TEC)		  525,000543,000  Video cameras, digital still cameras, personal digital assistants, mobile phones,phone handsets, and modules

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Kisarazu, Chiba
(Sony EMCS Corporation — Kisarazu TEC)		Approximate502,000DVD-Video Recorders
LocationOverseas:floor spacePrincipal products manufactured
(square feet)
Overseas:      
Pittsburgh, Pennsylvania, U.S.A.
(Sony Electronics Inc.)		  2,820,000  Televisions and CRTsRear-projection televisions
Huizhou, China
(Sony Precision Devices (Huizhou) Co., Ltd.)		1,329,000Optical pickups


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Approximate
Location
floor spacePrincipal products manufactured
(square feet)
 
San Diego, California,Terre Haute, Indiana, U.S.A.
(Sony ElectronicsDADC US Inc.)		  1,249,0001,255,000  CRTsCDs, CD-ROMs, DVDs, DVD-ROMs, and Blu-ray Discs
Wuxi, China
(Sony Electronics (Wuxi) Co., Ltd., Sony Digital Products (Wuxi) Co., Ltd. and Sony (China) Ltd.)		1,202,000Batteries, LCD televisions, PCs, and digital cameras
 
Penang, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — PG TEC)		  988,000  Audio equipment
and data storagerecording systems
 
Tijuana, Mexico
(Sony de Tijuana Este, S.A. de C.V.)		  935,000  Televisions, computer displays,
LCD televisions, rear projection televisions, TV tuners, and audio equipment
 
Jurong, Singapore
(Sony Electronics (Singapore) Pte. Ltd.)		  838,000 CRTs
 
Dothan, Alabama, U.S.A.
(Sony Magnetic ProductsElectronics Inc. of America))		  809,000  Magnetic tape products
and polarized film for LCD
 
Bangi, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — KL TEC)		  797,000  DVDCRT televisions, rear projection televisions, TV tuners, and DVD-Video players VTRs,
and televisions
 
Bridgend, Wales, U.K.
(Sony Manufacturing Company U.K.)		752,000CRTs and TV components
Pencoed, Wales, U.K.
(Sony Manufacturing Company U.K.)		707,000Televisions, broadcast cameras,
and professional-use displays
Wuxi, China
(Sony Electronics (Wuxi) Co., Ltd. and Sony		      
(China) Ltd.Jurong, Singapore
(Sony Display Device (Singapore))		  684,000786,000  Batteries, televisions, and CRTs
San Diego, California, U.S.A.
(Sony Electronics Inc.)		658,000PCs
 
Nuevo Laredo, Mexico
(Sony Electronics Inc.)		  608,000587,000  Magnetic storage media and batteries
 
Barcelona,Pitman, New Jersey, U.S.A.
(Sony Music Entertainment Inc.)		568,000CDs, CD-ROMs, DVDs, and DVD-ROMs
Viladecavallas, Spain
(Sony Espana, S.A.)		  566,000  Televisions,LCD televisions, TV components, and projectors
Huizou, China
(Sony Precision Devices (Huizou) Co., Ltd.)		526,000Optical pickups and DVD players

Sony plans to invest 130 billion yen during the fiscal year ending March 31, 2008, compared to 150 billion yen in the previous fiscal year in semiconductor fabrication facilities and equipment. This investment includes investment in production capacity for CMOS image sensors.
In addition to the facilities above, Sony has a number of other plants for electronic products throughout the world. Sony owns research and development facilities, and employee housing and recreation facilities, as well as Sony Corporation’s headquarters buildings in Tokyo, Japan, where administrative functions and product development activities are carried out. SCEI leases its corporate headquarters buildings located in Tokyo, where administrative functions, product development, and software development are carried out. SCEA and SCEE lease their offices in the U.S. and Europe, respectively.

     Although doing so will not require expansion of the floor space at the Nagasaki facility owned by Sony Semiconductor Kyushu Corporation and SCEI, Sony plans to increase its semiconductor manufacturing capacity at this facility. This capacity increase constitutes a portion of Sony’s 120 billion yen planned investment during the fiscal year ending March 31, 2005, in semiconductor fabrication

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equipment built at the 65 nanometer level of process technology. The chips made on the equipment purchased will be some of the most highly advanced on the market, and will include the new microprocessor for the broadband era, code-named Cell, as well as other system large scale integration (“LSI”), for use in the next generation computer entertainment system and a variety of future consumer electronics products.

The following table sets forth information as of March 31, 2004 with respect to principal plants for the manufacturing of software for the Music, Pictures and Game segments with floor space of more than 500,000 square feet:

Approximate
Locationfloor spacePrincipal products manufactured
(square feet)
Terre Haute, Indiana, U.S.A.
(Digital Audio Disc Corporation)		655,000CDs, CD-ROMs, DVDs, and DVD-ROMs
Pitman, New Jersey, U.S.A.
(Sony Music Entertainment Inc.)		568,000CDs, CD-ROMs, DVDs, and DVD-ROMs

     In addition to the above, SMEI and its affiliates have several plants in various parts of the world and lease their corporate headquarters located in New York City from Sony Corporation of America (“SCA”). Most of SMEJ’s offices, including leased premises, are located in Tokyo, Japan.

SPE’s corporate offices and motion picture and television production facilities are headquartered in Culver City, California, where it owns and operates a studio facility, Sony Pictures Studios. A second studio facility, thatThe Culver Studios, which was owned and operated by SPE The Culver Studios, was sold by SPE in April 2004, and2004. SPE is leasing back a portion

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of this facility for a two-year period.with the lease term expiring on April 30, 2008. SPE also leases office space and motion picture and television support facilities from affiliates of Sony Corporation and other third parties. Itsparties in various worldwide locations. SPE’s film and videotape storage operations are located in various leased locations in the U.S. and Europe, where SPE also leases space.

Europe.

Most of SMEJ’s offices, including leased premises, are located in Tokyo, Japan.
In December 2001, SCA entered into a lease with a Variable Interest Entity, which is consolidated by Sony, for its corporate headquarters. Sony has the option to purchase the building at any time during the lease term which expires in December 2008. The aggregate floor space of this building is approximately 723,000 square feet. Refer to “Increase in Assets and Liabilities as a Result of Consolidation of Variable Interest Entities” in “Item 5.Operating and Financial Review and Prospects” below for more information on this lease.

Item 5.4A.      Operating and Financial Review and ProspectsUnresolved Staff Comments

Not applicable.

Item 5.Operating and Financial Review and Prospects
OPERATING RESULTS

Operating Results for the Fiscal Year Ended March 31, 20042007 compared with the Fiscal Year Ended March 31, 20032006

Overview

     Although the global economy showed some signs of growth in the fiscal year ended March 31, 2004, the political situation, especially in Iraq, and concern about potential terrorist attacks led to a continued sense of uncertainty regarding the economy. In Japan, although the stock market showed signs of recovery, questions remained about the sustainability of economic growth and the strength of the recovery in consumer spending.

     Despite these market conditions and the impact of the translation of financial results into yen, in accordance with Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”), the currency in which Sony’s financial statements are prepared,

Sony’s sales and operating revenue (“sales”) for the fiscal year ended March 31, 20042007 increased 0.310.5 percent compared with the previous fiscal year. Sales within the Electronics segment, the Game segment and the Pictures segment increased while Financial Services revenue decreased. In the Electronics segment, although there was a decline in sales of such products as cathode ray tube (“CRT”) televisions, sales to outside customers increased 13.4 percent compared with the previous fiscal year mainly due to an increase in sales of liquid crystal display (“LCD”) televisions. Sales within the Game segment increased 6.1 percent compared to the previous fiscal year as a result of the launch of the PLAYSTATION®3 (“PS3”) in Japan, North America and Europe. In the Pictures segment, sales increased 29.5 percent compared to the previous fiscal year due to higher worldwide theatrical and home entertainment revenue from films released in the fiscal year ended March 31, 2007 as compared to those released in the previous fiscal year. Revenues decreased 12.6 percent within the Financial Services segment primarily due to lower valuation gains in the general account and the separate account at Sony Life, compared to the previous fiscal year, when there was a significant increase in the Japanese stock market.
Operating income decreased 68.3 percent compared with the previous fiscal year. The operating income for the previous fiscal year included a one time net gain of 73.5 billion yen resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund, of which 64.5 billion yen was recorded within the Electronics segment. During the fiscal year ended March 31, 2007, Sony recorded a 51.2 billion yen provision that relates to the recalls by Dell Inc., Apple Inc. and Lenovo, Inc. of notebook computer battery packs that use lithium-ion battery cells manufactured by Sony and the subsequent global replacement program initiated by Sony for certain notebook computer battery packs used by Sony and several other notebook computer manufacturers that use lithium-ion battery cells manufactured by Sony. Despite the recording of this provision, operating income within the Electronics segment increased 2,167.4 percent mainly as a result of an increase in sales to outside customers and a positive impact from the depreciation of the yen versus the U.S. dollar and the Euro. In the Game segment, an operating loss was recorded in the fiscal year ended March 31, 2007 as a result of the sale of the PS3 at strategic price points lower than its production cost during the introductory period. In the Pictures segment, operating income increased 55.7 percent compared with the previous fiscal year due to strong worldwide theatrical and home entertainment revenue on feature films released in the current fiscal year. In the Financial Services segment, increased

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due to improvements inoperating income decreased 55.3 percent compared with the previous fiscal year as a result of decreased valuation gains and lossesfrom investments in the general account, including valuation gains from convertible bonds at Sony Life Insurance Co., Ltd. (“Sony Life”), despite a decrease in sales.
Operating income in the Game, Picturesfiscal year ended March 31, 2007 included a gain on the sale of a portion of the site of Sony’s former headquarters in the amount of 21.7 billion yen, of which 2.6 billion yen was recorded within All


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Other and Music segments.

the remaining amount was recorded in “Corporate.” Operating income decreased 46.7 percent compared withrelated to an additional gain on sale for the previous fiscal year. This decrease was mainly dueremaining portion of the site under contract, which is expected to the increase in restructuring chargesbe recognized in the Electronics segment, the decrease in sales and increase in research and development costs in the Game segment, and the absence of profits contributed by the breakaway performance ofSpider-Manin the previous fiscal year ending March 31, 2008 is estimated to be approximately 59.0 billion yen, and this entire amount will be recorded in the Pictures segment. Partially offsetting the decrease in operating“Corporate.”

Operating income were the improvements in valuation gains and losses from investments in the general account at Sony Life in the Financial Services segment, and the benefits of restructuring, a decrease in restructuring charges and a reduction in advertising and promotion expenses in the Music segment.

On a local currency basis (regarding references to results of operations expressed on a local currency basis, refer to “Foreign Exchange Fluctuations and Risk Hedging” below), Sony’s sales for the fiscal year ended March 31, 2004 increased approximately 3 percent, and operating income decreased approximately 47 percent compared2007 was negatively affected by the recording of certain provisions for outstanding legal proceedings including the European Commission’s investigation in connection with professional videotape claims, partially offset by the previous fiscal year.

reversal of a portion of provisions related to the resolution of certain patent claims recorded in prior periods.

Restructuring

     For more detailed information about restructuring, please refer to Note 16 of Notes to the Consolidated Financial Statements. In addition, refer to “Trend Information” below for more information on planned restructuring efforts.

In the fiscal year ended March 31, 2004,2007, Sony recorded restructuring charges of 168.138.8 billion yen, an increasea decrease from the 106.3138.7 billion yen recorded in the previous fiscal year. The primary restructuring activities were in the Electronics Music and Pictures segments.

segment.

Of the total 168.138.8 billion yen, Sony recorded 133.410.8 billion yen in personnel related costs. This expense was incurred because 9,000 people, mainly in Japan, the U.S. and Western Europe, left the company primarily throughpersonnel-related costs including early retirement programs. Of the 9,000 people, 5,000 were people who left the company in Japan.
 
Electronics

Electronics
Restructuring charges in the Electronics segment for the fiscal year ended March 31, 20042007 were 143.337.4 billion yen, compared to 72.5125.8 billion yen in the previous fiscal year, and exceededyear.
Due to the 135.0 billion yen total estimated at the beginningworldwide market shrinkage as a result of the fiscal year.

     In the year ended March 31, 2004, Sony made a decision to shut down certain TV display CRT manufacturing operations in Japan to rationalize production facilities and downsize its business, due to a contraction in the market and ademand shift in demand from CRT televisions to LCD and plasma and liquid crystal display (“LCD”) panel televisions. Restructuring charges associated with the shut down totaled 8.5 billion yen, and consisted of 3.1 billion yen in personnel related costs and 5.3 billion yen in non-cash equipment impairment, disposal and other costs. Of the 8.5 billion yen in restructuring charges, 0.2 billion yen was recorded in cost of sales; 3.1 billion yen was included in selling, general and administrative expense, and 5.2 billion yen was included in loss on sale, disposal or impairment of assets, net.

     In addition to the above restructuring effort, during the year ended March 31, 2004, the Electronics segment accelerated the implementation of headcount reduction through early retirement programs resulting in personnel related costs of 114.0 billion yen, an increase of 96.4 billion yen compared to the previous year. Of the 9,000 people who left the company on a consolidated basis, the majority came from the Electronics segment. Headcount of relatively high-paid white collar employees in Japan, the U.S. and Western Europe was reduced through early retirement programs while headcount increased at manufacturing facilities in East Asia, particularly in China.

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Music

     Due to the continued contraction of the worldwide music market due to slow worldwide economic growth, the saturation of the CD market, the effects of piracy and other illegal duplication, parallel imports, pricing pressures and the diversification of customer preferences,televisions, Sony has been actively repositioning the Music segment for the future by lookingimplementing a worldwide plan to create a more effectiverationalize CRT and profitableCRT television production facilities and has been downsizing its business model.over several years. As a result, the Music segment has undergone a worldwidepart of this restructuring program, since the year ended March 31, 2001 to reduce staffing and other costs through the consolidation and rationalization of facilities worldwide.

During the year ended March 31, 2004, Sony broadened the scope of its worldwide restructuring of the Music segment, which resulted in restructuring charges totaling 10.7 billion yen, compared to 22.4 billion yen in the fiscal year ended March 31, 2003. Restructuring activities included the shutdown2007 Sony recorded a non-cash impairment charge of a CD1.7 billion yen for CRT television manufacturing facilityfacilities located in the U.S. as wellThe impairment charge was calculated as the restructuringdifference between the carrying value of the music label operations and further rationalization of overhead functions through staff reductions. The restructuring charges consisted of personnel related costs of 5.1 billion yen, lease abandonment costs of 1.3 billion yen and other related costs of 4.2 billion yen including non-cash asset impairments and disposals. Most of these charges were recorded in selling, general and administrative expense. Employees were eliminated across various employee levels, business functions, operating units, and geographic regions during this phase of the worldwide restructuring program.

Pictures

     Restructuring charges in the Pictures segment for the fiscal year ended March 31, 2004 were 4.6 billion yen, compared to 0.5 billion yen in the previous fiscal year. A variety of initiatives were undertaken in the segment in an effort to reduce fixed costs including the reduction of staffing levels and the disposalpresent value of certain long-lived assets. Restructuring charges consisted of 1.0 billion yen of personnel related costs, 1.7 billion yen of non-cash asset impairment and disposal costs and 1.9 billion yen of other restructuring costs. Among these charges, 1.5 billion yen was recorded in cost of sales, 1.3 billion yen was recorded in selling, general and administrative expenses, and 1.7 billion yenestimated future cash flows. The charge was recorded in loss on sale, disposal or impairment of assets, net.

The table below summarizes major restructuring activitiesnet in the consolidated statements of income. While continuing to manufacture and sell CRT televisions in countries and territories where demand remains, Sony is actively shifting its focus in those areas to LCD televisions. As a result, Sony plans to cease manufacturing CRTs by March 2008, after it has stockpiled a sufficient quantity for whichfuture use.

As a result of the contraction of the European rear projection television market, Sony has decided to discontinue the production of LCD rear projection televisions in Europe. In association with this action, Sony has recorded inventory writedowns and charges for supplier claims of over 53.8 billion yen were recorded duringfor the fiscal year ended March 31, 2004.
Costs incurred in
the fiscal Year
Ended
SegmentNature of RestructuringMarch 31, 2004Additional Information
ElectronicsReduction of TV display CRT production capacity in Japan8.5 billion yenRemaining liability balance of 2.2 billion yen at March 31, 2004 will be paid or settled in the fiscal year ending March 31, 2005.
Early retirement program114.0 billion yenRemaining liability balance of 18.3 billion yen at March 31, 2004 will be paid in the fiscal year ending March 31, 2005.
MusicClosure of CD manufacturing facility in U.S., restructuring of the music label operations, and rationalization of overhead functions10.7 billion yenMost of the remaining liability balance of 6.2 billion yen at March 31, 2004 will be paid or settled during the fiscal year ending March 31, 2005.
2007, with most of these expenses being recorded as cost of sales in the consolidated statements of income.
In addition to the above restructuring efforts, Sony undertook headcount reduction programs to further reduce operating costs in the Electronics segment. As a result of these programs, Sony recorded restructuring charges of 9.7 billion yen for the fiscal year ended March 31, 2007, and these charges were included in selling, general and administrative expenses in the consolidated statements of income. The remaining liability balance as of March 31, 2007 was 7.2 billion yen and will be paid through the fiscal year ending March 31, 2008.
For more detailed information about restructuring, please refer to Note 17 of Notes to the Consolidated Financial Statements.


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31

Operating Performance
             
Year Ended
March 31
20032004Percent change
(Yen in billions)
Sales and operating revenue  7,473.6   7,496.4   +0.3%
Operating income  185.4   98.9   -46.7 
Income before income taxes  247.6   144.1   -41.8 
Net income  115.5   88.5   -23.4 
 
             
  Fiscal Year Ended
  
  March 31  
  2006 2007 Percent change
  (Yen in billions)  
 
Sales and operating revenue  7,510.6   8,295.7   +10.5%
Operating income  226.4   71.8   −68.3 
Income before income taxes  286.3   102.0   −64.4 
Equity in net income of affiliated companies  13.2   78.7   +496.9 
Net income  123.6   126.3   +2.2 
Sales

Sales

Sales for the fiscal year ended March 31, 20042007 increased by 22.8785.1 billion yen, or 0.310.5 percent, to 7,496.48,295.7 billion yen compared with the previous fiscal year. A further breakdown of sales figures is presented under“Operating Performance by Business Segment”below.

(

“Sales” in this analysis of the ratio of cost of sales, including research and development costs, and selling, general and administrative expenses to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue, and excludes Financial Servicefinancial service revenue. This is because Financial Servicefinancial service expenses are recorded separately from cost of sales and selling, general and administrative expenses. Furthermore, in the analysisThe calculations of cost of sales, including research and development costs, to sales, only “net sales” are used. This is because cost of sales is an expense associated only with net sales. All theall ratios below that pertain to business segments are calculated withinclude intersegment transactions included.)transactions.
 
Cost of Sales and Selling, General and Administrative Expenses

Cost of Sales and Selling, General and Administrative Expenses
Cost of sales for the fiscal year ended March 31, 20042007 increased by 78.8738.2 billion yen, or 1.614.3 percent, to 5,058.25,889.6 billion yen compared with the previous fiscal year, and increased from 72.075.9 percent to 73.576.8 percent as a percentage of sales. Year on year, the cost of sales ratio was unchanged atdecreased from 80.6 percent to 78.8 percent in the Electronics segment, and almost unchangedincreased from 70.280.4 percent to 70.1102.8 percent in the Game segment, and increased from 60.2 percent to 60.3 percent in the Pictures segment. The
In the Electronics segment, there was an improvement in the cost of sales ratio decreased from 61.5 percent to 60.7 percentfor several products, in particular digital cameras, LCD televisions and video cameras. In the Game segment, there was a deterioration in the Music segment.cost of sales ratio. This deterioration was primarily the result of the loss arising from the sale of the PS3 at strategic price points lower than its production cost during the introductory period, as well as the recording of other charges in association with preparation for the launch of the PS3 platform. In the Pictures segment, operating income increased due to substantially higher revenue. However, the cost of sales ratio increased from 58.2 percentwas flat compared to 60.0 percent in the Pictures segment.

In the Electronics segment, the benefit of restructuring undertaken in previous years was offset primarily by an increase in research and development costs during the fiscal year. In the Game segment, the effect of increased PlayStation 2 software sales was offset by increased research and development costs. The cost of sales ratio in the Music segment decreasedyear due to the benefits from restructuring activities implemented over the pastrecording of production expenses associated with several fiscal years. However, the cost of sales rationew network television shows in the Pictures segment increased due totelevision business in the current fiscal year and the absence of the higher margins generated by revenues froma licensing agreement extension forSpider-ManWheel of Fortune, which was recognized in the priorprevious fiscal year.

     Personnel related

The personnel-related costs included in cost of sales increased only 1.7were 457.3 billion yen, compared withan increase of 1.0 billion yen, primarily recorded within the previous fiscal year.

Electronics segment.

Research and development costs (included in(all research and development costs are included within cost of sales) for the fiscal year ended March 31, 20042007 increased by 71.412.1 billion yen or 16.1 percent, to 514.5543.9 billion yen compared with the previous fiscal year, primarily due to increases in the Electronics and Game segments.year. The ratio of research and development costs to sales increased from 6.4was 7.1 percent compared to 7.5 percent.

7.8 percent in the previous fiscal year.

Selling, general and administrative expenses for the fiscal year ended March 31, 20042007 increased by 15.9261.4 billion yen, or 0.917.1 percent, to 1,798.21,788.4 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales increased from 25.622.5 percent in the previous fiscal year to 25.923.3 percent. Year on year, the ratio of selling, general and administrative expenses to sales increased from 20.318.0 percent to 21.818.2 percent in the Electronics segment and from 18.018.7 percent to 21.120.0 percent in the Game segment, and from 34.4 percent to 35.0 percent insegment. On the Pictures segment, while it decreased from 39.8 percent to 35.0 percent inother hand, the Music segment.

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     Of theratio of selling, general and administrative expenses personnel relatedto sales decreased from 36.0 percent to 35.2 percent in the Pictures segment.


33

Personnel-related costs in selling, general and administrative expenses increased by 89.754.4 billion yen compared with the previous fiscal year mainly due to an increase in severance related expenses in the Electronics segmentrecording of a gain resulting from the implementationtransfer to the Japanese government of restructuring initiatives. However, the increasesubstitutional portion of Sony’s employee pension fund in selling, generalthe previous fiscal year. In addition, advertising and administrativepublicity expenses was partially offsetfor the fiscal year increased by a decrease in royalty expenses, which decreased by 20.586.0 billion yen compared with the previous fiscal year primarily due to increased advertising and publicity expenses within the reversal, in the fiscal year ended March 31, 2004, of royalty expense reserves provided for in the previous fiscal year in the ElectronicsPictures segment.

Loss on sale, disposal or impairment of assets, net decreased 4.4was 5.8 billion yen, or 11.1 percent, compared with 73.9 billion yen in the previous fiscal year,year. This decrease was mainly due to 35.5 billion yen. Losses were recordedlosses on the sale, disposal and impairment of CRT and CRT television production equipment in the Electronics segment, on theas well as an asset impairment of goodwill that resulted from the making of a manufacturing subsidiary into a wholly owned subsidiary in the Electronics segment, and on the commencement of reorganization proceedings under the Corporate Reorganization Law of Japan by Crosswave Communications Inc. (“Crosswave”), which leased fixed assets from a business in the Financial Services segment. On the other hand, a one time gain was recorded in the Other segment due towrite-down associated with the sale of rights tothe Metreon, a portion ofU.S. entertainment complex, in the Sony Card portfolio.previous fiscal year.
 
Operating Income

Operating Income

Operating income for the fiscal year ended March 31, 20042007 decreased by 86.5154.7 billion yen, or 46.768.3 percent, to 98.971.8 billion yen compared with the previous fiscal year. OperatingThe operating income margin decreased from 2.53.0 percent to 1.30.9 percent. The Electronics segment recorded an operating loss mainly due to an increase in restructuring charges. On the other hand, the business segments that contributed the most to operating income, inIn descending order by amount of financial impact, werethe Electronics segment, Financial Services segment, the Pictures segment and All Other contributed to operating income. On the other hand, an operating loss was recorded within the Game and Financial Services segments.segment primarily due to a loss arising from the sale of the PS3 at strategic price points lower than its production cost during the introductory period, as well as the recording of other charges in association with preparation for the launch of the PS3 platform. For a further breakdown of operating income (loss) for each segment, please refer to “Operating Performance by Business Segment” below.
 
Other Income and Expenses

     In the consolidated results for

Other Income and Expenses
For the fiscal year ended March 31, 2004,2007, other income decreased by 35.223.3 billion yen, or 22.419.6 percent, to 122.395.2 billion yen, while other expenses decreasedincreased by 18.26.4 billion yen, or 19.110.9 percent, to 77.164.9 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 45.230.3 billion yen, a decrease of 17.029.6 billion yen, or 27.4 percent, compared with the previous fiscal year.

The decreasegain on change in interest in subsidiaries and equity investees decreased by 29.3 billion yen, or 48.2 percent compared to the previous fiscal year, to 31.5 billion yen. During the fiscal year ended March 31, 2007, there was a gain recorded on the sale of a portion of the stock held in StylingLife Holdings Inc. (“StylingLife”). However, the total gain on change in ownership interests declined as Sony recorded a gain on change in interest of 60.8 billion yen in the previous fiscal year resulting from the initial public offering ofSo-net Entertainment Corporation(“So-net”), and the sale of a portion of the stock held in both Monex Beans Holdings, Inc., andSo-net M3 Inc., a consolidated subsidiary ofSo-net.
Interest and dividends in other income of 28.2 billion yen was primarily due to the recording,recorded in the fiscal year ended March 31, 2003,2007, an increase of a 66.53.3 billion yen, gain onor 13.2 percent, compared with the sale of Sony’s equityprevious year. For the fiscal year ended March 31, 2007, interest in Telemundo Communications Group, Inc. and its subsidiaries (“Telemundo”), a U.S. based Spanish language television network and station group that was accounted for under the equity method. Partially offsetting the decrease in other income was a 16.1expense totaling 27.3 billion yen increase inwas recorded, a decrease of 1.7 billion yen, or 5.9 percent, compared with the previous year.
In addition, a net foreign exchange gain, from 1.9loss of 18.8 billion yen was recorded in the fiscal year ended March 31, 2007, an increase of 15.8 billon yen from the previous fiscal year to 18.1 billion yen.year. The net foreign exchange gainloss was recorded because the value of the yen, especially during the second halfthrough fourth quarters of the fiscal year ended March 31, 2004,2007, was higherlower than the value of the yen at the time that Sony entered into foreign exchange forward contracts and foreign currency option contracts. These contracts are entered into by Sony to mitigate the foreign exchange rate risk to cash flows that arises from settlements of foreign currency denominated accounts receivable and accounts payable, as well as foreign currency denominated transactions between consolidated subsidiaries. Compared to the previous fiscal year, royalty income increased 1.9 billion yen, or 5.8 percent, from 32.4 billion yen to 34.2 billion yen. Interest and dividends received increased by 4.3 billion yen, or 29.9 percent, to 18.8 billion yen.

     The decrease in other expenses was primarily due to a 6.7 billion yen, or 29.0 percent, decrease to 16.5 billion yen in loss on devaluation of securities investments compared with the previous year. During the fiscal year ended March 31, 2004, the valuation losses Sony recorded included 10.3 billion yen recorded in regards to securities issued by a privately held Japanese company engaged in cable broadcasting and other businesses which Sony accounted for under the cost method. Compared to the previous fiscal year, interest paid increased 0.5 billion yen, or 2.0 percent, to 27.8 billion yen.

33

     In January 2004, FeliCa Networks Inc. (“FeliCa Networks”) issued 11.5 billion yen in shares (115,000 shares at 100,000 yen per share) in a private offering. FeliCa Networks engages in the development and licensing of an Integrated Circuit (“IC”) chip for cellular phones based on the contactless IC card technology “FeliCa”, which was developed by Sony. It also operates a platform, based on FeliCa-ready cellular phones, for use by service providers. Sony recorded a gain of 3.4 billion yen and also recorded deferred taxes on this gain. This issuance reduced Sony’s ownership interest from 100 percent to 60 percent. In June 2004, FeliCa Networks allocated new shares to a third party; Sony’s ownership interest is now approximately 57 percent.

In addition to the above transaction, for the year ended March 31, 2004, Sony recognized 1.5 billion yen of other gains on issuances of stock by subsidiaries and equity investees resulting in total gains of 4.9 billion yen. These transactions were not part of a broader corporate reorganization and the reacquisition of such shares was not contemplated at the time of issuance.

 
Income before Income Taxes

Income before Income Taxes

Income before income taxes for the fiscal year ended March 31, 20042007 decreased 103.6184.3 billion yen, or 41.864.4 percent, to 144.1102.0 billion yen compared with the previous fiscal year. As mentioned above,year, as a result of the decrease in operating income and the decrease in the net amount of other income and other expenses decreased compared with the previous year.mentioned above.


34

 
Income Taxes

Income taxes forTaxes

During the fiscal year ended March 31, 2004 decreased by 28.12007, Sony recorded 53.9 billion yen or 34.7 percent, toof income taxes at an effective tax rate of 52.8 billion yen,percent. This effective tax rate exceeded the Japanese statutory tax rate as a result of the decreaserecording of losses by certain overseas subsidiaries with tax rates that are lower than the rate in income before income taxes. Income taxes decreased 91.6 billion yen, or 51.2 percent, to 87.2 billion yen, while deferred income tax expense decreased by 63.6 billion yen, or 64.9 percent, to 34.4 billion yen.Japan. The effective tax rate forwas 61.6 percent in the previous fiscal year was 36.6 percent, lower thanand exceeded the Japanese statutory rate in Japan due to a decrease in deferred tax liabilities on undistributed earnings of foreign subsidiaries and because U.S. income was taxed at a lower rate due to utilizationthe recording of tax loss and foreign tax credit carryforwards. However, this rate was higher than the effective tax rate of 32.6 percent in the prior fiscal year, which benefited from a reversal inadditional valuation allowances onagainst deferred tax assets by Aiwa Co., Ltd.Sony Corporation and itsseveral of Sony’s Japanese and overseas consolidated subsidiaries (“Aiwa”).due to continued losses recorded by these entities and the recording of an additional tax provision for the undistributed earnings of overseas subsidiaries.
 
Results of Affiliated Companies Accounted for under the Equity Method

Results of Affiliated Companies Accounted for under the Equity Method

Equity in net income of affiliated companies during the fiscal year ended March 31, 20042007 was 1.778.7 billion yen, an improvement over the 44.7increase of 65.5 billion yen, in losses recorded inor 496.9 percent compared to the previous fiscal year. Equity in net income of affiliated companies reported for Sony Ericsson Mobile Communications AB (“Sony Ericsson”) was 85.3 billion yen, an increase of 56.3 billion yen compared to the previous fiscal year, due to the increase in sales of hit models such as “Walkman®” and “Cyber-shot” phones. Sony recorded equity in net income of 5.0 billion yen for SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), a joint venture focused on mobile phone handsets,decrease of 0.8 billion yen compared to the previous fiscal year. Although there was a favorable impact due to an industry-related legal settlement, ayear-on-year reduction in restructuring charges, and reductions in overhead costs from continued restructuring, sales declined due to the accelerated decline in the worldwide physical music market. Sony recorded equity in net income of 6.4 billion yen an improvement from(before the 20.8elimination of unrealized intercompany profits of 1.4 billion yen), a 13.6 billion yen improvement compared to the prior fiscal year, for S-LCD Corporation (“S-LCD”), a joint-venture with Samsung Electronics Co., Ltd. (“Samsung”) for the manufacture of amorphous thin film transistor (“TFT”) LCD panels. Sony recorded equity in lossesnet loss of 18.9 billion yen forMetro-Goldwyn-Mayer Inc. (“MGM”), an increase in the amount of equity in net loss of 2.0 billion yen compared to the previous fiscal year. The equity in net loss for MGM includes non-cash interest expense of 9.6 billion yen on cumulative preferred stock compared to the 6.0 billion yen of non-cash interest expense on cumulative preferred stock recorded in the previous fiscal year. This improvement was dueWith respect to strong demand for Sony Ericsson’s products, particularly in the Global System for Mobile Communications (“GSM”) and Japanese markets, and due to improvements in operating efficiencies at the company. Moreover, S.T. Liquid Crystal Display Corporation (“ST-LCD”), an LCD joint venture in Japan, recorded a profit compared with a loss in the previous fiscal year. Partially offsetting these improvements were equity in net lossesincome of some other affiliated companies, such as Crosswave, which commenced reorganization proceedings under the Corporate Reorganization Law of Japan. TheMGM is expected to have no effect on equity in net income or loss related to Crosswave forduring the fiscal year endedending March 31, 2004 was 1.4 billion yen.2008, due to the fact that Sony no longer has any book basis in MGM as of March 31, 2007.
 
Minority Interest in Income (Loss) of Consolidated Subsidiaries

Minority Interest in Income (Loss) of Consolidated Subsidiaries
In the fiscal year ended March 31, 2004,2007, minority interest in income of consolidated subsidiaries decreased 4.2of 0.5 billion yen or 63.9 percent,was recorded compared to 2.4 billion yen. This decrease is due to the absence of the previous year increase which resulted from the reversal, in that year, of valuation allowances on deferred tax assets held by Aiwa, as described above, and the fact that Sony ceased to record a minority interest in the lossesloss of Aiwa in that year, as a result of taking Aiwa private. For the fiscal year ended March 31,

34

2004, minority interest in income was recorded mainly at certain television and home entertainment subsidiaries0.6 billion yen in the Pictures segment.previous year.
 
Net Income

Net Income
Net income for the fiscal year ended March 31, 2004 decreased2007 increased by 27.02.7 billion yen, or 23.42.2 percent, to 88.5126.3 billion yen compared with the previous fiscal year. Despite the decrease in income before income taxes, net income increased mainly due to the decrease of income taxes and increase in equity in net income of affiliated companies. As a percentage of sales, net income decreased 0.3 percentage points from 1.51.6 percent to 1.21.5 percent. Although income before income taxes decreased as described above, the year on year change from loss to income in equity in net income (loss) of affiliated companies partially offset the decline in net income. Return on stockholders’ equity decreased 1.2 percentage points from 5.04.1 percent to 3.8 percent. (This ratio is calculated by dividing net income by the simple average of stockholders’ equity at the end of the previous fiscal year and at the end of the fiscal year ended March 31, 2004.2007.)

Basic net income per share was 95.97126.15 yen compared with 125.74122.58 yen in the previous fiscal year, and diluted net income per share was 90.88120.29 yen compared with 118.21116.88 yen in the previous fiscal year. Refer to Notes 2 and 2021 of Notes to Consolidated Financial Statements.


35

 
Operating Performance by Business Segment

Operating Performance by Business Segment

The following discussion is based on segment information. Sales and operating revenue in each business segment include intersegment transactions. Refer to Note 2324 of Notes to Consolidated Financial Statements.
 
Business Segment Information
              
Year Ended
March 31
20032004Percent change
(Yen in billions)
Sales and Operating revenue
            
 Electronics  4,940.5   4,897.4   -0.9%
 Game  955.0   780.2   -18.3 
 Music  597.5   559.9   -6.3 
 Pictures  802.8   756.4   -5.8 
 Financial Services  537.3   593.5   +10.5 
 Other  306.3   330.4   +7.9 
   
   
   
 
 Elimination  (665.7)  (421.4)  — 
   
   
   
 
Consolidated  7,473.6   7,496.4   +0.3 
   
   
   
 

35

              
Year Ended
March 31
20032004Percent change
(Yen in billions)
Operating income (loss)
            
 Electronics  41.4   (35.3)  — 
 Game  112.7   67.6   -40.0%
 Music  (7.9)  19.0   — 
 Pictures  59.0   35.2   -40.3 
 Financial Services  22.8   55.2   +142.4 
 Other  (25.0)  (10.0)  — 
   
   
   
 
 Elimination and unallocated corporate expenses  (17.5)  (32.7)  — 
   
   
   
 
Consolidated  185.4   98.9   -46.7 
   
   
   
 

     At the beginning of the fiscal year ended March 31, 2004, Sony partly realigned its business segment configuration. Expenses incurred in connection with the creation of a network platform business have been transferred out of the Other segment

Business Segment Information
             
  Fiscal Year Ended
  
  March 31  
  2006 2007 Percent change
  (Yen in billions)  
 
Sales and operating revenue
            
Electronics  5,176.4   6,050.5   +16.9%
Game.  958.6   1,016.8   +6.1 
Pictures  745.9   966.3   +29.5 
Financial Services  743.2   649.3   −12.6 
All Other  426.0   377.6   −11.4 
Elimination  (539.5)  (764.8)  — 
             
Consolidated  7,510.6   8,295.7   +10.5 
             
             
  Fiscal Year Ended
  
  March 31  
  2006 2007 Percent change
  (Yen in billions)  
 
Operating income (loss)
            
Electronics  6.9   156.7   +2,167.4%
Game  8.7   (232.3)  — 
Pictures  27.4   42.7   +55.7 
Financial Services  188.3   84.1   −55.3 
All Other  20.5   32.4   +57.9 
             
Sub-Total  251.9   83.7   −66.8 
Elimination and unallocated corporate expenses  (25.5)  (11.9)  — 
             
Consolidated  226.4   71.8   −68.3 
             
Electronics
Sales and reclassified as unallocated corporate expenses, because the expected future benefits of this business will be spread across the Sony Group. In the Music segment, certain non-core businesses of Sony Music Entertainment (Japan), Inc., such as media, animation, character and cosmetics, were transferred to the newly-established Sony Culture Entertainment, Inc. (“SCU”) and SCU was classified in the Other segment. In accordance with this realignment, results of the previous fiscal year have been reclassified to conform to the presentationoperating revenue for the fiscal year ended March 31, 2004.

Electronics

     Sales for the fiscal year ended March 31, 2004 decreased by 43.12007 increased 874.1 billion yen, or 0.916.9 percent, to 4,897.46,050.5 billion yen compared with the previous fiscal year. An operating loss of 35.3Operating income increased by 149.8 billion yen, was recorded comparedor 2,167.4 percent, to operating income of 41.4156.7 billion yen incompared with the previous fiscal year.

     The year on year decrease inand the operating income to sales was dueratio increased from 0.1 percent to a significant decrease in intersegment sales to the Game segment as a result of the outsourcing of PlayStation 2 game console production to third parties in China.2.6 percent. Sales to outside customers on a yen basis increased 4.713.5 percent compared withto the previous fiscal year.

Regarding sales to outside customers by geographicgeographical area, sales on a yen basis increased by 7 percent in Japan, by 119 percent in the U.S., by 24 percent in Europe, and by 1014 percent and in non-Japan Asia and other geographic areas (“Other Areas”) by 8 percent. Sales on.

In Japan, there was a yen basissignificant increase in the U.S. decreased 7 percent.

     In Japan, mainly due to the strong sales of mobile phones, principally to Sony Ericsson, and LCD televisions, while sales decreased for DVD-Video recorders, personal computers (“PCs”) and CRT televisions. In the U.S., sales of cellularLCD televisions significantly increased, while sales decreased for rear projection and CRT televisions. In Europe, sales increased for LCD televisions and PCs, while sales declined for CRT televisions and home-use video cameras. In Other Areas, sales of LCD televisions and digital cameras increased, while sales of mobile phones, primarily to Sony Ericsson, increased significantly. In addition, sales of charge coupled devices (“CCDs”), which benefited from an expansion in demand mainly from digital still cameras, DVD recorders (including PSX), plasma and LCD flat panel televisions, and broadcast- and professional-use equipment increased. On the other hand, sales of PCs and CRT televisions decreased. In Europe,The decrease in sales of digital still cameras, flat panel televisions, cellularmobile phones and PCs increased significantly. Sales of CRT televisions, portable audio, Aiwa products, and home audio, however, decreased. In Other Areas, sales of CD-R/ RW and DVD+/-R/ RW drives, digital still cameras, PCs, and video cameras increased while sales of CRT televisions decreased. In the U.S., a significant decrease in the sales of CRT televisions combined with decreased sales of Aiwa products, computer displays, set-top boxes, and personal digital assistants to cause a decline in sales, but sales of flat panel televisions, projection televisions, digital still cameras and PCs increased.


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was due to the impact of the deconsolidation resulting from the transfer to Sony Ericsson in the previous fiscal year of the stock of a Chinese subsidiary that mainly assembled mobile phones.
Performance by Product Category

Performance by Product Category
Sales and operating revenue by product category discussed below represent sales to outside customers, which do not include intersegment transactions. Refer to Note 2324 of Notes to Consolidated Financial Statements.

     “Audio”

“Audio” sales decreased by 58.913.3 billion yen, or 8.62.5 percent, to 623.6522.9 billion yen. Sales of homeflash memory and hard drive digital audio declinedplayers decreased due to a contraction of the market and increased price competition. Regarding headphone stereos, sales declined primarily due to falling prices, but thechange in model mix, as unit shipments of both MD format and CD format devices slightly exceeded their levels inapproximately 4.5 million units were flat compared to the previous fiscal year. Worldwide shipments of MD format devices increased by approximately 40,000 units to approximately 3.36 million units and worldwide shipments of CD format devices increased by approximately 240,000 units to approximately 10.96 million units. On the other hand, there was a significant decrease in sales of both CD and MiniDisc (“MD”) format headphone stereos due to a shift in market demand. However, car audio and home audio sales increased.
“Video” sales increased by 121.8 billion yen, or 11.9 percent, to 1,143.1 billion yen. Sales of digital cameras increased in Japan, the U.S. and Europe. Worldwide shipments of digital cameras increased by approximately 3.5 million units to approximately 17.0 million units. Sales of DVD recorders decreased as worldwide shipments decreased by approximately 150,000 units to approximately 1.85 million units. Worldwide shipments of home-use video cameras decreased by approximately 150,000 units to approximately 7.45 million units. DVD-Video player unit shipments decreased by approximately 100,000 units to approximately 7.9 million units.
“Televisions” sales increased by 299.2 billion yen, or 32.2 percent, to 1,227.0 billion yen. There was a significant increase in worldwide sales of LCD televisions, as worldwide shipments of LCD televisions increased by approximately 3.5 million units, to approximately 6.3 million units. Sales of LCD rear projection televisions decreased significantly as a result of declining sales prices, despite an increase in worldwide shipments of approximately 50,000 units, as compared to the previous fiscal year, to approximately 1.10 million units. There was also a significant decrease in worldwide sales of CRT televisions, primarily as a result of a decrease in worldwide shipments of CRT televisions by approximately 2.1 million units to approximately 4.7 million units.
“Information and Communications” sales increased by 107.9 billion yen, or 12.8 percent, to 950.5 billion yen. Sales of PCs increased due to strong sales in the European market.

     “Video” sales increased by 97.0 billion yen, or 11.4 percent, to 948.1 billion yen. In addition to a significant increase in the sales of digital still cameras outside of Japan, sales of DVD recorders (including PSX) increased significantly primarily in Japan. Worldwide shipments of digital still cameras increased by approximately 4.4 million units to approximately 10 million units. Worldwide shipments of DVD recorders were approximately 20,000 units in the previous fiscal year but increased to approximately 650,000 units in the fiscal year ended March 31, 2004. Regarding home-use video cameras, worldwide shipments of combined analogEurope and digital devices increased by approximately 850,000 units to approximately 6.6 million units, but overall sales increased only slightly, as sales in JapanOther Areas, and the U.S. decreased due to increased price competition. DVD-Video player sales decreased due to pricing pressure, although unit shipments increased.

     “Televisions” sales decreased by 33.0 billion yen, or 3.5 percent, to 917.2 billion yen. Sales of CRT televisions decreased significantly due to a contraction of the market and declining prices, resulting primarily from a shift in demand to flat panel televisions. Worldwide shipments of CRT televisions decreased approximately 600,000 units to approximately 9.4 million units compared with the previous fiscal year. Sales of computer displays also decreased worldwide. On the other hand, sales of plasma and LCD flat panel televisions increased significantly worldwide and sales of projection televisions in the U.S. increased. Worldwide shipments of flat panel televisions increased approximately 480,000 units to approximately 640,000 units.

     “Information and Communications” sales decreased by 2.0 billion yen, or 0.2 percent, to 834.8 billion yen. Despite a decrease in sales in Japan, due to price declines in the notebook PC market, overall sales of PCs increased as sales in all regions outside of Japan increased. Worldwide unit shipments of PCs increased approximately 100,000300,000 units to approximately 3.24.0 million units. Sales of personal digital assistants decreased due to a contraction of the market and the effects of price declines. Sales of broadcast- and professional-use products were almost unchanged year on yearincreased as a result of favorable sales in Japan increased due to the sale of equipment installed in two new broadcasting stations, while many broadcasters in the U.S. and other countries outside of Japan reduced their capital expenditures.

     “Semiconductors”high-definition related products.

“Semiconductors” sales increased by 48.533.5 billion yen, or 23.719.5 percent, to 253.2205.8 billion yen. The increase was due to a significantan increase in sales of CCDs, mainly reflecting the expansion of the market for digital still cameras. Regarding LCDs, sales of low temperature polisilicon LCDs for digital still camerascharged coupled devices (“CCDs”) and cellular phones increased significantly.

     “Components”CMOS image sensors.

“Components” sales increased by 96.052.3 billion yen, or 18.26.5 percent, to 623.8853.0 billion yen. TheThis increase was primarily due to significant increasesan increase in sales of CD-R/ RW and DVD+/-R/ RW drives, and Memory Sticks. Moreover, sales of lithium-ion batteries, increased. Sales of CD-R/ RW drives increased due to a production and sales alliance with a third party, and sales of DVD+/-R/ RW drives increased as a result of the expansion of the market for those devices. Worldwide shipments of Memory Stick increased approximately 12 million units to approximately 31 million units due to the continued, strong demand for digital still cameras. On March 31, 2004, Sony’s cumulative shipments of Memory Stick had reached approximately 66 million units. Regarding lithium-ion batteries, salesprimarily for use in digital still camerasPCs and PCs increased.

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     “Other” sales increased by 67.4 billion yen, or 13.7 percent, to 557.7 billion yen. The increase resulted from a significant increase in sales to Sony Ericsson of mobile phone handsets, reflecting an increase in the sales of Sony Ericsson’s handsets.power tools, and Memory Sticks. On the other hand, sales of Aiwa products decreasedCD-R/RW drives and optical pickups declined, primarily as a result of significant unit price declines. Sales of DVD+/-R/RW drives increased, despite a deterioration in all regions.

unit selling prices, as a result of a significant growth in units sold in association with the expansion of the market.

“Other” sales increased by 37.8 billion yen, or 7.9 percent, to 519.2 billion yen. This increase was the result of an increase in sales of mobile phones, primarily to Sony Ericsson.
In the Electronics segment, cost of sales for the fiscal year ended March 31, 2004 decreased2007 increased by 34.6594.4 billion yen, or 0.914.2 percent to 3,834.64,769.0 billion yen compared with the previous fiscal year. The cost of sales ratio improved by 1.8 percentage points to sales ratio remained unchanged year on year at 78.8 percent. Products that contributedpercent compared to 80.6 percent in the previous fiscal year. There was also an improvement in the cost of sales to sales ratio were PCs, which benefited from an emphasis on profitabilityfor such products as digital cameras, LCD televisions and an increase inhome-use video cameras, although the proportion of high value added models in the product line-up, and low temperature polisilicon LCDs, which benefited from a significant expansion in sales. Offsetting this improvement, however, was a significant increase in the sales of mobile phone handsets, produced for Sony Ericsson, which have a relatively high cost of sales ratio deteriorated for products such as LCD rear projection televisions due to sales ratio.price reductions associated with severe sales competition in North America. Restructuring charges recorded in cost of sales amounted to 10.112.6 billion yen, a decrease of 11.2 billion yen compared with 22.2the 23.8 billion yen recorded in the previous fiscal year. Research and development costs increased 49.122.2 billion yen, or 12.95.3 percent, from 380.3418.1 billion yen in the previous fiscal year to 429.4440.4 billion yen.

Selling, general and administrative expenses increased by 67.9170.6 billion yen, or 6.818.3 percent to 1,068.71,101.7 billion yen compared with the previous fiscal year. The primary reasonA provision of 51.2 billion yen was recorded for the fiscal year ended


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March 31, 2007 for recalls by Dell Inc., Apple Inc. and Lenovo, Inc. of notebook computer battery packs that use lithium-ion batteries manufactured by Sony as well as the subsequent global replacement program initiated by Sony for certain notebook computer battery packs used by Sony and several other notebook computer manufacturers that use lithium-ion battery cells manufactured by Sony. Also, an additional provision was recorded due to the expansion of models subject to free repairs and an extension of the repair period for Sony products and the products of other companies that are equipped with Sony CCDs. Results for the Electronics segment were also negatively impacted by an adjustment to reflect a more accurate method of calculating the provision for free repairs of Sony CCDs, which had the effect of further increasing the provision. Although there was a reversal of a portion of provisions related to the resolution of certain patent claims recorded in prior periods, this increasereversal was an increasemore than offset by the negative impact of the recording of certain provisions for outstanding legal proceedings including the European Commission’s investigation in connection with professional videotape claims. Finally, a 64.5 billion yen gain recorded as a result of the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund was included in the previous fiscal year. Total selling, general and administrative expenses increased because the cumulative impact of the above-mentioned items exceeded the decrease in restructuring charges.charges that were recorded in selling, general and administrative expenses for the fiscal year ended March 31, 2007. Of the restructuring charges recorded in the Electronics segment, the amount recorded in selling, general and administrative expenses increaseddecreased by 86.235.5 billion yen from 36.449.5 billion yen in the previous fiscal year to 122.614.0 billion yen. Of the restructuring charges recorded in selling, general and administrative expenses, the amount recorded for headcount reductions, including reductions through the early retirement program, was 117.19.7 billion yen, an increasea decrease of 89.3 billion yen compared with the previous fiscal year. In addition to these personnel related costs, restructuring charges were recorded in relation to TV display CRT manufacturing facilities in Japan. In contrast to the increase in restructuring charges, royalty expenses decreased 20.4 billion yen and after sales service expenses decreased 8.635.4 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales increased 1.50.2 percentage points from 20.3the 18.0 percent recorded in the previous fiscal year to 21.8 percent, due to the decrease in sales.

18.2 percent.

Loss on sale, disposal or impairment of assets, net increased 0.3decreased 12.3 billion yen to 29.410.8 billion yen compared with the previous fiscal year. This amount includes 10.610.8 billion yen inof restructuring charges, which includesincluding 5.2 billion yen of restructuring charges related to the TV displayrecording of an impairment loss for goodwill for a CRT television glass manufacturing facilitiessubsidiary in Japan.the U.S. The amount of restructuring charges included in loss on sale, disposal or impairment, net in the previous fiscal year was 13.952.5 billion yen.

     Regarding profit performance

The amount of operating income recorded in the Electronics segment an operating loss was recorded for the fiscal year ended March 31, 2007, increased significantly due to a significantan increase in restructuring charges, especially severance-related expenses,sales to outside customers and the positive impact of the depreciation of the yen. This result is in spite of the above-mentioned recording by Sony of a 51.2 billion yen provision that relates to recalls of notebook computer battery packs and the subsequent global replacement program and the recording of an additional provision related to free repairs of Sony CCDs. The operating income from the previous year included a 64.5 billion yen gain that was recorded as mentioned above.a result of the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund. Regarding profit performance by product, excluding restructuring charges compared withand the previous fiscal year, operating income was recorded in PCs compared withimpact of the net gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund, digital cameras and LCD televisions, which experienced favorable sales, and video cameras, which experienced an operating loss in the previous fiscal year, and a significant increase in operating incomesales of CCDs was recorded. Losses from Aiwa products decreased whilehigh value-added models, contributed to the increase in the operating income of CD-R/ RW and DVD+/-R/ RW drives, as well as of video cameras, increased.

On the other hand, operating income of CRT televisions decreased significantly while operating income of optical pickups decreased due to a sharp decline in prices. Furthermore, personal digital assistants recorded an operating loss compared with operating income recorded in the previous year.segment.

 
Manufacturing by Geographic Area

     Approximately

Manufacturing by Geographic Area
Slightly more than 50 percent of the Electronics segment’s total annual production during the fiscal year ended March 31, 2007 took place in Japan, including the production of digital still cameras, video cameras, flat panel televisions, PCs, semiconductors and components such as batteries and Memory Sticks. Approximately 60 percent of the annual production in Japan was destined for other regions. China accounted for approximately 15slightly more than 10 percent of total annual production, approximately 6080 percent of which was destined for Japan, the U.S. and Europe.other regions. Asia, excluding Japan and China, accounted for approximately 10 percent of total annual production, with

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approximately 60 percent destined for Japan, the U.S. and Europe. The Americas and Europe together accounted for the remaining balance of approximately 25 percent of total annual production, most of which was destined for local distribution and sale. Until July 2003, total annual production included the assembly of PlayStation 2 hardware for the


38

Game segment; however, due to the outsourcing of PlayStation 2 hardware production to China-based third parties, this assembly activity ceased in July 2003.
 
Comparison of Results on a Local Currency Basis and Results on a Yen Basis

     In the Electronics segment, the negative effect of the appreciation of the yen against the U.S. dollar slightly exceeded the positive effect of the appreciation of the euro against the yen.

Sales for the fiscal year ended March 31, 2004 decreased, on a yen basis,2007 increased by 0.9 percent, but increased on a local currency basis by approximately 1 percent. In terms of operating performance on a local currency basis, an operating loss was recorded compared to operating profit in the previous year, but the amount of that loss was less than on a yen basis.

     Regarding sales to outside customers by geographic area, sales on a yen basis increased in Japan by 11 percent, in Europe by 10 percent, and in Other Areas by 8 percent. Sales on a yen basis in the U.S decreased 7 percent. Sales on a local currency basis increased in every region, with sales in Japan increasing 11 percent, sales in Europe increasing 4 percent, sales in Other Areas increasing 14 percent and sales in the U.S. increasing 1 percent.

Game

     Sales for the fiscal year ended March 31, 2004 decreased by 174.858.2 billion yen, or 18.36.1 percent, to 780.21,016.8 billion yen compared with the previous fiscal year. Operating income decreased by 45.1An operating loss of 232.3 billion yen or 40.0 percent,was recorded for the fiscal year ended March 31, 2007, which was a deterioration of 241.1 billion yen from the fiscal year ended March 31, 2006.

By region, although sales decreased slightly in Japan, there was a significant increase in sales in North America and Europe.
Overall hardware sales increased as a result of the launch of the PS3 in Japan, North America and Europe. However, the sales of the PlayStation®2 (“PS2”) and PSP®(PlayStation®Portable) (“PSP”) declined due to 67.6 billion yenlower unit sales compared with the previous fiscal year, and the operating income margin decreased from 11.8 percent to 8.7 percent.

     Sales in the Game segment onalso because of a local currency basis decreased 18 percent, approximately the same as on a yen basis. In regards to operating income, the positive impact of the depreciation of the yen against the euro exceeded the negative impact of the appreciation of the yen against the U.S. dollar, resulting in a 52 percent decrease in operating income on a local currency basis.

     By region, sales decreased in Japan, the U.S. and Europe. In Japan, hardware sales declined due to a strategic price reduction of PlayStation 2 hardware,the PS2. On the other hand, overall software sales decreased as a result of lower PS2 software sales, despite higher unitan increase in PSP software sales, of PlayStation 2 hardware. Software sales in Japan also decreased due to lower unit sales. In the U.S., sales declined due to a decrease in unit sales of PlayStation 2 hardware, a strategic price reduction of PlayStation 2 hardware and a decrease in software unit sales. In Europe, although hardware unit sales increasedas well as the market penetration of PlayStation 2 hardware continued to expand, hardware sales declined due to a strategic price reduction of PlayStation 2 hardware. Software unit sales andcontribution from PS3 software sales, in Europe both increased.

compared to the previous fiscal year.

Total worldwide production shipments of hardware and software were as follows:
              
Year Ended
March 31
Cumulative as of
20032004March 31, 2004
(Million units)
Total Production Shipments of Hardware            
 PlayStation + PS one  6.78   3.31   99.72 
 PlayStation 2  22.52   20.10   71.30 
Total Production Shipments of Software*            
 PlayStation  61.00   32.00   949.00 
 PlayStation 2  189.90   222.00   572.00 

Worldwide hardware production shipments (decrease compared to the previous fiscal year):*
* Including those both from Sony and third parties under Sony licenses.à  PS2:14.20 million units (a decrease of 2.02 million units)
à  PSP: 8.36 million units (a decrease of 5.70 million units)
à  PS3: 5.50 million units

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     In terms

Worldwide software production shipments (increase/decrease compared to the previous fiscal year):*/**
à  PS2:193 million units (a decrease of 30 million units)
à  PSP:54.1 million units (an increase of 12.5 million units)
à  PS3:13.2 million units
* Production shipments of profitability, operating income decreasedhardware and software are counted upon shipment of the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers.
** Including those both from Sony and third parties under Sony licenses.
Operating performance deteriorated significantly compared with the previous fiscal year. This decreasedeterioration was primarily the result of the loss arising from the sale of the PS3 at strategic price points lower than its production cost during the introductory period, as well as the recording of other charges in association with the preparation for the launch of the PS3 platform. Operating income for the PS2 business decreased due to an increase in research and development costs for future businesses and a decrease in software sales while operating income in the PSP business increased primarily due to continued cost reductions in hardware sales. Research and development costs increased by 21.9production. A write-down of PS3-related inventory of 81.4 billion yen to 83.4was recorded in the fiscal year ended March 31, 2007 compared with a write-down of 25.0 billion yen compared withrecorded in the previous fiscal year. Although research and development costs for software development increased only slightly, costs for the development of semiconductors and process technologies increased significantly.

     Cost of sales in the Game segment decreased due to the decrease in hardware unit sales and reductions in the cost of producing hardware.

The cost of sales to sales ratio however, remained unchanged asdeteriorated 22.4 percentage points, from 80.4 percent in the cost of producing PlayStation 2 hardware decreased in line with the decrease in hardware sales. Selling, generalprevious fiscal year, to 102.8 percent and administrative expenses decreased as a result of a decline in advertising and promotion expenses, reflecting the decrease in hardware units sold. However, the ratio of selling, general and administrative expenses to sales rose compared toincreased 1.3 percentage points from 18.7 percent in the previous fiscal year, asto 20.0 percent for the ratio of personnel relatedreasons mentioned for the decrease in operating income above.
A significant reduction in the operating loss is expected in the fiscal year ending March 31, 2008 due to rapid reductions in hardware production costs and advertising and promotion expenses to sales rose compared withan enhancedline-up of software titles in the previous fiscal year.

PS3 business.

MusicPictures

Sales for the fiscal year ended March 31, 2004 decreased2007 increased by 37.6220.4 billion yen, or 6.329.5 percent, to 559.9966.3 billion yen compared with the previous fiscal year. Compared to an operating loss of 7.9 billion yen in the previous fiscal year, operating income of 19.0 billion yen was recorded this year.

     On a local currency basis, sales in the Music segment were flat while the Music segment recorded operating income as compared to an operating loss in the previous fiscal year.

Sales at Sony Music Entertainment Inc. (“SMEI”), a U.S. based subsidiary, were flat on a U.S. dollar basis (refer to “Foreign Exchange Fluctuations and Risk Hedging” below). In terms of profitability, SMEI recorded operating income in the fiscal year as compared to an operating loss in the previous fiscal year. The appreciation of European currencies against the U.S. dollar contributed to higher sales outside of the U.S. which were offset by lower sales in the U.S. On a worldwide basis, total album sales at SMEI decreased due to the continued contraction of the global music industry and the lack of hit releases. Although unit sales in various markets such as the U.S. have begun to reverse their downward trend, the global music market has continued to experience an overall contraction primarily due to piracy (i.e. unauthorized file sharing and CD burning) and competition from other entertainment sectors.

     The increase in profitability resulted in operating income at SMEI, compared to an operating loss recorded in the previous fiscal year. The improvement in profitability primarily resulted from the benefits realized from the worldwide restructuring activities implemented over the past two years to reduce costs in response to the downward trend of the market. These activities included the rationalization of manufacturing, distribution and support functions including record label shared services through elimination of redundancy. Operating income also benefited from lower restructuring charges as compared to the prior year. The total cost of restructuring for the fiscal year ended March 31, 2004 was 95 million U.S. dollars or 10.7 billion yen, a decrease of 95 million U.S. dollars from the prior year (refer to “Restructuring” above for details.) A third factor contributing to the improved operating results were lower advertising and promotion expenses. The above factors more than offset the negative effect of lower worldwide album sales. The savings realized from previously implemented restructuring initiatives, lower restructuring charges and the decrease in advertising and promotion expenses resulted in a decrease in selling, general and administrative expenses for the year and an improvement in the ratio of selling, general and administrative expenses to sales.

     Regarding the results of Sony Music Entertainment (Japan) Inc. (“SMEJ”), sales were flat compared with the previous year, despite the continued contraction of the music industry. Operating income increased 69 percent compared with the prior year due to a reduction in selling, general and administrative expenses, primarily advertising and promotion expenses, and strong sales of Japanese artists’ recordings.

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     On a yen basis, 74 percent of the Music segment’s sales were generated by SMEI while 26 percent were generated by SMEJ.

     In December 2003, Sony and Bertelsmann AG announced that they had signed a binding agreement to combine their recorded music businesses in a joint venture. The newly formed company, which will be known as Sony BMG, will be 50% owned by each parent company. It will not include SMEI’s music publishing, physical distribution and disc manufacturing business or SMEJ. The merger is subject to regulatory approvals in the U.S. and the European Union.

Pictures

     Sales for the fiscal year ended March 31, 2004 decreased by 46.4 billion yen, or 5.8 percent, to 756.4 billion yen compared with the previous fiscal year. Operating income decreasedincreased by 23.815.3 billion yen, or 40.355.7 percent , to 35.242.7 billion yen and the operating income margin decreasedincreased from 7.33.7 percent to 4.74.4 percent. The results in the Pictures segment consist of the results of Sony Pictures Entertainment Inc. (“SPE”), a U.S. based subsidiary.

On a U.SU.S. dollar basis, sales for the fiscal year in the Pictures segment increased approximately 226 percent and operating income decreasedincreased by approximately 3053 percent. The increase in sales was primarily due to higher television performance in the fiscal year. Television revenuesSales increased significantly due to initial syndication sales ofThe King of Queensand third cycle syndication sales ofSeinfeld, as well as the extension of a licensing agreement forWheel of Fortune. This increase in sales was partially offset by lowerhigher worldwide theatrical and home entertainment revenuesrevenue from films released in the current fiscal year, as compared to those


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released in the previous fiscal year. Major films released in the fiscal year release slate, whichthat contributed to both theatrical and home entertainment revenue included such notable titles asBad Boys 2The Da Vinci Code,S.W.A.T.Casino Royale,Anger ManagementClick,Talladega Nights: The Ballad of Ricky BobbyandSomething’s Gotta Give, when compared to the prior fiscal year release slate, which includedSpider-Man, the highest grossing film in SPE’s history,Men in Black II, xXxandMr. Deeds.The Pursuit of Happyness. Sales for the fiscal year release slate decreased 359 millionincreased approximately 1.8 billion U.S. dollars as compared to the previous fiscal year. Television product revenues increased by approximately 160 million U.S. dollars primarily as a result of higher advertising and subscription sales from several international channels.
Operating income for the segment decreasedincreased significantly, primarily due to the absenceperformance of profits contributed by the record breaking performance ofSpider-Manfilms released in the previouscurrent fiscal year and, to a lesser extent,year. Operating loss from the aggregate disappointing performance of several films from thecurrent fiscal year release slate includingGigli, Hollywood Homicide, The MissingandCharlie’s Angels: Full Throttle, resultingdecreased approximately 530 million U.S. dollars as compared to the previous year’s release slate due to the same factors contributing to the increase in film revenue noted above. Partially offsetting this was a decrease in operating income of 41298 million U.S. dollars fromfor television product primarily due to the priorrecording of production and marketing expenses in the current fiscal year release slate. Additionally, operating incomeassociated with several new network andmade-for-syndication television shows, combined with the absence of a licensing agreement extension forWheel of Fortune, which was recognized in the previous fiscal year. Results for the Pictures segment were also negatively impacted by a 38 million U.S. dollaran adjustment to increase in restructuring charges recorded in the fiscal year (refer to “Restructuring” aboveits reserve for details). Partially offsetting these decreases in operating income was the contribution from the syndication sales and extensionreturns of a licensing agreement noted above, DVD sales of television library product and an additional syndication sale ofDawson’s Creek, resulting in a 201 million U.S. dollar increase in operating income. Further improving operating income was the absence of the 66 million U.S. dollar provision recorded in the prior year with respect to previously recorded revenue from KirchMedia, a licensee in Germany of SPE’s feature film and television product, and related adjustments to ultimate film income.

home entertainment catalog product.

As of March 31, 2004,2007, unrecognized license fee revenue at SPE was approximately 1.21.1 billion U.S. dollars. SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television product.products. The license fee revenue will be recognized in the fiscal year thatin which the product is made available for broadcast.

Financial Services

Note that the revenue and operating income at Sony Life, Sony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”) discussed below on a U.S. GAAP basis differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
Financial Services segment revenue for the fiscal year ended March 31, 2004 increased2007 decreased by 56.393.9 billion yen, or 10.512.6 percent, to 593.5649.3 billion yen compared with the previous fiscal year. Operating income increaseddecreased by 32.4104.2 billion yen, or 142.455.3 percent, to 55.284.1 billion yen and the operating income margin increaseddecreased to 9.313.0 percent compared with the 4.225.3 percent of the previous fiscal year.

At Sony Life, revenue increaseddecreased by 46.4100.0 billion yen, or 9.915.5 percent, to 513.0 billion yen and operating income increased by 33.6 billion yen, or 113.3 percent, to 63.2545.1 billion yen compared with the previous fiscal year. RevenueAlthough revenue from insurance premiums increased due to improvementsat Sony Life reflecting an increase ininsurance-in-force, the main reason for this decrease was lower valuation gains and losses from investments in the general and separate account andaccounts as compared to the general account, reflecting strengthprevious fiscal year, when there was a significant increase in the equity markets. This increase occurred

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despite a 30.8 billion yen reduction in revenue resulting from a change in the method of recognizing insurance premiums received on certain products from being recorded as revenues to being offset against the related provision for future insurance policy benefits since the third quarter beginning October 1, 2003. Insurance revenue decreased as a result of this change in method of recording revenue but the actual life insurance business remained strong as new insurance sales increased compared with the previous year, and the amount of insurance-in-force at the end of the fiscal year increased compared with the end of the previous year.Japanese stock market. Operating income at Sony Life increaseddecreased by 106.8 billion yen or 56.7 percent to 81.7 billion yen, primarily due to improvementsa decrease in valuation gains and losses from investments in the general account. The above mentioned change in revenue recognition method did not have a material effect on operating income. Valuationaccount, including valuation gains and losses from investments in the separate account accrue directly to the account of policyholders and, therefore, do not affect operating income.convertible bonds.

At Sony Assurance, Inc. (“Sony Assurance”), revenue increased due to higher insurance revenue brought about by an expansion in automobileinsurance-in-force. Operating income was recorded during the fiscal year comparedincreased due to an operating loss in the previous fiscal year due to the increase in insurance revenue and an improvement in the expense ratio (the ratio of sales, general and administrative expenses and commissions to net premiums written).
At Sony Bank, revenue rose mainly due to a significant decrease of foreign exchange losses from part of Sony Bank’s foreign currency deposits, as compared with the previous fiscal year, and an increase in interest revenue associated with an increase in the balance of assets from investing activities. As a result, Sony Bank recorded operating expensesincome in the fiscal year ended March 31, 2007, as compared to premiums) andan operating loss in the loss ratio (the ratio of insurance payouts to premiums).

previous fiscal year.

At Sony Finance International, Inc. (“Sony Finance”), a leasing and credit financing business subsidiary in Japan, revenue was unchanged compared to the previous year as credit financing revenue increased slightly and leasing revenue and rentoverall revenue decreased slightly. In terms of profitability,and the operating loss increased primarily due to the recording of a loss from the lease of certain fixed assets to Crosswave Communications Inc., which commenced reorganization proceedings under the Corporate Reorganization Law of Japan,decreases in revenue and an increase in expenses associated withprofit at leasing and installment businesses. However, revenue increased at the start, in earnest, of a credit card business.

     Sony Bank Inc. (“Sony Bank”),business which started businessresulted in June 2001, recorded a loss, as was also the casedecrease in the previous fiscal year, butoperating loss recorded for that business.


40

Condensed Statements of Income Separating Out the amount of loss decreased.

* The revenue and operating income at Sony Life, Sony Assurance and Sony Bank discussed here differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
Financial Services Segment (Unaudited)

 
Condensed Statements of Income Separating Out the Financial Services Segment (Unaudited)

The following schedule shows unaudited condensed statements of income for the Financial Services segment and all other segments excluding Financial Services as well as condensed consolidated statements of income. This presentation is not required under generally accepted accounting principles in the U.S. GAAP,(“U.S. GAAP”), which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements.

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Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
Condensed Statements of Income
                         
All other segments
excluding
Financial ServicesFinancial ServicesConsolidated
Year Ended March 31200320042003200420032004
(Yen in millions)
Financial Services revenue  537,276   593,544   —   —   509,398   565,752 
Net sales and operating revenue  —   —   6,974,980   6,939,964   6,964,235   6,930,639 
   
   
   
   
   
   
 
   537,276   593,544   6,974,980   6,939,964   7,473,633   7,496,391 
   
   
   
   
   
   
 
Costs and expenses  514,518   538,383   6,811,292   6,896,377   7,288,193   7,397,489 
   
   
   
   
   
   
 
Operating income  22,758   55,161   163,688   43,587   185,440   98,902 
   
   
   
   
   
   
 
Other income (expenses), net  (1,282)  1,958   67,846   52,746   62,181   45,165 
   
   
   
   
   
   
 
Income before income taxes  21,476   57,119   231,534   96,333   247,621   144,067 
   
   
   
   
   
   
 
Income taxes and other  13,071   22,975   120,089   30,916   132,102   53,439 
Cumulative effect of accounting changes  —   —   —   (2,117)  —   (2,117)
   
   
   
   
   
   
 
Net income  8,405   34,144   111,445   63,300   115,519   88,511 
   
   
   
   
   
   
 
         
  Fiscal Year ended March 31
  Financial Services 2006 2007
  (Yen in millions)
 
Financial service revenue  743,215   649,341 
Financial service expenses  554,892   565,199 
         
Operating income
  188,323   84,142 
Other income (expenses), net  24,522   9,886 
         
Income before income taxes
  212,845   94,028 
Income taxes and other  78,527   33,536 
         
Net income
  134,318   60,492 
         
         
  Fiscal Year ended March 31
  Sony without Financial Services 2006 2007
  (Yen in millions)
 
Net sales and operating revenue  6,799,068   7,680,578 
Costs and expenses  6,762,194   7,694,375 
         
Operating income
  36,874   (13,797)
Other income (expenses), net  36,610   27,917 
         
Income before income taxes
  73,484   14,120 
Income taxes and other  84,186   (57,991)
         
Net income (loss)
  (10,702)  72,111 
         
  Fiscal Year ended March 31
  Consolidated 2006 2007
  (Yen in millions)
 
Financial service revenue  720,566   624,282 
Net sales and operating revenue  6,790,031   7,671,413 
         
   7,510,597   8,295,695 
Costs and expenses  7,284,181   8,223,945 
         
Operating income
  226,416   71,750 
Other income (expenses), net  59,913   30,287 
         
Income before income taxes
  286,329   102,037 
Income taxes and other  162,713   (24,291)
         
Net income
  123,616   126,328 
         


41

All Other

During the fiscal year ended March 31, 2007, sales of thewithin All Other segment were comprised mainly of an in-house oriented information system service business, an advertising agency business in Japan andsales from Sony Communication Network CorporationMusic Entertainment (Japan) Inc. (“SCN”SMEJ”), a Japanese domestic recorded music business; Sony Music Entertainment Inc.’s (“SMEI”) music publishing business;So-net, an Internet-related service business subsidiary operating mainly in Japan; a contactless IC card business; and an advertising agency business in Japan.

In June 2006, Sony Corporation sold 51 percent of the stock of StylingLife Holdings Inc. (“StylingLife”), a holding company comprised of six retail businesses within Sony previously included within All Other, to a wholly-owned subsidiary of Nikko Principal Investments Japan Ltd. Sony Corporation sold additional shares of StylingLife in December 2006, and currently holds approximately 23 percent of the total outstanding stock in StylingLife.

Sales for the fiscal year ended March 31, 2004 increased2007 decreased by 24.148.4 billion yen, or 7.911.4 percent, to 330.4377.6 billion yen, compared with the previous fiscal year. During the fiscal year, the sales decrease within All Other reflects the deconsolidation of the six retail businesses noted above after the sale of a majority of the stock of StylingLife. Of total segment sales, 5382 percent were sales to outside customers. In terms of profit performance, operating lossesincome for the segment decreasedAll Other increased from 25.020.5 billion yen in the previous fiscal year to 10.032.4 billion yen.

During

Sales at SMEJ declined mainly due to lower intersegment sales in association with the transfer of business activity relating to Sony’s disc custom press business, which was carried out at SMEJ during the previous fiscal year, to other segments within Sony Group. Best selling albums during the fiscal year included CHEMISTRY’sALL THE BEST, Yuna Ito’sHEARTand Angela Aki’sHOME.
Excluding sales increased primarilyrecorded within Sony’s music business, there was a decrease in sales within All Other. This decrease was mainly due to the above-mentioned deconsolidation of Sony’s retail businesses, partially offset by an increase in sales at the in-house oriented information systemcontactless IC card business andSo-net, where there was a favorable increase in fiber optic connection service business, reflecting greater demand for its services by other businesses within the Sony Group. subscribers.
Regarding profit performance the segmentwithin All Other, operating income of 32.4 billion yen was recorded, a loss primarily duean 11.9 billion yen increase compared to the recording20.5 billion yen of expenses associated with the development of network and content technology and services, intended to facilitate new businessesoperating income recorded in the broadband age. Overall segment losses decreasedprevious fiscal year. Operating income at SMEJ declined approximately 37 percent compared to the previous fiscal year, primarily becausemainly due to a U.S. subsidiary recordeddecrease in album and single sales and the recognition of a one-time gain in the previous fiscal year resulting from the transfer to the Japanese government of 7.7 billion yen onthe substitutional portion of Sony’s Employee Pension Fund.
Excluding the decrease in operating income in the music business, there was an increase in operating income within All Other, mainly due to an asset impairment write-down associated with the sale of rights related tothe Metreon, a portion of the Sony Card portfolio and because software in a discontinued professional-use video software business had been written offU.S. entertainment complex, recorded in the previous fiscal year. On the other hand, an operating loss was recordedOperating income at SCN compared with operating income in the previous fiscal year,So-net increased mainly due to increased expenses for subscriber acquisition.an increase in profit resulting from greater fee revenue from new subscribers.
 
Foreign Exchange Fluctuations and Risk Hedging

During the fiscal year ended March 31, 2004,2007, a gain on the sale of a portion of Sony’s former headquarters site in the amount of 2.6 billion yen is included in operating income within All Other.
Foreign Exchange Fluctuations and Risk Hedging
During the fiscal year ended March 31, 2007, the average value of the yen was 112.1116.0 yen against the U.S. dollar, and 131.1148.6 yen against the euro,Euro, which was 7.33.2 percent higherlower against the U.S. dollar and 9.78.2 percent lower against the euro,Euro, respectively, compared with the average of the previous fiscal year. Operating results on a local currency basis described in “Overview” and “Operating Performance” show results of sales and operating revenue and operating income obtained by applying the yen’s monthly average exchange rate in the previous fiscal year to monthly local currency-denominated sales, cost of sales, and selling, general and administrative expenses for the fiscal year ended March 31, 2004, as if the value of the yen had remained constant. In the Music segment, Sony consolidates the yen-translated

43

results of SMEI (a U.S. based operation that aggregates the results of its worldwide subsidiaries on a U.S. dollar basis) and the results of SMEJ (a Japan based operation that aggregates the results of its operations in yen).
In the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of SPE (a U.S. basedU.S.-based operation that has worldwide subsidiaries).
Therefore, analysis and discussion of certain portions of the operating results of SMEI and SPE are specified as being on “a U.S. dollar basis.” Results on a local currency basis and results on a U.S. dollar basis are not on the same basis as Sony’s consolidated financial statements and do not conform with U.S. GAAP. In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that results presented on a local currency basis results provide additional useful information to investors regarding operating performance.

Sony’s consolidated results are subject to foreign currency rate fluctuations mainly derived from the fact that the countries where manufacturing takes place may be different from those where such products are sold. In order to


42

reduce the risk caused by such fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy. Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies.

     In 2001,

Sony Global Treasury Services Plc (“SGTS”) was established in London for the purpose of providingprovides integrated treasury services for Sony Corporation and its subsidiaries. Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should enter into commitments with SGTS for hedging their exposures. Sony Corporation and most of its subsidiaries utilize SGTS for this purpose. The concentration of foreign exchange exposures at SGTS means that, in effect, SGTS hedges the net foreign exchange exposure of Sony Corporation and its subsidiaries. SGTS in turn enters into foreign exchange transactions with creditworthy third-party financial institutions. Most of the transactions are entered into against projected exposures before the actual export and import transactions take place. In particulargeneral, SGTS hedges the majority of theprojected exposures on major currency pairs such as U.S. dollar against Japanese yen, euro against Japanese yen and euro against U.S. dollar, on average three months before the actual transactions take place. In the case of emerging market currencies, such as Brazil, with high inflation and high interest rates, the majority ofHowever, in certain cases SGTS partially hedges the projected exposures are hedged one month before the actual transactions take place due to cost effectiveness considerations.when business requirements such as shorter production-sales cycles for certain products arise. Sony enters into foreign exchange transactions with financial institutions onlyprimarily for hedging purposes andpurposes. Sony does not undertakeuse these derivative financial instruments for trading or speculative transactions.

purposes except for certain derivatives in the Financial Services segment utilized for portfolio investments and Asset Liability Management (“ALM”).

To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.

Changes in the fair value of derivatives designated as cash flow hedges, including foreign exchange forward contracts and foreign currency option contracts, are initially recorded in accumulated other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges aremarked-to-market with changes in value recognized in Other Income and Expenses. The notional amounts of foreign exchange forward contracts, currency option contracts purchased and currency option contracts written as of March 31, 20042007 were 1,348.21,768.6 billion yen, 375.6287.8 billion yen and 124.967.2 billion yen, respectively.

Operating Results for the Fiscal Year Ended March 31, 20032006 compared with the Fiscal Year Ended March 31, 20022005

Overview

     Although the global economy showed some signs of growth in the fiscal year ended March 31, 2003, military action in Iraq contributed to increased economic uncertainty in the second half of the year, particularly in the U.S.,

Sony’s sales and the year ended without any indications of a sustained recovery. In Japan, in addition to stagnant consumer demand and an increase in unemployment, declines in the stock market contributed to the unfavorable economic climate.

44

     Under such difficult market conditions and reflecting the impact of the translation of financial results into yen in accordance with U.S. GAAP, the currency in which Sony’s financial statements are prepared, Sony’s salesoperating revenue for the fiscal year ended March 31, 2003 decreased 1.42006 increased 4.4 percent compared with the previous fiscal year. This decrease was principallyincrease is mainly due to industry-wide declinesan increase in personal consumptionrevenues within the Financial Services segment, as a result of an improvement in gains and losses on investments at Sony Life due to favorable Japanese domestic equity market conditions, and increased sales within the Game segment, due to the contribution from the PSP. In the Electronics segment, and also increased price competitionalthough sales benefited from the depreciation of the yen as well as an increase in certain markets, including the PC, DVD-Video player and home-use video camera markets. However, operating income increased 37.7sales of LCD televisions, sales to outside customers decreased 0.9 percent compared with the previous fiscal yearyear. There was a decline in sales of CRT televisions, due to a continued shift in demand towards flat panel televisions, and in plasma televisions, where new product development has been terminated.

Operating income increased 55.5 percent compared with the beneficial effectprevious fiscal year. Operating income includes a one-time net gain of 73.5 billion yen, which resulted from the transfer to the Japanese government of the depreciationsubstitutional portion of Sony’s Employee Pension Fund. Of this amount, a gain of 64.5 billion yen was recorded within the yen againstElectronics segment. In the euro, as well asFinancial Services segment, operating income increased profitability ofdue to an improvement in gains and losses on investments at Sony Life resulting from the above-mentioned favorable Japanese domestic equity market conditions. In the Electronics segment, although restructuring charges increased compared with the previous fiscal year, the amount of operating loss decreased as a result of a net gain resulting from restructuring initiatives in previous fiscal years,the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund mentioned above and favorable exchange rates. Operating income within the Game segment due to increased software salesdeclined primarily as a result of an increase in research and decreased productiondevelopment costs and ofassociated mainly with the PS3. In the Pictures segment,


43

operating income also declined due to stronglower worldwide performance of certain releases intheatrical and home entertainment revenues on feature films.
Restructuring
In the fiscal year ended March 31, 2003.

On a local currency basis (regarding references to results2006, Sony recorded restructuring charges of operations expressed on a local currency basis, refer to“Foreign Exchange Fluctuations and Risk Hedging” below), Sony’s sales for the fiscal year ended March 31, 2003 decreased approximately 2 percent and operating income decreased approximately 5 percent compared with the previous fiscal year.

Restructuring

Restructuring charges for the fiscal year ended March 31, 2003 amounted to 106.3138.7 billion yen, compared to 107.0an increase from the 90.0 billion yen recorded in the previous fiscal year. The primary restructuring activities were in the Electronics segment and Music segments.All Other.

 
Electronics

Of the total 138.7 billion yen, Sony recorded 48.3 billion yen in personnel-related costs. This expense was incurred because 5,700 people, mainly in Japan, the U.S. and Western Europe, left Sony primarily through early retirement programs.
For more detailed information about restructuring, please refer to Note 17 of Notes to the Consolidated Financial Statements.
Electronics
Restructuring charges in the Electronics segment for the fiscal year ended March 31, 2003,2006 were 72.5125.8 billion yen, compared to 86.983.2 billion yen in the previous fiscal year, but exceededyear.
Due to the 60.0 billion yen total that was estimated at the beginning of the year.

     In the year ended March 31, 2003, a decision was made to reduce production capacity of CRT computer display manufacturing facilities in Japanworldwide market shrinkage and Southeast Asia, in response to market contraction resulting from the demand shift from CRT computer displaystelevisions to flatplasma and LCD panel displays such as LCDs. Although thetelevisions, Sony has been implementing a worldwide market forplan to rationalize CRT computer displays inand CRT television production facilities and has been downsizing its business over several years. In the fiscal year ended March 31, 2002 was approximately 96.0 million units,2006, as part of this restructuring program, Sony recorded a non-cash impairment charge of 25.5 billion yen for CRT TV display manufacturing facilities located in the fiscal year ended March 31, 2003 it had fallen to approximately 81.0 million units. In order to restoreU.S. The impairment charge was calculated as the profitabilitydifference between the carrying value of the CRT computer display business, which, due toasset group and the decrease in demand, had been suffering from low utilization ratios at manufacturing facilities, higher ratiospresent value of fixed costs to sales and lower operating income margins, Sony decided to close under-utilized manufacturing facilities.estimated future cash flows. The resulting charges totaled 6.9 billion yen, of which 1.3 billion yen was recorded in cost of sales, 1.7 billion yen was recorded in selling, general and administrative expenses, and 4.0 billion yencharge was recorded in loss on sale, disposal or impairment of assets, net.

     The restructuring program implementednet in the previous fiscal year was accelerated at Aiwa in response to a continued decline in operating performance, caused by further declines in the worldwide market for audio products, which form the majorityconsolidated statements of Aiwa’s sales. After further reductions in personnel and reductions in the number of unprofitable product lines which resulted in the closure of all of Aiwa’s manufacturing facilities, Aiwa’s operations were integrated with those of Sony. (Aiwa became a wholly-owned subsidiary of Sony Corporation in October 2002, and merged into Sony Corporation on December 1, 2002.) Charges resulting from the restructuring of Aiwa totaled 23.0 billion yen, of which 13.8 billion yen was recorded in cost of sales, 5.7 billion yen in selling, general and administrative expenses, and 3.5 billion yen in loss on sale, disposal or impairment of assets, net.

     In the fourth quarter of the fiscal year ended March 31, 2003, Sony decided to close a semiconductor plant in the U.S. that produced semiconductor wafers for both internal use and the original equipment manufacturer (OEM) market. This closure was both a response to a significant decline in the business conditions of the semiconductor industry in the U.S., and the result of a shift in Sony’s semiconductor strategy. Sony’s semiconductor manufacturing for internal use is moving toward an emphasis on high-end,

45

income.

network-centric devices and components because Sony is focusing its efforts on broadband and network-related businesses in response to rapid increases in broadband Internet access. The restructuring activity was completed in the year ended March 31, 2004 (refer to “Restructuring” under“Operating Results for the Fiscal Year Ended March 31, 2004”). During the fiscal year ended March 31, 2003, 5.9 billion yen was recorded for this restructuring, all of which was recorded in cost of sales.

In addition to thesethe above restructuring activities,efforts, Sony has continued to reduceundertook several headcount through the implementation of several early retirementreduction programs in Japan to further reduce operating costs in the Electronics segment. The resulting charges totaled 10.9 billion yen, compared to 12.3 billion yen in the previous fiscal year. These charges were recorded in selling, general and administrative expenses.
Music

     In response to the continued contraction of the worldwide music market due to slow worldwide economic growth, the saturation of the CD market, the effects of piracy and other illegal duplication, parallel imports, pricing pressures and the diversification of customer preferences brought on by increased competition from other entertainment sectors, Sony has been actively repositioning the Music segment for the future by looking to create a more effective and profitable business model. As a result the Music segment has undertaken a worldwide restructuring program since the fiscal year ended March 31, 2001 to reduce staffing and other costs through the consolidation and rationalization of facilities worldwide. Under this worldwide restructuring program, SMEI incurredthese programs, Sony recorded restructuring charges of 22.445.1 billion yen for the fiscal year ended March 31, 2003, compared to 8.62006, and these charges were included in selling, general and administrative expenses in the consolidated statements of income. These staff reductions were achieved worldwide mostly through the implementation of early retirement programs. The remaining liability balance as of March 31, 2006 was 19.4 billion yen and will be paid through the fiscal year ending March 31, 2007. Sony will continue to seek the appropriate headcount level to optimize the workforce in the previous fiscal year. This exceeded the estimate made in January 2003, as certain restructuring initiatives originally expected to be undertaken inElectronics segment.

All Other
Restructuring charges within All Other for the fiscal year ended March 31, 20042006 were accelerated as a result of a management change and the continued decline10.4 billion yen, compared to 5.3 billion yen recorded in the worldwide music market. Ofprevious fiscal year. The main component of the 22.4 billion yen in total charges at SMEI, 19.1 billion yen was recorded in selling, general and administrative expense and 3.3 billion yen was recorded in loss on sale, disposal or impairment of assets, net.

     Restructuring activities included the further consolidation of operations through the shutdown of a CD and cassette manufacturing and distribution center in Holland, the shutdown of a CD manufacturing facility in the U.S. (announced on April 2, 2003, although the decision to shut down the facility was made during the fiscal year ended March 31, 2003) as well as further staff reductions to consolidate various support functions across labels and operating units. These restructuring activities resulted in the termination of over 1,400 jobs during the fiscal year ended March 31, 2003, of which approximately 600 were in the U.S.

     Total restructuring charges in the Music segment, including SMEJ, were 23.9 billion yen.

46

The table below summarizes major restructuring activities for which charges of over 5 billion yen were recorded during the fiscal year ended March 31, 2003.

Costs incurred in
the fiscal Year
Ended
SegmentNature of RestructuringMarch 31, 2003Additional Information
ElectronicsReduction of CRT production capacity in Japan and SE Asia6.9 billion yenRemaining liability balance of 0.4 billion yen at March 31, 2003 was used during the fiscal year ended March 31, 2004.
Personnel reductions and closure of all Aiwa’s facilities23.0 billion yenNo remaining liability balance at March 31, 2003.
Closure of semiconductor plant in U.S.5.9 billion yenRemaining liability balance of 1.5 billion yen at March 31, 2003 was used during the fiscal year ended March 31, 2004.
Early retirement program10.9 billion yenRemaining liability balance of 1.0 billion yen at March 31, 2003 was used during the fiscal year ended March 31, 2004.
MusicClosure of CD and cassette manufacturing and distribution facility in Holland, CD manufacturing facility in U.S., and others23.9 billion yenRemaining reserve balance of 11.5 billion yen at March 31, 2003 to be used by March 31, 2006. Estimated total charges at SMEI, for years ended March 31, 2001 to March 31, 2006, are 43.4 billion yen with an estimated 4.5 billion yen of these charges expected to be incurred in the future.

2006 was an 8.5 billion yen asset impairment write-down associated with the sale of the Metreon, a U.S. entertainment complex.

Operating Performance
             
Year Ended
March 31
20022003Percent change
(Yen in billions)
Sales and operating revenue  7,578.3   7,473.6   -1.4%
Operating income  134.6   185.4   +37.7 
Income before income taxes  92.8   247.6   +166.9 
Net income  15.3   115.5   +654.5 
 
Sales
             
  Fiscal Year Ended
  
  March 31  
  2005 2006 Percent change
  (Yen in billions)  
 
Sales and operating revenue  7,191.3   7,510.6   +4.4%
Operating income  145.6   226.4   +55.5 
Income before income taxes  157.2   286.3   +82.1 
Equity in net income of affiliated companies  29.0   13.2   −54.6 
Net income  163.8   123.6   −24.5 


44

Sales
Sales for the fiscal year ended March 31, 2003 decreased2006 increased by 104.6319.3 billion yen, or 1.44.4 percent, to 7,473.67,510.6 billion yen compared with the previous fiscal year. A further breakdown of sales figures is presented under“Operating Performance by Business Segment”below.

     (“

“Sales” in this analysis of the ratio of cost of sales, including research and development costs, and selling, general and administrative expenses to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue, and excludes Financial Servicefinancial service revenue. This is because Financial Servicefinancial service expenses are recorded separately from cost of sales and selling, general and administrative expenses. Furthermore, in the analysisThe calculations of cost of sales, including research and development costs, to sales, only “net sales” are used. This is because cost of

47

sales is an expense associated only with net sales. All theall ratios below that pertain to business segments are calculated withinclude intersegment transactions included.)transactions.
 
Cost of Sales and Selling, General and Administrative Expenses

Cost of Sales and Selling, General and Administrative Expenses
Cost of sales for the fiscal year ended March 31, 2003 decreased2006 increased by 260.2151.3 billion yen, or 5.03.0 percent, to 4,979.45,151.4 billion yen compared with the previous fiscal year, and decreasedincreased from 74.275.1 percent to 72.075.9 percent as a percentage of sales. Year on year, the cost of sales ratio decreased from 80.580.7 percent to 78.880.6 percent in the Electronics segment, 74.7increased from 73.0 percent to 70.280.4 percent in the Game segment, 64.0and increased from 58.7 percent to 61.5 percent in the Music segment, and 62.0 percent to 58.260.2 percent in the Pictures segment. The cost of sales ratio in
In the Electronics segment, improved due to the effects of prior restructuring and other cost reduction measures, andthere was a deterioration in the cost of sales ratio for several products, in particular image sensors and CRT televisions. In the Game segment, improved due to reductionsthere was an increase in PlayStation 2 hardware production costs. These improvements occurred despite declining sales in the Electronics and Game segments. The cost of sales ratio in the Pictures segment improved due to increased revenue resulting from the strong worldwide performance, both theatrically and in home entertainment, of releases in the fiscal year ended March 31, 2003.

     Although the cost of sales ratio decreased year on year, assisted byas a result of research and development costs associated with the positive effect ofPS3. In the appreciation of the euro against the yen on sales,Pictures segment, the cost of sales ratio in the fourth quarter of the fiscal year ended March 31, 2003also increased primarily due to declininglower worldwide theatrical and home entertainment revenues from feature films.

There was a decrease in personnel-related costs included in cost of sales and temporary reductions in production volume for the purpose of lowering inventory to target levels at the end of the fourth quarter. These production adjustments were carried out9.8 billion yen, primarily in March 2003, mainly inwithin the Electronics segment. segment, compared with the previous fiscal year.
Research and development costs (included in(all research and development costs are included within cost of sales) for the fiscal year ended March 31, 20032006 increased by 9.929.8 billion yen or 2.3 percent, to 443.1531.8 billion yen compared with the previous fiscal year, with much of this increase in the Game segment.year. The ratio of research and development costs to sales increased from 6.1was 7.8 percent compared to 6.4 percent.

7.5 percent in the previous fiscal year.

Selling, general and administrative expenses for the fiscal year ended March 31, 2003 increased2006 decreased by 86.58.0 billion yen, or 5.10.5 percent, to 1,782.41,527.0 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales increasedimproved from 23.923.1 percent in the previous fiscal year to 25.622.5 percent. Year on year, the ratio of selling, general and administrative expenses to sales increasedimproved from 18.9 percent to 20.3 percent in the Electronics segment, from 16.718.8 percent to 18.0 percent in the GameElectronics segment and from 32.721.0 percent to 39.818.7 percent in the Music segment, and from 32.8 percent to 34.4 percent inGame segment. On the Pictures segment.

     Advertising and promotion expenses increased 40.8 billion yen mainly due to increased expenses inother hand, the Pictures segment, which contributed to increased box office and home entertainment revenue. Increased competition and the continued reduction in the time interval between theatrical and home entertainment release has resulted in a trend towards larger initial advertising expenditures. Personnel related costs increased 30.5 billion yen compared with the previous fiscal year, and have increased over each of the last three years. A major factor in this increase is the recording of increased severance related expenses, as Sony accelerates its restructuring activities. Severance-related charges in the fiscal year ended March 31, 2003 increased by 14.6 billion yen, or 23.3 percent, mainly in the Electronics and Music segments, to reach a total of 77.4 billion yen. Royalty expenses increased 16.9 billion yen.

     The increase in selling, general and administrative expenses was partially offset by a 33.9 billion yen decrease in after-sales service expenses in the fiscal year ended March 31, 2003, caused mainly by the absence of non-recurring expenses recorded during the previous fiscal year due to mobile phone-related quality issues. The increase in selling, general and administrative expenses was also offset by a decrease of 10.0 billion yen in loss on the sale, disposal or impairment of assets, net. This was due to a 19.0 billion yen decrease in such losses in the Electronics segment, offset by a 6.4 billion yen increase in such losses in the Other segment.

     The ratio of selling, general and administrative expenses to sales in the fourth quarter wasincreased from 32.5 percent an increase from 26.6to 36.0 percent in the fourth quarterPictures segment.

Personnel-related costs in selling, general and administrative expenses decreased by 60.4 billion yen compared with the previous fiscal year mainly due to a decrease in severance-related expenses in the Electronics segment resulting from the implementation of restructuring initiatives. In addition, advertising and publicity expenses for the fiscal year increased by 59.8 billion yen compared with the previous fiscal year. This was primarily due to an increase in selling, generalthe fact that advertising and administrativepublicity expenses increased within the Pictures and a decrease in salesGame segments.
Loss on sale, disposal or impairment of assets, net was 73.9 billion yen, compared with the

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same quarter of28.0 billion in the previous fiscal year. Selling, general and administrative expenses increased primarilyThis increase was due to losses recorded on the sale, disposal and impairment of CRT and CRT television production equipment in the Electronics segment, as well as an increase in royalty expenses amounting to 23.3 billion yen. Sales decreased due to pricing pressure and discount selling of goods forasset impairment write-down associated with the purpose of lowering inventory to target levels at the endsale of the quarter.Metreon, a U.S. entertainment complex.
 
Operating Income

Operating Income

Operating income for the fiscal year ended March 31, 20032006 increased by 50.880.8 billion yen, or 37.755.5 percent, to 185.4226.4 billion yen compared with the previous fiscal year. OperatingThe operating income margin increased from 1.82.0 percent to 2.53.0 percent. The segments makingIn descending order by the most significant contributionsamount of financial impact, the Financial Services segment, the Pictures segment, All Other and the Game segment contributed to operating income. On the other hand, although there was a


45

net gain from the transfer to the year on year increase in operating income wereJapanese government of the substitutional portion of Sony’s Employee Pension Fund and the depreciation of the yen, the Electronics segment recorded an operating loss mainly due to a decrease in sales to outside customers, an increase in loss on sale, disposal or impairment of assets and a deterioration in the Gamecost of sales ratio associated with a decline in unit selling prices. For a further breakdown of operating income for each segment, and the Pictures segment, in descending order of financial impact.please refer to “Operating Performance by Business Segment”below.
 
Other Income and Expenses

Other Income and Expenses
In the consolidated results for the fiscal year ended March 31, 2003,2006, other income increased by 61.252.5 billion yen, or 63.579.7 percent, to 157.5118.4 billion yen, while other expenses decreasedincreased by 42.84.2 billion yen, or 31.07.7 percent, to 95.358.5 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 62.259.9 billion yen, an increase of 48.3 billion yen, compared to net other expense of 41.9 billion yen inwith the previous fiscal year.

The increasegain on change in other income was primarily dueinterest in subsidiaries and equity investees increased by 44.5 billion yen, or 272.7 percent compared to the recordingprevious fiscal year to 60.8 billion yen. This was mainly the result of a 72.6gain of 21.5 billion yen on the change in interest in subsidiaries and equity investees resulting from the initial public offering ofSo-net, a gain of 20.6 billion yen on salesthe change in interest resulting from the partial sale of securities investmentsSony’s investment in Monex Beans Holdings, Inc., and other, net,gains of 12.0 billion yen and 6.6 billion yen, respectively, on the change of interest atSo-net M3 Inc., a consolidated subsidiary ofSo-net and at DeNA Co., Ltd., an equity affiliate ofSo-net accounted for by the equity method.
Interest and dividends of 24.9 billion yen were recorded in the fiscal year ended March 31, 2003. This was mostly due to a 66.52006, an increase of 10.2 billion yen, gainor 69.5 percent, compared with the previous year. This increase was mainly the result of an increase in interest received resulting from an improvement in the rate of return on overseas investments.
For the sale, in April 2002, of Sony’s equityfiscal year ended March 31, 2006, interest in Telemundo, a U.S. based Spanish language television network and station group that was accounted for under the equity method. In addition, Sony deferred an approximate 6.0payments totaling 29.0 billion yen gain on this sale due to provisions in the sale agreement that required a partial refund of the purchase price for certain losses or claims as defined in the agreement. The right of the acquirer to claim such refunds expired in April 2003 without any such claim being made. Therefore, Sonywere recorded, an additional gainincrease of 6.04.4 billion yen, in April 2003. Gains were also recorded onor 18.0 percent, compared with the sale of the equity interest in Sony Tektronix Inc., which develops, manufactures and sells electronic measuring instruments and related devices, and Columbia House Company (“CHC”), a direct marketer of music and videos. Other income was positively impacted by a net foreign exchange gain of 1.9 billion yen recorded during the year, compared withprevious fiscal year.
In addition, a net foreign exchange loss of 31.73.1 billion yen was recorded in the fiscal year ended March 31, 2006, compared to a net foreign exchange loss of 0.5 billion yen recorded in the previous fiscal year. The net foreign exchange gainloss was recorded because the value of the yen, especially during the first and third quarters of the fiscal year ended March 31, 2006, was primarily due to gains incurred onlower than the value of the yen at the time that Sony entered into foreign exchange forward contracts and foreign currency option contracts. These contracts whichwere entered into by Sony employs to hedge the risk from exchange rate fluctuations, whilemitigate the foreign exchange losses recorded during the previous fiscal year were duerate risk to losses incurred on such contracts due to the rapid depreciationcash flows that arises from settlements of the yenforeign currency denominated accounts receivable and accounts payable, as well as foreign currency denominated transactions between December 2001 and March 2002. Compared to the previous fiscal year, interest and dividends received decreased from 16.0 billion yen in the previous fiscal year to 14.4 billion yen, primarily due to lower interest earned from investments.

     The decrease in other expenses was primarily due to the absence of the net foreign exchange loss recorded in the previous fiscal year as noted above. Interest expense also decreased by 9.1 billion yen, or 25.0 percent, to 27.3 billion yen, primarily due to lower average balances of short-term borrowings and lower interest rates. As a result, the amount of income from interest and dividends less interest expense improved to a net expense of 12.9 billion yen, compared with a net expense of 20.4 billion yen in the previous fiscal year. Partially offsetting the decrease in other expenses was an increase of 4.7 billion yen, or 25.7 percent, to 23.2 billion yen, in losses on the devaluation of securities investments, including securities issued by companies in the U.S. and Europe with which Sony has strategic relationships for the purpose of developing and marketing new technologies. Such companies include Canal+ Technologies, a developer of middleware and conditional access technologies for digital broadcasting, TIVO Inc., a marketer of digital video recorders, and Transmeta Corporation, a chip manufacturer.

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consolidated subsidiaries.

 
Income before Income Taxes

Income before Income Taxes

Income before income taxes for the fiscal year ended March 31, 20032006 increased by 154.8129.1 billion yen, or 166.982.1 percent to 247.6 billion yen compared with the previous fiscal year. Significant contributorsyear, to the year on year increase in income before income taxes, in descending order286.3 billion yen as a result of significance, were the increase in operating income and the increase in gains on salesthe net amount of securities investmentsother income and other net, and the absence of the foreign exchange loss recorded in the previous fiscal year.expenses mentioned above.
 
Income Taxes

Income Taxes
Income taxes for the fiscal year ended March 31, 20032006 increased by 15.6160.5 billion yen or 24.0 percent, to 80.8176.5 billion yen. The increase in income tax was principally dueCompared to the increase in income before income taxes described above, although this increase was partially offset by a tax benefit of 51.9 billion yen recorded due to the reversal of valuation allowances on deferred tax assets held by Aiwa as these assets became recoverable as a result of Sony’s decision to merge with Aiwa.

The ratio of income taxes to income before income taxes (thean effective tax rate) decreased from 70.3rate of 10.2 percent in the previous fiscal year, the effective tax rate was 61.6 percent in the current fiscal year. This effective tax rate exceeded the Japanese statutory tax rate primarily due to 32.6 percent.the recording of additional valuation allowances against deferred tax assets by Sony Corporation and several of Sony’s Japanese domestic and overseas consolidated subsidiaries, mainly within the Electronics segment, due to continued losses recorded at these businesses and the recording of an additional tax provision for the undistributed earnings of certain foreign subsidiaries. The effective tax rate was significantly lower than the Japanese statutory rate in the previous fiscal year as a result of the reversal of valuation allowances at Sony’s U.S. subsidiaries associated with an improvement in operating performance.

 
Results of Affiliated Companies Accounted for under the Equity Method
On June 30, 2006, Sony Corporation and Sony Computer Entertainment Inc. (“SCEI”) each received notification from the Tokyo Regional Taxation Bureau (“TRTB”) of a reassessment of the profits they reported


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     During

from transactions between SCEI and its subsidiary Sony Computer Entertainment America Inc. (“SCEA”), for the fiscal years ended March 31, 2000 through 2005. On the same date, Sony Corporation also received notification of a reassessment of the profits reported from transactions related to CD and DVD disc manufacturing operations with a number of its overseas subsidiaries for the fiscal years ended March 31, 2004 and 2005.
Sony Corporation and SCEI believe that their allocation of income for the periods in question was appropriate and that they have paid the proper amount of taxes in each of the jurisdictions. Therefore Sony Corporation and SCEI disagree with the position of the TRTB and have lodged an objection. In addition, Sony Corporation and SCEI plan to formally request bilateral consultations (where available) to obtain relief from double taxation under the applicable tax treaties of various countries and is currently in the process of obtaining an Advanced Price Agreement.
Transfer pricing was reassessed in accordance with the notification from the TRTB, resulting in additional Japanese income of 74.4 billion yen, which led to Sony Corporation and SCEI incurring an estimated additional cash tax (including corporate tax and others) of approximately 27.9 billion yen. Sony Corporation and SCEI believe that double taxation will be avoided through the procedure described above, and therefore Sony does not expect any material impact on its consolidated profit and loss as a result of this reassessment.
Results of Affiliated Companies Accounted for under the Equity Method
Equity in net income of affiliated companies during the fiscal year ended March 31, 2003,2006 was 13.2 billion yen, a decrease of 15.9 billion yen, or 54.6 percent compared to the previous fiscal year. Equity in net income of affiliated companies for the previous fiscal year included the recording of 12.6 billion yen as equity in net lossesincome for InterTrust Technologies Corporation (“InterTrust”), which reflected InterTrust’s proceeds from a license agreement arising from the settlement of affiliated companiesa patent-related suit. In the current fiscal year, Sony Ericsson, as a result of increased from 34.5sales of products including camera phone and “Walkman®” phone models, contributed 29.0 billion yen to equity in net income, an increase of 11.6 billion yen compared to the previous fiscal year. Sony recorded equity income of 5.8 billion yen for SONY BMG during the current fiscal year, compared to an equity loss of 3.4 billion yen in the previous fiscal year to 44.7 billion yen.as a result of a reduction in restructuring charges and the realization of incremental cost savings. However, Sony Ericsson, a joint venture focused on mobile phone handsets recorded a 20.8an equity in net loss of 7.2 billion yen loss. In addition,forS-LCD, a joint-venture with Samsung for the manufacture of amorphous TFT LCD panels and equity affiliates recording losses included ST-LCD, an LCD joint venture in Japan, Crosswave, a data communications carrier offering customers broadband networks and network services in Japan, and BE-ST Bellevuestrasse Development GmbH & Co. First Real Estate KG, Berlin, a real estate business in Germany. Regarding the significant losses at Sony Ericsson, no year on year comparison is available because Sony Ericsson was established in October 2001. However, thenet loss of 10.716.9 billion yen recorded due to Sony Ericssonfor MGM. The equity in the second halfnet loss for MGM includes non-cash interest of the fiscal year ended March 31, 2003 was greater than the 7.46.0 billion yen loss recordedon cumulative preferred stock.
Minority Interest in the second halfIncome (Loss) of the fiscal year ended March 31, 2002. This increase in losses was due to the following factors: decreased sales in the fourth quarter ended March 31, 2003, compared to the fourth quarter ended March 31, 2002, due to increased pricing pressure; increased expenses due to the phase-in of new products in the GSM and Japanese markets; and the recording of an operating loss in the fourth quarter ended March 31, 2003 compared to income in the fourth quarter ended March 31, 2002, which benefited from the successful introduction of two high-end models in the Japanese and European markets. In the fourth quarter ended March 31, 2003, Sony and Telefonaktiebolaget LM Ericsson each invested an additional 150 million euro in Sony Ericsson to strengthen its financial position (refer to “Electronics”, above).

In the first quarter of the fiscal year ended March 31, 2003, SPE and other non-Sony investors sold Telemundo to NBC, a media company owned by the General Electric Company. In the same quarter, SMEI and AOL Time Warner Inc.’s Warner Music Group each sold the majority of their holding in CHC to Blackstone Capital Partners, an affiliate of The Blackstone Group, an investment bank. The Chairman of the Blackstone Group was a director of Sony Corporation until June 2002.Consolidated Subsidiaries

 
Minority Interest in Income (Loss) of Consolidated Subsidiaries

In the fiscal year ended March 31, 2003,2006, minority interest in the income of consolidated subsidiaries, which is excluded from income before income taxes, was 6.6 billion yen, compared to a 16.2 billion yen minority interest in the loss of consolidated subsidiaries of 0.6 billion yen was recorded compared to minority interest in income of 1.7 billion yen for the previous fiscal year. This changeloss was principallyprimarily due to the reversalrecording of valuation allowances on deferred tax assets held by Aiwa and because Sony no longer recordedloss at ST Mobile Display Corporation, a minority interest in Aiwa’s losses as Sony took Aiwa private in October 2002.

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joint venture with Toyota Industries Corporation for the manufacture of low-temperature polysilicon thin film transistor liquid crystal display panels for mobile products.

 
Net Income

Net Income
Net income for the fiscal year ended March 31, 2003 increased2006 decreased by 100.240.2 billion yen, or 654.524.5 percent, to 115.5123.6 billion yen compared with the previous fiscal year. This decrease was primarily the result of the above-mentioned increase in income taxes and decrease in equity in net income of affiliated companies. As a percentage of sales, net income increaseddecreased from 0.22.3 percent to 1.51.6 percent. The most significant contribution to the year on year increase in net income was the increase in income before income taxes. However the effect of the minority interest in the income of consolidated subsidiaries, the absolute increase in income taxes, and the increase in losses in equity of affiliated companies caused net income to be 132.1 billion yen less than income before income taxes, compared to a difference of 77.5 billion yen in the previous fiscal year.

     The returnReturn on stockholders’ equity increaseddecreased from 0.76.2 percent to 5.04.1 percent. (This ratio is calculated by dividing net income by the simple average of stockholders’ equity at the end of the previous fiscal year and at the end of the fiscal year ended March 31, 2003.2006.)

Basic net income per share was 125.74122.58 yen compared with 16.72175.90 yen in the previous fiscal year, and diluted net income per share was 118.21116.88 yen compared with 16.67158.07 yen in the previous fiscal year. Refer to Notes 2 and 2021 of Notes to Consolidated Financial Statements.


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Operating Performance by Business Segment

Operating Performance by Business Segment

The following discussion is based on segment information. Sales and operating revenue in each business segment include intersegment transactions. Refer to Note 2324 of Notes to Consolidated Financial Statements.
 
Business Segment Information
              
Year Ended
March 31
20022003Percent change
(Yen in billions)
Sales and Operating revenue
            
 Electronics  5,286.2   4,940.5   -6.5%
 Game  1,003.7   955.0   -4.9 
 Music  600.1   597.5   -0.4 
 Pictures  635.8   802.8   +26.3 
 Financial Services  509.1   537.3   +5.5 
 Other  261.5   306.3   +17.1 
   
   
   
 
 Elimination  (718.1)  (665.7)  — 
   
   
   
 
Consolidated  7,578.3   7,473.6   -1.4 
   
   
   
 

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Year Ended
March 31
20022003Percent change
(Yen in billions)
Operating income (loss)
            
 Electronics  (1.2)  41.4   — 
 Game  82.9   112.7   +35.9%
 Music  22.1   (7.9)  — 
 Pictures  31.3   59.0   +88.6 
 Financial Services  21.8   22.8   +4.3 
 Other  (18.2)  (25.0)  — 
   
   
   
 
 Elimination and unallocated corporate expenses  (4.1)  (17.5)  — 
   
   
   
 
Consolidated  134.6   185.4   +37.7 
   
   
   
 

     Commencing with

Business Segment Information
             
  Fiscal Year Ended
  
  March 31  
  2005 2006 Percent change
  (Yen in billions)  
 
Sales and operating revenue
            
Electronics  5,094.5   5,176.4   +1.6%
Game  729.8   958.6   +31.4 
Pictures  733.7   745.9   +1.7 
Financial Services  560.6   743.2   +32.6 
All Other  470.9   426.0   −9.5 
Elimination  (398.1)  (539.5)  — 
             
Consolidated  7,191.3   7,510.6   +4.4 
             
             
  Fiscal Year Ended
  
  March 31  
  2005 2006 Percent change
  (Yen in billions)  
 
Operating income (loss)
            
Electronics  2.9   6.9   +140.0%
Game  43.2   8.7   −79.7 
Pictures  63.9   27.4   −57.1 
Financial Services  55.5   188.3   +239.4 
All Other  5.1   20.5   +305.4 
             
Sub-Total  170.5   251.9   +47.8 
Elimination and unallocated corporate expenses  (24.9)  (25.5)  — 
             
Consolidated  145.6   226.4   +55.5 
             
As of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses in a joint venture. The newly formed company, SONY BMG, is 50 percent owned by each parent company. Under U.S. GAAP, SONY BMG is accounted for by Sony using the first quarter ended June 30, 2003, Sony partly realigned itsequity method and, since August 1, 2004, 50 percent of net profits or losses of this business segment configuration. Expenses incurredhave been included under “Equity in net income (loss) of affiliated companies.”
In connection with the creationestablishment of this joint venture, Sony’s non-Japan-based disc manufacturing and physical distribution businesses, formerly included within the Music segment, a network platform business were transferred outseparate reporting segment until the end of the Other segment and reclassified as unallocated corporate expenses, because the expected future benefits of this business will be spread across the Sony Group. In accordance with this realignment, results of theprevious fiscal years ended March 31, 2002 and 2003year, have been reclassified to conformthe Electronics segment to recognize the presentationnew management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. Effective April 1, 2005, a similar change was made with respect to Sony’s Japan-based disc manufacturing business. Results for the fiscal year ended March 31, 2004.

     The above reclassification also reflects2005 in the effect of Sony’s realignment of its business segment configuration and Electronics segment product category configuration from the first quarter ended June 30, 2002. From the first quarter ended June 30, 2002, sales of businesses devoted to the creation of a network platform business and of businesses devoted to the development of network and content technology and services have been restated to account for these reclassifications.

Effective April 1, 2005, Sony no longer breaks out its music business as a reportable segment as it no longer meets the materiality threshold. Accordingly, the results for Sony’s music business are now included inwithin All Other, and the “Other” segment. In addition to SCN, which was originally contained in the “Other” segment, these businesses include an in-house oriented information system service business and an IC card business formerly contained in the “Other” category of the Electronics segment.

Electronics

     Salesresults for the fiscal year ended March 31, 2003 decreased by 345.72005 have been reclassified to All Other for comparative purposes. Results for the fiscal year ended March 31, 2006 in All Other include the results of SMEI music publishing business and SMEJ, excluding Sony’s Japan-based disc manufacturing business which, as noted above,


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has been reclassified to the Electronics segment. However, results for the previous fiscal year in All Other include the consolidated results for SMEI’s recorded music business for the period through August 1, 2004, as well as the results for SMEI’s music publishing business and SMEJ excluding Sony’s Japan-based disc manufacturing business.
Electronics
Sales and operating revenue for the fiscal year ended March 31, 2006 increased 81.8 billion yen, or 6.51.6 percent, to 4,940.55,176.4 billion yen compared with the previous fiscal year. Operating incomeprofit of 41.46.9 billion yenin the Electronics segment was recorded compared to an operating lossprofit of 1.22.9 billion yen in the previous fiscal year. The year on year decreaseDespite the increase in sales, was duesales to outside customers, on a yen basis, decreased 1.0 percent compared to the continued industry-wide effects of falling consumption in markets for certain products in the Electronics segment, increased price competition worldwide, and the impact of business withdrawals and rationalization of product lines (referprevious fiscal year. With respect to Note 16 of Notes to Consolidated Financial Statements).

     Regarding sales to outside customers by geographicgeographical area, sales decreased by 12 percent in the U.S. andJapan, by 93 percent in Japan, but sales increasedthe U.S., by 24 percent in Europe and increased by 12 percent in Other Areas, respectively. Sales decreasedAreas.

In Japan, although there was a significant increase in the U.S. over a wide rangesales of LCD televisions, as well as increased sales for flash memory and hard drive digital audio players, sales decreased for such products including, in descending order of financial impact, PCs, computer displays, Aiwa products,as mobile phones, principally to Sony Ericsson, CRT televisions DVD-Video players, home-use video cameras, home audio and CD-R/ RW drives. Sales inplasma televisions. In the U.S. were also negatively impacted by Sony’s withdrawal from the home telephone business, although there was an increase in 2001. Products with increased sales in the U.S. included personal digital assistants,of LCD and rear projection televisions, sales decreased for such products as CRT and digital still cameras.plasma televisions. In Japan, overall demand decreased substantially, with PCs, AiwaEurope, although sales increased for such products home-use video cameras and CRTas LCD televisions, showing year on year sales declines; however,there was a decline in sales of semiconductors increased. In Europe, sales of PCs, digital still camerassuch products as CRT and digital home-use video cameras showed strong sales growth, while sales of Aiwa productsplasma televisions, and computer displays decreased. Sales in Europe were also positively impacted by the strength of the euro against the yen in the second half of the year.mobile phones, primarily to Sony Ericsson. In Other Areas, sales of digital still cameras, home-use video camerassuch products as LCD televisions and PCs increased, while sales of Aiwasuch products and broadcast- and professional-use products decreased. The transfer of Sony’s mobile phone business to Sony Ericsson, an affiliate accounted

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for under the equity method since October 2001, also had a negative impact on sales, particularly in Japan and Europe. This was because before the transfer of the business to Sony Ericsson, Sony handled all aspects of the mobile phone operation from manufacturing through to sales, while now Sony only manufactures handsets for Sony Ericsson and Sony Ericsson is responsible for the remainder of the operation. These sales are recorded in the Electronics segment.

The sales decrease during the fiscal year ended March 31, 2003, accelerated in the fourth quarter, as sales decreased by 227.0 billion yen, or 18.1 percent, to 1,025.3 billion yen compared to the fourth quarter of the previous fiscal year. This was principally due to declines in sales, in descending order of financial impact, of PCs,CD-R/RW drives and CRT televisions Aiwa products, computer displays, home-use video cameras and home audio.decreased.

 
Performance by Product Category

Performance by Product Category
Sales and operating revenue by product category discussed below represent sales to outside customers, which do not include intersegment transactions. Refer to Note 2324 of Notes to Consolidated Financial Statements.

     “Audio”

“Audio” sales decreased by 65.035.7 billion yen, or 8.76.2 percent, to 682.5536.2 billion yen. Sales of homeflash memory and hard drive digital audio declinedplayers increased significantly, in all geographic areas, although sales of home theater systems increased principallyconjunction with an increase in Europe and the U.S. Regarding headphone stereos, MD format sales increased dueshipments to rapid market growth particularlyapproximately 4.5 million units, compared to approximately 850,000 unit shipments recorded in the U.S. However, CD format headphone stereos sales decreased overall due toprevious fiscal year. On the contraction ofother hand, there was a significant decrease in the U.S. market, although such sales rose strongly in Europe aided by continued market expansion and the depreciation of the yen against the euro. Salesunit shipments of both formats declined in Japan. Overall sales for the cassette format decreased due to the continued contraction of the market in all areas. Worldwide shipments ofCD and MD format headphone stereos increaseddue to a shift in market demand. In addition, car audio experienced a decrease in sales, and there was a slight decrease in home audio sales.
“Video” sales decreased by 15.0 billion yen, or 1.4 percent, to 1,021.3 billion yen. In addition to a decrease in sales of digital cameras in Japan, the U.S. and Europe, there was a decrease in sales of VHS video recorders. Sales of digital cameras decreased, coupled with a decrease in worldwide shipments by approximately 370,0000.5 million units to approximately 3.3213.5 million units. Worldwide shipments of CD format headphone stereosDVD recorders increased by approximately 300,000 units to approximately 2.0 million units, while sales increased slightly. Worldwide shipments of home-use video cameras increased by approximately 250,000 units to approximately 10.727.6 million units. DVD-Video player unit shipments decreased by approximately 1.5 million units to approximately 8.0 million units.
“Televisions” sales increased by 6.6 billion yen, or 0.7 percent, to 927.8 billion yen. There was a significant increase in worldwide sales of LCD televisions, as worldwide shipments of LCD televisions increased by approximately 1.8 million units, to approximately 2.8 million units. Sales of home telephones declined becauserear projection televisions increased as the sales percentage of Sony’s withdrawal fromhigher priced units increased, although worldwide shipments remained largely unchanged at approximately 1.2 million units. On the home telephone businessother hand, there was a significant decrease in the U.S. and Japan in the previous fiscal year.

     “Video” sales increased by 3.8 billion yen, or 0.4 percent, to 851.1 billion yen. The increase was principally due to higherworldwide sales of digital still camerasCRT televisions, primarily as a result of both a decrease in all areas and digital home-use video cameras in Other Areas, particularly Asia, and Europe. Worldwideworldwide shipments of digital still cameras increasedCRT televisions, by approximately 2.22.7 million units to approximately 5.66.8 million units. Worldwide shipments of home-use video cameras, both analogunits and digital, increased by approximately 350,000 units to approximately 5.75 million units. However, analog home-use video camera sales decreased due to lower demand, particularly in the U.S. Overall sales of home-use video cameras decreased in Japan and the U.S. due to increased price competition. DVD-Video player sales decreased primarily in the U.S. where pricing pressure was severe, although the market expanded. Sales from set-top boxes decreased due to a declinefall in unit sales in the U.S. and Europe.

     “Televisions” sales decreased by 34.1 billion yen, or 3.5 percent, to 950.2 billion yen. One factor leading to the decrease was a substantial decline in CRT television sales in the U.S. and Japan, as a result of market contraction, although sales in Europe increased partlyprices due to the appreciation of the euro against the yen. Worldwide shipments of CRT televisions were approximately 10 million units, almost flat compared with the previous fiscal year. Another factor causing the decrease was a decline in sales of CRT computer displays in the U.S., Europe and Japan, resulting from thecontinued shift in demand towards flat panel computer displays. A third factor was a decrease in thetelevisions. In addition, sales of CRTs, reflecting the decline in the market for CRTplasma televisions, and CRT computer displays. Offsetting these decreases were higher sales of large-screen projection televisions, particularly in the U.S., and plasma and LCD flat panel televisions.

     “Informationwhere new product development has been terminated, also decreased worldwide.

“Information and Communications” sales decreasedincreased by 162.026.4 billion yen, or 16.23.2 percent, to 836.7842.5 billion yen. The decrease was primarily due to lowerAlthough sales of desktop PCs and broadcast- and professional-use products. Further, since October 2001, when Sony began recording mobile phone handsetdecreased, overall sales increased as sales to Sony Ericsson in “Other”, noa result of favorable worldwide sales of mobile phone handsets have been recorded under “Information and Communications”. Sales of PCs decreased in Japan and the U.S. due to increased price competition.

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notebook PCs. Worldwide unit shipments of PCs decreased byincreased approximately 400,000 units to approximately 3.1


49

3.7 million units. Sales of personal digital assistants increased significantly, particularly in the U.S. and Europe, as the market for these products expanded. Sales of broadcast- and professional-use products increased as a result of favorable sales of high-definition related products.
“Semiconductors” sales decreased as many broadcasters postponed the installation of new systemsby 12.0 billion yen, or 6.5 percent, to 172.2 billion yen. The decrease was due to economic uncertainty.a decrease in sales of CCDs as the result of pricing pressures.

     “Semiconductors”

“Components” sales increased by 22.449.6 billion yen, or 12.36.6 percent, to 204.7800.7 billion yen. TheThis increase was primarily due to a significantan increase in sales of CCDs, particularly in Japan and Other Areas, reflecting higher demand for digital still cameras, and a significant increase in sales of bipolar integrated circuits for CD-R/ RW and DVD drives, particularly in Japan. Partially offsetting the above increase was a decrease in sales revenue from high temperature LCDs in all geographic areas due to pricing pressure.

     “Components” sales increased by 16.2 billion yen, or 3.2 percent, to 527.8 billion yen. The increase was primarily due to significant increases in sales of DVD drives, Memory Stick and batteries. DVD drive sales increased as the strong performance of Sony branded products, particularly in the U.S., allowed Sony to avoid unit price reductions. Memory Stick sales increased due to continued demand for digital still cameras, with worldwide shipments of Memory Stick increasing by approximately 8 million units to approximately 19 million units. At the end of the fiscal year ended March 31, 2003, Sony’s cumulative shipments of Memory Stick had reached 39 million units. Regarding batteries, the growing market for lithium-ion batteries, led to strong revenue growth despite declinesprimarily for use in the average selling price.PCs and power tools, and Memory Sticks. On the other hand, sales of CD-R/RW drives decreased due to severe price competition.

     “Other” sales decreased by 10.5 billion yen, or 2.1 percent, to 490.4 billion yen,and optical pickups declined, primarily due to lower sales of Aiwa products in all geographic areas. This decrease was partially offset by the sales of mobile phone handsets which were transferred from “Information and Communications” to “Other” in October 2001, as a result of their becomingsignificant unit price declines. Sales of DVD+/-R/RW drives increased, despite a deterioration in unit selling prices, as a result of a significant growth in units sold in association with the expansion of the market.

“Other” sales decreased by 65.4 billion yen, or 12.0 percent, to 481.4 billion yen. This decrease was the result of a decrease in sales of mobile phones, primarily to Sony Ericsson.

In the Electronics segment, cost of sales for the fiscal year ended March 31, 2003 decreased2006 increased by 368.563.3 billion yen, or 8.71.5 percent to 3,869.24,174.6 billion yen compared with the previous fiscal year. This decrease was due to the effects of restructuring carried out in the previous fiscal year in CRTs and other products, the increased profitability as a result of increased sales in semiconductors, batteries and other products, and the favorable impact of the appreciation of the euro against the yen. A majority of goods sold in Europe are imported from other regions; therefore an appreciation of the euro causes increased sales without a corresponding increase in the cost of sales. Research and development costs were 380.3 billion yen, almost flat year on year. The cost of sales ratio decreased from 80.5by 0.1 percent to 78.8 percent.

80.6 percent compared to 80.7 percent in the previous fiscal year. Although there was an improvement in the cost of sales ratio for such products as video cameras and PCs, products that contributed to the deterioration in the cost of sales ratio included image sensors and CRT televisions, which experienced decreased sales. Restructuring charges recorded in cost of sales amounted to 23.8 billion yen, an increase of 14.2 billion yen compared with the 9.6 billion yen recorded in the previous fiscal year. Research and development costs decreased 15.2 billion yen, or 3.5 percent, from 433.3 billion yen in the previous fiscal year to 418.1 billion yen.

Selling, general and administrative expenses decreased by 0.825.4 billion yen, or 0.12.7 percent to 1,000.8931.1 billion yen compared with the previous fiscal year. After-sales serviceThe primary reason for this decrease was the recording of a 64.5 billion yen net gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund. Of the restructuring charges recorded in the Electronics segment, the amount recorded in selling, general and administrative expenses decreased by 36.54.1 billion yen partially because of the absence of mobile phone-related after-sales service expenses recordedfrom 53.6 billion yen in the previous fiscal year to 49.5 billion yen. Of the restructuring charges recorded in selling, general and administrative expenses, the amount recorded for headcount reductions, including reductions through the early retirement program, was 45.1 billion yen, a decrease of 5.8 billion yen compared with the previous fiscal year. RoyaltyOn the other hand, royalty expenses increased 16.9decreased 17.2 billion yen. The ratio of selling, general and administrative expenses to sales increaseddecreased 0.8 percentage points from 18.9the 18.8 percent recorded in the previous fiscal year to 20.3 percent due to the decrease in sales.

18.0 percent.

Loss on sale, disposal or impairment of assets, net also decreased, by 19.0increased 40.0 billion yen primarily becauseto 63.9 billion yen compared with the previous fiscal year. This amount includes 52.5 billion yen in restructuring charges, which includes 25.5 billion yen of a decrease in restructuring charges related to reductions in CRT computer displayand CRT television manufacturing capacity, mainlyfacilities in the U.S. In the fiscal year ended March 31, 2003, due to CRT computer display relatedThe amount of restructuring in Japan and South-East Asia, a restructuring charge of 4.0 billion yen was recordedcharges included in loss on sale, disposal or impairment, of assets, net.

     Regarding profit performance by product compared with the previous fiscal year, the largest gains in operating income were recorded in CRTs, portable audio, batteries, CRT televisions, recording media and digital still cameras. Increased demand for semiconductors resulted in a substantial decrease in the size of losses. On the other hand, losses increased in PCs and Aiwa products. Restructuring carried outnet in the previous fiscal year also led to improved profitability in several component businesses, including CRTs and recording media, as a resultwas 19.2 billion yen.

The amount of the reduction of fixed costs and the concentration of resources toward

54

successful products. Also contributing to the increase in profitability was the withdrawal from the loss-making home telephone business and the transfer, in October 2001, of Sony’s mobile handset business, which was recording a loss, to Sony Ericsson. Further, operating income benefited from the depreciation of the yen against the euro, which exceeded the negative impact of the appreciation of the yen against the U.S. dollar.

     Partially offsetting the increase in profitability were lossesprofit recorded in PCs, where sales declined due to increased competition from lower priced products. Large operating losses were also recorded by Aiwa in almost all geographic areas as a result of reduced sales because of a decline in the competitiveness of Aiwa’s mainstay products such as audio, restructuring charges including costs of headcount reductions, inventory write-downs brought about by the elimination of product lines, and the sale and disposal of production facilities. Sony Corporation absorbed Aiwa by merger on December 1, 2002.

In the past Sony has recorded losses in the fourth quarter, due to a seasonal decline in demandElectronics segment for electronics products. However, the loss in the fourth quarter of the fiscal year ended March 31, 20032006 increased substantially dueas a result of the net gain resulting from the transfer to in descending orderthe Japanese government of financialthe substitutional portion of Sony’s Employee Pension Fund, despite the recording of increased restructuring charges. Excluding the impact a decline in sales,of restructuring charges and the net gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund, profit performance by product reflected an increase in selling, generaloperating losses recorded by CRT televisions and administrative expenses associated withLCD televisions and a decrease in operating income recorded by image sensors. On the other hand, there was a decrease in the operating loss recorded by DVD recorders (including PSXTM) as well as an increase in patent-relatedoperating income for video cameras and other expenses, and a deterioration in the costPCs.

Manufacturing by Geographic Area
Slightly more than 50 percent of sales ratio due to reductions in production undertaken to lower inventory to target levels and pricing pressure. Fourth quarter operating losses in the Electronics segment totaled 116.1 billion yen compared with an operating loss of 51.3 billion yen in the same quarter of the previous fiscal year. Significant losses were recorded by products including Aiwa products, semiconductors, digital still cameras and home audio. An approximate 5.9 billion yen restructuring charge for the closure of a semiconductor plant in the U.S. impacted the loss in the semiconductor business.
Manufacturing by Geographic Area

Regarding the geographic breakdown ofsegment’s total annual production induring the Electronics segment (including the assembly of PlayStation 2 for the Game segment), and the final destination of such production, half of total production wasfiscal year ended March 31, 2006 took place in Japan, including the production of digital still cameras, video cameras, flat panel televisions, PCs, semiconductors personal digital assistants,and components (includingsuch as batteries and Memory Stick), and plasma televisions.Sticks. Approximately 5565 percent of the annual production in Japan was destined for other regions. Asia, here excluding Japan and China accounted for slightly more than 1510 percent of total annual production, more than 60approximately 70 percent of which was destined for other regions. Asia, excluding Japan the U.S.


50

and Europe. China, accounted for lessslightly more than 10 percent of total annual production, more than 70with approximately 60 percent of which was destined for Japan, the U.S. and Europe. The Americas and Europe together accounted for the remaining quarterbalance of slightly less than 25 percent of total annual production, most of which was sold in the area where it was produced.destined for local distribution and sale.
 
Comparison of Results on a Local Currency Basis and Results on a Yen Basis

     Results in the Electronics segment, on a yen basis, were positively impacted overall by the appreciation of the euro against the yen, although this impact was partially offset by the negative impact of the depreciation of the U.S. dollar against the yen. On a local currency basis, sales for the fiscal year ended March 31, 2003 decreased by approximately 7 percent compared with the previous fiscal year and operating income was recorded where an operating loss had been recorded in the previous fiscal year.

     Due to the negative impact of the depreciation of the U.S. dollar against the yen, year on year increases in sales of products in the U.S. were generally smaller, and decreases generally larger, when stated in yen than when stated on a local currency basis. However, no products which recorded a sales increase on a local currency basis recorded a sales decrease on a yen basis.

     Sales in Europe were positively affected by currency fluctuations, in particular the appreciation of the euro against the yen. Year on year increases in sales of products in Europe were generally larger, and decreases generally smaller, when stated in yen than when stated on a local currency basis. Regarding significant differences between results on a yen basis and results on a local currency basis, CRT televisions and home-use video cameras recorded an increase in sales on a yen basis but a decrease in sales on a local

55

currency basis while portable audio and batteries, which all recorded increases in sales on a yen basis, were flat year on year on a local currency basis.

     The net effect of currency fluctuations on product sales in Other Areas was negative. Sales increases were generally smaller, and decreases larger, when stated in yen than when stated on a local currency basis. Regarding significant differences between results on a yen basis and results on a local currency basis, sales of CRT televisions were flat year on year on a local currency basis but showed a slight decrease on a yen basis. Sales trends for other products were not significantly different on a local currency basis or a yen basis.

Game

Sales for the fiscal year ended March 31, 2003 decreased2006 increased by 48.7228.9 billion yen, or 4.931.4 percent to 955.0 billion yen compared with the previous fiscal year.year, to 958.6 billion yen. Operating income increaseddecreased by 29.734.4 billion yen, or 35.979.7 percent, to 112.78.7 billion yen compared with the previous fiscal year, and the operating income margin increaseddecreased from 8.35.9 percent to 11.80.9 percent.

     Sales

By region, although sales decreased slightly in Japan, there was an increase in sales in the Game segment were positively impacted by the yen’s depreciation against the euro. OnU.S. and Europe.
There was a local currency basis,significant increase in hardware sales for the fiscal year ended March 31, 2003 decreased approximately 7 percent and operating income increased 12 percent compared withto the previous fiscal year.

     Regarding sales by geographic area, sales decreased Sales increased significantly, mainly in Japanthe U.S and the U.S. but increased in Europe. In Japan, hardware sales declined due to lower unit sales of PlayStation 2 hardware, brought on by a stagnation of the game industry,Europe, and a price reduction of PlayStation 2 hardware. Software sales decreased slightly due to lower unit sales of software published by SCE. As a result overall sales in Japan decreased. Inremained relatively unchanged compared to the U.S., unit sales of PlayStation 2 hardware increased mainlyprevious fiscal year, primarily due to strategic price reductions. Despite an increasea significant contribution to sales from the PSP, which experienced favorable growth in unitall geographic areas and the fact that PlayStation®2 (“PS2”) sales hardwarewere on a par with those in the previous fiscal year. In addition, although PS2 software sales decreased, due to the negative impact of the price reductions exceeding the positive impact of the increase in unit sales. Software sales increased due to an increase in unit sales brought on by an expansion of the software market as a result of the increase in hardware unit sales. As the decrease in hardwarecontribution to sales exceeded the increase infrom PSP software, software sales overall sales in Japan, the U.S. decreased. Inand Europe were relatively unchanged compared to the market penetration of PlayStation 2 hardware continued to expand as hardware unit sales increased mainly in Western Europe, primarily due to a strategic price reduction of PlayStation 2 hardware. As a result, software sales increased and overall sales in Europe increased. The depreciation of the yen against the euro also had a positive impact on sales in Europe.

previous fiscal year.

Total worldwide production shipments of hardware and software were as follows:
              
Year Ended
March 31
Cumulative as of
20022003March 31, 2003
(Million units)
Total Production Shipments of Hardware            
 PlayStation + PS one  7.40   6.78   96.41 
 PlayStation 2  18.07   22.52   51.20 
Total Production Shipments of Software*            
 PlayStation  91.00   61.00   917.00 
 PlayStation 2  121.80   189.90   350.00 

* Including those both from Sony and third parties under Sony licenses.

     In terms of total software unit sales, PlayStation 2 titles represented 76 percent of the software unit sales for the fiscal year ended March 31, 2003, an increase from 57 percent of software unit sales recorded in

Worldwide hardware production shipments (increase compared to the previous fiscal year.

     In termsyear):*

à  PS2:16.22 million units (an increase of 0.05 million units)
à  PSP:14.06 million units (an increase of 11.09 million units)
Worldwide software production shipments (increase/decrease compared to the previous fiscal year):*/**
à  PS2:223 million units (a decrease of 29 million units)
à  PSP:41.6 million units (an increase of 35.9 million units)
* Production shipments of profitability, operatinghardware and software are counted upon shipment of the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers.
** Including those both from Sony and third parties under Sony licenses.
Operating income increased asdecreased significantly compared with the previous fiscal year. This increase was due to an improvementAlthough profits from the PS2 and PSP businesses exceeded those in profitability of the hardware business as a result of a reduction in

56

previous fiscal year, the cost of producing PlayStation 2 hardware and the positive impact of the yen’s depreciation against the euro. The increasedecrease in operating income was also due to an increase in profitabilitymainly the result of continued high research and development costs associated with the PS3, as well as the recording of charges associated with preparation for the launch of the software business brought on by an increase in unit sales mainlyPS3 platform including a write-down of approximately 25.0 billion yen for semiconductor components used in the U.S. and Europe. Cost of sales in the Game segment decreased due to a decrease in manufacturing-related expenses of PlayStation 2 hardware, resulting in a decrease in the ratio ofPS3.
The cost of sales to sales compared toratio deteriorated by 7.4 percent, from 73.0 percent in the previous fiscal year. Although selling, general and administrative expenses increased primarily dueyear, to an increase in advertising and promotion expenses in conjunction with80.4 percent for the increase in units sold, thereasons mentioned above for operating income. The ratio of selling, general and administrative expenses to sales decreased asby 2.3 percent, compared to 21.0 percent in the previous fiscal year.year, to 18.7 percent as a result of the sales increase.

MusicPictures

Sales for the fiscal year ended March 31, 2003 decreased2006 increased by 2.512.2 billion yen, or 0.41.7 percent, to 597.5 billion yen compared with the previous fiscal year. Compared to operating income of 22.1 billion yen in the previous fiscal year, an operating loss of 7.9 billion yen was recorded.

     On a local currency basis, sales in the Music segment increased by 1 percent while the Music segment incurred an operating loss as compared to operating income in the previous fiscal year.

Sales at SMEI increased approximately 6 percent on a U.S. dollar basis (refer to “Foreign Exchange Fluctuations and Risk Hedging” below). In terms of profitability, SMEI incurred an operating loss in the current year as compared to operating income in the previous fiscal year. The increase in sales was primarily due to an increase in sales of DVD software, manufactured in the Music segment, to the Pictures and Game segments. Sales to the Pictures segment increased as a result of the greater popularity of DVD media in the home entertainment market and sales to the Game segment increased due to higher unit sales of PlayStation 2 software titles, which are packaged on DVDs. Partially offsetting the increase in sales at SMEI was a decline in album sales in many regions worldwide. Album sales at SMEI have been declining due to the continued contraction of the global market for music. Industry-wide album unit sales in the U.S. decreased for 19 consecutive months up to and including March 2003. Such sales in the fiscal year ended March 31, 2003 were 10 percent lower than in the previous fiscal year. This contraction trend has been caused by slow economic growth, the saturation of the CD market, the effects of digital piracy and other illegal duplication, parallel imports, pricing pressures and a diversification of customer preferences brought on by increased competition from other entertainment sectors.

     The decline in profitability resulting in an operating loss at SMEI primarily resulted from a 120 million U.S. dollar year on year increase in restructuring charges undertaken to reduce costs in response to the downward trend of the market. The total cost of restructuring for the fiscal year ended March 31, 2003 was 190 million U.S. dollars, or 22.4 billion yen (refer to “Restructuring” above for details) net of a reversal of an expense of 30.8 million U.S. dollars accrued in previous fiscal years as a result of reduced compensation expense. The second largest factor leading to the operating loss was a decrease in gross profit brought about by the decrease in album sales. A third factor leading to operating loss was an increase in talent-related expenses, primarily because the continued decline in album sales led to an increase in impairments of capitalized advances paid to artists. Partially offsetting the decline in operating profitability, in descending order of magnitude, were a decrease in advertising and promotion expenses, savings realized from previously implemented restructuring initiatives and higher income generated by the increase in DVD software manufacturing activity. Although restructuring charges increased significantly compared with the previous fiscal year, the decrease in advertising and promotion expenses and savings realized from previously implemented restructuring initiatives caused a decrease in selling, general and administrative expenses for the year and an improvement in the ratio of selling, general and administrative expenses to sales.

     Regarding the results of SMEJ, sales decreased by 10 percent and operating income decreased 59 percent year on year. Sales decreased due to the continued contraction of the music industry. The decrease in operating income resulted from the decrease in sales and, to a lesser extent, an increase in severance-related expenses incurred from restructuring. Restructuring activity at SMEJ during the fiscal year centered on headcount reductions.

57

     On a yen basis, 76 percent of the Music segment’s sales were generated by SMEI while 24 percent were generated by SMEJ.

Pictures

     Sales for the fiscal year ended March 31, 2003 increased by 167.0 billion yen, or 26.3 percent, to 802.8745.9 billion yen compared with the previous fiscal year. Operating income increaseddecreased by 27.736.5 billion yen, or 88.657.1 percent, to 59.027.4 billion yen and the operating income margin increaseddecreased from 4.98.7 percent to 7.33.7 percent. The results in the Pictures segment consist of the results of SPE.

SPE, aU.S.-based subsidiary.

On a U.S. dollar basis, sales for the fiscal year in the Pictures segment increaseddecreased approximately 304 percent and operating income increaseddecreased by approximately 9261 percent. TheSales decreased primarily due to lower worldwide theatrical and home entertainment revenues on feature films, partially offset by an increase in sales was due totelevision product revenues. The lower theatrical and home entertainment revenues primarily resulted from the strong worldwide performance both theatrically and of


51

Spider-Man 2in home entertainment, ofthe prior fiscal year releases includingcoupled with the disappointing performance of certain films in the current fiscal year film slate, particularlySpider-Man,Stealth,Zathuraand theLegend of Zorro. the highest grossing film in SPE’s history,Men in Black II, xXx andMr. Deeds. The increased worldwide popularity of DVDs also contributed to the higher home entertainment revenues. As a result of these factors, sales for the release slateSales for the fiscal year ended March 31, 2003 increased 1.6 billionrelease slate decreased 967 million U.S. dollars as compared withto the previous fiscal year’s slate. year. Television product revenues increased by approximately 220 million U.S. dollars primarily due to higher advertising and subscription sales from several of SPE’s international channels, higher sales of television library product and the extension of a licensing agreement forWheel of Fortune.
Operating income for the segment increaseddecreased significantly, primarily due to the higherdisappointing overall performance of the current fiscal year’s film slate in both the theatrical and home entertainment revenuesmarkets. Operating loss from the current fiscal year release slate partially offset by the aggregate disappointing performance of several films includingI SpyandStuart Little 2, resulting in an increase of 221increased 623 million U.S. dollars in profit fromas compared to the prior fiscal yearyear’s release slate the benefit of restructuring initiatives undertaken in the previous fiscal year, resulting in an increase of 52 million U.S. dollars, and, less significantly, increased operating income in the television business due to higher revenues from the game show,Wheel of Fortune. The primary benefit ofsame factors contributing to the restructuring undertakendecrease in the previous fiscal year was a reduction in losses recorded on the production of new network television shows and pilots. Losses declined because the number of new shows and pilots was reduced and because production expenses per new show and pilot were reduced. Operating income for the segment was also higher because the 67 million U.S. dollar, or 8.5 billion yen, restructuring charge recorded in the previous fiscal year was not recorded during the fiscal year (refer to “Restructuring” for details).film revenue noted above. Partially offsetting thethis was an increase in operating income was an additional provision of 6683 million U.S. dollars an increase of 26 million U.S. dollars over the previous fiscal year, with respect to previously recorded revenue from KirchMedia, an insolvent licensee in Germany of SPE’s feature film andfor television product and related adjustmentsdue to ultimate film income.

the same factors noted above for revenue.

As of March 31, 2003,2006, unrecognized license fee revenue at SPE was approximately 1.31.2 billion U.S. dollars. SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television product.products. The license fee revenue will be recognized in the fiscal year that the product is available for broadcast.

Financial Services

Please note that the revenue and operating income at Sony Life, Sony Assurance and Sony Bank discussed below on a U.S. GAAP basis differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
Financial Services revenue for the fiscal year ended March 31, 20032006 increased by 28.2182.7 billion yen, or 5.532.6 percent, to 537.3743.2 billion yen compared with the previous fiscal year. Operating income increased by 0.9132.8 billion yen, or 4.3239.4 percent, to 22.8188.3 billion yen and the operating income margin decreased from 4.3increased to 25.3 percent to 4.2 percent.

compared with the 9.9 percent of the previous fiscal year.

At Sony Life, revenue increased by 19.5170.8 billion yen, or 4.436.0 percent, to 466.6 billion yen and operating income increased by 1.8 billion yen, or 6.4 percent, to 29.6645.0 billion yen compared with the previous fiscal year. Insurance revenue increasedThe main reasons for this increase were an improvement in gains and losses from investments at Sony Life, primarily within the general account, as insurance-in-force from individual life insurance products increased due to the maintenance of a lower than industry average rate of contract cancellation, despite a decrease in new insurance sales brought about by a decrease in disposable family incomes due to continued weak economic conditions. Thewell as an increase in revenue also resulted from insurance premiums reflecting an increase ofinsurance-in-force. The improvement in the valuation gains and losses from investments in the general account which occurred because loss recorded due to the devaluationwas principally a result of Argentine government bonds held in that account decreased significantly compared with the previous fiscal year. On the other hand, the increase in Sony Life’s revenue was partially offset by a deterioration of valuation gains and losses from investments in the separate account, which resulted from

58

the stock market downturn. Operating income increased because of the increase in insurance revenue that accompanied the increase in insurance-in-force from individual life insurance products and thean improvement in valuation gains from stock conversion rights in convertible bonds resulting from the aforementioned favorable Japanese domestic stock market conditions. Operating income at Sony Life increased by 127.4 billion yen or 208.8 percent to 188.4 billion yen, mainly as a result of a significant improvement in gains and losses fromon investments in the general account mentioned above. Valuation gains and losses from investments in the separate account accrue directly to the account of policyholders and, therefore, do not affect operating income.

At Sony Assurance, revenue increased due to higher insurance revenue brought about by an expansion in automobile insurance-in-force reflecting greater customer awareness of the benefit of flexible insurance policies which take into account mileage driven. Regarding profit performance, an operating loss was recorded in the fiscal year ended March 31, 2003, as was the case in each of the previous three fiscal years. The loss was recorded because essential investments necessary for the expansion of the business put pressure on profitability. These investments were for advertising and for computer systems necessaryinsurance-in-force. Operating income increased due to develop new products and establish customer claims service centers. However, an increase in insurance revenue and a decreasean improvement in the expense ratio (the ratio of operatingsales, general and administrative expenses to premiums) and.
At Sony Bank, which started operations in June 2001, although foreign exchange losses were recorded as a result of the depreciation of the yen on part of Sony Bank’s foreign currency deposits, revenue rose as there was an increase in interest revenue associated with an increase in the balance of assets from investing activities, in addition to revenues from other investing activities. The amount of the operating loss ratio (the ratiodecreased compared with the previous fiscal year, as a result of insurance payouts to premiums) caused losses to decrease.

the increase in revenue.

At Sony Finance, a leasing and credit financing business subsidiary in Japan, revenue decreased slightlyincreased due to a decrease in rent revenue despite an increase in leasing and credit card revenue. In terms of profitability, a reduced operating loss was recorded compared with an operating income into the previous fiscal year, due to an increase in operating expenses in connection withas a result of improved profitability at a credit card business at Sony Finance.


52

Condensed Statements of Income Separating Out the issuance of credit cards that utilize contact-free IC card technology.

     Sony Bank, which started business in June 2001, recorded a loss, as was also recorded in the previous fiscal year, primarily due to start-up expenses.

* The revenue and operating income at Sony Life, Sony Assurance and Sony Bank discussed here differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
Financial Services Segment (Unaudited)

 
Condensed Statements of Income Separating Out the Financial Services Segment (Unaudited)

The following schedule shows unaudited condensed statements of income for the Financial Services segment and all other segments excluding Financial Services as well as condensed consolidated statements of income. This presentation is not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful infor understanding and analyzing Sony’s consolidated financial statements.
Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
Condensed Statements of Income
         
  Fiscal Year ended March 31
  Financial Services 2005 2006
  (Yen in millions)
 
Financial service revenue  560,557   743,215 
Financial service expenses  505,067   554,892 
         
Operating income
  55,490   188,323 
Other income (expenses), net  9,177   24,522 
         
Income before income taxes
  64,667   212,845 
Income taxes and other  23,634   78,527 
         
Income before cumulative effect of an accounting change
  41,033   134,318 
Cumulative effect of an accounting change  (4,713)   — 
         
Net income
  36,320   134,318 
         
         
  Fiscal Year ended March 31
  Sony without Financial Services 2005 2006
  (Yen in millions)
 
Net sales and operating revenue  6,664,437   6,799,068 
Costs and expenses  6,575,354   6,762,194 
         
Operating income
  89,083   36,874 
Other income (expenses), net  9,957   36,610 
         
Income before income taxes
  99,040   73,484 
Income taxes and other  (34,979)  84,186 
         
Income (loss) before cumulative effect of an accounting change
  134,019   (10,702)
Cumulative effect of an accounting change  —    — 
         
Net income (loss)
  134,019   (10,702)


53

59

         
  Fiscal Year ended March 31
  Consolidated 2005 2006
  (Yen in millions)
 
         
Financial service revenue  537,715   720,566 
Net sales and operating revenue  6,653,610   6,790,031 
         
   7,191,325   7,510,597 
Costs and expenses  7,045,697   7,284,181 
         
Operating income
  145,628   226,416 
Other income (expenses), net  11,579   59,913 
         
Income before income taxes
  157,207   286,329 
Income taxes and other  (11,344)  162,713 
         
Income before cumulative effect of an accounting change
  168,551   123,616 
Cumulative effect of an accounting change  (4,713)   — 
         
Net income
  163,838   123,616 
         
Reflecting the realignment of the business segment configuration, results for fiscal year ended March 31, 2002, and 2003 have been reclassified to conform to the presentation forAll Other
During the fiscal year ended March 31, 2004.
                         
All other segments
excluding
Financial ServicesFinancial ServicesConsolidated
Year Ended March 31200220032002200320022003
(Yen in millions)
Financial Services revenue  509,122   537,276   —   —   480,190   509,398 
Net sales and operating revenue  —   —   7,105,491   6,974,980   7,098,068   6,964,235 
   
   
   
   
   
   
 
   509,122   537,276   7,105,491   6,974,980   7,578,258   7,473,633 
   
   
   
   
   
   
 
Costs and expenses  487,300   514,518   6,992,254   6,811,292   7,443,627   7,288,193 
   
   
   
   
   
   
 
Operating income  21,822   22,758   113,237   163,688   134,631   185,440 
   
   
   
   
   
   
 
Other income (expenses), net  (1,833)  (1,282)  (40,451)  67,846   (41,856)  62,181 
   
   
   
   
   
   
 
Income before income taxes  19,989   21,476   72,786   231,534   92,775   247,621 
   
   
   
   
   
   
 
Income taxes and other  11,477   13,071   72,799   120,089   83,443   132,102 
Cumulative effect of accounting changes  4,305   —   1,673   —   5,978   — 
   
   
   
   
   
   
 
Net income  12,817   8,405   1,660   111,445   15,310   115,519 
   
   
   
   
   
   
 

Other

     Reflecting the realignment of the business segment configuration, results for fiscal year ended March 31, 2002, and 2003 have been reclassified to conform to the presentation for the fiscal year ended March 31, 2004. Based on that reclassification,2006, sales of thewithin All Other segment in the fiscal year ended March 31, 2003 were comprised mainly of an in-house oriented information system service business, an advertising agency business in Japan, and SCN,sales from SMEJ, a Japanese domestic recorded music business; SMEI’s music publishing business;So-net, an Internet-related service business subsidiary operating mainly in Japan; a retailer of imported general merchandise in Japan; an in-house facilities management business in Japan; and an advertising agency business in Japan.

Results for the first four months of the previous fiscal year in All Other incorporated the results for SMEI’s recorded music business, which, as noted above, was combined with Bertelsmann AG’s recorded music business to form the SONY BMG joint venture which is accounted for by the equity method.

Sales for the fiscal year increasedended March 31, 2006 decreased by 44.844.9 billion yen, or 17.19.5 percent, to 306.3426.0 billion yen, compared with the previous fiscal year. Of total segment sales, 5581 percent were sales to outside customers. In terms of profit performance, operating lossesincome for All Other increased for the segment increasedfiscal year from 18.25.1 billion yen to 25.020.5 billion yen.

During the fiscal year, intersegmentthe sales increased primarily due todecrease within All Other reflects the fact that, as noted above, the results for the first four months of the previous fiscal year in All Other incorporated the results for SMEI’s recorded music business.
Sales at SMEJ were relatively unchanged compared with the previous fiscal year. Best selling albums during the fiscal year includedKen Hirai 10th Anniversary Complete Single Collection ’95-’05 “Uta Baka”by Ken Hirai,NATURALby ORANGE RANGE andBESTby Mika Nakashima.
Excluding sales recorded within Sony’s music business, there was an increase in sales at the advertising agency business in Japanwithin All Other. This increase was mainly due to strong sales at a business engaged in the production and marketing of animation products, favorable sales both atSo-net and its taking over the media buying for all Sony Group companies in Japan, and at the in-house oriented information system service business, in addition tosubsidiaries, as well as an increase in sales recorded at SCN. an imported general merchandise retail business.
Regarding profit performance the segmentwithin All Other, operating income of 20.5 billion yen was recorded, a loss primarily due15.5 billion yen increase compared to expenses associated with the development5.1 billion yen of network and content technology and services, intended to facilitate new businessesoperating income recorded in the broadband age, and the advertising agency business in Japan. In comparison with the previous fiscal year, segment losses increased primarily due to anyear. This increase inwas mainly the aforementioned expenses and the write-offresult of professional-use video software in the professional-use video software business due to a discontinuation of that business. Operating losses for the Other segment increased despite the fact that operating income wasthe results for SMEI’s recorded at SCN, as compared tomusic business, which recorded an operating loss in the previous fiscal year. SCNyear, are now recorded as part of the results of the SONY BMG joint venture, and the continued strong performance at SMEJ, where operating income increased approximately 40 percent compared to the previous fiscal year mainly due to an increaseimprovement in the cost of sales ratio and the recording of a net gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund.

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Excluding the operating income recorded in the music business, a rise in broadband subscribers and a reduction in costsloss was recorded within All Other mainly as the result of an asset impairment write-down associated with communication line usage.the sale of the Metreon, a U.S. entertainment complex. This was offset to some extent by cost reductions at network related businesses within Sony Corporation.
 
Foreign Exchange Fluctuations and Risk Hedging

Foreign Exchange Fluctuations and Risk Hedging
During the fiscal year ended March 31, 2003,2006, the average value of the yen was 120.9112.3 yen against the U.S. dollar, and 119.5136.3 yen against the euro,Euro, which was 2.65.1 percent higherlower against the U.S. dollar and 8.82.0 percent lower against the euro,Euro, respectively, compared with the average of the previous fiscal year. Operating results on a local currency basis described in “Overview” and “Operating Performance” show

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results of sales and operating income obtained by applying the yen’s monthly average exchange rate in the previous fiscal year to monthly local currency-denominated sales, cost of sales, and selling, general and administrative expenses for the fiscal year ended March 31, 2003, as if the value of the yen had remained constant. In the Music segment, Sony consolidates the yen-translated results of SMEI (a U.S. based operation that aggregates the results of its worldwide subsidiaries on a U.S. dollar basis) and the results of SMEJ (a Japan based operation that aggregates the results of its operations in yen).
In the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of SPE (a U.S. basedU.S.-based operation that has worldwide subsidiaries).
Therefore, in the results of SMEI and SPE, analysis and discussion of certain portions of theirthe operating results of SPE are specified as being on “a U.S. dollar basis.” Results on a local currency basis and results on a U.S. dollar basis are not on the same basis as Sony’s consolidated financial statements and do not conform with U.S. GAAP. In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that results presented on a local currency basis results provide additional useful information to investors regarding operating performance.

Sony’s consolidated results are subject to foreign currency rate fluctuations mainly derived from the fact that the countries where manufacturing takes place may be different from those where such products are sold. In order to reduce the risk caused by such fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy. Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies.

     In 2001,

SGTS was established in London for the purpose of providingprovides integrated treasury services for Sony Corporation and its subsidiaries. Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should enter into commitments with SGTS for hedging their exposures. Sony Corporation and most of its subsidiaries utilize SGTS for this purpose. The concentration of foreign exchange exposures at SGTS means that, in effect, SGTS hedges the net foreign exchange exposure of Sony Corporation and its subsidiaries. SGTS in turn enters into foreign exchange transactions with creditworthy third-party financial institutions. Most of the transactions are entered into against projected exposures before the actual export and import transactions take place. In particulargeneral, SGTS hedges the majority of theprojected exposures of major currency pairs such as U.S. dollar against Japanese yen, euro against Japanese yen and euro against U.S. dollar, on average three months before the actual transactions take place. In the case of emerging market currencies, such as Brazil, with high inflation and high interest rates, the majority ofHowever, in certain cases SGTS partially hedges the projected exposures are hedged one month before the actual transactions take place due to cost effectiveness considerations.when business requirements such as shorter production-sales cycle for certain products arise. Sony enters into foreign exchange transactions with financial institutions onlyprimarily for hedging purposes andpurposes. Sony does not undertakeuse these derivative financial instruments for trading or speculative transactions.

purposes except for certain derivatives in the Financial Services segment utilized for portfolio investments and ALM.

To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.

Changes in the fair value of derivatives designated as cash flow hedges, including foreign exchange forward contracts and foreign currency option contracts, are initially recorded in accumulated other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges aremarked-to-market with changes in value recognized in Other Income and Expenses. The notional amounts of foreign exchange forward contracts, currency option contracts purchased and currency option contracts written as of March 31, 20032006 were 1,139.31,489.2 billion yen, 484.5457.4 billion yen and 238.8163.7 billion yen, respectively.
Assets, Liabilities and Stockholders’ Equity


55

     (Regarding Assets and Liabilities refer also to “Increase in Assets and Liabilities as a Result of Consolidation of Variable Interest Entities” below.)

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Assets

Assets, Liabilities and Stockholders’ Equity

Assets
Total assets on March 31, 20042007 increased by 720.11,108.6 billion yen, or 8.610.5 percent, to 9,090.711,716.4 billion yen, compared with the previous fiscal year-end. Total assets on March 31, 20042007 in all segments excluding the Financial Services segment increased by 235.0711.3 billion yen, or 4.011.1 percent, to 6,060.87,098.1 billion yen and total assets on March 31, 20042007 in the Financial Services segment increased by 577.9409.5 billion yen, or 19.99.0 percent, to 3,475.04,977.6 billion yen, compared with the previous fiscal year-end. Total assets on March 31, 2004 in all segments excluding the Financial Services segment would have increased by approximately 9 percent compared with the previous fiscal year-end if the value of the yen had remained the same on March 31, 2004 as it was on March 31, 2003.
 
Current Assets

Current Assets
Current assets on March 31, 20042007 increased by 209.1777.2 billion yen, or 6.620.6 percent, to 3,363.44,546.7 billion yen compared with the previous fiscal year-end. Current assets on March 31, 20042007 in all segments, excluding the Financial Services segment, increased by 188.5538.4 billion yen, or 7.518.2 percent, to 2,692.43,495.0 billion yen.

Cash and cash equivalents on March 31, 2007 in all segments, excluding the Financial Services increased 154.4segment, decreased 62.6 billion yen, or 35.210.7 percent, to 592.9522.9 billion yen compared with the previous fiscal year. This increase was primarily due to the issuance, in December 2003, of 250 billion yen in euro yen convertible bonds. The proceeds from this issuance will be applied towards investments in the development of, and production equipment for, key devices, such as the next generation broadband processor (for more information on cash and cash equivalents, refer to “Liquidity Management” below).

year-end.

Notes and accounts receivable, trade (net of deductionsallowance for doubtful accounts and allowances forsales returns) on March 31, 2007, excluding the Financial Services segment, increased 3.8369.5 billion yen, or 37.9 percent, compared with the previous fiscal year-end to 1,011.21,343.1 billion yen.

This was primarily the result of an increase in sales of the PS3.

Inventories on March 31, 20042007 increased by 40.8136.2 billion yen, or 6.516.9 percent, to 666.5940.9 billion yen compared with the previous fiscal year-end. This increase was primarily a result of both increased semiconductor inventory, primarily for use in the PS3, and LCD television inventory in the Electronics segment and increased inventory in the Game segment resulting from the world-wide introduction of the PS3 platform. The inventory to cost of sales turnover ratio (based on the average of inventories at the end of each fiscal year and the previous fiscal year) decreased from 1.57was 1.78 months compared to 1.67 months at the end of the previous fiscal year to 1.53 months.year. Sony considers this level of inventory to be appropriate in the aggregate. During the fiscal year ended March 31, 2004, Sony did not engage in the kind of aggressive inventory reduction that it engaged in during the fourth quarter of the fiscal year ended March 31, 2003.

Current assets on March 31, 20042007 in the Financial Services segment increased by 14.8237.8 billion yen, or 2.227.9 percent, to 699.7 billion yen, compared with the previous fiscal year-end. The increase was primarily attributable to an increase in marketable securities.
Investments and Advances

     (Also see “Investments” below.)

     Investments and advances on March 31, 2004 increased by 518.8 billion yen, or 26.0 percent, to 2,513.0 billion yen, compared with the previous fiscal year-end.

     Investments and advances on March 31, 2004 in all segments excluding the Financial Services segment decreased by 24.4 billion yen, or 6.4 percent, to 358.6 billion yen. This decrease was mainly due to the recording of an impairment loss on securities issued by a privately held Japanese company, which Sony accounted for under the cost method, that is engaged in cable broadcasting and other businesses and a decrease in the amount recorded in “investments” due to the consolidation of an affiliated company that was formerly accounted for under the equity method as a result of the adoption during the fiscal year ended March 31, 2004 of Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) 46 (refer to Notes 5 and 6 in the Notes to the Consolidated Financial Statements).

     Investments and advances on March 31, 2004 in the Financial Services segment increased by 543.1 billion yen, or 31.4 percent, to 2,274.51,089.3 billion yen, compared with the previous fiscal year-end. This increase was primarily due to an increase in assets under management.

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expansion of the life insurance and banking businesses.

 
Property, plant and equipment (after deduction of accumulated depreciation)

     Property, plant

Investments and equipmentAdvances
Investments and advances on March 31, 20042007 increased by 86.7368.8 billion yen, or 6.810.5 percent, to 1,365.03,888.7 billion yen, compared with the previous fiscal year-end.

     Property, plant

Investments and equipmentadvances on March 31, 20042007 in all segments, excluding the Financial Services segment, increased by 91.9148.8 billion yen, or 7.531.3 percent, to 1,324.2623.3 billion yen. This was primarily a result of an increase in investments and advances towards affiliated companies such as Sony Ericsson and S-LCD.
Investments and advances on March 31, 2007 in the Financial Services segment increased by 216.6 billion yen, or 6.9 percent, to 3,347.9 billion yen, compared with the previous fiscal year-end. TheThis increase was mainlyprimarily due to investments mainly in Japanese fixed income securities by Sony Life, which increased assets as a result of an expansion of business, and an increase in assets resulting frommortgage loans at Sony Bank.
Also refer to “Investments” below.
Property, Plant and Equipment (after deduction of accumulated depreciation)
Property, plant and equipment on March 31, 2007 increased by 33.0 billion yen, or 2.4 percent, to 1,421.5 billion yen, compared with the adoption of FIN 46.previous fiscal year-end.
Property, plant and equipment on March 31, 2007 in all segments, excluding the Financial Services segment, increased by 31.7 billion yen, or 2.3 percent, to 1,382.9 billion yen, compared with the previous fiscal year-end.


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Capital expenditures (part of the increase in property, plant and equipment) for the fiscal year ended March 31, 20042007 increased by 117.029.8 billion yen, or 44.87.8 percent, to 378.3414.1 billion yen compared with the previous fiscal year. Capital expenditures in the Electronics segment increased 72.4by 22.9 billion yen, or 42.57.0 percent, to 242.7 billion yen and in the Game segment by 59.4 billion yen, or 144.9 percent, to 100.4351.5 billion yen. Capital expenditures in the semiconductor businesses (includedbusiness within the Electronics segment, including capital expenditures related to the Cell Broadband Enginetm (“Cell/B.E.”), totaled approximately 150.0 billion yen. Capital expenditures increased in the Game segment by 8.4 billion yen, or 99.5 percent, to 16.8 billion yen. In the Pictures segment, capital expenditures of both the Electronics and Game segments) amountedincreased by 0.9 billion yen, or 8.6 percent to 175.011.0 billion yen. In All Other, which includes Sony’s consolidated music business, 5.6 billion yen of which investments in production equipment for next generation broadband microprocessors amountedcapital expenditures were recorded, compared to 69.0the 4.2 billion yen.

     Capitalyen of capital expenditures recorded in the Music segment decreased by 8.9 billion yen, or 40.9 percent, to 12.9 billion yen, in the Pictures segment by 1.1 billion yen, or 15.8 percent to 6.0 billion yen, and in the Other segment by 5.3 billion yen, or 34.3 percent, to 10.1 billion yen.

previous fiscal year.

Property, plant and equipment on March 31, 20042007 in the Financial Services segment decreased 5.2increased by 1.2 billion yen, or 11.23.3 percent, to 40.838.7 billion yen compared with the previous fiscal year-end. Capital expenditures in the Financial Services segment increased 1.0by 2.4 billion yen, or 26.353.4 percent, to 4.66.8 billion yen.
 
Other Assets

Other Assets
Other assets on March 31, 20042007 decreased by 63.518.7 billion yen, or 3.81.2 percent, to 1,592.61,550.7 billion yen, compared with the previous fiscal year-end.

year end.

Other assets on March 31, 20042007 in all segments, excluding the Financial Services segment, increased by 0.144.1 billion yen to 1,251.9 billion yen. Other assets on March 31, 2004 in the Financial Services segment increased 25.2 billion yen, or 5.8 percent, to 460.0 billion yen compared with the previous year. This was mainly due to an increase in deferred insurance acquisition costs at Sony Life.

Deferred tax assets on March 31, 2004 decreased by 124.9 billion yen, or 38.1 percent, to 203.21,100.8 billion yen compared with the previous fiscal year-end.

Deferred tax assets on March 31, 2007 increased by 38.2 billion yen, or 21.4 percent, to 217.0 billion yen compared with the previous fiscal year end. The decrease wasincrease is due primarily to the offset betweenan increase of deferred tax assets and liabilities recorded at eachin connection with tax loss carryforwards of foreign subsidiaries in the companies within the Sony Group, as a result of the adoption of consolidated tax filing in Japan.Game segment.
 
Liabilities

Other assets in the Financial Services segment on March 31, 2007 decreased by 46.2 billion yen, or 8.4 percent, to 501.8 billion yen compared with the previous fiscal year-end.
Liabilities
Total current and long-term liabilities on March 31, 20042007 increased by 622.2939.9 billion yen, or 10.312.8 percent, to 6,689.88,306.7 billion yen compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, 20042007 in all segments, excluding the Financial Services segment, increased by 189.6589.0 billion yen, or 5.216.6 percent, to 3,855.94,140.9 billion yen. Total current and long-term liabilities on March 31, 2004, in the Financial Services segment on March 31, 2007 increased by 515.4363.2 billion yen, or 19.99.1 percent, to 3,099.84,337.7 billion yen, compared with the previous fiscal year-end. Total liabilities on March 31, 2004 in all segments excluding the Financial Services segment would have increased by approximately 10 percent compared with the previous fiscal year-end if the value of the yen had remained the same on March 31, 2004 as it was on March 31 of the previous fiscal year.
 
Current Liabilities

Current Liabilities
Current liabilities on March 31, 20042007 increased by 547.2351.6 billion yen, or 22.511.0 percent, to 2,982.23,551.9 billion yen compared with the previous fiscal year-end. Current liabilities on March 31, 2004 in all segments

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excluding the Financial Services segment increased by 307.7 billion yen, or 14.9 percent, to 2,373.6 billion yen.

     Short-term borrowings and current portion of long-term debt on March 31, 2004 in all segments excluding the Financial Services segment increased 283.1 billion yen, or 223.4 percent, to 409.8 billion yen compared with the previous fiscal year-end. This increase was mainly due to the shift from long-term liabilities to current liabilities of 287.8 billion yen (as of March 31, 2004) in outstanding convertible bonds, due for redemption on March 31, 2005, and an increase of 57.3 billion yen in bank syndicated loans, which will reach maturity by November 2004, as a result of the adoption of FIN 46. Partially offsetting these items was a 52.8 billion yen repayment of commercial paper during the fiscal year.

     Notes and accounts payable, trade on March 31, 20042007 in all segments excluding the Financial Services segment increased by 79.6311.3 billion yen, or 11.513.4 percent, to 773.22,640.6 billion yen.

Short-term borrowings and the current portion of long-term debt on March 31, 2007 in all segments, excluding the Financial Services segment, decreased 144.1 billion yen, or 64.0 percent, to 80.9 billion yen compared with the previous fiscal year-end. This increase was particularly conspicuousprincipally as a result of a decrease in the Electronics segment, where inventories also increased.

Current liabilitiescurrent portion of long-term debt, due to the redemption of straight bonds and medium-term notes.

Notes and accounts payable, trade on March 31, 2004 in the Financial Services segment increased by 232.9 billion yen, or 56.0 percent, to 648.8 billion yen, mainly due to the increase in deposits from customers and interbank short-term borrowings in the banking business. Deposits from customers in the banking business increased by 130.1 billion yen, or 52.3 percent, to 378.9 billion yen, due to the expansion of the banking business.
Long-term Liabilities

     Long-term liabilities on March 31, 2004 increased by 75.0 billion yen, or 2.1 percent, to 3,707.6 billion yen compared with the previous fiscal year-end.

     Long-term liabilities on March 31, 20042007 in all segments, excluding the Financial Services segment, decreasedincreased by 118.1362.9 billion yen, or 7.445.1 percent, to 1,482.41,167.3 billion yen. This decrease wasyen compared with the previous fiscal year-end.

Current liabilities on March 31, 2007 in the Financial Services segment increased by 39.1 billion yen, or 4.3 percent, to 957.5 billion yen, mainly due to a 129.2an increase in deposits from customers at Sony Bank.


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Long-term Liabilities
Long-term liabilities on March 31, 2007 increased by 588.3 billion yen, or 26.514.1 percent, decrease to 358.24,754.8 billion yen of accrued pension and severance costs primarily resulting from an increase in pension assets due tocompared with the rise in value of equity investment in Japan.

previous fiscal year-end.

Long-term debtliabilities on March 31, 20042007 in all segments, excluding the Financial Services segment, decreased 27.7increased by 277.7 billion yen, or 3.4%,22.7 percent, to 775.21,500.3 billion yen. This was mainlyIn addition, long-term debt on March 31, 2007 in all segments, excluding the Financial Services segment, increased by 223.9 billion yen, or 31.9 percent, to 925.3 billion yen.
Long-term debt increased primarily due to the shift to current liabilitiesexecution of 287.8 billion yen (asyen-denominated syndicated loans for the purpose of March 31, 2004) in outstanding convertible bonds, dueallocating funds for redemption on March 31, 2005,general corporate purposes, including capital expenditures, and despite the issuance of the 250.0 billion yen in euro yen convertible bonds (bonds with stock acquisition rights).

for debt redemption.

Long-term liabilities on March 31, 20042007 in the Financial Services segment increased by 282.5324.0 billion yen, or 13.010.6 percent, to 2,451.03,380.2 billion yen. This was due to an increase ininsurance-in-force in the life insurance business which resulted in an increase in future insurance policy benefits and other of 264.2293.3 billion yen, or 13.810.7 percent, to 2,178.63,037.7 billion yen.
 
Total Interest-bearing Debt

Total Interest-bearing Debt

Total interest-bearing debt on March 31, 2004 increased2007 decreased by 286.54.8 billion yen, or 29.70.4 percent, to 1,252.71,096.5 billion yen, compared with the previous fiscal year-end. Total interest-bearing debt on March 31, 20042007 in all segments, excluding the Financial Services segment, increased by 255.479.7 billion yen, or 27.58.6 percent, to 1,185.01,006.2 billion yen.
 
Increase in Assets and Liabilities as a Result of Consolidation of Variable Interest Entities

     Sony adopted FIN 46 on July 1, 2003. As a result, Sony’s assets and liabilities increased as non-cash transactions, which resulted in no cash flows, by 95.3 billion yen and 98.0 billion yen, respectively. Cash

64

and cash equivalents also increased by 1.5 billion yen. The Variable Interest Entities (“VIEs”) consolidated by Sony include the following:Stockholders’ Equity

     Sony leases the headquarters of its U.S. subsidiary from a VIE. Upon consolidation of the VIE, assets and liabilities increased by 25.3 billion yen and 27.0 billion yen, respectively. Sony has the option to purchase the building at any time for 26.9 billion yen during the lease term which expires in December 2008. The debt held by the VIE is unsecured. At the end of the lease term, Sony has agreed to either renew the lease, purchase the building or remarket it to a third party on behalf of the owner.

     A subsidiary in the Pictures business entered into a joint venture agreement with a VIE for the purpose of funding the acquisition of certain international film rights. Upon consolidation of the VIE, assets and liabilities increased by 10.2 billion yen and 10.6 billion yen, respectively. Under the agreement, the subsidiary’s 1.2 billion yen equity investment is the last equity to be repaid.

     Sony has utilized a VIE to erect and operate a multi-use real estate complex in Berlin, Germany, which was accounted for under the equity method by Sony until June 30, 2003. On July 1, 2003, Sony consolidated this entity. Upon consolidation of the VIE, assets and liabilities increased by 61.3 billion yen and 60.3 billion yen, respectively. These liabilities include a 57.3 billion yen syndicated bank loan which matures in November 2004. The syndicated bank loan is secured by the multi-use real estate complex.

Regarding further information on transactions with VIEs please refer to Notes 21 and 22 of Notes to Consolidated Financial Statements.

 
Stockholders’ Equity

Stockholders’ equity on March 31, 20042007 increased by 97.1166.9 billion yen, or 4.35.2 percent, to 2,378.03,370.7 billion yen compared with the previous fiscal year-end. Retained earnings increased 65.3116.9 billion yen compared with the previous fiscal year-end, and accumulated other comprehensive income (net of tax) was 115.5 billion yen. This was primarily due to accumulated other comprehensive income of 86.3 billion yen arising from foreign currency translation adjustments in the amountcurrent fiscal year due to the depreciation of deductions recordedthe yen, partially offset by a decrease in unrealized gains on securities in accumulated other comprehensive income decreased 22.0 billion yen. Accumulated other comprehensive income improved because, although foreign currency translation adjustments (deduction from accumulated other comprehensive income) increased 127.9of 14.7 billion yen year on year, due toin the appreciation of the yen, minimum pension liability adjustments (deduction from accumulated other comprehensive income) decreased 93.4 billion yen, due to an increase in pension assets resulting from the rise in value of equity investment in Japan, and unrealized gains on securities increased 52.3 billion yen compared with the previouscurrent fiscal year-end.year. The ratio of stockholders’ equity to total assets decreased 1.0 percent1.4 percentage points compared to the end of the previous fiscal year, from 27.230.2 percent to 26.228.8 percent.


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65

 
Condensed Balance Sheets Separating Out the Financial Services Segment (Unaudited)

Condensed Balance Sheets Separating Out the Financial Services Segment (Unaudited)

The following schedule shows an unaudited condensed balance sheet for the Financial Services segment and all other segments excluding Financial Services as well as the condensed consolidated balance sheet. This presentation is not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
Financial Services
                          
All other Segments
excluding
Financial ServicesFinancial ServicesConsolidated
As at March 31200320042003200420032004
(Yen in millions)
Assets
                        
 Current assets  684,945   699,698   2,503,940   2,692,436   3,154,214   3,363,355 
   
   
   
   
   
   
 
 Cash and cash equivalents  274,543   256,316   438,515   592,895   713,058   849,211 
 Marketable securities  236,621   270,676   4,899   4,072   241,520   274,748 
 Notes and accounts receivable, trade  68,188   72,273   943,073   943,590   1,007,395   1,011,189 
 Other  105,593   100,433   1,117,453   1,151,879   1,192,241   1,228,207 
 Film costs  —   —   287,778   256,740   287,778   256,740 
 Investments and advances  1,731,415   2,274,510   383,004   358,629   1,994,123   2,512,950 
   
   
   
   
   
   
 
 Investments in Financial Services, at cost  —   —   166,905   176,905   —   — 
           
   
         
 Property, plant and equipment  45,990   40,833   1,232,359   1,324,211   1,278,350   1,365,044 
   
   
   
   
   
   
 
 Other assets  434,769   459,998   1,251,810   1,251,901   1,656,080   1,592,573 
   
   
   
   
   
   
 
 Deferred insurance acquisition costs  327,869   349,194   —   —   327,869   349,194 
 Other  106,900   110,804   1,251,810   1,251,901   1,328,211   1,243,379 
   
   
   
   
   
   
 
   2,897,119   3,475,039   5,825,796   6,060,822   8,370,545   9,090,662 
   
   
   
   
   
   
 
         
  March 31
  2006 2007
  (Yen in millions)
 
ASSETS
        
Current assets:        
Cash and cash equivalents  117,630   277,048 
Marketable securities  532,895   490,237 
Other  200,929   321,969 
         
   851,454   1,089,254 
Investments and advances  3,131,269   3,347,897 
Property, plant and equipment  37,422   38,671 
Other assets:        
Deferred insurance acquisition costs  383,156   394,117 
Other  164,827   107,703 
         
   547,983   501,820 
         
   4,568,128   4,977,642 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
Current liabilities:        
Short-term borrowings  136,723   48,688 
Notes and accounts payable, trade  11,707   13,159 
Deposits from customers in the banking business  599,952   752,367 
Other  169,956   143,245 
         
   918,338   957,459 
Long-term liabilities:        
Long-term debt  128,097   129,484 
Accrued pension and severance costs  13,479   8,773 
Future insurance policy benefits and other  2,744,321   3,037,666 
Other  170,294   204,317 
         
   3,056,191   3,380,240 
Minority interest in consolidated subsidiaries  4,089   5,145 
Stockholders’ equity  589,510   634,798 
         
   4,568,128   4,977,642 
         


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All other Segments
excluding
Financial ServicesFinancial ServicesConsolidated
As at March 31200320042003200420032004
(Yen in millions)
Liabilities and stockholders’ equity
                        
 Current liabilities  415,877   648,803   2,065,854   2,373,550   2,435,048   2,982,215 
   
   
   
   
   
   
 
 Short-term borrowings  72,753   86,748   126,687   409,766   158,745   475,017 
 Notes and accounts payable, trade  5,417   7,847   693,589   773,221   697,385   778,773 
 Deposits from customers in the banking business  248,721   378,851   —   —   248,721   378,851 
 Other  88,986   175,357   1,245,578   1,190,563   1,330,197   1,349,574 
 Long-term liabilities  2,168,476   2,450,969   1,600,484   1,482,378   3,632,580   3,707,587 
   
   
   
   
   
   
 
 Long-term debt  140,908   135,811   802,911   775,233   807,439   777,649 
 Accrued pension and severance costs  8,737   10,183   487,437   358,199   496,174   368,382 
 Future insurance policy benefits and other  1,914,410   2,178,626   —   —   1,914,410   2,178,626 
 Other  104,421   126,349   310,136   348,946   414,557   382,930 
   
   
   
   
   
   
 
 Minority interest in consolidated subsidiaries  —   —   16,288   17,554   22,022   22,858 
   
   
   
   
   
   
 
 Stockholders’ equity  312,766   375,267   2,143,170   2,187,340   2,280,895   2,378,002 
   
   
   
   
   
   
 
   2,897,119   3,475,039   5,825,796   6,060,822   8,370,545   9,090,662 
   
   
   
   
   
   
 
Sony without Financial Services
 
Investments
         
  March 31
  2006 2007
  (Yen in millions)
 
ASSETS
        
Current assets:        
Cash and cash equivalents  585,468   522,851 
Marketable securities  4,073   3,078 
Notes and accounts receivable, trade  973,675   1,343,128 
Other  1,393,306   1,625,914 
         
   2,956,522   3,494,971 
Film costs  360,372   308,694 
Investments and advances  474,568   623,342 
Investments in Financial Services, at cost  187,400   187,400 
Property, plant and equipment  1,351,125   1,382,860 
Other assets  1,056,726   1,100,795 
         
   6,386,713   7,098,062 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
Current liabilities:        
Short-term borrowings  225,082   80,944 
Notes and accounts payable, trade  804,394   1,167,324 
Other  1,299,809   1,392,333 
         
   2,329,285   2,640,601 
Long-term liabilities:        
Long-term debt  701,372   925,259 
Accrued pension and severance costs  168,768   164,701 
Other  352,457   410,354 
         
   1,222,597   1,500,314 
Minority interest in consolidated subsidiaries  32,623   32,808 
Stockholders’ equity  2,802,208   2,924,339 
         
   6,386,713   7,098,062 
         


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Consolidated
         
  March 31
  2006 2007
  (Yen in millions)
 
ASSETS
        
Current assets:        
Cash and cash equivalents  703,098   799,899 
Marketable securities  536,968   493,315 
Notes and accounts receivable, trade  985,508   1,369,777 
Other  1,543,950   1,883,732 
         
   3,769,524   4,546,723 
Film costs  360,372   308,694 
Investments and advances  3,519,907   3,888,736 
Property, plant and equipment  1,388,547   1,421,531 
Other assets:        
Deferred insurance acquisition costs  383,156   394,117 
Other  1,186,247   1,156,561 
         
   1,569,403   1,550,678 
         
   10,607,753   11,716,362 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
Current liabilities:        
Short-term borrowings  336,321   95,461 
Notes and accounts payable, trade  813,332   1,179,694 
Deposits from customers in the banking business  599,952   752,367 
Other  1,450,623   1,524,330 
         
   3,200,228   3,551,852 
Long-term liabilities:        
Long-term debt  764,898   1,001,005 
Accrued pension and severance costs  182,247   173,474 
Future insurance policy benefits and other  2,744,321   3,037,666 
Other  475,106   542,691 
         
   4,166,572   4,754,836 
Minority interest in consolidated subsidiaries  37,101   38,970 
Stockholders’ equity  3,203,852   3,370,704 
         
   10,607,753   11,716,362 
         
Investments
Sony regularly evaluates its investment portfolio to identifyother-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether another-than-temporary decline in value has occurred include: the length of time and extent to which the market value of the security has been less than its original cost, the financial condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors affecting the market value, deterioration of issuer’s credit condition, sovereign risk, and whether or not Sony is able to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value.


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In evaluating the factors foravailable-for-sale securities with readily determinable fair values, management presumes a decline in value to beother-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally a period of up to six to twelve months). The presumption of another-than-temporary impairment in such cases may be overcome if there is evidence to support the conclusion that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value isother-than-temporary.

The assessment of whether a decline in the value of an investment isother-than-temporary is often judgmental in nature and involves certain assumptions and estimates concerning the expected operating results, business plans and future cash flows of the issuer of the security. Accordingly, it is possible that investments in Sony’s portfolio that have had a decline in value that Sony currently believes to be temporary may be determined to beother-than-temporary in the future based on Sony’s evaluation of

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additional information such as continued poor operating results, future broad declines in value of worldwide equity markets and the effect of world wideworldwide interest rate fluctuations. As a result, unrealized losses recorded for investments may be recognized into income in future periods.

The following table contains available for saleavailable-for-sale and held to maturity securities, breaking out the unrealized gains and losses by investment category.
                    
March 31, 2004
UnrealizedUnrealizedFair Market
CostgainLossValue
Yen in Millions
Financial Services Business:                
Available for sale                
 Debt securities                
  Sony Life  1,581,723   54,645   1,828   1,634,540 
  Other  348,443   971   232   349,182 
 Equity securities                
  Sony Life  33,694   16,398   149   49,943 
  Other  2,384   4,365   0   6,749 
Held to maturity                
 Debt securities                
  Sony Life  —   —   —   — 
  Other  26,437   381   28   26,790 
   
   
   
   
 
   Total Financial Services  1,992,681   76,760   2,237   2,067,204 
   
   
   
   
 
Non-Financial Services:                
Available for sale securities  58,946   42,768   1,749   99,965 
Held to maturity securities  2   —   —   2 
   
   
   
   
 
   Total Non-Financial Services  58,948   42,768   1,749   99,967 
   
   
   
   
 
Consolidated  2,051,629   119,528   3,986   2,167,171 
   
   
   
   
 

                 
  March 31, 2007
    Unrealized
 Unrealized
 Fair Market
  Cost Gain Loss Value
  (Yen in millions)
 
Financial Services Business:                
Available-for-sale                
Debt securities                
Sony Life  2,129,352   17,679   (3,052)  2,143,979 
Other  381,663   5,983   (5,794)  381,852 
Equity securities                
Sony Life  210,009   105,376   (3,579)  311,806 
Other  7,341   1,657   (40)  8,958 
Held to maturity                
Debt securities                
Sony Life  —   —   —   — 
Other  34,931   165   (127)  34,969 
 
 
Total Financial Services  2,763,296   130,860   (12,592)  2,881,564 
 
 
Non-Financial Services:                
Available-for-sale securities
  70,496   21,909   (3,770)  88,635 
Held to maturity securities  1,104   —   —   1,104 
 
 
Total Non-Financial Services  71,600   21,909   (3,770)  89,739 
 
 
Consolidated  2,834,896   152,769   (16,362)  2,971,303 
 
 
The most significant portion of these unrealized losses relate to investments held by Sony Life. Sony Life principally invests in debt securities in various industries. Almost all of these securities were rated “BBB” or betterhigher by Standard & Poor’s, Moody’s or others.other rating agencies. As of March 31, 2004,2007, Sony Life had debt and equity securities which had gross unrealized losses of 1.83.1 billion yen and 0.13.6 billion yen, respectively. Of the unrealized loss amounts recorded by Sony Life, less than 1approximately 46 percent relate to securities being in an unrealized loss position offor periods greater than 12 months.months as of March 31, 2007. These unrealized losses related to numerous investments, with no single investment being in a material unrealized loss position.position for the above-mentioned periods. In addition, there was no individual security with unrealized losses that met the test discussed above for impairment


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as the declines in value were observed to be small both in amounts and percentage, and therefore, the decline in value for those investments was still determined to be temporary in nature. The percentage of noninvestmentnon-investment grade securities held by Sony Life represents approximately 30.1 percent of Sony Life’s total investment portfolio, while the percentage of unrealized losses that relate to those noninvestmentnon-investment grade securities was approximately 71 percent of Sony Life’s total unrealized losses as of March 31, 2004.

2007.

For fixed maturity securities with unrecognized losses held by Sony Life as of March 31, 2004 (1.82007 (3.1 billion yen), maturity dates vary as follows:
   
• Within 1 year: 90.4 percent
• 1 to 5 years: 5496.0 percent
• 5 to 10 years: 373.4 percent
• Above 10 years:0.2 percent

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Sony also maintains long-term investment securities issued by a number of non-public companies. The aggregate carrying amount of the investments in non-public companies at March 31, 2004, which were2007 was 64.9 billion yen. A non-public equity investment is valued at the lower of cost oras fair value was 51.4 billion yen.

is not readily determinable. If the value is estimated to have declined and such decline is judged to beother-than-temporary, the impairment of the investment is recognized and the carrying value is reduced to its fair value.

For the fiscal years ended March 31, 2002, 20032005, 2006 and 2004,2007, total impairment losses were 27.64.2 billion yen, 25.54.0 billion yen and 16.77.4 billion yen, of which 9.20.5 billion yen, 2.30.2 billion yen and 0.26.1 billion yen, respectively, were recorded by Sony Life in Financial Services revenue (refer to “Financial Services” under “Operating Performance by Business Segment” for the fiscal years ended March 31, 2004 and March 31, 2003).revenue. Impairment losses other than at Sony Life in each of the three years were reflected in non-operating expenses and primarily relate to the certain strategic investments in non-financial services businesses. These investments primarily relate to the certain strategic investments in Japan and the U.S. and Europe with which Sony has strategic relationships for the purposes of developing and marketing new technologies. The impairment losses were recorded for each of the three fiscal years as these companies failed to successfully develop and market such technology, the operating performance of the companies was more unfavorable than previously expected and the decline in fair value of these companies was judged asother-than-temporary. None of these impairment losses was individually material to Sony, except for the devaluation of securities explained in “Other Income and Expenses” for the fiscal years ended March 31, 2004, March 31, 2003 and March 31, 2002, except for the devaluation of securities in the cases of companies such as Candescent Technologies Corporation, a developer of flat-screen technology and Trimedia Technologies Inc., a developer of microprocessor technologies.

Sony.

Upon determination that the value of an investment is impaired, the value of the investment is written down to its fair value. For publicly traded investments, fair value is determined by the closing stock price as of the date on which the impairment determination is made. For non-public investments, fair value is determined through the use of such methodologies as discounted cash flows, valuation of recent financings and comparable valuations of similar companies. The impairment losses that were recorded in each of the three fiscal years related to the unique facts and circumstances of each individual investment and did not significantly impact other investments.

Sony Life and Sony Bank’s investments constitute the majority of the investments in the Financial Services segment. Sony Life and Sony Bank account for approximately 8185 percent and 1713 percent of the investments of the Financial Services segment, respectively.

Sony Life’s basicfundamental investment policy is to takebuild an investment portfolio capable of ensuring stable mid- to long-term returns through the efficient investment of funds, taking into account both expected returns and investment risks into account in order to maintain sound asset quality, structuring its asset management portfolio to ensure steady medium- and long-term returns by investing assets in an efficient manner and responding flexibly to changes in financial conditions and the investment environment.environment, while maintaining a sound asset base. Moreover, Sony Life analyzes the character of future insurance policy benefits by utilizing Asset Liability Management (“ALM”),as its fundamental stance towards ALM, a method of managing interest rate fluctuation risk through the comprehensive identification of the mismatches ofdifferences in duration and cash flows between assets and liabilities. Government bonds and corporate bonds constitute a majority of Sony Life’s current portfolio.liabilities, Sony Life investstakes the distinct characteristics of liability into account in various typesorder to control price fluctuation risks and establish a portfolio that ensures a certain level of government and corporate bonds in many countries, companies and industries, to diversify associated risks. Further, as stocks accounted for approximately 2 percent of such securities, the financial structure ofreturns. Sony Life is not greatly influenced byadjusts its investing style depending on changes in the investment environment. In the first half of the fiscal year ended March 31, 2007, when interest rates in Japan were increasing, Sony Life invested mainly in long-term Japanese government bonds. Sony Life concentrated its investments in convertible bonds whose prices had declined due to the issuer’s falling stock prices.

price.

Sony Bank operates using a similar basic investment policy as Sony Life, taking expected returns and investment risks into account in order to disperse associated risks, and structuring its asset portfolio to ensure steady returns from investments. In addition, Sony Bank is careful to match the duration of its asset portfolio with the


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duration of liabilities resulting from customer deposits, in order to ensure that significant discrepancies do not occur. Government bonds and corporate bonds in yen or other currencies constitute a majority of Sony Bank’s current portfolio. To safeguard its assets Sony Bank does not invest in equity securities but invests in various types of government and corporate bonds in many countries, companies and industries, to diversify associated risks. To safeguard its assetsWith respect to loans, Sony Bank mainly offers housing loans to individuals and does not lend its assets to corporations or invest in equity securities.

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have any corporate loan exposure.

Contractual obligations, commitments, and contingent liabilities

The following table summarizes Sony’s contractual obligations and major commitments.
                      
Payments Due by Period
Less than1 to3 toAfter
Total1 Year3 Years5 Years5 Years
(Yen in millions)
Contractual Obligations and Major Commitments:
                    
Long-term debt (Note 10)                     
 Capital lease obligations (Notes 7 and 10)  42,689   12,667   13,109   10,923   5,990 
 Other long-term debt (Note 10)  1,118,717   371,090   316,103   299,984   131,540 
Minimum rental payments required under operating leases (Note 7)  187,379   42,649   58,725   29,498   56,507 
Purchase commitments for property, plant and equipment and other assets (Note 22)  20,796   20,331   462   3   — 
Expected payments regarding contracts with recording artists and other (Note 22)  39,073   19,470   14,759   3,708   1,136 
Expected cost for the production or purchase of films and television programming or certain rights (Note 22)  95,232   39,672   55,560   —   — 
Commitment under the joint venture agreement with Samsung Electronics Co., Ltd. (Note 22)  96,285   96,285   —   —   — 
commitments as of March 31, 2007. The references to the Notes below refer to a corresponding note within the Notes to Consolidated Financial Statements.
                     
    Payments Due by Period
    Less than
   3 to 5
 After 5
  Total 1 year 1 to 3 year year year
 
 
  (Yen in millions)
Contractual Obligations and Major
Commitments:*
                    
Long-term debt (Note 11)                    
Capital lease obligations (Notes 8 and 11)  49,403   12,559   13,674   6,052   17,118 
Other long-term debt (Note 11)  994,772   30,611   448,404   272,798   242,959 
Minimum rental payments required under operating leases (Note 8)  202,723   46,154   64,811   31,129   60,629 
Purchase commitments for property, plant and equipment and other assets (Note 23)  43,329   43,083   213   33   — 
Expected cost for the production or purchase of films and television programming or certain rights (Note 23)  67,717   54,940   12,033   585   159 
Partnership program contract with Fédération Internationale de Football Association (Note 23)  30,939   3,897   7,794   9,624   9,624 
8th generation amorphous TFT-LCD panel manufacturing line at joint venture, S-LCD Corporation (Note 23)  50,200   50,200   —   —   — 
 
 
*The total amount of expected future pension payments is not included in either the above table or the total amount of commitments outstanding at March 31, 2007 discussed below as such amount is not currently determinable. Sony expects to contribute approximately 37.0 billion yen to the Japanese pension plans and approximately 5.0 billion yen to the foreign pension plans during the fiscal year ending March 31, 2008 (Note 14).
*The total unused portion of the line of credit extended under loan agreements in the Financial Services segment is not included in either the above table or the amount of commitments outstanding at March 31, 2007 discussed below as it is not foreseeable how many loans will be executed. The total unused portion of the line of credit extended under these contracts was 348.4 billion yen as of March 31, 2007 (Note 23).
*The 5 year Revolving Credit Agreement with Sony BMG, which matures on August 5, 2009 and provides for a base commitment of 300 million U.S. dollars and additional incremental borrowings of up to 150 million U.S. dollars, is not included in either the above table or the amount of commitments outstanding at March 31, 2007 discussed below as such amount is not currently determinable. Sony’s outstanding commitment under this Credit Agreement as of March 31, 2007 was 26.6 billion yen (Note 23).


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* The total amount of expected future pension payments is not included in the above table or the total amount of commitments outstanding at March 31, 2004 discussed below as such amount is not currently determinable. Sony expects to contribute approximately 23.0 billion yen to the Japanese pension plans and approximately 17.0 billion yen to the foreign pension plans for the year ending March 31, 2005 (Note 13).

The total amount of commitments outstanding at March 31, 20042007 was 316.1296.1 billion yen (refer to Note 22 of Notes to Consolidated Financial Statements)(Note 23). The commitments include major purchase obligations as shown above.

In the ordinary course of business, Sony makes commitments for the purchase of property, plant and equipment. As of March 31, 2004,2007, such commitments outstanding were 20.843.3 billion yen. Most of these assets will be used for general operating purposes.

     Certain subsidiaries in the Music segment have entered into long-term contracts with recording artists and companies for the production and/or distribution of pre-recorded music and videos. As of March 31, 2004, the total amount of expected payments regarding these long-term contracts was 39.1 billion yen.

A subsidiary in the Pictures segment has committed to fund a portion of the production costcosts of completed films and is responsible for all distribution and marketing expenses relating to these films under a distribution agreement with a third party. Further, certain subsidiaries in the Pictures segment have entered into agreements with creative talent for the development and production of films and television programming as well as agreements with third parties to acquire completed films, or certain rights therein. As of March 31, 2004,2007, the total amount of the expected cost for the production or purchase of films and television programming or certain rights under the above commitments was 95.267.7 billion yen.

     On March 8, 2004,

Sony Corporation signedhas entered into a partnership program contract with Fédération Internationale de Football Association (“FIFA”). Through this program Sony Corporation will be able to exercise various rights as an agreement with Samsung Electronics Co., Ltd. (“Samsung”)official sponsor of FIFA events from 2007 to establish a joint venture, named S-LCD Corporation.2014. As of March 31, 2004,2007, Sony Corporation was committed to make payments of 30.9 billion yen under such contract.
In July 2006, Sony Corporation and Samsung signed the final contract with respect to the construction of an 8th generation amorphousTFT-LCD panel manufacturing line at their joint venture, agreement,S-LCD. As of March 31, 2007, Sony isCorporation was committed to fund a totalmake payments of 96.350.2 billion yen.

     In December 2003, Sony and Bertelsmann AG signed a binding agreement to combine their recorded music businesses in a joint venture. The newly formed company, which will be known as Sony BMG, will

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yen under such contract.

be 50% owned by each parent company. The merger is subject to regulatory approvals in the U.S. and European Union.

In order to fulfill its commitments, Sony will use cash generated by its operating activities, use netintra-group loans and borrowings from subsidiaries with excess cash within the Sony Groupfunds to subsidiaries that are short of funds through groupits finance subsidiaries, such as SGTS and, when necessary, raise funds from the global capital markets and from banks when necessary.

banks.

The following table summarizes Sony’s contingent liabilities.
liabilities as of March 31, 2007.
 
Total Amounts of
Contingent Liabilities
(Yen in millions)
Contingent Liabilities: (Notes 21 and 22)
    
 Total Amounts of
Contingent Liabilities
Contingent Liabilities: (Note 23)
(Yen in millions)
Loan guarantees to related parties  19,90311,100 
Maximum potential future unrecorded obligation associated with a joint venture in the Pictures segment17,955
Other  22,00410,581 
Total contingent liabilities  59,86221,681 
 
Off-Balance Sheet Arrangements

Off-Balance Sheet Arrangements
Sony has several off-balance sheet arrangements to provide liquidity, capital resources and/or credit risk support.
During the fiscal year ended March 31, 2004,2005, Sony entered into a new accounts receivable securitization program which providessales programs that provide for the accelerated receipt of up to 500 million U.S. dollars47.5 billion yen of cash on eligible trade accounts receivable of Sony’s U.S. electronics subsidiary and replaced the previous accounts receivable securitization program which provided for the accelerated receipt of up to 900 million U.S. dollars.Sony Corporation. Through this program,these programs, Sony can securitize and sell a percentage of undivided interest in that pool of receivables to several multi-seller commercial paper conduitsspecial purpose entities owned and operated by a bank.banks. These securitization transactions are accounted for as a sale in accordance with Statement of Financial Accounting Standards (“FAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, because Sony has relinquished control of the receivables. Accordingly, accounts receivable sold under these facilitiestransactions are excluded from receivables in the accompanying consolidated balance sheet. There were no amounts outstanding under this facility atThe initial sale of these receivables was in March 2005, and Sony sold a total of 10.0 billion yen for the fiscal year ended March 31, 2004.2005. Total receivables sold for the fiscal years ended March 2006 and 2007 were 146.2 billion yen and 152.5 billion yen, respectively. Losses from these transactions were insignificant. Although Sony continues servicing the sold receivables, no servicing liabilities are recorded because costs regarding collection of the sold receivables are insignificant.
Refer to Note 6 of Notes to Consolidated Financial Statements for more information on the accounts receivable securitization.


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Sony has, from time to time, entered into various financing arrangements with variable interest entities (“VIEs”). In several of the arrangements in which Sony holds a significant variable interest, Sony is the primary beneficiary and therefore consolidates these VIEs. These arrangements include facilities which provide for the leasing of certain property, the financing of film production and the development and operation of a multi-use real estate complex. Although notU.S. based music publishing business. In addition, Sony holds a significant partvariable interest in VIEs in which Sony is not the primary beneficiary and therefore does not consolidate. These VIEs include the film production/co-financing arrangements noted as follows.
On December 30, 2005, a subsidiary in the Pictures segment entered into aproduction/co-financing agreement with a VIE toco-finance 11 films that were released over the 15 months ended March 31, 2007. The subsidiary received 373 million U.S. dollars over the term of the agreement to fund the production or acquisition cost of films (including fees and expenses). The subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE. On April 28, 2006, the subsidiary entered into a secondproduction/co-financing agreement with a VIE toco-finance additional films. Nine films are anticipated to be released under this financing activities, Sony employs these arrangements because they providearrangement. The subsidiary will receive approximately 240 million U.S. dollars over the term of the agreement to fund the production or acquisition cost of the films (including fees and expenses). Similar to the first agreement, the subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a diversificationdistribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. As of funding sources.March 31, 2007, threeco-financed films have been released by the subsidiary and 37 million U.S. dollars has been received from the VIE under this agreement. The assetssubsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE. On January 19, 2007, the subsidiary entered into a thirdproduction/co-financing agreement with a VIE toco-finance a majority of the films to be submitted through March 2012. The subsidiary has received a commitment from the VIE that the VIE will fund up to 525 million U.S. dollars on a revolving basis to fund the production or acquisition cost of films (including fees and liabilities associatedexpenses). As of March 31, 2007, no films of the subsidiary have been funded by this VIE. Similar to the first two agreements, the subsidiary is responsible for marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with these arrangements previously qualified for off-balance sheet treatment. On July 1, 2003, Sony adopted FIN 46 and accordingly,respect to the assets and liabilities associated with these arrangements were consolidated. VIE.
Refer to Note 2122 of Notes to Consolidated Financial Statements for more information. As a result, Sony recognized a one time charge with no tax effect of 2.1 billion yen for a cumulative effect of accounting change. Additionally, Sony’s assets and liabilities increased as non-cash transactions, which resulted in no cash flows, by 95.3 billion yen and 98.0 billion yen, respectively. Cash and cash equivalents also increased by 1.5 billion yen. For all the VIEs in which Sony holds a significantinformation on variable interest Sony is a primary beneficiary, and all these VIEs are consolidated by Sony.

entities.

Cash Flows
(The fiscal year ended March 31, 20042007 compared with the fiscal year ended March 31, 2003)2006)

Operating Activities: During the fiscal year ended March 31, 2004,2007, Sony generated 632.6561.0 billion yen of net cash from operating activities, a decreasean increase of 221.2161.2 billion yen, or 25.940.3 percent compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment generated 401.1305.6 billion yen of net cash from operating activities, a decreasean increase of 143.053.6 billion yen, or 26.321.3 percent, compared with the previous fiscal year, and the Financial Services segment generated 241.6256.5 billion yen of net

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cash from operating activities, a decreasean increase of 73.1109.4 billion yen, or 23.274.3 percent, compared with the previous fiscal year.

During the fiscal year, profitsthere was a positive impact on operating cash flow from the Game, Financial Services, Pictures and Music segments, an increase in depreciation expenses, and an increase in notes and accounts payable, trade, primarily due toand an increase in future insurance policy benefits and other as well as the procurementcontribution of raw materialsnet income after taking into account depreciation and parts reflecting the increase in sales to outside customers in the Electronics segment, contributed to operating cash flow. Partiallyamortization. However, primarily offsetting these contributions were factors including an increase in inventories in the Electronics segment andwas an increase in notes and accounts receivable, trade, inand inventory, particularly within the Electronics and PicturesGame segments. An increase in future insurance policy benefits and other, due to an increase in insurance-in-force, contributed to operating cash flow in the Financial Services segment.

Compared with the previous fiscal year, net cash provided by operating activities decreased, due toincreased mainly as a year on yearresult of an increase in notesnet income after taking into account depreciation and accounts receivable, tradeamortization recorded during the fiscal year ended March 31, 2004,as compared with a year on year decrease duringto the previous fiscal year, ended March 31, 2003. The increaseas well as the effect of the gain on the transfer to the Japanese government of


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the substitutional portion of the employee pension fund in notesthe previous fiscal year, and accounts receivable, trade was primarily due tothe effect of an increase in sales to outside customers, in the fourth quarter ended March 31, 2004, of digital still cameras, flat panel televisions and cellular phones (sold to Sony Ericsson) in the Electronics segment, as well as home entertainment revenues in the Pictures segment, compared with the fourth quarter ended March 31, 2003. Although certain factors contributed torevenue from insurance premiums, primarily reflecting an increase in operating cash flow, such as a year on year increase, during the fiscal year ended March 31, 2004, in notes and accounts payable, trade, compared with a year on year decrease in the fiscal year ended March 31, 2003, mainly due to the increase in the procurement of raw materials and parts reflecting the increase in sales to outside customers in the Electronics segment, these factors were offset by factors such as an increase in inventories in the Electronics segment during the fiscal year ended March 31, 2004 compared with a decrease in the fiscal year ended March 31, 2003, which decreased operating cash flow.

insurance-in-force at Sony Life.

Investing Activities: During the fiscal year, Sony used 761.8715.4 billion yen of net cash in investing activities, an increasea decrease of 55.4155.8 billion yen, or 7.817.9 percent, compared with the previous fiscal year. Of this total, all segments, excluding the Financial Services segment, used 352.5431.1 billion yen of net cash in investing activities, an increase of 166.6134.7 billion yen, or 89.645.5 percent, compared with the previous fiscal year, and the Financial Services segment used 401.6276.7 billion yen in net cash, a decrease of 115.1287.0 billion yen, or 22.3 percent.

50.9 percent compared with the previous fiscal year.

During the fiscal year, purchases of fixed assets (capital expenditures) in the Electronics segment were made primarily due to proactive capital expendituresfor semiconductor manufacturing facilities. Part of an investment inS-LCD was also made for manufacturing facilities for 8th generation TFT LCD panels.
Within the Electronics and Game segments mainly for next generation broadband microprocessors and CCDs, andFinancial Services segment, payments for investments and advances, exceeded proceedssuch as investments mainly in the Financial Services segment due toJapanese fixed income securities at Sony Life and an increase in assets under management (refer to “Financial Services”).

the outstanding balance of mortgage loans at Sony Bank, exceeded proceeds from the maturities of marketable securities, sales of securities investments and collections of advances.

Compared with the previous fiscal year, net cash used in investing activities increased due to an increase in purchases of fixed assets, primarily in the Electronics and Game segments. Inwithin all segments excluding the Financial Services segment, reflecting the amountadditional investment inS-LCD and the purchases of payments for investments and advances decreased by 90.5 billion yen, or 73.1 percent, to 33.3 billion yen, compared with the previous year, due to investments associated with the acquisition of companies such as InterTrust Technologies Corporation (“InterTrust”) and an increase in the capital stock of Sony Ericsson in the fiscal year ended March 31, 2003.fixed assets noted above. On the other hand, the amount of proceeds from sales and maturities of investments and collections of advancesnet cash used in the segments other than Financial Services segment for investing activities decreased 113.5 billion yen, or 76.2 percentcompared to 35.5 billion yen compared with the previous fiscal year due to the salefact that there was an increase in the collections of Sony’s equity interest in Telemundo ininvestments and advances as compared to the previous fiscal year. In the Financial Services segment, net cash used in investing activities decreased due to an increase in proceeds from investments and advances.

In all segments excluding the Financial Services segment, the difference between cash generated from operating activities and cash used in investing activities was a positive 48.6net use of cash of 125.5 billion yen, for the fiscal year, a decreasean increase of 309.681.1 billion yen, or 86.4182.7 percent, as compared withto a net use of cash of 44.4 billion yen in the previous fiscal year.

Financing Activities: During the fiscal year ended March 31, 2004, 313.32007, 247.9 billion yen of net cash was provided by financing activities (inactivities. Of the previous fiscal year, 93.1total, 59.6 billion yen of net cash was used in

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financing activities). Of the total, 153.8 billion yen of net cash was procured throughgenerated from financing activities in all segments excluding the Financial Services segment. Although 23.1segment, a decrease of 15.0 billion yen or 20.1 percent, compared to net cash generated in cashthe previous fiscal year of 74.6 billion yen. This was used fora result, as noted above, of financing carried out through yen-denominated syndicated loans during the payment of dividends and 52.8 billion yen in commercial paper was repaid, 250.0 billion yen in euro yen convertible bonds (bonds with stock acquisition rights) were issued. current fiscal year.
In the Financial Services segment, due to factors such as a 129.9 billion yenresult of an increase in policyholder accounts at Sony Life and an increase in deposits from customers inat the banking business, net cash provided by financing activities was 141.7generated 179.6 billion yen.yen of net cash.

Accounting for all these factors and the effect of exchange rate changes, the total outstanding balance of cash and cash equivalents at the end of the fiscal year increased 136.2by 96.8 billion yen, or 19.113.8 percent, to 849.2799.9 billion yen, compared with the end of the previous fiscal year. The total outstanding balance of cash and cash equivalents of all segments, excluding the Financial Services segment, increased 154.4decreased by 62.6 billion yen, or 35.210.7 percent, to 592.9522.9 billion yen, and for the Financial Services segment, decreased 18.2increased by 159.4 billion, or 6.6135.5 percent, to 256.3277.0 billion yen, compared with the end of the previous fiscal year.


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Condensed Statements of Cash Flows Separating Out the Financial Services Segment (Unaudited)

Condensed Statements of Cash Flows Separating Out the Financial Services Segment (Unaudited)

The following schedule shows unaudited condensed statements of cash flow for the Financial Services segment and all other segments excluding the Financial Services segment as well as condensed consolidated statements of cash flow. These presentations are not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
Condensed Statements of Cash Flows
                         
All other segments
excluding
Financial ServicesFinancial ServicesConsolidated
Year Ended March 31200320042003200420032004
(Yen in millions)
Net cash provided by operating activities  314,764   241,627   544,051   401,090   853,788   632,635 
   
   
   
   
   
   
 
Net cash used in investing activities  (516,663)  (401,550)  (185,883)  (352,496)  (706,425)  (761,792)
   
   
   
   
   
   
 
Net cash provided by (used in) financing activities  149,207   141,696   (251,247)  153,759   93,134   313,283 
   
   
   
   
   
   
 
Effect of exchange rate changes on cash and cash equivalents          24,971   (47,973)  24,971   (47,973)
   
   
   
   
   
   
 
Net increase (decrease) in cash and cash equivalents  (52,692)  (18,227)  81,950   154,380   29,258   136,153 
Cash and cash equivalents at beginning of the fiscal year  327,235   274,543   356,565   438,515   683,800   713,058 
   
   
   
   
   
   
 
Cash and cash equivalents at end of the fiscal year  274,543   256,316   438,515   592,895   713,058   849,211 
   
   
   
   
   
   
 

         
  Fiscal Year ended March 31
  Financial Services 2006 2007
  (Yen in millions)
 
Net cash provided by operating activities  147,149   256,540 
Net cash used in investing activities  (563,753)  (276,749)
Net cash provided by financing activities  274,863   179,627 
         
Net increase (decrease) in cash and cash equivalents  (141,741)  159,418 
Cash and cash equivalents at beginning of the fiscal year  259,371   117,630 
         
Cash and cash equivalents at end of the fiscal year  117,630   277,048 
         
         
  Fiscal Year ended March 31
  Sony without Financial Services 2006 2007
  (Yen in millions)
 
Net cash provided by operating activities  251,975   305,571 
Net cash used in investing activities  (296,376)  (431,086)
Net cash provided by (used in) financing activities  74,600   59,598 
Effect of exchange rate changes on cash and cash equivalents  35,537   3,300 
         
Net increase (decrease) in cash and cash equivalents  65,736   (62,617)
Cash and cash equivalents at beginning of the fiscal year  519,732   585,468 
         
Cash and cash equivalents at end of the fiscal year  585,468   522,851 
         
         
  Fiscal Year ended March 31
  Consolidated 2006 2007
  (Yen in millions)
 
Net cash provided by operating activities  399,858   561,028 
Net cash used in investing activities  (871,264)  (715,430)
Net cash provided by financing activities  359,864   247,903 
Effect of exchange rate changes on cash and cash equivalents  35,537   3,300 
         
Net increase (decrease) in cash and cash equivalents  (76,005)  96,801 
Cash and cash equivalents at beginning of the fiscal year  779,103   703,098 
         
Cash and cash equivalents at end of the fiscal year  703,098   799,899 
         
Cash Flows
(The fiscal year ended March 31, 20032006 compared with the fiscal year ended March 31, 2002)2005)

Operating Activities: During the fiscal year ended March 31, 2003,2006, Sony generated 853.8399.9 billion yen of net cash from operating activities, an improvementa decrease of 116.2247.1 billion yen, or 15.838.2 percent compared with the previous fiscal year.

     All Of this total, all segments, excluding the Financial Services segment, generated 542.8252.0 billion yen of net cash from


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operating activities, a decrease of 233.5 billion yen, or 48.1 percent, compared with the previous fiscal year, and the Financial Services segment generated 147.1 billion yen of net cash from operating activities. The primary reasons foractivities, a decrease of 20.9 billion yen, or 12.5 percent, compared with the previous fiscal year.
During the fiscal year, there was a positive impact on operating cash flow weremainly from the effect of the profit contribution from the Financial Services segment, and after taking into account depreciation and amortization, as well as the effect of the loss on sale, disposal or impairment of assets, net. However, primarily offsetting these contributions was an increase in inventory, particularly within the Electronics and Game segments, the effect of the non-cash net gain on the transfer to profit by the

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Game, Pictures Japanese Government of the substitutional portion of the employee pension fund, an increase in deferred acquisition costs within the Financial Services segment and Electronics segmentseffect of the gain on change in interest in subsidiaries and a decrease in notes and accounts receivable despite a decrease in notes and accounts payable. equity investees.
Compared towith the previous fiscal year, net cash generated fromprovided by operating activities improved 106.8 billion yen, or 24.5 percent. Although there wasdecreased mainly as a smaller decrease in inventories,result of lower net income recorded during the fiscal year as compared to the previous fiscal year, and, as noted above, the increase in inventory during the operating income in the Electronics, Game and Pictures segments, a smaller decrease in notes and accounts payable, and a larger decrease in notes and accounts receivable all contributed to the net increase in cash generated from operating activitiesfiscal year compared with the previous fiscal year.year, the effect of the gain on the transfer to the Japanese Government of the substitutional portion of the employee pension fund, and of the gain on change in interest in subsidiaries and equity investees.

     The Financial Services segment generated 316.0

Investing Activities: During the fiscal year, Sony used 871.3 billion yen of net cash in investing activities, a decrease of 59.9 billion yen, or 6.4 percent, compared with the previous fiscal year. Of this total, all segments, excluding the Financial Services segment, used 296.4 billion yen of net cash in investing activities, a decrease of 175.7 billion yen, or 37.2 percent, compared with the previous fiscal year, and the Financial Services segment used 563.8 billion yen in net cash, an increase of 142.4 billion yen, or 33.8 percent. During the fiscal year, purchases of fixed assets (capital expenditures) were made, primarily due to proactive capital expenditures in semiconductors mainly within the Electronics segment, mostly associated with image sensors.
Within the Financial Services segment, payments for investments and advances exceeded proceeds from operating activities. While cash declinedmaturities of marketable securities, sales of securities investments and collections of advances, primarily as a result of investments, mainly in Japanese fixed income securities, resulting from an increase in deferred insurance acquisition costs,premiums at Sony Life, and an increase in future insurance policy benefits and other as a resultthe outstanding balance of an increase in insurance-in-force resulted in cash generated from operating activities exceeding expenditures. mortgage loans at Sony Bank.
Compared with the previous fiscal year, net cash generated from operatingused in investing activities decreased, primarily due to the fact that in the previous fiscal year, investments were carried out principally in relation toS-LCD and in semiconductor fabrication equipment, particularly investments associated with the Cell/B.E. On the other hand, within the Financial Services segment, improved by 14.3 billion yen, or 4.8 percent.

     During the fiscal year, 706.4 billion yen innet cash was used in investing activities (a decrease of 60.7 billion yen, or 7.9 percentincreased due to an increase in investments and advances compared withto the previous fiscal year).

year.

In all segments excluding the Financial Services segment, 185.2 billion yen in cash was used in investing activities. During the fiscal year, cash was used to purchase fixed assets mainly in the Electronics segment. Cash proceeds of 135.8 billion yen were generated from sales of securities investments, maturities of marketable securities and collections of advances, including 88.4 billion yen from the sale of Telemundo. Compared with the previous fiscal year, cash used in investing activities decreased by 183.8 billion yen, or 49.8 percent. As a result of a reduction in capital expenditures mainly in the Electronics segment, cash used to purchase fixed assets decreased compared with the previous fiscal year.

     In the Financial Services segment, 517.4 billion yen in cash was used in investing activities (an increase of 115.5 billion yen, or 28.7 percent compared with the previous fiscal year). The use of cash derived primarily from the fact that investments and advances of 1,026.4 billion yen exceeded sales of securities investments, maturities of marketable securities and collections of advances of 542.5 billion yen, reflecting an increase in assets under management in the Financial Services segment.

     As a result of these factors, the difference between cash generated from operating activities and cash used in investing activities was a positive 147.4use of cash of 44.4 billion yen, foras compared to the fiscal year, an improvement of 176.913.3 billion yen compared withof cash generated in the previous fiscal year (in the previous fiscal year, net cash flow was a negative 29.5 billion yen). In terms of net cash flow from all segments excluding the Financial Services segment, net cash flow was a positive 357.7 billion yen for the fiscal year, an improvement of 290.6 billion yen, or 433.0 percent, compared with the previous fiscal year. Net cash flow from the Financial Services segment was a negative 201.4 billion yen, a deterioration of 101.2 billion yen compared with the previous fiscal year.

Financing Activities: During the fiscal year ended March 31, 2003, 93.1 billion yen of net cash was used in financing activities compared to 85.0 billion yen of net cash provided by financing activities in the previous year. 22.9 billion yen in cash was used for the payment of dividends.

     In all segments excluding the Financial Services segment, 251.1 billion yen of net cash was used in financing activities compared to 31.6 billion yen of cash used in financing activities in the previous year. Cash was used during the fiscal year for repayments of long-term debt including 1.5 billion U.S. dollars of U.S. dollar notes redeemed on March 4, 2003. These repayments caused cash used in financing activities to exceed cash provided by financing activities.

     In the Financial Services segment, 149.12006, 359.9 billion yen of net cash was provided by financing activities compared to 120.3activities. Of the total, 74.6 billion yen of net cash provided bywas generated from financing activities.activities in all segments, excluding the Financial Services segment, compared to a use of net cash in the previous fiscal year of 95.4 billion yen. This was duea result of straight bonds issued in order to redeem bonds maturing during the fiscal years ended March 31, 2006 and March 31, 2007.

In the Financial Services segment, as a 142.2 billion yen, or 133.6 percent,result of an increase in policyholder accounts at Sony Life, and an increase in deposits from customers, in the banking business.

as well as call loan borrowings carried out at Sony Bank, financing activities generated 274.9 billion yen of net cash.

Accounting for all these factors and the effect of exchange rate changes, the total outstanding balance of cash and cash equivalents at the end of the fiscal year increased 29.3decreased by 76.0 billion yen, or 4.39.8 percent, to

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713.1 703.1 billion yen, compared with the end of the previous fiscal year. The total outstanding balance of cash and cash equivalents of all segments excluding the Financial Services segment, increased 81.6by 65.7 billion yen, or 22.912.6 percent, to 438.1585.5 billion yen, and for the Financial Services segment, decreased 52.3by 141.7 billion, or 16.054.6 percent, to 274.9117.6 billion yen, compared with the end of the previous fiscal year.


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Condensed Statements of Cash Flows Separating Out the Financial Services Segment (Unaudited)

Condensed Statements of Cash Flows Separating Out the Financial Services Segment (Unaudited)

The following schedule shows unaudited condensed statements of cash flow for the Financial Services segment and all other segments excluding the Financial Services segment as well as condensed consolidated statements of cash flow. These presentations are not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
Condensed Statements of Cash Flows
                         
All other segments
excluding
Financial ServicesFinancial ServicesConsolidated
Year Ended March 31200220032002200320022003
(Yen in millions)
Net cash provided by operating activities  301,625   315,968   436,059   542,848   737,596   853,788 
   
   
   
   
   
   
 
Net cash used in investing activities  (401,866)  (517,383)  (368,951)  (185,163)  (767,117)  (706,425)
   
   
   
   
   
   
 
Net cash provided by (used in) financing activities  120,255   149,086   (31,603)  (251,128)  85,040   (93,134)
   
   
   
   
   
   
 
Effect of exchange rate changes on cash and cash equivalents  3   (5)  21,033   (24,965)  21,036   (24,971)
   
   
   
   
   
   
 
Net increase (decrease) in cash and cash equivalents  20,017   (52,334)  56,538   81,592   76,555   29,258 
Cash and cash equivalents at beginning of the fiscal year  307,245   327,262   300,000   356,538   607,245   683,800 
   
   
   
   
   
   
 
Cash and cash equivalents at end of the fiscal year  327,262   274,928   356,538   438,130   683,800   713,058 
   
   
   
   
   
   
 
         
  Fiscal Year ended March 31
  Financial Services 2005 2006
  (Yen in millions)
 
Net cash provided by operating activities  168,078   147,149 
Net cash used in investing activities  (421,384)  (563,753)
Net cash provided by financing activities  256,361   274,863 
         
Net increase (decrease) in cash and cash equivalents  3,055   (141,741)
Cash and cash equivalents at beginning of the fiscal year  256,316   259,371 
         
Cash and cash equivalents at end of the fiscal year  259,371   117,630 
         
         
  Fiscal Year ended March 31
  Sony without Financial Services 2005 2006
  (Yen in millions)
 
Net cash provided by operating activities  485,439   251,975 
Net cash used in investing activities  (472,119)  (296,376)
Net cash provided by (used in) financing activities  (95,373)  74,600 
Effect of exchange rate changes on cash and cash equivalents  8,890   35,537 
         
Net increase (decrease) in cash and cash equivalents  (73,163)  65,736 
Cash and cash equivalents at beginning of the fiscal year  592,895   519,732 
         
Cash and cash equivalents at end of the fiscal year  519,732   585,468 
         
         
  Fiscal Year ended March 31
  Consolidated 2005 2006
  (Yen in millions)
 
         
Net cash provided by operating activities  646,997   399,858 
Net cash used in investing activities  (931,172)  (871,264)
Net cash provided by financing activities  205,177   359,864 
Effect of exchange rate changes on cash and cash equivalents  8,890   35,537 
         
Net increase (decrease) in cash and cash equivalents  (70,108)  (76,005)
Cash and cash equivalents at beginning of the fiscal year  849,211   779,103 
         
Cash and cash equivalents at end of the fiscal year  779,103   703,098 
         

LIQUIDITY AND CAPITAL RESOURCES

Sony’s financial policy is to secure adequate liquidity and financing for its operations and to maintain the strength of its balance sheet.

Sony’s mid-term fund requirements are expectedsheet, while securing adequate liquidity for business expenses.

Sony intends to increase due to restructuring charges andcontinue various investments in research, development and capital expenditures for key devices, including next generation broadband microprocessors. These increases in expenses and investments are part of the fundamental reform plan, Transformation 60, which is being undertaken across the entire Sony Group and was started in the fiscal year beginning April 1, 2003 (refer to “Issues Facing Sony and Management’s Responses to those Issues” and “Forecast of Consolidated Results” below).

     In regards to the fundingfuture growth. Funding requirements that arise from thisits business strategy working capital needs, repayment of existing debt, and all its other capital needs, Sony believes that it can maintain sufficient liquidity and financial flexibility through operatingare principally covered by free cash flow generated from business operations and by cash and cash equivalents its ability to(“cash balance”) however as needed, Sony will procure necessary funds from the financial and capital markets, its commitment lines with banks, and other means.markets.


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For these financing activities, Sony has sufficient access to financial and capital markets as described below. In addition, to sustain sufficient liquidity, Sony has committed lines of credit with financial institutions, together with cash balances.
Capital Resources

The description below covers liquidity and capital resources for consolidated Sony and excludes the Financial Services segment, which secures liquidity on its own.
Market Access
Sony Corporation and SGTS, a Sony finance subsidiary in the U.K., and Sony Capital Corporation (“SCC”), a Sony finance subsidiary in the U.S., procure funds from the financial and capital markets.

In order to meet long-term funding requirements, Sony Corporation utilizes its access to global equity and bond markets. In December 2003,markets and borrowings from financial institutions. During the fiscal year ended March 31, 2007, Sony Corporation issued 250an 80 billion yen syndicated loan in euroJune 2006 (3 years maturity), and a 130 billion yen zero coupon convertible bonds, duesyndicated loan in 2008. The purpose of the issuance was to acquire fundsDecember 2006 (4 years and 7 years maturity), for the growth strategy component of Transformation 60.general corporate purposes including capital expenditures, and debt redemption. Sony hasmaintains a bond shelf registration of 200300 billion yen filed in Japan, effective until April 2008; however Sony has not issued a bond using this shelf registration during the Japanese domestic bond market, of which there was no outstanding balance as offiscal year ended March 31, 2004.

2007.

In order to meet the working capital requirements of the Group, Sony, SGTS maintains commercial paper (“CP”) programs and a medium-term note (“MTN”) programs through SGTS and SCC.program. SGTS maintains a CP programprograms for both the U.S., Euro and Euro CP markets, and a CP program in the Japanese CP market. SCC maintains a CP program in the U.S. market.markets. As of March 31, 2004,2007, the total maximum amount ofto be issued under these CP programs, translated into yen, was 1,873.41,326.6 billion yen. During the fiscal year ended March March��31, 2004,2007, the largest month-end outstanding balance of CP at Sony was 200.1348.2 billion yen in November 2003.2006. There was no outstanding balance of CP as of March 31, 2004.

Regarding MTNs, 2007.

SGTS maintains a Euro MTN program while SCC maintainswith a Rule 144A U.S. MTN program. The totalprogram limit amount, of these MTN programstranslated into yen as of March 31, 20042007, of 590.5 billion yen. There was 845.2 billion yen, and the totalno outstanding balance was approximately 60.5 billion yen. SCC maintains another Euro MTN program apart from these MTN programs shownas of that date.
Liquidity Management
Sony’s working capital needs grow significantly in the third quarter (from October to December) as a result of the general seasonality of Sony’s business. Sony’s basic liquidity management policy is to secure sufficient liquidity throughout the relevant fiscal year, covering such factors as short-term cash flow volatility mentioned above, but Sony does not intendrepayments for debts whose due date fall within a year, and possible downward earnings risk due to utilize this program for future financing requirements as Sony intends to concentrate its Euro MTN programs at SGTS.changes in the business environment.
 
Liquidity Management and Commitment Lines

Sony defines its liquidity sources as (a)the amount of cash cash equivalentsbalance, and time deposits, and (b) committed lines of credit contracted with financial institutions rated “C” or above in Bank Financial Strength ratings from Moody’s Investors Services, Inc. (“Moody’s”).institutions. Regarding its cash balance, Sony’s basic policy is to maintain liquidity equalmore than a certain level of cash balance to at least 100 percent of the sum of a) the amount of averageabsorb any daily and monthly sales and b) the amount of the largest expected monthly debt redemption during the fiscal year. Although its working capital needs have a general tendency to growneeds. The balance of cash and marketable securities on March 31, 2007 was 525.9 billion yen. A short-term shortage in the third quarter (from October to December),cash balance is financed by the issuance of CP. However, Sony believes that this policy is sufficient to meetcontrols the outstanding CP amount through internal limits as part of its working capital requirementsshort-term debt risk management strategy.
For general corporate purposes, including the support of CP programs and for any given fiscal year.

     On March 31, 2004, the amountemergency purposes, Sony has a total, translated into yen, of liquidity sources, as defined by Sony, held by consolidated Sony excluding Sony Life., Sony Assurance, and Sony Bank was 1,118.0 billion yen. Of this total, cash, cash equivalents and time deposits were 601.1689.3 billion yen and contracts for commitmentin committed lines of credit with banks rated “C” or above totaled approximately 516.9 billion yen,various financial institutions, of which the unused amount was approximately 515.6684.9 billion yen. Sony also has additional commitmentyen as of March 31, 2007. Major committed lines supporting its operational needsof credit include a total, translated into yen, of 505.4 billion yen of Global Commitment Facilities contracted with somea syndicate of global banks effective until March 2009, and a 150 billion yen committed line of credit contracted with Japanese financial institutions, which have Moody’s financial strength ratings of “C” or below, and these lines amount to approximately 302.8 billion yen. Refer to Note 11 of the Consolidated Financial Statements for the total amount of commitment lines regardless of Moody’s financial strength rating foreffective until July 2009. During the fiscal year ended March 31, 2004.

2007, the contract period of the committed line of credit with Japanese financial institutions was extended for one year, from the previous contract which was effective until July 2008. In the event of a downgrade in Sony’s credit ratings, even though the cost of borrowing could increase, there are no financial covenants in any of Sony’s material financial agreements that would cause an acceleration of the obligation. In general, there are no restrictions on how Sony’s borrowings can be usedthe uses of proceeds except that some borrowings may not be used to acquire securities listed on a U.S. exchange or tradedover-the-counter in the U.S., and the use of such borrowingborrowings must comply with the rules and regulations issued by authorities such as the Board of Governors of the Federal Reserve Board. In addition, there are no financial covenants that would cause an acceleration


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Ratings
Sony considers one of management’s top priorities to be the obligation in the eventmaintenance of a downgrade in Sony’sstable and appropriate credit ratings in any of Sony’s material financing agreements.order to ensure financial flexibility for liquidity and capital management and continued adequate access to sufficient funding resources in the financial and capital markets.
 
Ratings

In order to facilitate access to global capital markets, Sony obtains credit ratings from two rating agencies, Moody’s Investors Service (“Moody’s”) and Standard and Poor’s Rating Services (“S&P”). In addition, Sony maintains a

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rating from Rating and Investment Information, Inc. (“R&I”), a rating agency in Japan, for access to the Japanese capital market.

Sony’s current debt ratings (long-term/ short-term) are: Moody’s: A1 (outlook: negative)/ P-1;from each agency are noted below:
Moody’sS&PR&I
Long-term debtA2 (Outlook: Stable)A- (Outlook: Negative)AA- (Outlook: Stable) 
Short-term debtP-1A-2a-1+
In October 2006, S&P: A+ (outlook: negative)/ A-1; and R&I: AA/a-1+.

     On June 25, 2003, Moody’s downgraded&P changed its outlook of Sony’s long-term debt rating from Aa3stable to A1 (outlook: negative). R&I downgradednegative. This change was made based upon their view of increased uncertainty for Sony’s long-term debt rating from AA+ to AA on June 16, 2003. These actions reflected the concerns of the two agencies thatbusiness recovery in fiscal year 2007 onwards. Despite this change in outlook, Sony may take longer than initially expected to regain its previous level of profit and cash flow under the severe competition, particularly in the electronics business, and deflationary pressures. Sony’s short-term debt rating from Moody’s and R&I has been unaffected.

     Despite the downgrading of Sony’s long-term debt rating by Moody’s and R&I, Sony believes that its access to the global capital markets will remain sufficient for its financing needs going forward, and that it will retain its ability to issue CP to meetfor its working capital needs.

Sony seeks to maintain a stable credit rating in order to ensure financial flexibility for liquidity and capital management, and to continue to maintain adequate access to sufficient funding resources in the financial and capital markets.needs have not been restricted.

 
Cash Management

Cash Management
Sony is centralizing and working to make more efficient its global cash management activities through SGTS. The excess or shortage of cash at most of itsSony’s subsidiaries is invested or funded by SGTS after having been netted out, although Sony recognizes that fund transfer istransfers are limited in certain countries orand geographical areas due to restrictions on capital transactions. In order to pursue more efficient cash management, Sony manages uneven cash distribution among its subsidiaries directly or indirectly through SGTS so that Sony can reduce unnecessary cash and cash equivalents as well as borrowings as much as possible.

The above description covers liquidity and capital resources for consolidated Sony excluding Sony Life, Sony Assurance and Sony Bank, each of which respectively secures liquidity on its own.

 
Financial Services Segment

Financial Services segment
In the Financial Services segment, the management of Sony Financial Holdings Inc. (“SFH”), Sony Life, Sony Assurance and Sony Bank recognize the importance of securing sufficient liquidity to cover the payment of obligations that they take on as a result of theirincur in the ordinary course of business. Thesebusiness, and these companies abide by the regulations imposed by regulatory authorities and establish and operate under company guidelines that comply with these regulations. Their purpose in doing so is to maintain sufficient cash and cash equivalents and secure sufficient means to pay their obligations.

For instance, cash inflows for Sony Life and Sony Assurance come mainly from policyholders’ insurance premiums and Sony Life and Sony Assurance keep sufficient liquidity in the form of investments primarily in various securities. Sony Bank, on the other hand, uses its cash inflows, which come mainly from customers’ deposits in local or foreign currencies, in order to offer mortgage loans to individuals or to make bond investments, and establish a necessary level of liquidity for the smooth settlement of transactions.

Sony Life currently obtains ratings from fourfive rating agencies: A+ by S&P for insurer financial strength rating, Aa3 by Moody’s for insurance financial strength rating, A+ by AM Best Corporation, andCompany Inc. for financial strength rating, AA by R&I for insurance claims paying ability and AA by the Japan Credit Rating Agency Ltd. for ability to pay insurance claims. Sony Bank obtained an A-/ A-2 rating from S&P for its long-term/long-term local/foreign currency issuer ratings and anA-2 rating from S&P for its short-term debt.local/foreign currency issuer rating.
 
The Use of EVA®Methodology

     Aiming to advance corporate value creation management, Sony uses EVA®*, which reflects cost of capital, as one of its internal evaluation measures. The fiscal year ended March 31, 2004 marked the fourth year Sony has used EVA®. EVA® is used in the Electronics, Game, Music, and Pictures segments for various internal evaluation measures such as setting, monitoring and evaluating financial performance targets. EVA® is also linked to compensation. As a result, recognition of return on invested capital and cost of capital has spread further within each business unit and proactive efforts have been made to

* EVA® (Economic Value Added) is a trademark of Stern Stewart & Co.

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improve EVA®. These efforts include focusing on key businesses in order to concentrate management resources in highly growing and profitable areas and controlling investments and inventories to improve capital efficiency.

RESEARCH AND DEVELOPMENT

     Recognizing

In its mid-term corporate strategy announced on September 22, 2005, Sony stressed that the most pressing issue confronting Sony today is the revitalization of its electronics business. The strengthening of the competitiveness of Sony’s technologies and its products is an important element of both the revitalization of the Electronics business and Sony’s growth strategy, and Sony expects that research and development are indispensable for business growth, Sony is actively pursuing various technical themes, including technologiesactivities that support current services and those thatthis competitiveness will create new markets. Sony has also done away with the organizational structure in which there was an Electronics Chief Technology Officer (“CTO”), a Co-CTO and several CTOs for each network company, movingremain pivotal to a structure in which each business domain has a CTO. In this way, a single individual in each business domain oversees technological advances in that domain.its mid- to long term strategy.


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•  CTO of Home Electronics
•  CTO of Device Technology
•  CTO of Semiconductor Technology
•  CTO of Material Technology
•  CTO of Information Technology

     Furthermore, in accordance with the strengthening of research

Research and development at the network companies, the corporate laboratories were reorganized on April 1, 2004. In an effort to reinforce basic researchis focused in four key domains: a common development platform technology for home and development activity in core science areas, two new research laboratories were also established, with the CTO of Material Technologymobile electronics and the CTOtechnologies essential for product differentiation and for creating value-added products, semiconductor, device, and software technologies.
Reflecting Sony’s mid-term corporate strategy, in October 2005, Sony established the Display Device Development Group, to accelerate the development of Informationorganic light-emitting diode (“OLED”) displays, and the Technology each responsible for one.

• Materials Laboratories
• Information Technologies Laboratories

Development Group, to strengthen software development. In addition, two independent research laboratories,April 2007, Sony Computer Science Laboratories, Inc. (fundamental research and user interface research) and Sony-Kihara Research Center, Inc. (three-dimensional computer graphics and image processing technologies), are conducting research and development in close collaboration with each other.

expressed its intention to begin selling 11- inch OLED flat panel televisions during 2007.

Research and development costs for the fiscal year ended March 31, 20042007 increased 71.412.1 billion yen, or 162.3 percent, to 514.5543.9 billion yen, compared with the previous fiscal year. The ratio of research and development costs to net sales (excluding the Financial Services segment) increased(which excludes financial service revenue) decreased from 6.47.8 percent to 7.57.1 percent. The bulk of research and development costs were incurred in the Electronics and Game segments; expensessegments. Expenses in the Electronics segment increased 49.122.3 billion yen, or 12.95.3 percent, to 429.4440.4 billion yen, andwhereas expenses in the Game segment increased 21.9decreased 10.8 billion yen, or 35.79.9 percent, to 83.497.9 billion yen. In the Electronics segment, approximately 62 percent of expenses were for the development of new product prototypes while the remaining approximately 38 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications displays and next generation optical discs. Researchdisplays. In the Game segment, research and development costs indecreased mainly due to the Game segment increased primarily in the semiconductor and hardware field, with network technology accounting for partcompletion of most of the increase in the hardware area.

PS3’s research and development phase.

Research and development costs for the fiscal year ended March 31, 20032006 increased 9.929.8 billion yen, or 2.35.9 percent, to 443.1531.8 billion yen, compared with the previous fiscal year. The ratio of research and development costs to net sales (excluding the Financial Services segment)(which excludes financial service revenue) increased from 6.17.5 percent to 6.47.8 percent. The bulk of research and development costs were incurred in the Electronics and Game segments; expensessegments. Expenses in the Electronics segment decreased 3.115.2 billion yen, or 0.83.5 percent, to 380.3418.1 billion yen, andwhereas expenses in the Game segment increased 13.240.2 billion yen, or 27.458.7 percent, to 61.5 billion yen. In the Electronics segment, approximately 66 percent of expenses were for the development of new product prototypes while the remaining approximately 34 percent were for the development of mid- to long-term

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new technologies in such areas as semiconductors, communications, and displays. Research and development costs in the Game segment increased primarily in the semiconductor and hardware field.

Research and development costs for the fiscal year ended March 31, 2002 increased 16.5 billion yen, or 4.0 percent, to 433.2 billion yen, compared with the previous fiscal year. The ratio of research and development costs to sales (excluding the Financial Services segment) was 6.1 percent, almost flat compared with the previous fiscal year. The bulk of research and development costs were incurred in the Electronics and Game segments; expenses in the Electronics segment increased 2.5 billion yen, or 0.7 percent, to 383.4 billion yen, and expenses in the Game segment increased 14.0 billion yen, or 40.9 percent, to 48.2108.7 billion yen. In the Electronics segment, approximately 64 percent of expenses were for the development of new product prototypes while the remaining approximately 36 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications, displays and displays.next generation optical discs. In addition, within the Game segment, there was an increase primarily of hardware-related research and development costs associated with the PS3.

Research and development costs for the fiscal year ended March 31, 2005 decreased 12.5 billion yen, or 2.4 percent, to 502.0 billion yen, compared with the previous fiscal year. The increaseratio of research and development costs to net sales (which excludes financial service revenue) increased from 7.4 percent to 7.5 percent. The bulk of research and development costs were incurred in the Electronics and Game segments. Expenses in the Electronics segment increased 2.4 billion yen, or 0.6 percent, to 433.3 billion yen, and expenses in the Game segment centered on next-generationdecreased 14.9 billion yen, or 17.9 percent, to 68.5 billion yen. In the Electronics segment, approximately 62 percent of expenses were for the development of new product prototypes while the remaining 38 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications, displays and next generation optical discs. There was an increase in research and development costs related to semiconductor architectureprocess technology associated with the transfer of Sony Computer Entertainment’s semiconductor manufacturing operations from the Game segment to the Electronics segment. However, the stringent selection of research and network-related technologies for hardware.
development activities resulted in a small increase in research and development expenses within the Electronics segment. Research and development expenses in the Game segment remained high due to the research and development associated with the PSP and the PS3.

TREND INFORMATION

This section including theForecast of Consolidated Results, contains forward-looking statements about the possible future performance of Sony and should be read in light of the cautionary statement on that subject, which appears on the inside front cover page and which applies to this entire document.
Issues Facing Sony and Management’s Response to those Issues
 
Issues Facing Sony and Management’s Response to those Issues

     Compared with the previous fiscal year, the global business environment in which Sony operates has improved, with macroeconomic indicators showing signs of recovery and personal consumption beginning to increase. These improvements have done little to dissipate the challenges facing Sony, however, as competition

Competition in many of Sony’s business segments continues to intensify and price erosion, especially in the Electronics segment, remains persistent. Competition has intensified due to the penetration of broadband, which has


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led to an augmentation of network infrastructure, making it easier for companies in other sectors to enter the markets in which Sony competes.

In response to these challenges, Sony has begunbeen undertaking initiatives to implement Transformation 60,improve its competitiveness and strengthen the quality of its management, such as a seriesreduction in the number of fundamental reforms aimed at improving operational profitabilitybusiness categories and the number of models, a rationalization of manufacturing sites and the creation of a more efficient administrative structure, as well as the sale of non-core assets (refer to “Restructuring” in “Item 5.Operating and Financial Review and Prospects” for more detailed information about restructuring). This plan, developed in consultation with Sony’s stakeholders both inside and outside the company, moved to strengthen Sony’s competitiveness in anticipationthree core sectors — Electronics, Game and Entertainment �� through a balanced mix of future growth.restructuring and growth initiatives combined with a new organizational structure. In particular, it is the revitalization of Electronics that management regards as the most pressing issue confronting Sony planstoday. As well as reorganizing its Electronics business to implement Transformation 60place centralized decision-making authority over key areas under the three fiscal years ending March 31, 2006. Through greater focusElectronics CEO, Sony is implementing reorganization initiatives to strengthen horizontal coordination in the key areas of management resources on strategic businesses, accelerated reform of itsproduct planning, technology, procurement, manufacturing, platform, headcount reductions in administrative (including corporate) and sales functions and reductionsmarketing. For Sony’s growth strategy in Electronics, resources will be focused on the costdevelopment and commercialization of non-production materials,high-definition products, mobile products and advanced semiconductors and other key devices that can further differentiate these products, targeting enhanced competitiveness and improved profitability. In the Game segment, Sony intends to reduce fixed costs. Restructuring charges associated with these activities are expected to amount to approximately 335 billion yen overexpand the three fiscal years ending March 31, 2006. The details of the restructuring plans for the fiscal years ending March 31, 2005PS3 platform while developing its PS2 and 2006 have yet to be determined in full. Sony also aims to lay the seeds for future growth through strategic investments in research and development and aggressive capital expenditures in the area of semiconductors.

In the fiscal year ended March 31, 2004, the first year of Transformation 60, Sony recorded 168.1 billion yen in consolidated restructuring charges, 514.5 billion yen in consolidated research and development costs and 175 billion yen in semiconductor capital expenditures (total of Electronics and Game segments). PSP businesses.

In addition to this cost-cutting and investment for growth, each of Sony’s business segments grappled with issues specific to that segment. Below is a description of the issues management believes each segment continues to face and an explanation as to how each segment is approaching those issues.
 
Electronics

Electronics
Although the Electronics segment continues to hold a very strong position in the worldwide consumer AVaudio visual products market, that position has become increasingly threatened as a result of the entrance of new manufacturers and distributors. These new entrants are able to pose a threat to Sonythreatening Sony’s position due to the industry

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shift from analog to digital technology. In the analog era, complicated functionality of electronics products was made possible through the combination of several complex parts, and Sony held a competitive advantage in the design and manufacture of those parts as a result of its accumulated expertise. In the digital era, however, complicated functionality has become concentrated on semiconductors and other key digital devices. Since these semiconductors and key devices are able to be mass produced, they have become readily available to new market entrants, and the functionality that once commanded a high premium has become more affordable. This has led to intense price erosion in the end-user consumer AVaudio visual products market. To respond to these challenges, Sony is striving to keep pace with price erosion by reducing its manufacturing and other costs. It is seeking to maintain the premium pricing it enjoys on many of its end-user products by adding functionality to those products and developing new applications and ways of use that are then communicatedappeal to the consumer. AndIn addition, it is taking steps to increase its competitive edge by developing high value-added semiconductors and other digital key devices in-house. By increasingenhancing the ratioin-house production of key devices, produced in-house, Sony aims to capture the value that has become increasingly concentrated in thoseincorporate added-value into these key devices.

In the area of semiconductors, Sony invested 69 billion yen in the fiscal yearyears ended March 31, 20042006 and plans to invest 1202007, Sony carried out 140 billion yen and 150 billion yen, respectively, of capital expenditures mainly on system large scale integrations (“LSI”) and CCDs. These totals also include Sony’s investment in the fiscal year ending March 31, 2005 on semiconductor fabrication equipment built at the 65 nanometer level of process technology. These chipstechnology level. Chips that will be manufactured using this equipment will be some of the most highly advanced on the market, and will include system LSI, in particular the newCell/B.E. microprocessor for the broadband era, code-named Cell, as well as otherwhich is already used in the computer entertainment system, large scale integration (“LSI”)PS3, and is anticipated for use in the next generation computer entertainment system and a variety of futuredigital consumer electronics products. Over the last five years, Sony began developing Cell together withCorporation, Sony Computer Entertainment, IBM Corporation (“IBM”) and Toshiba Corporation (“Toshiba”) have carried out joint development focused on 90 and 65 nanometer process technology for utilization in the springdesign and manufacturing of 2001. To ensure efficient usethe Cell/B.E. Moreover, in 2006 Sony Corporation, IBM, and Toshiba concluded a new joint development agreement and an alliance for the research and development of alladvanced semiconductor technology has begun.


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Sony has reconsidered its investment policy in the semiconductor production facilities inbusiness. In the future, Sony Group, Sony is also planningwill carefully select investments and adopt a strategy to consolidatemore clearly focus on the semiconductor fabrication facilities of the ElectronicsCCD and Game segments into one organization on July 1, 2004.

CMOS image sensor, television- and video-related, and Game-related businesses.

In the area of other key devices, SonyS-LCD, Sony’s joint venture with Samsung, which is currently investingbased in South Korea, started production of 7th generation amorphous TFT LCD panel (glass panel size: 1,870mm x 2,200mm) in April 2005 and since October 2005 has been producing 60,000 sheets a month. In July 2006, S-LCD increased its production equipment, reflectingcapacity to 75,000 sheets a month and further increased its belief that demand forproduction capacity to 90,000 sheets in January 2007.
In July 2006, Sony and Samsung signed the final contract regarding the manufacturing of 8th generation TFT LCD televisions will continue to increase rapidly. Sony is investing one billion U.S. dollars in a joint venture it has established with Samsung, namedpanels (glass panel size: 2,200mm x 2,500mm) at the S-LCD Corporation, and based in South Korea. Samsung holds 50 percent plus one share of the equity of the joint venture while Sony holds 50 percent minus one share of the equity of the joint venture. The President and CEO comes from Samsung whiletotal amount of the CFO comes from Sony. Investment in manufacturing equipment will begin in the summer of 2004 while mass production of LCD panelsinvestment is expected to begin inbe approximately 200 billion yen (approximately 50 percent of which will be borne by Sony), the second calendar quartermajor part of 2005. Expectedwhich has already been completed. The start of mass production is targeted for summer 2007 with production capacity is 60,000expected to be 50,000 sheets per month at the 7th generation (1,870 mm x 2,200 mm) level of technology.a month.
 
Game

Game

In the Game segment, PlayStation 2 has a high share offor the global game console market, and the PlayStation 2 business, particularly the PlayStation 2 software business, remainsPS2, which is in its harvest stage. However,eighth year since release, Sony estimated a decrease in production shipment units of PlayStation 2volume, including hardware are expected to decrease in the fiscal year ending March 31, 2005. In order to ensure future growth in the Game segment, Sony is investing, as described above, in the research and development of cutting-edge microprocessors and other LSIs that will be used in the next generation computer entertainment system. Furthermore, Sony is working to develop a new market through its planned introduction, in the fiscal year ending March 31, 2005, of PlayStation Portable (“PSP”), a new handheld game system on which a variety of content can be enjoyed.
Music

     In the Music segment, album sales over the past several years have decreased due to the worldwide contraction of the global music industry brought on by piracy and competition from other entertainment sectors. Although Sony experienced improvement in a number of key retail markets duringsoftware, for the fiscal year ended March 31, 2004, it continued2007. However, as the PS2 platform is still recording favorable sales around the world, Sony will continue to record declining sales on a global basis. In an efforttry to maintain profitability,the scale of this business. Sony is continuingstrongly promoting the PSP platform by offering new ways to implement restructuring initiatives designedenjoy it, such as by increasing interconnectivity with the PS3, along with expanding theline-up of software unique to reduce fixed costs atthe PSP. Sony expects a rate equal to or abovesignificant reduction in the rateoperating loss of the decline in sales. Sony is also working to combat digital piracy and

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generate profits through digital distribution of content, most notably through its launch of the Connect music store, a digital downloading service. Finally, in an effort to achieve significant operational efficiencies, Sony is seeking to merge its recorded musicPS3 business with BMG. In December 2003, Sonythe rollout of an exciting software lineup, in addition to seeking rapid cost reductions, mainly by shrinking the size of semiconductor chips and Bertelsmann AG announced that they had signed a binding agreement to combine their recorded music businesses in a joint venture. The newly formed company, which will be known as Sony BMG, will be 50% owned by each parent company. The merger is subject to regulatory approvalsreducing the number of parts in the U.S. and the European Union.console.
 
Pictures

Pictures

In the Pictures segment, Sony faces intense competition, rising expenses, including advertising and promotion expenses, and a growing trend toward digital piracy. In addition, the DVD format is ten years old and is showing signs of maturation. To meet these challenges, Sony is working to distribute a diversified portfolio of motion pictures with broad worldwide appeal on existing and capitalize on the expanding DVDnew home entertainment market, which is becoming a more significant source of revenuesformats, including Blu-ray, and profits. Additionally, to differentiate itself in the marketplace and to proactively address risks ofon other emerging platforms, including digital piracy, Sony Pictures Digital is developing broadband network strategies to facilitate the integration between Sony’s hardware and content products and create protected revenue-generating alternatives.download.
 
Financial Services

Financial Services

In the Financial Services segment, the value of assets accumulated by the businesses in the segment has grown continuously over the past several fiscal years, resulting in a large portion (approximately 42 percent as of March 31, 2007) of Sony’s total assets being accounted for by the Financial Services segment. To strengthen asset management and risk management in parallel with this growing asset value, enhance disclosure of business details, and offer customers integrated financial services tailored to their individual needs, Sony established Sony Financial Holdings Inc.SFH in April 2004. ThisSFH functions as a holding company is comprised ofoverseeing Sony Life, Sony Assurance and Sony Bank, and will serve to increasewith the aim of increasing the synergies betweenamong these businesses.
 
Forecast
With respect to the environment in the financial services industry, Sony expects increasingly intense competition as it confronts changes in its business environment. In particular, Sony expects competition to result from the deregulation and liberalization of additional insurance premiums, postal privatization and the complete lifting of the ban on the sale of insurance products at banks, as well as changes in the macroeconomic environment brought about by Japan’s declining population, low birthrate and growing proportion of elderly citizens. In response to this changing environment, each of Consolidated Results

Factors which may affect Sony’s financial performance includeservices businesses, which are latecomers to the following: market conditions, including general economic conditions, in major areas where Sony conducts its businesses,life insurance, property and casualty insurance and banking industries, make use of distinctive, individual industry-specific business models and plan to achieve further business expansion and even higher levels of consumer spending, foreign exchange fluctuations, Sony’s ability to continue to design, develop, manufacture, sell, and win acceptance of its products and services, Sony’s ability to continue to implement personnel reduction and other business reorganization initiatives, Sony’s ability to implement its network strategy, and implement successful sales and distribution strategies in the light of the Internet and other technological developments, Sony’s ability to devote sufficient resources to research and development, and capital expenditures, and the success of Sony’s joint ventures and alliances. Risks and uncertainties also include the impact of any future events with material unforeseen impacts. Refer also to the “Cautionary Statement”.customer satisfaction.


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     Regarding the forecast of consolidated results for the fiscal year ending March 31, 2005, sales and operating revenue is expected to increase slightly compared with the fiscal year ended March 31, 2004. Operating income, income before income taxes, and net income are also expected to increase. This forecast assumes that the yen for the fiscal year ending March 31, 2005 will strengthen against the U.S. dollar and the euro compared with the fiscal year ended March 31, 2004.

     During the fiscal year ending March 31, 2005, primarily in the Electronics segment, restructuring charges of approximately 130 billion yen are expected to be incurred across the Sony Group. 168.1 billion yen in restructuring charges were recorded in the fiscal year ended March 31, 2004.

     In April 2004, a settlement was reached in a lawsuit between InterTrust, an equity affiliate of Sony, and Microsoft regarding patents held by InterTrust. In return for the provision of a license to Microsoft, InterTrust received 440 million U.S. dollars. As a result of this settlement, Sony expects to record approximately 100 million U.S. dollars in equity in net income of InterTrust during the fiscal year.

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Electronics

     Sales of products such as digital still cameras, flat panel televisions and DVD recorders are expected to continue to increase, resulting in an anticipated increase in overall sales of the segment, despite an expected decrease in sales of CRT televisions. Operating income is expected to increase due to the increase in sales and the benefit of restructuring activities undertaken in the previous fiscal year, despite an anticipated appreciation of the yen and an expected increase in research and development costs.

From the fiscal year ending March 31, 2005, research and development costs associated with process technologies, including those technologies used in the Game segment, which were previously recorded in the Game segment, will be recorded in the Electronics segment, due to the integration of the semiconductor businesses in the Electronics and Game segments.

 
Game

Although software production shipments are expected to remain unchanged year on year, production shipments of PS one and PlayStation 2 hardware are expected to decrease compared with the previous year, resulting in a decrease in sales for the segment. Although a portion of research and development costs will be recorded in the Electronics segment, as described above and in “Research and Development” below, operating income is expected to decrease due to continued investment in products such as the PSP handheld entertainment system and the next generation computer entertainment system.

Music

Sales are expected to decrease due to an anticipated continued contraction of the market for music and a reduction in the unit price of DVDs in the manufacturing division. However, due to factors such as the benefits of restructuring activities already carried out, operating income is expected to increase.

Pictures

Sales are expected to decrease due to the absence of the significant television revenues in the fiscal year ended March 31, 2004. However, operating income is expected to remain unchanged primarily due to the contribution of films scheduled for release during the year, most notablySpider-Man 2.

Financial Services

Although an increase in insurance-in-force is expected at Sony Life, a decrease in insurance revenue is expected due to a change, at Sony Life, in the recognition method of insurance premiums received on certain products from being recorded as revenue to being offset against the related provision for future insurance policy benefits. A decrease in operating income is also expected because valuation gains from marketable securities are not included in the forecast.

Capital Expenditures

In the fiscal year ending March 31, 2005, capital expenditures (additions to fixed assets) are expected to be 410 billion yen, an increase of 8 percent compared with the previous year. More than 90 percent of the amount is expected to be spent in the Electronics and Game segments. Of this amount, capital expenditures on semiconductors (in the Electronics and Game segments) during the fiscal year are expected to amount to 190 billion yen (actual amount in the fiscal year ended March 31, 2004 was 175 billion yen). Of the capital expenditures on semiconductors, 120 billion yen is expected to be spent for the installation of semiconductor production equipment designed for next generation broadband microprocessors (actual amount in the fiscal year ended March 31, 2004 was 69 billion yen). For an explanation regarding fund procurement, refer to “Capital Resources” above.

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Depreciation and Amortization

In the fiscal year ending March 31, 2005, expenses for depreciation and amortization, which includes the amortization of intangible assets and the amortization of deferred insurance acquisition costs, are expected to be 370 billion yen, an increase of 1 percent compared with the previous year. Although expenses for the amortization of deferred insurance acquisition costs in the Financial Services segment are expected to decrease, total expenses for depreciation and amortization in the Electronics and Game segments are expected to increase.

Research and Development

Sony expects research and development costs (total of expenses for the development of new product prototypes and expenses for the development of mid-to long-term new technologies) for the fiscal year ending March 31, 2005 to be 550 billion yen, a 7 percent increase compared with the fiscal year ended March 31, 2004. Research and development costs associated with process technologies, including those technologies used in the Game segment, which were previously recorded in the Game segment, will be recorded in the Electronics segment from the fiscal year ending March 31, 2005, due to the integration of the semiconductor businesses in the Electronics and Game segments. As a result, research and development costs in the Electronics segment are expected to increase more than 10 percent compared with the 429.4 billion yen recorded in the previous year. On the other hand, in the Game segment, overall research and development costs are expected to decrease by only 10 percent compared to the 83.4 billion yen recorded in the previous year. The relatively small decrease is due to the fact that, although research and development costs associated with process technologies will decrease, research and development costs associated with next generation semiconductor design, new platforms such as the PSP and software are expected to increase.

CRITICAL ACCOUNTING POLICIES

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, Sony evaluates its estimates which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of these evaluations form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. Sony considers an accounting policy to be critical if it is important to its financial condition and results, and requires significant judgments and estimates on the part of management in its application. Sony believes that the following represent the critical accounting policies of the company.
 
Investments

Investments
Sony’s investments are comprised of debt and equity securities accounted for under both the cost and equity method of accounting. If it has been determined that an investment has sustained another-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings. Sony regularly evaluates its investment portfolio to identifyother-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether another-than-temporary decline in value has occurred include: the length of time and extent to which the market value of the security has been less than its original cost, the financial condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors affecting the market value, deterioration of credit condition of the issuers, sovereign risk, and ability to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value.

In evaluating the factors foravailable-for-sale securities whose fair values are readily determinable, management presumes a decline in value to beother-than-temporary if the fair value of the security is

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20 percent or more below its original cost for an extended period of time (generally a period of up to six to twelve months). This criteria is employed as a threshold to identify securities which may have a decline in value that isother-than-temporary. The presumption of another-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20%20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value isother-than-temporary.

The assessment of whether a decline in the value of an investment isother-than-temporary often requires management judgment based on evaluation of relevant factors. Those factors include business plans and future cash flows of the issuer of the security, the regulatory, economic or technological environment of the investee, and the general market condition of either the geographic area or the industry in which the investee operates. Accordingly, it is possible that investments in Sony’s portfolio that have had a decline in value that are currently believed to be temporary may determine to beother-than-temporary in the future based on Sony’s evaluation of additional information such as continued poor operating results, future broad declines in value of worldwide equity markets or circumstances in market interest rate fluctuations. As a result, unrealized losses recorded for investments may be recognized into income in future periods.
 
Impairment of long-lived assets
Valuation of inventory
Sony values its inventory based on the lower of cost or market. Sony writes down inventory to an amount equal to the difference between the cost of the inventory and the net realizable value — i.e., less reasonably predictable costs of completion and disposal. However, if actual market conditions are less favorable than projected and further price decreases are needed, additional inventory write-downs may be required. Additionally, as Sony evaluates its manufacturing cost in yen while it sets its sales prices in euros and U.S. dollars for some products, Sony’s results may be negatively impacted by future exchange rate fluctuations.


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Impairment of long-lived assets
Sony reviews the carrying value of its long-lived assets held and used and long-lived assets to be disposed of whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. This review is performed using estimates of future cash flows by product category (e.g. CRT TV display CRTs)display) or entity (e.g. semiconductor manufacturing divisionan entertainment complex in the U.S.). If the carrying value of the asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset exceeds its fair value. Fair value is determined using the present value of estimated net cash flows or comparable market values.

Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business assumptions could negatively affect the valuations of those long-lived assets. These unforeseen changes include a possible further decline in demand for TV display CRTs due to a shift in demand from CRT displays to LCD and plasma panel displays.

In the fiscal year ended March 31, 2003,2005, Sony recorded impairment charges for long-lived assets totaling 12.419.2 billion yen. Ityen, which included 8.17.5 billion yen for the impairment of semiconductor and computerlong-lived assets of CRT TV display CRT manufacturing equipmentfacilities to be abandoned or to be soldheld and used in Europe in connection with certain restructuring activities in the Electronics segment. It also included 2.7 billion yen for the impairment of a CD manufacturing facility in the U.S., the fairFair value of these assets was determined using estimated future discounted cash flows which was estimated by using methods such as a survey ofwere based on the local real estate market.

best information available.

In the fiscal year ended March 31, 2004,2006, Sony recorded impairment charges for long-lived assets totaling 16.159.8 billion yen. Ityen, which included 5.325.5 billion yen for the impairment of long-lived assets such as semiconductor andof CRT TV display CRT manufacturing equipmentfacilities to be abandoned or soldheld and used in the U.S. in connection with certain restructuring activities in the Electronics segment. ItFair value of these assets was determined using estimated future discounted cash flows which were based on the best information available. The impairment charge also included 3.08.5 billion yen for the impairment of long-lived assets in Music segment including a certain CD manufacturing facilityof Sony’s entertainment complex to be abandoned or sold and a recording studio and equipmentheld for sale in the U.S. in connection with restructuring activities of non-core businesses in All Other. The impairment charge was based on the negotiated sales price of the complex.
In the fiscal year ended March 31, 2007, Sony recorded impairment charges for long-lived assets totaling 16.8 billion yen, which included 3.6 billion yen for the impairment of long-lived assets of CRT TV display manufacturing facilities to be held and used in Japan.the U.S., East Asia and Southeast Asia in connection with certain restructuring activities in the Electronics segment. Fair value of these assets iswas determined using estimated future discounted cash flows which arewere based on the best information available.
 
Goodwill and Other Intangible Assets

Goodwill and other intangible assets
Goodwill and other intangible assets that are determined to have an indefinite life are not amortized, but are tested annually for impairment in accordance with FAS No. 142 on anduring the fourth quarter of each fiscal year, and the assets are also tested between the annual basis and between annual

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tests if an event occurs or circumstances change that would more likely than not reduce the fair value of these assets below their carrying value.amount. Such an event would include unfavorable variances from established business plans, significant changes in forecasted results or volatility inherent to external markets and industries, which are periodically reviewed by Sony’s management. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit (Sony’s operating segments or one level below the operating segments) with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Other intangible assets are tested for impairment by comparing the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.


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Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. These estimates and assumptions could significantly impact whether or not an impairment charge is recognized as well as the magnitude of any such charge. In its impairment review, Sony performs internal valuation analyses or utilizes third-party valuations when management believes it to be appropriate, and considers other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flow analysis. This approach uses significant estimates and assumptions including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. During the fiscal year ended March 31, 2004,2007, Sony recorded a charge for the impairment losses of goodwill of 6.0 billion5,620 million yen in reporting units in the Electronics segment. Thissegment, of which 5,320 million yen was related to the CRT TV business which was downsized in the U.S., and an impairment chargeloss of 237 million yen in a reporting unit included in All Other. These impairment charges reflected the overall decline in the fair value of a subsidiary within the Electronics segment.subsidiaries. The fair value of that reporting unitthe subsidiaries was estimated principally using the expected present value of future cash flows utilizing a third party valuation.

flows.

Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business assumptions could negatively affect the valuations, which may result in Sony recognizing impairment charges for goodwill and other intangible assets in the future. AsIn order to evaluate the sensitivity of March 31, 2004,the fair value calculations on the impairment analysis, Sony applied a 10%hypothetical 10 percent decrease into the fair value of each reporting unit. As of Sony’sMarch 31, 2007, a hypothetical 10 percent decrease to the fair value of each reporting unitsunit would not have resulted in a material impairment charge.loss.
 
Pension benefits costs

Pension benefits costs
Employee pension benefit costs and obligations are dependent on certain assumptions including discount rates, retirement rates and mortality rates, which are based upon current statistical data, as well as expected long-term rates of return on plan assets and other factors. Specifically, the discount rate and expected long-term rate of return on assets are two critical assumptions in the determination of periodic pension costs and pension liabilities. Assumptions are evaluated at least annually, andor at the time when events occur or circumstances change whichand these events or changes could have a significant effect on these critical assumptions. In accordance

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with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods. Therefore, actual results generally affect recognized expensescosts and the recorded obligations for pensions in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect Sony’s pension obligations and future expense.costs.

Sony’s principal pension plans are its Japanese pension plans. Foreign pension plans are not significant, individually, withto total plan assets and pension obligations amounting to less than 10% of those ofobligations.
To determine the aggregatebenefit obligation of the Japanese plans.

pension plans, Sony used a discount rate of 2.4%2.3 percent for its Japanese pension plans as of March 31, 2004.2007. The discount rate was determined by using currently available information about rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefit obligation.obligation in consideration of amounts and timing of cash outflows for expected benefit payments. Such available information about rates of returns is collected from Bloomberg and credit rating agencies. The 2.4%2.3 percent discount rate represents a 5010 basis point increase from the 1.9%2.2 percent discount rate used for fiscal year ended March 31, 20032006 and reflects current market interest rate conditions. For Japanese pension plans, a 5010 basis point increase in the discount rate would decrease pension costs by approximately 12.00.8 billion yen compared tofor the fiscal year endedending March 31, 2004.

2008.

To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as historical and expected long-term rates of return on various categories of plan assets. For Japanese pension plans, the expected long-term rate of return on pension plan assets was 4.0%3.5 percent and 3.7 percent as of March 31, 20032006 and 2004.2007 respectively. The actual returngain on pension plan assets for the fiscal year ended March 31, 20042007 was 23.0%. Consistent with U.S. GAAP, actual0.8 percent. Actual results that differ from the expected return on plan assets are


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accumulated and amortized as a component of pension expensecosts over the average future service period, thereby reducing theyear-to-year volatility in pension expense. Atcosts. As of March 31, 2003 and 2004,2006 Sony had unrecognized actuarial losses of 513.0169.9 billion yen and 328.5as of March 31, 2007 Sony had a net actuarial loss of 200.6 billion yen, respectively, including losses related to plan assets. For the fiscal year ended March 31, 2004,2007, the unrecognizednet actuarial loss decreased primarilyincreased due to the improved performancedifference between the actual rate of equity markets.return on pension plan assets and the expected long-term rate of return on pension plan assets. The unrecognizednet actuarial losses reflectloss reflects the overall unfavorable performance of equity marketsreturn on investment over the past several years and will result in an increase in pension expensecosts as they are recognized.

Sony recorded a minimum pension liability adjustment for the unfunded accumulated benefit obligation for Japanese pension plans of 308.7 billion yen and 149.435.8 billion yen as of March 31, 20032006. FAS No. 158 was adopted by Sony in the financial statements for the year ended March 31, 2007. As a result, Sony recorded a pension liability adjustment for the prior service cost, net actuarial loss and 2004, respectively. This liability represents the excess of the accumulated benefit obligation under Sony’s qualified defined benefitexisting at transition for Japanese pension plans over the fair value of the plans’ assets. In accordance with U.S. GAAP, this liability was73.5 billion yen as of March 31, 2007. Both adjustments were established by a charge to stockholders’ equity, resulting in no impact to the accompanying consolidated statements of income.

Refer to Note 14 of Notes to Consolidated Financial Statements for more information regarding Sony’s pension and severance plans.

The following table illustrates the sensitivity to a changeeffect of changes in the discount rate and the expected return on pension plan assets, while holding all other assumptions constant, for Japanese pension plans as of March 31, 2004:
2007.
             
Pre-Tax
Pension
Equity
Change in AssumptionPre-Tax PBOPension ExpenseCosts(Net of Tax)
(Yen in billions)
25 basis point increase/decrease in discount rate  -−/+ 50.024.9   -−/+ 6.02.0   +/- 3.4−1.2 
25 basis point increase/decrease in expected return on assets  —   -−/+ 1.01.3   +/- 0.6−0.8 
 
Deferred tax asset valuation

Stock-based compensation
Sony accounts for stock-based compensation using the fair value based method. The fair value is measured on the date of grant using the Black-Scholes option-pricing model. Sony estimates the forfeiture rate based on its historical experience for the stock acquisition rights plans, and recognizes this compensation expense, net of an estimated forfeiture rate, only for the stock acquisition rights expected to vest over the requisite service period. The expense is mainly included in selling, general and administrative expenses.
The Black-Scholes option-pricing model requires various highly judgmental assumptions including expected stock price volatility and the expected life of each award. In addition, judgment is also required to estimate the expected forfeiture rate and recognize expense only for those rights expected to vest.
Management believes that these estimates are reasonable; however, if actual results differ significantly from these estimates, stock-based compensation expense may differ materially in the future from that recorded in the current period.
Deferred tax asset valuation
Sony records a valuation allowance to reduce the deferred tax assets to an amount that management believes is more likely than not to be realized. In establishing the appropriate valuation allowance for deferred tax assets (including deferred tax assets on tax loss carry-forwards), all available evidence, both positive and negative, is considered. Information on historical results is supplemented by all currently available information on future years, asbecause realization of deferred tax assets is dependent on whether each tax-filing unit generates sufficient taxable income. The estimates and assumptions used in determining

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future taxable income are consistent with those used in Sony’s approved forecasts of future operations. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, less valuation allowance, will be realized.

     Sony applied

SCEI and SCEA have recorded cumulative losses in recent years primarily due to file its corporate income tax return under the consolidated tax filing systemsale of the PS3 at a price lower than production cost during the introductory period, the recording of other charges in Japan beginningassociation with the fiscal year ended March 31, 2004. Underpreparation for the consolidated tax filing system, the tax-filing unit consists of Sony Corporation, the ultimate parent companylaunch of the PS3 platform and a write-down for semiconductor components used in the PS3. However, Sony Group, and its fully owned Japanese subsidiaries. The eventual realizability ofexpects to establish the same successful business model with the PS3 that it achieved with the PS2,


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which has sold over 100 million units. Taxable income is expected to increase during the tax benefitcarryforward period due to the rapid reduction in hardware production costs and an enhancedline-up of its deferred tax assets is dependent on whether the tax-filing unit generates sufficient taxable incomesoftware titles in the future. In addition, Sony is subjectPS3 business. Accordingly, both companies expect to local income taxes in Japan, in which,recover these losses within the tax-filing unit, for purposes of local income taxes, is on a stand alone entity basis. The eventual realizability of the tax benefit of deferred tax assets for local income taxes is dependent on whether Sony Corporation and each subsidiary generates sufficient taxable income in future. As of March 31, 2004, Sony Corporation had deferred tax assets for local income taxes totaling 86.5 billion yen. The eventual realizability of the tax benefit of its deferred tax assets is dependent on whether Sony Corporation generates sufficient taxable income in the future. Management believes that Sony Corporation’s historical results, when evaluated in connection with relevant qualitative factors and available information concerning its business and industry, provided substantial positive evidence, which outweighs the negative evidence available. However, under recent conditions, management considers that it is possible that Sony Corporation’s future results may yield sufficient negativenext five years.
Given sufficiently strong evidence to support the conclusion that ita valuation allowance is more likely than not thatnecessary, Sony Corporation willhas decided not realize the tax benefit of all theseto record a valuation allowance for SCEI and SCEA’s deferred tax assets. If this is the case, subject to review of relevant qualitative factors and uncertainties, Sony may establish a valuation allowance against part or all of the deferred tax assets of Sony Corporation that would be charged to income as an increase in tax expense.

As of March 31, 2004, the U.S. subsidiaries of Sony had a valuation allowance of 81.0 billion yen against deferred tax assets for federal and certain state taxes. Since the U.S. subsidiaries did not have a sufficient history of taxable income at this time to conclude that it is more likely than not that the tax benefit from these deferred tax assets would be realized, a valuation allowance was established. Management believes this lack of sufficient earnings history, when evaluated in connection with relevant qualitative factors and uncertainties concerning the U.S. subsidiaries’ businesses and industries, provided substantial negative evidence, which outweighs any positive evidence, regarding the eventual realizability of the tax benefit of the deferred tax assets as of March 31, 2004. However, under recent conditions, management considers that it is possible that the U.S. subsidiaries’ future results may yield sufficient positive evidence to support the conclusion that it is more likely than not that the U.S. subsidiaries could realize the tax benefit of these deferred tax assets and that such a conclusion may be reached as early as during the fiscal year ending March 31, 2005. If this is the case, subject to review of relevant qualitative factors and uncertainties, Sony may reverse part or all of the valuation allowance that would be recognized into income as a reduction to tax expense.

 
Film accounting

Film accounting
An aspect of film accounting that requires the exercise of judgment relates to the process of estimating the total revenues to be received throughout a film’s life cycle. Such estimate of a film’s ultimate revenue is important for two reasons. First, while a film is being produced and the related costs are being capitalized, it is necessary for management to estimate the ultimate revenue, less additional costs to be incurred, including exploitation costs which are expensed as incurred, in order to determine whether the value of a film has been impaired and thus requires an immediate write off of unrecoverable film costs. Second, the amount of film costs recognized as cost of sales for a given film as it is exhibited in various markets throughout its life cycle is based upon the proportion that current period actual revenues bear to the estimated ultimate total revenues.

Management bases its estimates of ultimate revenue for each film on several factors including the historical performance of similar genre films, the star power of the lead actors and actresses, the expected number of theaters at which the film will be released, anticipated performance in the home entertainment, television and other ancillary markets, and agreements for future sales. Management updates such

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estimates based on the actual results to date of each film. For example, a film that has resulted in lower than expected theatrical revenues in its initial weeks of release would generally have its theatrical, home videoentertainment and television distribution ultimate revenues adjusted downward; a failure to do so would result in the understatement of amortized film costs for the period. Since the total film cost to be amortized for a given film is fixed, the estimate of ultimate revenues impacts only the timing of film cost amortization.
 
Future insurance policy benefits

     Long-term liabilities

Future insurance policy benefits
Liabilities for future insurance policy benefits are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities are computed by the net level premium method based upon estimates as to future investment yield, mortality, morbidity, withdrawals and other factors. Future policy benefits are computed using interest rates ranging from approximately 1.00%0.90 percent to 5.50%.5.00 percent. Mortality, morbidity and withdrawal assumptions for all policies are based on either the life insurance subsidiary’s own experience or various actuarial tables. Generally these assumptions are “locked-in” upon the issuance of new insurance. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect Sony’s future insurance policy benefits.

For a summary of Sony’s significant accounting policies, including the critical accounting policies discussed above, please see Note 2 of Notes to the Consolidated Financial Statements.

RECENTLY ADOPTED ACCOUNTING STANDARDS
 
Employers’ Disclosures about Pensions and Other Postretirement Benefits

Inventory Costs -

In December 2003,November 2004, the FASB revised Statement of Financial Accounting Standards Board (“FAS”FASB”) issued Statement of FAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”,151, “Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4.” This statement requires certain abnormal expenditures to be recognized as expenses in the current period. It also requires that the amount of fixed production overhead allocated to the inventory be based on the normal capacity of the production facilities. Sony adopted FAS No. 87, “Employers’ Accounting for Pensions”, FAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and FAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”.151 on April 1, 2006. The new FAS No. 132 revised employers’ disclosures about pension plans and other postretirement benefit plans. It did not change the measurement or recognition of those plans required by FAS No. 87, 88 and 106. While retaining the disclosure requirementsadoption of FAS No. 132, the new FAS No. 132 requires additional disclosures about assets, obligations, cash flows, and net periodic benefit costs of defined benefit plans and other defined benefit postretirement plans. The provisions of the new FAS No. 132 are generally effective for financial statements with fiscal years ending after December 15, 2003, excluding the disclosure of certain information about foreign plans, which shall be effective for fiscal years ending after June 15, 2004. In accordance with the transition provisions of the new FAS No. 132, the disclosure provisions have been adopted in the consolidated financial statements.
Consolidation of Variable Interest Entities

     In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51”, which addresses consolidation by a primary beneficiary of a VIE. FIN No. 46 became effective immediately for all new VIEs created or acquired after January 31, 2003. Sony has not entered into any new agreements with VIEs on or after February 1, 2003. For VIEs created or acquired prior to February 1, 2003, Sony early adopted the provisions of FIN No. 46 on July 1, 2003. Under FIN No. 46, any difference between the net amount added to the balance sheet and the amount of any previously recognized interest in the VIE shall be recognized as a cumulative effect of accounting changes. As a result of adopting FIN No. 46, Sony recognized a one-time charge with no tax effect of 2.1 billion yen as a cumulative effect of accounting change in the consolidated statement of income, and Sony’s assets and liabilities increased by 95.3 billion yen and 98.0 billion yen, respectively. These increases were treated as non-cash transactions in the consolidated statements of cash flows. In addition, cash and cash equivalents increased by 1.5 billion yen. See Consolidated Financial Statements Note 21 for further discussion on the VIEs that are used by Sony.

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In December 2003, the FASB issued a revision to FIN No. 46 (“FIN No. 46R”), which replaces FIN No. 46. FIN No. 46R retains many of the basic concepts introduced in FIN No. 46; however, it also introduces a new scope exception for certain types of entities that qualify as a “business” as defined in FIN No. 46R, revises the method of calculating expected losses and residual returns for determination of a primary beneficiary, and includes new guidance for assessing variable interests. Sony early adopted the provisions of FIN No. 46R upon its issuance. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or impact the way Sony had previously accounted for VIEs.

Impairment of securities investments

In November 2003, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. EITF Issue No. 03-01 establishes additional disclosure requirements for each category of FAS No. 115 investments in a loss position. In March 2004, the EITF also reached a consensus on the additional accounting guidance for other-than-temporary impairments and its application to debt and equity investments. In accordance with the new disclosure requirements under EITF Issue No. 03-01, the disclosure in the consolidated financial statements has been expanded to include certain additional information regarding Sony’s securities investments.

Multiple Element Revenue Arrangements

In November 2002, the FASB issued EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF Issue No. 00-21 provides guidance on when and how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. Sony adopted EITF Issue No. 00-21 on July 1, 2003. The adoption of EITF Issue No. 00-21151 did not have a material impact on Sony’s results of operations and financial positionposition.

Accounting for Stock-Based Compensation -
Effective April 1, 2006, Sony adopted FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123(R)”). This statement requires the use of the fair value based method of accounting for employee stock-based compensation and eliminates the alternative to use the intrinsic value method prescribed by Accounting Principle Board Opinion (“APB”) No. 25. With limited exceptions, FAS No. 123(R) requires that the grant-date fair value of share-based payments to employees be expensed over the period the service is received. Sony had accounted for its employee stock-based compensation in accordance with the provisions prescribed by APB No. 25 and its related interpretations and had disclosed the net effect on net income and net income per share (“EPS”)


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allocated to the common stock as if Sony had applied the fair value recognition provisions of FAS No. 123 to stock-based compensation as described in Note 2 to the Consolidated Financial Statements, Significant accounting policies — Stock-based compensation. Sony has elected the modified prospective method of transition prescribed in FAS No. 123(R), which requires that compensation expense be recorded for all unvested stock acquisition rights as the requisite service is rendered beginning with the first period of adoption. As a result of the adoption of FAS No. 123(R), Sony’s operating income decreased by 3,670 million yen for the fiscal year ended March 31, 2004.2007.
 
Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities -

In April 2003,February 2006, the FASB issued FAS No. 149, “Amendment155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of StatementFAS No. 133 on Derivative Instruments and Hedging Activities”.FAS No. 140. This statement amendspermits an entity to elect fair value remeasurement for any hybrid financial instrument if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and clarifies financial accounting and reportingaccounted for derivative instruments, including derivative instruments embedded in other contracts and for hedging activitiesseparately under FAS No. 133. The election to measure the hybrid instrument at fair value is made on aninstrument-by-instrument basis and is irreversible. The statement is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s fiscal year beginning after September 15, 2006, with earlier adoption permitted as of the beginning of the fiscal year, provided that financial statements for any interim period of that fiscal year have not been issued. Sony early adopted FAS No. 149155 on JulyApril 1, 2003. The2006. As a result of the adoption of FAS No. 149 did not have an impact155, Sony’s operating income increased by 3,828 million yen for the fiscal year ended March 31, 2007. Additionally, on Sony’s results of operations and financial position.
Accounting for Asset Retirement Obligations

On April 1, 2003,2006, Sony adoptedrecognized a net charge of 3,785 million yen (net of income taxes of 2,148 million yen) as a cumulative-effect adjustment to beginning retained earnings, which consisted of 1,754 million yen (net of income taxes of 996 million yen) of gross gains and 5,539 million yen (net of income taxes of 3,144 million yen) of gross losses.

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans -
In September 2006, the FASB issued FAS No. 143, “Accounting158, “Employers’ Accounting for Asset Retirement Obligations”,Defined Benefit Pension and Other Postretirement Plans,” an amendment to FASB Statements No. 87, 88, 106 and 132(R). FAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit pension and other postretirement benefit plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which addressesthe changes occur through other comprehensive income. FAS No. 158 was adopted by Sony in the financial accounting and reportingstatements for obligations associated with the retirementyear ending March 31, 2007. FAS No. 158 also requires companies to measure the funded status of tangible long-lived assets and the associated asset retirement costs. The adoptionplan as of the date of its fiscal year-end, effective for years ending after December 15, 2008. Sony expects to adopt the measurement provisions of FAS No. 143158 effective March 31, 2009. Refer to Note 14, “Pension and severance plans”, for further details.
Quantifying Effects of Prior Year Misstatements in Current Year Financial Statements -
In September 2006, the U.S. Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effect of Prior Year Misstatement when Quantifying Misstatements in Current Year Financial Statements”. SAB No. 108 requires that registrants quantify errors using both a balance sheet approach, generally referred to as the “Iron Curtain” method, and a statement of operations approach, generally referred to as the “Rollover” method, and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 became effective for Sony as of April 1, 2006. Prior to the application of SAB No. 108, Sony used a statement of operations approach to quantify errors. The application of SAB No. 108 did not have a material impact on Sony’s results of operations andconsolidated financial position for the year ended March 31, 2004.statements.
 
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity

     In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS No. 150 establishes standards for how certain financial instruments with characteristics of both liabilities and equity shall be classified and measured. Sony adopted FAS No. 150 during the first quarter of the year ended March 31, 2004. The adoption of FAS No. 150 did not have an impact on Sony’s results of operations and financial position for the year ended March 31, 2004.

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RECENT PRONOUNCEMENTS

 
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts

Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts -

In July 2003,September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued the Statement of Position (“SOP”) 03-1,05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance


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Contracts.”SOP 05-1 provides guidance on accounting for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in FAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate accounts”. SOP 03-1 provides guidance on accountingRealized Gains and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts.Losses from the Sales of Investments”. This statement shallwill be effective for fiscal years beginning after December 15, 2003.Sony as of April 1, 2007. Although Sony is currently evaluating the impact of adopting this guidance.new pronouncement, the adoption ofSOP 05-1 is not expected to have a material impact on Sony’s results of operations and financial position.
Accounting for Servicing of Financial Assets -
In March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140.” This statement amends FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement will be effective for Sony as of April 1, 2007. Sony is currently evaluating the impact of adopting this new pronouncement.
Accounting for Uncertainty in Income Taxes -
In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This statement will be effective for Sony as of April 1, 2007. Sony is currently evaluating the potential cumulative impact of FIN No. 48 on the consolidated financial statements, and the final evaluation is expected to result in a charge to beginning retained earnings and an increase in tax liabilities.
How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement -
In June 2006, the EITF issued EITF IssueNo. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement.” EITF IssueNo. 06-3 requires disclosure of the accounting policy for any tax assessed by a governmental authority that is imposed concurrently on a specific revenue-producing transaction between a seller and a customer. EITF IssueNo. 06-3 should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. This statement will be effective for Sony as of April 1, 2007. Although Sony is currently evaluating the impact of adopting this new pronouncement, the adoption of EITF IssueNo. 06-3 is not expected to have a material impact on Sony’s results of operations and financial position.
Fair Value Measurements -
In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements.” FAS No. 157 establishes a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures about the use of fair value measurements. FAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. FAS No. 157 will be effective for Sony beginning April 1, 2008. Sony is currently assessing the potential effect of FAS No. 157 on the financial statements.
Fair Value Option for Financial Assets and Financial Liabilities -
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” FAS No. 159 permits companies to choose to measure, on aninstrument-by-instrument basis, financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Sony is currently evaluating whether to elect the option provided for in this statement. If elected, FAS No. 159 would be effective for Sony as of April 1, 2008.


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Item 6.     Directors, Senior Management and Employees

Item 6.Directors, Senior Management and Employees

Directors and Senior Management

Set forth below are the current Sony Corporationmembers of the Board of Directors and Corporate Executive Officers of Sony Corporation, their date of birth, the year in which they were first elected, their current position at the Sony, Group, prior positions, and other principal business activities outside the Sony Group as of June 22, 2004.21, 2007.
Board of Directors
 
Board of Directors
   
Nobuyuki IdeiSir Howard Stringer
Date of Birth: November 22, 1937
Director (Member of the Board) Since: 1989
Current Positions: Chairman and Group Chief Executive Officer, Representative Corporate Executive Officer
Prior Positions:
2000Chairman and Chief Executive Officer, Representative Director, Sony Corporation
1999President and Representative Director, Chief Executive Officer, Sony Corporation
1995President and Representative Director, Chief Operating Officer, Sony Corporation
1990Senior General Manager, Advertising & Marketing Communication Strategy Group, Sony Corporation
1989Director, Sony Corporation
1988Senior General Manager, Home Video Group, Sony Corporation
1960Entered Sony Corporation
Principal Business Activities Outside Sony:
Director of Nestlé S.A., Switzerland

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Kunitake Ando
Date of Birth: January 1, 1942
Director (Member of the Board) Since: 2000 (and from 1994 through 1997)
Current Positions: President and Global Hub President, Representative Corporate Executive Officer, Officer in charge of Personal Solutions Business Group
Prior Positions:
2003President and Group Chief Operating Officer, Representative Corporate Executive Officer, Sony Corporation
2000President and Chief Operating Officer, Representative Director, Sony Corporation
1999President and Chief Operating Officer, Personal IT Network Company, Sony Corporation
1994Director, Sony Corporation
1990President and Chief Operating Officer, Sony Engineering and Manufacturing of America
1985Deputy President, Sony Prudential Life Insurance Co., Ltd.
1969Entered Sony Corporation
Principal Business Activities Outside Sony: None
Teruo Masaki
Date of Birth: August 7, 1943
Director (Member of the Board) Since: 1999
Current Positions: Executive Deputy President and Group General Counsel, Corporate Executive Officer
Prior Positions:
2000Corporate Senior Executive Vice President, Director, Sony Corporation
1999Senior Managing Director, Sony Corporation
1997Executive Vice President, Sony Corporation of America
1991Deputy Senior General Manager, Legal and Intellectual Property Group, Sony Corporation
1971Entered Sony Corporation
Principal Business Activities Outside Sony: None
Howard Stringer
Date of Birth: February 19, 1942
Director (Member of the Board) Since: 1999
Corporate Executive Officer Since: 2003
Current Positions: Vice Positions within Sony:Chairman and Chief Executive Officer, Representative Corporate Executive Officer
Chairman and Chief Executive Officer, Sony Group Americas Representative,Corporation of America
Member of the Nominating Committee
Prior Positions:
2003Vice Chairman, Chief Operating Officer in charge of Entertainment Business Group, Corporate Executive Officer, Sony Corporation, Chairman and Chief Executive Officer, Sony Corporation of America, Chairman, Sony Electronics Inc.
Prior Positions:
1999Director, Sony Corporation
1997 President, Sony Corporation of America
1995 Chairman and Chief Executive Officer,TELE-TV U.S.A.
1988 President, CBS Broadcast Group, CBS Inc., U.S.A.
1986 President, CBS News U.S.A.
Principal Business Activities Outside Sony:
Director of InterContinental Hotels Group None

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Ken KutaragiRyoji Chubachi
Date of Birth: August 2, 1950September 4, 1947
Director (Member of the Board) Since: 20002005
Corporate Executive Officer Since: 2004
Current Positions:Positions within Sony:President, Representative Corporate Executive Deputy President, Officer, Electronics Chief Executive Officer
Member of the Nominating Committee
Prior Positions:
2004Chief Operating Officer in charge of Game Business Group, Home ElectronicsMicro Systems Network Company Semiconductor Solutions Network Company (SSNC)(“MSNC”) and Engineering, Manufacturing and Customer Services (“EMCS”), President, Production Strategy Group, Sony Corporation
Executive Deputy President, Corporate Executive Officer, Sony Corporation
2003Executive Vice President, Executive Officer, NC President, SSNC
Prior Positions:
2000Director,MSNC, Sony Corporation
2002NC President, Core Technology & Network Company (“CNC”), Sony Corporation
2002Corporate Senior Vice President, Sony Corporation
1999 ExecutiveCorporate Vice President, Sony Computer Entertainment Inc.
1991Manager, PS Project, Video Disc Player Group,President, Recording Media Company, CNC, Senior Vice President, CNC, Sony Corporation
19751977 Entered Sony Corporation
Principal Business Activities Outside Sony: None


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Teruhisa TokunakaKatsumi Ihara
Date of Birth: August 9, 1945September 24, 1950
Director (Member of the Board) Since: 19992005
Corporate Executive Officer Since: 2004
Current Positions:Positions within Sony:Executive Deputy President, Representative Director, Sony Financial Holdings Inc.Corporate Executive Officer
Officer in charge of Consumer Products Group
Prior Positions:
20052003Officer in charge of Procurement Strategies and TV & Video Business
NC President of Home Electronics Network Company, Sony Corporation
2004 Group Chief Strategy Officer Representative Corporate Executive Officer, Officer in charge of Network Application & Content Service Sector, Personal Solutions Business Group Sony Corporation
2000Executive Deputy President and Chief Financial Officer, Representative Director, Sony Corporation
1999Senior Managing Director and Chief Financial Officer, Sony Corporation
20011995Group Executive Officer, Sony Corporation
President, Sony Ericsson Mobile Communications AB
2000Corporate Senior Vice President, NC President, Personal IT Network Company, Sony Corporation
1997Corporate Vice President, Sony Corporation
1996 President, Sony Computer Entertainment Inc.
1989Deputy Senior General Manager, Corporate Strategy Group,Home A&V Products Company, Sony Corporation
19691981 Entered Sony Corporation
1973Entered Mitsui Knowledge Industry Co., Ltd.
Principal Business Activities Outside Sony: None
Göran Lindahl
Date of Birth: April 28, 1945
Director (Member of the Board) Since: 2001
Prior Positions:
2003Corporate Executive Officer, Sony Group Europe Representative, Chairman of Sony Group in Europe
2001Director, Sony Corporation
1999Director, LM Ericsson Telephone Co., Ltd., Sweden
1997President and Chief Executive Officer, Asea Brown Boveri Ltd., Switzerland
1985President, ASEA Transmission AB, Sweden
1983President, ASEA Transformers AB, Sweden
Principal Business Activities Outside Sony:
Director, Anglo American Plc, U.K.

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Akihisa Ohnishi
Date of Birth: March 10, 1937
Director (Member of the Board) Since: 2003 (and from 1989 through 1993)
Prior Positions:
1993Standing Statutory Auditor, Sony Corporation
1989Senior General Manager, Corporate Planning Group, Sony Corporation (concurrent with prior position)
1989Director, Sony Corporation
1988General Manager, Accounting Division, Sony Corporation
1977Managing Director, Hispano Sony S.A.
1961Entered Sony Corporation
Principal Business Activities Outside Sony: None
Iwao Nakatani
Date of Birth: January 22, 1942
Outside Director (Member of the Board) Since: 1999
Current Position: Chairman of the Board
Prior Positions:
1999Professor, School of Management and Information Sciences, Tama University
1991Professor, Faculty of Commerce, Hitotsubashi University
1984Professor, Faculty of Economics, Osaka University
1973Lecturer and Researcher, Faculty of Economics, Harvard University
Principal Business Activities Outside Sony:
President, Tama University
Director of Research, UFJ Institute Ltd.
Director, JSAT Corporation
Director, ASKUL Corporation
Akishige Okada
Date of Birth: April 9, 1938
Outside Director (Member of the Board) Since: 2002
Current Position:Position within Sony: Chairman of the Compensation Committee
Prior Positions:
1997President, The Sakura Bank, Ltd.
1996Senior Managing Director, The Sakura Bank, Ltd.
1995Managing Director, The Sakura Bank, Ltd.
1991Director, The Mitsui Taiyo Kobe Bank, Ltd.
Principal Business Activities Outside Sony:
 Advisor, Sumitomo Mitsui Banking Corporation
Director, Daicel Chemical Industries, Ltd.
Director, Mitsui & Co., Ltd.
Statutory Auditor, Toyota Motor Corporation
Statutory Auditor, Hotel Okura Co., Ltd.
Statutory Auditor, Mitsui Fudosan Co., Ltd.
Prior Positions:
2002 Chairman of the Board (Representative Director), Sumitomo Mitsui Financial Group, Inc.
2001 Chairman of the Board (Representative Director), Sumitomo Mitsui Banking Corporation
Director, Kao Corporation
Director, Mitsui & Co., Ltd.

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Hirobumi Kawano
Date of Birth: January 1, 1946
Outside Director (Member of the Board) Since: 2003
Current Position: Position within Sony:Vice Chairman of the Board
Member of the Nominating Committee
Principal Business Activities Outside Sony: Senior Vice President, JFE Steel Corporation
Prior Positions:
2002Executive Adviser, The Tokio Marine and Fire Insurance Co., Ltd.
1999 Director-General, Agency for Natural Resources and Energy, Ministry of International Trade and Industry (“MITI”) (later renamed the Ministry of Economy, Trade and Industry (METI))Industry)
1998 Director-General, Basic Industries Bureau, MITI

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1996 Director-General, Machinery and Information Industries Policy, Machinery and Information Industries Bureau, MITI
1995 Director-General, Petroleum Department, Agency of Natural Resources and Energy, MITI
1993Director, General Coordination Division, Minister’s Secretariat, MITI
1992Director, General Industrial Machinery Division, Machinery and Information Industries Bureau, MITI
1989Director, Americas-Oceania Division, International Trade Policy Bureau, MITI
1969Entered MITI
Principal Business Activities Outside Sony:
  Executive Adviser, The Tokio Marine and Fire Insurance Co., Ltd.
Yotaro Kobayashi
Date of Birth: April 25, 1933
Outside Director (Member of the Board) Since: 2003
Current Position:Position within Sony: Chairman of the Board and Chairman of the Nominating Committee
Principal Business Activities Outside Sony:
Chief Corporate Advisor, Fuji Xerox Co., Ltd.
Director, Nippon Telegraph and Telephone Corporation
Director, Callaway Golf Company
Prior Positions:
19991996Chairman of the Board, Fuji Xerox Co., Ltd.
1992Chairman and Chief Executive Officer, Fuji Xerox Co., Ltd.
1987 Director, ABB Ltd., SwitzerlandXerox Corporation
1978 President and Chief Executive Officer, Fuji Xerox Co., Ltd.
Principal Business Activities Outside Sony:
Chairman of the Board, Fuji Xerox Co., Ltd.
Director, Callaway Golf Company
Director, Nippon Telegraph and Telephone Corporation
Carlos Ghosn
Date of Birth: March 9, 1954
Outside Director (Member of the Board) Since: 2003
Prior Positions:
1990Chairman, President and Chief Executive Officer, Michelin North America Inc.
1985Chief Operating Officer, Michelin — Brazil
Principal Business Activities Outside Sony:
President and Chief Executive Officer, Nissan Motor Co., Ltd.
Director, Alcoa Inc., U.S.A.
Director, Renault S.A., France
Director, IBM Corporation

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Sakie T. Fukushima
Date of Birth: September 10, 1949
Outside Director (Member of the Board) Since: 2003
Prior Positions: 2000 Managing Director, Korn/ Ferry International — JapanCurrent Position within Sony: Member of the Compensation Committee
Principal Business Activities Outside Sony:
  Representative Director & Regional Managing Director — Japan, Korn/Ferry International
  Member, Board of Directors,Director, Korn/Ferry International, U.S.A.
  Director, KaoBenesse Corporation
Prior Position:
2000Managing Director, Korn/Ferry International — Japan
  Advisory Board Member, All Nippon Airways Co., Ltd.
Yoshihiko Miyauchi
Date of Birth: September 13, 1935
Outside Director (Member of the Board) Since: 2003
Prior Positions:
2000Representative Director, Chairman and Chief Executive Officer, ORIX Corporation
1980Representative Director, President, ORIX CorporationCurrent Position within Sony: Member of the Compensation Committee
Principal Business Activities Outside Sony:
  Director, Representative Executive Officer, Chairman and Group Chief Executive
Officer, ORIX Corporation
  Director, Aozora Bank, Ltd.
  Director, Fuji XeroxShowa Shell Sekiyu K.K.
Director, Daikyo Incorporated
Director, Access Co., Ltd.
  Director, MercianSojitz Corporation
Prior Positions:
2000Representative Director, Chairman and Chief Executive Officer, ORIX Corporation
1980Representative Director, President, ORIX Corporation

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  Director, Showa Shell Sekiyu K.K.
Yoshiaki Yamauchi
Date of Birth: June 30, 1937
Outside Director (Member of the Board) Since: 2003
Current Position:Position within Sony: Chairman of the Audit Committee
Principal Business Activities Outside Sony:
Director, Sumitomo Mitsui Financial Group, Inc.
Director, Sumitomo Mitsui Banking Corporation
Director, amana Inc.
Statutory Auditor, Stanley Electric Co., Ltd.
Statutory Auditor, Sumitomo Wiring System, Ltd.
Executive Officer, ARI Research Institute
Prior Positions:
1999 Director, Sumitomo Banking Corporation
1993 Executive Director, Asahi & Co.
1991 President, Inoue Saito Eiwa Audit Corporation
1986 President, Eiwa Audit Corporation
  Country Managing Partner — Japan, Arthur Andersen & Co.
Sir Peter Bonfield
Date of Birth: June 3, 1944
Outside Director (Member of the Board) Since: 2005
Current Position within Sony: Member of the Nominating Committee
Principal Business Activities Outside Sony:
  Director, Telefonaktiebolaget LM Ericsson, Sweden
Director, Mentor Graphics, Inc.
Director and Chairman of Audit Committee, Taiwan Semiconductor Manufacturing Company Ltd.
Prior Positions:
1996Chief Executive Officer, British Telecom plc
1986Chairman, ICL plc, U.K
1984Managing Director, ICL plc, U.K.
Fueo Sumita
Date of Birth: May 24, 1938
Outside Director (Member of the Board) Since: 2005
Current Position within Sony: Member of the Audit Committee
Principal Business Activities Outside Sony: Chief of Sumita Accounting Office
Prior Positions:
2002Executive Vice President, Kawada Corporation
2001Vice Chairman, Ernst & Young ShinNihon
2000Deputy President, ARI Research InstituteDirector, Ohta-Showa Century Audit Corporation
1999Chairman, Century Audit Corporation
1985Deputy General Manager, Corporate Accounting Dept., Hitachi, Ltd.

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Fujio Cho
Date of Birth: February 2, 1937
Outside Director (Member of the Board) Since: 2006
Current Position within Sony: Member of the Nominating Committee
Principal Business Activities Outside Sony:
Chairman, Toyota Motor Corporation
Director, Central Japan Railway Company
  Statutory Auditor, Stanley Electric Co., Ltd.Denso Corporation
Prior Positions:
2005Vice Chairman, Toyota Motor Corporation
1999President, Toyota Motor Corporation
Ned Lautenbach
Date of Birth: February 2, 1944
Outside Director (Member of the Board) Since: 2006
Principal Business Activities Outside Sony:
Partner, Clayton, Dubilier & Rice, Inc.
Lead Director, Fidelity Investments
  Director, AmanaEaton Corporation
Prior Positions:
1995Senior Vice President & Group Executive, IBM Worldwide Sales & Services, International Business Machines Corporation
Ryuji Yasuda
Date of Birth: April 28, 1946
Outside Director (Member of the Board) Since: 2007
Current Position within Sony: Member of the Audit Committee
Principal Business Activities Outside Sony:
  Statutory Auditor, Seiko Watch CorporationProfessor, Hitotsubashi University Graduate School of International Corporate Strategy (present)
  Director, Sumitomo Mitsui FinancialDaiwa Securities Group Inc. (present)
Director, Fuji Fire and Marine Insurance Co., Ltd. (present)
Prior Positions:
2003Chairman, J-Will Partners Co., Ltd.
1996Managing Director and Chairman, A.T. Kearney, Asia
1991Director, McKinsey & Company

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Corporate Executive Officers
In addition to Messrs. Idei, Ando, Masaki, Stringer, Kutaragi,Chubachi and Ihara, the tenfour individuals set forth below are the current Corporate Executive Officers of Sony Corporation.Corporation as of June 21, 2007. Refer to “Board Practices” below.

Corporate Executive Officers

   
Shizuo TakashinoYutaka Nakagawa
Date of Birth: September 2, 1943December 4, 1945
Corporate Executive Officer Since: 19972005
Current Positions: Positions within Sony:Executive Deputy President, and Chief Operating Officer in charge of ITSemiconductor & Mobile Solutions Network Company and Professional Solutions Network CompanyComponent Group, President of Semiconductor Business Group

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Prior Positions:
20002005 Network CompanyOfficer in charge of Products Strategies, Digital Imaging Business and Audio Business
NC President, Broadband SolutionsPersonal Audio Visual Network Company, Sony Corporation
19992003 Deputy President, and Chief Operating Officer, HomeMicro Systems Network Company, President, Energy Company, MSNC, Sony Corporation
19971999 Corporate Senior Vice President, (resigned as Director), Sony Corporation
19961998 President, Personal A&V Productsand Mobile Communication Company, Sony Corporation
1995Executive Vice President, Consumer A&V Products Company, Sony Corporation
1995Director, Sony Corporation
1990Senior General Manager, General Audio Group, Sony Corporation
1962Entered Sony Corporation
Principal Business Activities Outside Sony: None
Katsumi Ihara
Date of Birth: September 24, 1950
Corporate Executive Officer Since: 2004
Current Positions: Executive Deputy President, Group Chief Strategy Officer and Chief Financial Officer
Prior Positions:
2001Group Executive Officer, Sony Corporation
President, Sony Ericsson Mobile Communications AB
2000Corporate Executive Vice President, Sony Corporation
NC President, Personal IT Network Company, Sony Corporation
1997 Corporate Vice President, Sony Corporation
19961992 President, Home A&VGeneral Manager, Camcorder Products Company,Division, Personal Video Group, Sony Corporation
1981Entered Sony Corporation
1973Entered Mitsui Knowledge Industry Co., Ltd.
Principal Business Activities Outside Sony: None
Ryoji Chubachi
Date of Birth: September 4, 1947
Corporate Executive Officer Since: 2004
Current Positions: Executive Deputy President and Chief Operating Officer in charge of Micro Systems Network Company(MSNC) and EMCS, NC President, MSNC
Prior Positions:
2002NC President, Core Technology & Network Company (“CNC”), Sony Corporation
2002Corporate Senior Vice President, Sony Corporation
1999Corporate Vice President, Sony Corporation
President, Recording Media Company, CNC, Sony Corporation
Senior Vice President, CNC, Sony Corporation
19771968 Entered Sony Corporation
Principal Business Activities Outside Sony: None

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Keiji Kimura
Date of Birth: April 4, 1952
Corporate Executive Officer Since: 2004
Current Positions: Senior Executive Vice President, NC President, IT & Mobile Solutions Network Company
Prior Positions:
2003Senior Vice President, Executive Officer, Sony Corporation
2002Corporate Senior Vice President, Sony Corporation
2001NC President, Mobile Network Company, Sony Corporation
2000Corporate Vice President, Sony Corporation
President, Information Technology Company, Personal Network Company, Sony Corporation
1977Entered Sony Corporation
Principal Business Activities Outside Sony: None
Tsutomu Niimura
Date of Birth: June 14, 1947
Corporate Executive Officer Since: 2004
Current Positions: Executive Vice President, NC President, Home Electronics Network Company
Prior Positions:
2003President, Display Company, Home Network Company (“HNC”), Sony Corporation
Executive Vice President, Executive Officer, Sony Corporation
2002Co-President, Semiconductor Network Company, Sony Corporation
2001Corporate Senior Vice President, Sony Corporation
President, S&S Architecture Center, Sony Corporation
1999Corporate Vice President, Sony Corporation
Executive Vice President, PNC, Sony Corporation
Principal Business Activities Outside Sony: None
Fujio Nishida
Date of Birth: November 26, 1948
Corporate Executive Officer Since: 2004
Current Positions: Executive Vice President, Officer in charge of Marketing and Corporate Communications
Prior Positions:
2003Senior Vice President and Electronics Chief Marketing Officer, Executive Officer, Sony Corporation
2000Group Executive Officer, Sony Corporation
President and Chief Operating Officer, Sony Electronics Inc.
2000President, Consumer Electronics Group, Sony Electronics Inc.
1998President, Consumer Products Marketing Group, Sony Electronics Inc.
1996Senior Vice President, Home A/V Division, Consumer AV Group,
Sony Electronics Inc. (a U.S. subsidiary of Sony Corporation)
1972Entered Sony Corporation
Principal Business Activities Outside Sony: None

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Takao Yuhara
Date of Birth: June 7, 1946
Corporate Executive Officer Since: 2003
Current Positions: Senior Vice President, Officer in charge of Finance and Investor Relations
Prior Positions:
2003Group Chief Financial Officer, Sony Corporation
2001Senior General Manager, Corporate Planning & Control, Global Hub, Sony Corporation
1999Senior Vice President, Corporate Planning & Control, Group HQ, Sony Corporation
1996Vice President, Display Company, General Manager, Planning & Control Department, Display Company, Sony Corporation
1995General Manager, Planning & Control Department, Display Device Division, Component Company, Sony Corporation
1971Entered Sony Corporation
1969Entered Nippon Chemical Industrial Co., Ltd.
Principal Business Activities Outside Sony: None
Nobuyuki Oneda
Date of Birth: May 6, 1945
Corporate Executive Officer Since: 2004
Current Positions within Sony:Executive Vice President and Chief Financial Officer
Prior Positions:
2004Senior Vice President, Officer in charge of Transformation 60, Corporate Planning & Control, Accounting and Information Systems, Sony Corporation
Prior Positions:
2003 Senior Vice President, Executive Officer, Sony Corporation
2002 Officer and Chief Financial Officer, Network Application & Content Service Sector, Sony Corporation

Corporate Senior Vice President, Sony Corporation
2000 Deputy President and Chief Financial Officer, Sony Electronics Inc.

Group Executive Officer, Sony Corporation
1999 Executive Vice President and Chief Financial Officer, Sony Electronics Inc. (a U.S. subsidiary of Sony Corporation)
1996 General Manager, Corporate Planning & Control Department, Sony Corporation
1969 Entered Sony Corporation
Principal Business Activities Outside Sony: None
 
Yasunori KiriharaKeiji Kimura
Date of Birth: November 20, 1946April 4, 1952
Corporate Executive Officer Since: 2004
Current Positions: SeniorPositions within Sony:Executive Vice President, Officer in charge of Corporate Human ResourcesTechnology Strategies, Electronics Business Strategies and Intellectual Property
Prior Positions:
2005NC President, Information Technology & Communications Network Company, Sony Corporation
2004Senior Executive Vice President, Corporate Executive Officer, Sony Corporation
2003 Senior Vice President, Executive Officer, Sony Corporation
19982002 Representative Director and President, Sony Service Corporation
1997Corporate Senior Vice President, Recording Media & EnergySony Corporation
2001NC President, Mobile Network Company, Sony Corporation
19892000 General Manager, Human Resources, Human Resources Development,Corporate Vice President, Sony Corporation
NC President, Information Technology Company, Personal Network Company, Sony Corporation
19701977 Entered Sony Corporation
Principal Business Activities Outside Sony: None

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98

   
Nicole Seligman
Date of Birth: October 25, 1956
Corporate Executive Officer Since: 2003
Current Positions: Group DeputyPositions within Sony:Executive Vice President and General Counsel Sony Corporation,
Executive Vice President and General Counsel, Sony Corporation of America
Prior Positions:
2003Group Deputy General Counsel, Sony Corporation
2000 Entered Sony Corporation of America as Executive Vice President and General Counsel
1992 Partner, Williams & Connolly LLP
1985 Entered Williams & Connolly LLP
1978 Associate Editorial Page Editor for The Asian Wall Street Journal, Hong Kong
Principal Business Activities Outside Sony: None

All of the aforementioned persons, with the exception of Mr. Nakatani, Mr.Messrs. Okada, Mr. Kawano, Mr. Kobayashi, Mr. Ghosn,Miyauchi, Yamauchi, Bonfield, Sumita, Cho, Lautenbach, Yasuda and Ms. Fukushima, Mr. Miyauchi and Mr. Yamauchi are engaged on a full-time basis in the affairs ofby Sony. There is no family relationship between any of the persons named above. There is no arrangement or understanding with major shareholders, customers, suppliers, or others pursuant to which any person named above was selected as a Director or a Corporate Executive Officer.

Compensation

The aggregate amount of remuneration, including bonuses paid and benefits in kind granted by Sony during the fiscal year ended March 31, 20042007 to all Directors and Corporate Executive Officers (refer to “Board Practices” below) of Sony Corporation who served during the fiscal year ended March 31, 2004,2007, as a group (21(18 people), totaled 2,4242,600 million yen. Also, as a part of Sony’s incentive compensation arrangements, Sony Corporation issued stock acquisition rights during the fiscal year ended March 31, 2004.2007. The stock acquisition rights, which represent rights to subscribe for shares of common stock of Sony Corporation, have been granted to the Directors, Corporate Executive Officers, Executive Officers,Corporate Executives, Group Executive Officers,Executives, and selected employees. The stock acquisition rights generally vest ratably up to three years from the date of grant and are generally exercisable up to ten years from the date of grant. The portion of those stock acquisition rights which was granted by Sony during the fiscal year ended March 31, 20042007 to the Directors and Corporate Executive Officers as of May 31, 2004 confers rights to purchase a total number of 669,000686,800 shares of Sony Corporation’s Common Stock. The exercise price for these yen-denominated stock acquisition rights issued as of November 14, 2003 is 4,10116, 2006 was 4,756 yen per share, and the exercise price for these U.S. dollar-denominated stock acquisition rights issued as of March 31, 2004 is 40.90November 16, 2006 was 40.05 U.S. dollars.

Regarding the above compensation plans, refer to Note 1516 of Notes to Consolidated Financial Statements.

The aggregate

In the fiscal year ended March 31, 2006, the retirement allowance scheme was terminated and a new stock-based retirement remuneration (phantom restricted stock plan) was introduced. With the introduction of this plan, there was no amount accrued for lump-sum severance indemnities by Sony during the fiscal year ended March 31, 20042007 for all Directors and Corporate Executive Officers of Sony Corporation as of MayMarch 31, 2004,2007, as a group (21(18 people),.
Under this new plan, points fixed every year by the Compensation Committee shall be granted to Directors and Corporate Executive Officers every year duringhis/her tenure in office, and at the time of resignation, the remuneration amount shall be calculated by multiplying Sony’s common stock price by accumulated points. The resigning Directors and Corporate Executive Officers shall purchase Sony’s common stock with this remuneration. The aggregate number of points granted to Directors and Corporate Executive Officers of Sony Corporation as of March 31, 2007, as a group (16 people) totaled 210 million yen.57,000 points.


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Board Practices

As required under the

Sony has adopted a “Company with Committees” corporate governance system which was introduced by an amendment tounder the Japanese Commercial CodeCompany Law (ShohoKaishaho) and related legislation (including(collectively the Law for Special Exceptions to the Commercial Code concerning Audit, etc. ofKabushiki Kaisha, collectively the “Commercial Code”“Company Law”), Sony adopted a new corporate governance. Under this system, at its General Meeting of Shareholders held on June 20, 2003. Sony Corporation has established three committees: the Nominating Committee, the Audit Committee and the Compensation Committee. Under the Commercial Code,Company Law, each committee is required to consist of not less than three Directors, the majority of whom must be outside Directors. Under the committee system, Directors as such have no power to execute the business of Sony Corporation except for limited circumstances as permitted by law. The Board of Directors has designated 15must elect Corporate Executive Officers (Shikko-yaku), some of whom are also Directors, who are responsible for

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the execution of the business of Sony Corporation. A summary of the new governance system adopted by Sony Corporation is set forth below.

The Board of Directors determines the fundamental management policy and other important matters related to the management of the Sony Group and oversees the performance of the duties of Directors and Corporate Executive Officers. Under the Commercial Code,Company Law, all Directors must be elected at the General Meeting of Shareholders from among the candidates determined by the Nominating Committee. Under the Commercial Code,Company Law, the termsterm of office of Directors expireexpires at the conclusion of the General Meeting of Shareholders held with respect to the last closing of accountsbusiness year ending within one year after their assumption of office.election. Directors may serve any number of consecutive terms;terms although, under the RegulationsCharter of the Board of Directors of Sony Corporation, outside Directors may not be reelected more than five times without the consent of all Directors.

The Nominating Committee, which pursuant to the RegulationsCharter of the Board of Directors of Sony Corporation consists of five or more Directors, determines the content of proposals to be submitted for approval at the General Meeting of Shareholders regarding the appointment and dismissal of Directors. As stated above, under the Commercial Code,Company Law, a majority of the members of the Nominating Committee must be outside Directors. In order to qualify as an outside Director under the Commercial Code,Company Law, a Director must be a person (i) who is not a director of Sony Corporation or any of its subsidiaries engaged in the business operations of Sony Corporation or such subsidiary, as the case may be, or a corporate executive officer or general manager or other employee of Sony Corporation or any of its subsidiaries, and (ii) who has never been a director of Sony Corporation or any of its subsidiaries engaged in the business operations of Sony Corporation or such subsidiary, as the case may be, or a corporate executive officer aor general manager or another employee of Sony Corporation or of any of its subsidiaries and is not a director who is also engaged in the business or a corporate executive officer of such a subsidiary or a general manager or an employee of Sony Corporation or of any subsidiary of Sony Corporation.subsidiaries. Under the RegulationsCharter of the Board of Directors of Sony Corporation, at least two or more members of the Nominating Committee must concurrently be Corporate Executive Officers. The Nominating Committee is composedcomprised of the following members as of June 22, 2004:21, 2007: Yotaro Kobayashi, who is the Chairman of the Nominating Committee and an outside Director; Hirobumi Kawano, Peter Bonfield and Carlos Ghosn,Fujio Cho, who are outside Directors; and Nobuyuki IdeiHoward Stringer and Kunitake Ando,Ryoji Chubachi, who are Corporate Executive Officers. From June 20, 2003, the day Sony adopted the Company with Committees system, until March 31, 2004, the day the fiscal year ended, the Nominating Committee held four meetings. Prior to June 20, the old nominating committee held one meeting in the same fiscal year.

Under the RegulationsCharter of the Board of Directors of Sony Corporation, the Audit Committee must consist of three or more Directors, a majority of whom, as stated above, must be outside Directors. In addition, under the Commercial Code,Company Law, a member of the Audit Committee may not concurrently be a director of Sony Corporation or any of its subsidiaries who is engaged in the business operations of Sony Corporation or such subsidiary, as the case may be, or a corporate executive officer a general manager or any other employee of Sony Corporation or any of its subsidiaries, or a director who is engaged in the businessan accounting counselor, general manager or other employee of any of such subsidiaries. Further, under the RegulationsCharter of the Board of Directors of Sony Corporation, members of the Audit Committee must meet the independence and other equivalent requirements of U.S. securities laws and regulations to the extent applicable to Sony Corporation. Each member of theThe Audit Committee has the statutory dutyCommittee’s primary responsibility is to examinereview the consolidated and non-consolidated financial statements and business reports to be submitted by the Board of Directors at the General Meeting of Shareholders. The Audit Committee operates under a written charter adopted by the Board of Directors. The Audit Committee’s primary responsibility isShareholders; to monitor executionthe performance of duties by the Directors and Corporate Executive Officers by overseeing their(with respect to the preparation process of financial statements, disclosure controls and procedures, internal controls, compliance with the Commercial Codestructure, risk management structure, internal audit structure, internal hotline system and other relevant laws and regulations of host countries where Sony Corporation is listed and also their adherencematters), in each case pursuant to the Sony Group CodeCompany Law; and to propose appointment/dismissal or non-reappointment of, Conduct.approve the compensation of, and oversee and evaluate the work of Sony’s independent auditor. Under the Commercial Code,Company Law, the Audit Committee has a statutory duty to prepare and submit each year its audit report to the Corporate Executive Officer designated by the Board of Directors each year.Directors. A member of the Audit Committee may note his or her opinion in the audit report if it is different from the opinion of the Audit Committee that is expressed in the audit report. Other major responsibilities include the oversight, selection and evaluation of Sony’s independent auditor and the establishment of procedures for and the regular auditing of Sony’s internal complaint system concerning accounting and auditing matters.


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The Audit Committee discusses with Sony Corporation’s independent auditor, ChuoAoyama PricewaterhouseCoopers Aarata, the scope and results of their audits by the independent auditor including their evaluation of Sony Corporation’s internal controls, compatibility with Generally Accepted Accounting Principles in the U.S., and the overall quality of financial reporting. The Audit Committee ensuresmakes an assessment of the

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independence of ChuoAoyama PricewaterhouseCoopers Aarata by overseeing their activities through regular communications and discussions with ChuoAoyama PricewaterhouseCoopers.them, and by pre-approving audit and non-audit services to be provided. The Audit Committee is composedcomprised of the following members as of June 22, 2004:21, 2007: Yoshiaki Yamauchi, who is the Chairman of the Audit Committee and an outside Director; Sakie T. Fukushima,and Fueo Sumita and Ryuji Yasuda, who is anare also outside Director; and Akihisa Ohnishi, who is a Director and full-time member of the Audit Committee.Directors. Both Yoshiaki Yamauchi and Akihisa OhnishiFueo Sumita are “audit committee financial experts” within the meaning of Item 16A of this report. All the members of the Audit Committee are “independent” as defined in Rule 10A-3 under the Securities and Exchange Act of 1934, as amended. The Audit Committee held eight meetings in the fiscal year ended March 31, 2004, with the first meeting held on June 20, 2003, the day the Audit Committee was established. Prior to June 20, 2003, instead of the Audit Committee Sony had a Board of Statutory Auditors which held four meetings between April 1, 2003 and June 20, 2003.

As required by the Commercial Code,Company Law, the Compensation Committee determines the policy and the contents of compensation, bonus and any other benefits (including equity-related rights or options given for the purpose of stock incentive options) to be received by each Director and Corporate Executive Officer.Officer in consideration of the execution of their duties. In addition to such statutory duties, the Compensation Committee determinessets policy on the composition of individual compensation to be received by eachother senior management of Sony Group (Directors or other officers of Sony Group companies whose appointment is subject to approval by the Chief Executive Officer and Group Executive Officer,(“CEO”) of Sony Corporation), and also proposessubmits proposals to the Board of Directors stock option plans (involvingregarding the issuance of sharestock acquisition rights for the purpose of granting stock options and other forms of stock price based compensation)price-based compensation utilizing shares etc. of Sony Group, as individual compensation to be granted to directors, officers and employees of the Sony Group.aforementioned senior management. Under the RegulationsCharter of the Board of Directors, the Compensation Committee shall consist of three or more Directors, and as a general rule, at least one or more members mustmember shall concurrently serve as Corporate Executive Officers.Officer; provided, however, that a Director who is the CEO or the COO (Chief Operating Officer) of Sony Group or in any equivalent position shall not be a member of the Compensation Committee. As stated above, a majority of the members of the Compensation Committee must be outside Directors. The Compensation Committee is composedcomprised of the following members as of June 22, 2004:21, 2007: Akishige Okada, who is the Chairman of the Compensation Committee and an outside Director; and Yoshihiko Miyauchi and Sakie T. Fukushima,who is anare also outside Director; and Teruo Masaki, who is a Corporate Executive Officer. From June 20, 2003, the day Sony adopted the Company with Committees system, until March 31, 2004, the dayDirectors.
During the fiscal year ended March 31, 2007, the Board of Directors convened 8 times. The Nominating Committee met 5 times, the Audit Committee met 14 times and the Compensation Committee held six meetings. Prior to June 20,met 6 times. In the old compensation committee held twofiscal year ended March 31, 2007, no incumbent Director attended less than 75 percent of the aggregate number of meetings inof the same fiscal year.

Board and Committees on whichhe/she served (during the period thathe/she served).

No Directors have service contracts with Sony providing for benefits upon termination of service as a Director.

Under the Commercial CodeCompany Law and the Articles of Incorporation of Sony Corporation, Sony Corporation may, by a resolution of the Board of Directors, exempt Directors from liabilities to Sony Corporation to the extent permitted by law arising in connection with their failure to performexecute their duties. In addition,Also, in accordance with the Company Law and its Articles of Incorporation, Sony Corporation has entered into a liability limitation agreement with each outside Director whichthat limits the maximum amount of their liabilities owed to Sony Corporation arising in connection with their failure to performexecute their duties to the greater of either 30 million yen or an amount equal to the aggregate sum of the amounts prescribed in each item of Article 425, Paragraph 19 of Article 2661 of the Commercial Code.

Company Law.

The Board of Directors must appoint one or more Corporate Executive Officers who are authorized to determine matters delegated to them by the Board of Directors. The Corporate Executive Officers are responsible for conducting all the business operations of the Sony Group within the scope of authority delegated by the Board of Directors. As of June 21, 2007, there are 7 Corporate Executive Officers, some of whom are also Directors. Significant decision-making authority has been delegated to the Executive Board, which is made up of all Corporate Executive Officers,CEO and also to each Corporate Executive Officer with regardrespect to investments, strategic alliances and other actions related to the execution of business operations. Sony Corporation believes that this significant delegation enables the Sony Group to be managed in a more dynamic and responsive manner than in the past.manner. The terms of office of Corporate Executive Officers must expire at the conclusion of the first meeting of the Board of Directors held immediately after the conclusion of the General Meeting of Shareholders held with respect to the last closing of accountsbusiness year ending within one year after their assumption of office.election. From among the Corporate Executive Officers who as a general rule are also Directors, the Board of Directors mustshall elect one or more Representative Corporate Executive Officer(s).Officers. Each Representative Corporate Executive Officer has the statutory authority to represent Sony Corporation in the conduct of its affairs.


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(Reference)
At a Board meeting held on April 26, 2006, the Board of Directors reaffirmed the existing internal control and governance framework and determined to continue to evaluate and improve such framework going forward, as appropriate. This determination was required by and met the requirements of the Company Law.
Details of the determination are posted on the following website:
http://www.sony.net/SonyInfo/IR/library/control.html
For an explanation as to the significant differences between the New York Stock Exchange’s corporate governance standards and Sony’s corporate governance practices, please visit Sony’s website at:
http://www.sony.net/SonyInfo/IR/NYSEGovernance.html

Employees

As of March 31, 2004,2007, Sony had approximately 162,000163,000 employees, including fixed-term employees.an increase of approximately 4,500 employees from the end of March 2006. Although there was a reduction in the number of employees was reduced throughassociated with the deconsolidation of StylingLife Holdings Inc. (“StylingLife”) and restructuring activities, due to anat a number of manufacturing facilities, the total number of employees increased as a result of a significant increase at manufacturing facilities in Asia, primarily in China, the number of employees at the end of March 2004 increased by approximately 900 from the end of March 2003. In addition, approximately 3,600 employees in Japan who left Sony on March 31, 2004, through the early retirement program and other means, are included in this year-end total.East Asia. As of March 31, 2004,2007, approximately 65,60059,100 employees were located in Japan and approximately 96,400103,900 employees were located outside Japan, and approximately 13Japan. Approximately 24 percent of the total employees were members of labor unions.

As of March 31, 2003,2006, Sony had approximately 161,100158,500 employees, including fixed-term employees, a decreasean increase of approximately 6,9007,000 from the number as of March 31, 2002.2005. As of March 31, 2003,2006, approximately 67,10061,600 employees were located in Japan and approximately 94,10096,900 employees were located outside Japan, and approximately 13Japan. Approximately 19 percent of employees were members of labor unions.
The following table shows the number of employees by segment as of March 31, 2002, 20032005, 2006 and 2004.2007.
 
Number of Employees by Segment
              
March 31
200220032004
Electronics  131,500   122,100   121,700 
Game  4,100   4,400   4,800 
Music  14,900   13,400   12,000 
Pictures  5,500   5,700   6,200 
Financial Services  6,800   6,600   6,700 
Other  4,500   7,300   8,300 
Unallocated — Corporate employees  700   1,600   2,300 
   
   
   
 
 Total  168,000   161,100   162,000 
   
   
   
 

Number of Employees by Segment
             
  March 31
  2005 2006 2007
 
Electronics  124,500   130,800   136,900 
Game  4,300   4,700   5,100 
Pictures  5,900   6,900   7,300 
Financial Services  6,800   6,500   6,600 
All Other  8,000   7,400   4,700 
Unallocated — Corporate employees  1,900   2,200   2,400 
             
Total  151,400   158,500   163,000 
             
In addition, the average number of employees for the fiscal years ended March 31, 2005, 2006 and 2007 calculated by averaging the total number of employees at the end of each quarter, was 154,200, 156,200 and 162,900, respectively.
Sony generally considers its labor relations to be good. Only a few manufacturing facilities have labor unions and, of these, only a few have union contracts.

Regarding labor relations in the Electronics segment by area, in Asia, where Sony operates many manufacturing facilities, only a few manufacturing facilities have labor unions that have union contracts. In May 2003, Sony completed negotiations with a labor union regarding the terms of severance for employees who had been working at a manufacturing facility in Indonesia which was closed in the second half of the fiscal year ended March 31, 2003. The outcome of these negotiations did not have a significant impact on Sony’s consolidated financial results.

     In the U.S., no manufacturing facilities have labor unions that have union contracts.unions. In Mexico, one manufacturing facility has a labor union that has a union contract, but labor relations are good and there have been no significant problems in renegotiating the contract. In Europe, Sony maintains good labor relations with the Work Councils in each country, and, while some employees belong to unions, they are not eligible for union contracts.

     In the Music segment, overall employee and labor relations at Sony Music Entertainment Inc. (“SMEI”) are good. Sony Music’s U.S. manufacturing and distribution operations remain non-unionized. Sony Music Studio is a signatory to a union contract with the International Brotherhood of Electrical Workers (“IBEW”), which represents a unit of recording engineers. Renegotiation of the union contract with the IBEW was completed without any adverse impact on business, and the contract now runs through May 31, 2006. Sony is also subject to agreements with the American Federation of Television and Radio Artists (“AFTRA”), which represents recording artists, and the American Federation of Musicians (“AFM”), which represents musicians. The union contract with AFTRA runs through June 30, 2006.

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In the Pictures segment, Sony also generally considers its labor relations to be good. A number of Pictures’ subsidiaries are signatories to union contracts. Renegotiations with Alliance of Canadian Cinema, Televisions and Radio Artists (“ACTRA”) were successfully concluded in July 2003. During the fiscal year ended March 31, 2004,2007, negotiations to renewof new three-year agreements for Electronic Digital and Area Standards, and negotiations of new three-year agreements for Local 764, Local 829, Local 798 and Local 873 were successfully concluded with the International Alliance of Theatrical Stage Employees (“IATSE”); a contract that expires on June 30, 2005three-year agreement was negotiated with the Association of Canadian Cinema,


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Television and Radio Artists (“ACTRA”) and a two and a half year agreement formade-for-basic cable live action performers was negotiated with the Screen Actors Guild (“SAG”). On March 28, 2007, negotiations for a new two year agreement were completed without any production interruptions. A collective bargaining agreementconcluded with the Writers GuildUnion of AmericaBritish Columbia Performers (“WGA”UBCP”) expired on May 1, 2004.. The industry gavetentative agreement is subject to ratification by the WGA a final offer on June 1, 2004. No further negotiation dates have been scheduled at this time andUBCP membership. Negotiations with the industry is awaiting a response from the WGA to the June 1st offer. The industry negotiations with International Brotherhood of Teamsters IBEWLocal 399 (“Teamsters”) and the Basic Crafts Unions“Basic Crafts” unions (the International Brotherhood of Electrical Workers Local 40, the United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry Local 78, the Studio Utility Employees Local 724 and the Plasterers Local 755), commenced on June 2, 2004. IfFebruary 8, 2007 and are continuing. It is not anticipated that the parties are unable to reach agreement, there is the possibility of oneTeamster and Basic Craft negotiations will interrupt television or more strikes that could slow down film and television production, impact future planned releases and increase idle capacity in Pictures’ production facilities.

theatrical production.

Sony continuously strives to provide competitive wages and benefits and good working conditions for all of its employees.

Share Ownership

The following is the total number of shares of Sony Corporation’s Common Stock beneficially owned by Directors and Corporate Executive Officers as of May 31, 2004 (212007 (18 people). Refer to “Board Practices” above.
             
Number of sharesPercentage
Title of classIdentity of person or groupbeneficially ownedof class
(in thousands)
Common Stock  Directors and Executive Officers   1,158   0.1 

     None of Sony’s Directors or Executive Officers is a beneficial owner of more than one percent of Sony Corporation’s Common Stock.

Regarding compensation plans, following the amendments to the Commercial Code of Japan effective May 2002, Sony integrated different equity-related securities it had previously issued for the purpose of giving stock incentives into one unified stock option right.

             
    Number of shares
 Percentage
Title of class Identity of person or group beneficially owned of class
    (in thousands)  
 
Common Stock  Directors and Corporate Executive Officers   62   0.006 
During the fiscal year ended March 31, 2004,2007, Sony granted stock acquisition rights, which represent rights to subscribe for shares of common stockCommon Stock of Sony Corporation, to Directors, Corporate Executive Officers, Executive Officers,Corporate Executives, Group Executive Officers,Executives, and selected employees. The stock acquisition rights generally vest ratably up to three years from the date of grant and are generally exercisable up to ten years from the date of grant. The following table shows the portion of those stock acquisition rights which were granted by Sony to Directors and Corporate Executive Officers as of May 31, 20042007 and which were outstanding as of the same date.
         
Total number of
Year grantedshares subject to stock
(Year ended March 31)acquisition rightsExercise price per share
(in thousands)
2004  225   40.90 U.S. dollars 
2004  444   4,101 yen 
2003  200   36.57 U.S. dollars 
2003  375   5,396 yen 

       
  Total number of
  
Year granted
 shares subject to stock
  
(Fiscal Year ended March 31) acquisition rights Exercise price per share
  (in thousands)  
 
2007  430  40.05 U.S. dollars
2007  257  4,756 yen
2006  430  34.14 U.S. dollars
2006  159  4,060 yen
2005  230  40.34 U.S. dollars
2005  71  3,782 yen
2004  225  40.90 U.S. dollars
2004  42  4,101 yen
2003  215  36.57 U.S. dollars
2003  9  5,396 yen
Prior to the introduction of stock acquisition rights, Sony had granted warrants, which represent rights to subscribe tofor Sony Corporation’s Common Stock, to Directors, Executive Officers, Group Executive Officers, and selected employees. The warrants generally vest ratably up to three years from the date of grant and are generally exercisable up to six years from the date of grant. The following table shows the portion of those warrants which were granted by Sony to current Directors and Corporate Executive Officers as of May 31, 20042007 and which were outstanding as of the same date. The exercise price per share has been
         
Year granted
 Total number of shares
  
(Fiscal Year ended March 31) subject to warrants Exercise price per share
  (in thousands) (yen)
 
2002  19   6,039 


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adjusted for the two-for-one stock split effective on May 19, 2000 and is subject to anti-dilution adjustment.
         
Year grantedTotal number of shares
(Year ended March 31)subject to warrantsExercise price per share
(in thousands)(yen)
1999  139   6,264 
2000  171   7,167 
2001  261   12,457 
2002  291   6,039 

In addition, in order to provide equity-based compensation to selected executives at Sony’s U.S. subsidiaries, Sony Corporation has issued U.S. dollar-denominated Convertible Bonds (“CBs”) to a holding company in the U.S. and the holding company has sold the CBs to those executives. For the purpose of carrying out this plan, the holding company lent an amount equal to the conversion priceprincipal amount of CBs to such executives for their purchase of the CBs until the date of conversion. The CBs generally vest ratably up to three years from the date of sale and are generally exercisable up to ten years from the date of sale. The following table shows the portion of those CBs which were held by current Directors and Corporate Executive Officers as of May 31, 20042007 and which were outstanding as of the same date.
         
Year issuedTotal number of shares
(Year ended March 31)subject to CBsExercise price per share
(in thousands)(U.S. dollars)
2001  60   122.98 
2002  106   71.28 
2003  115   52.29 

         
Year issued
 Total number of shares
  
(Fiscal Year ended March 31) subject to CBs Exercise price per share
  (in thousands) (U.S. dollars)
 
2003  115   52.29 
2002  106   71.28 
2001  60   122.98 
Furthermore, Sony has granted stock appreciation rights (“SARs”) in Japan, Europe, and the U.S. to selected employees. Under the terms of thesethe plans, employees receive upon exercise cash equal to the amount by which the market price of Sony Corporation’s Common Stock exceeds the strike price of the SARs. The SARs generally vest ratably up to three years from the date of grant and are generally exercisable up to sixten years from the date of grant. The following table shows the portion of those SARs which were granted by Sony to selected employees who are Directors and Corporate Executive Officers as of May 31, 20042007 and which were outstanding as of the same date. The exercise price per share has been adjusted for the two-for-one stock split and is subject to anti-dilution adjustment. A range of exercise prices is given when such compensation was granted several times during the respective fiscal year.
         
Year grantedTotal number of shares
(Year ended March 31)subject to SARsExercise price per share
(Yen for the Japanese plan,
(in thousands)U.S. dollars for the U.S. plan)
The Japanese plan        
1999  2   5,586 
2000  3   7,445 
The U.S. plan        
1999  236   37.28 
2002  11   44.00 

         
Year granted
 Total number of shares
  
(Fiscal Year ended March 31) subject to SARs Exercise price per share
  (in thousands) (U.S. dollars)
 
The U.S. plan        
2002  10   44.00 
Regarding the above compensation plans, refer to Note 1516 of Notes to Consolidated Financial Statements.

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Item 7.Major Shareholders and Related Party Transactions

Major Shareholders

Dodge & Cox, an institutional investor based in San Francisco, California, filed aPersons or groups thatSchedule 13-F with the SEC on May 15, 2007. According to this filing, Dodge & Cox owned 68,921,043 American Depositary Receipts (“ADRs”) of record or beneficially more than five percent of the outstanding Common StockSony Corporation as of March 31, 2004 were2007. In addition, while Sony assumes no responsibility for the accuracy of this supplemental information, according to the website of Dodge & Cox, as follows:
             
Identity ofNumber ofPercentage of
Title of classperson or groupshares ownedclass owned
(in thousands)
Common Stock  Moxley & Co.   115,546   12.5 
Common Stock Japan Trustee Services Bank, Ltd. (Trust Account)  48,748   5.3 

     Moxleyof March 31, 2007, Dodge & Co. isCox owned 14,737,600 shares of outstanding Sony Corporation Common Stock. As a result, it appears that in total, Dodge & Cox beneficially owned 83,658,643 shares of outstanding Sony Corporation Common Stock representing 8.3 percent of the nominee of JPMorgan Chase Bank, which istotal. To the depositaryknowledge of Sony Corporation’s American Depositary Receipts (“ADRs”). The shares held by Japan Trustee Services Bank, Ltd. (Trust Account) are held in trust for investors, including shares in securities investment trusts. There wasCorporation, there is no other significant change in the percentage ownership held by any major beneficial shareholders during the past three years. Major shareholders of Sony Corporation do not have different voting rights.

As of March 31, 2004,2007, there were 926,418,2801,002,062,405 shares of Common Stock outstanding, of which 115,382,856176,704,973 shares were in the form of ADRs and 49,498,353135,536,612 shares were held of record in the form of Common Stock by residents in the U.S. The number of registered ADR holders was 7,355,7,285, and the number of registered holders of shares of Common Stock in the U.S. was 239.

251.

To the knowledge of Sony Corporation, it is not directly or indirectly owned or controlled by any other corporation, by any foreign government or by any other natural or legal person severally or jointly. As far as is known to Sony Corporation, there are no arrangements the operation of which may, at a subsequent date, result in a change in control of Sony Corporation.


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Related Party Transactions

In the ordinary course of business, Sony purchases materials, supplies, and services from numerous suppliers throughout the world, including firms with which certain members of the Board of Directors are affiliated. In addition, in the fiscal year ended March 31, 2004,2007, Sony entered into the following sales/purchase transactions with equity affiliates accounted for under the equity method: sales to Sony Ericsson Mobile Communications, AB (“Sony Ericsson”), a joint venture focused on mobile phone handsets, totaling 182.5199.9 billion yen; sales to Kyoshin Technosonic Co., LtdLtd. (“Kyoshin”), a joint venture focused on marketing semiconductors and other electronic components, totaling 71.156.0 billion yen; sales to SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), a recorded music business joint venture, totaling 27.2 billion yen; purchases from S.T. Liquid Crystal Display Corp.S-LCD Corporation (“ST-LCD”S-LCD”), a joint venture with Samsung Electronics Co., Ltd. for the manufacture of amorphous thin film transistor (“TFT”) liquid crystal display (“LCD”) joint venture in Japan,panels, totaling 58.5232.8 billion yen; and purchases from Oita TS Semiconductor Corporation (“OTSS”), a semiconductor manufacturing joint venture in Japan, totaling 38.0155.8 billion yen and purchases from S.T. Liquid Crystal Display Corp., a LCD joint venture in Japan, totaling 52.6 billion yen. As of March 31, 2004,2007, Sony held notes and accounts receivable, trade due from Sony Ericsson and Kyoshin worth 39.132.3 billion yen and 16.95.7 billion yen, respectively, in addition to notes and accounts payable, trade due to OTSS and S-LCD totaling 22.1 billion yen and 16.2 billion yen, respectively. Sony held advances to SONY BMG worth 16.3 billion yen. Because of the size of these transactions, Sony does not consider the amounts involved to be material to its business. Refer to Note 5 of Notes to Consolidated Financial Statements for additional information regarding Sony’s investments in and transactions with equity affiliates.

As of April 1, 2004, Sony Computer Entertainment

Sumitomo Mitsui Financial Group, Inc. (“SCE”) becameand Sumitomo Mitsui Banking Corporation have performed and continue to perform commercial banking services for Sony. Yoshiaki Yamauchi, who has served as a wholly-owned subsidiary of Sony Coporation through a stock for stock exchange pursuant to Article 358 of the Japanese Commercial Code (Shoho), which does not require approval of such transactions at a General Meeting of Shareholders. The stock for stock exchange ratio was determined based on the estimated equity values of SCE and Sony on a consolidated basis. Through the stock for stock exchange, Sony Corporation provided 1,000,000 sharesDirector since June 20, 2003, is a Director of common stock to an Executive Deputy President who was also a Corporate Executive Officer of Sony CorporationSumitomo Mitsui Financial Group, Inc. and who owned 100 shares of SCE’s common stock. This transaction is not expected to have a material impact on Sony’s results of operations and financial position for the year ending March 31, 2005.

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Sumitomo Mitsui Banking Corporation.

Interests of Experts and Counsel

Not Applicable
 
Item 8.Financial Information

Consolidated Statements and Other Financial Information

Refer to Consolidated Financial Statements and Notes to Consolidated Financial Statements.

Legal Proceedings
On October 18, 2006, class action lawsuits were filed in California in which the plaintiffs allege that Sony Corporation, Sony Corporation of America, Sony Electronics Inc., other named defendants, and other unnamed parties entered into and carried out an agreement, combination, or conspiracy to fix, raise, maintain or stabilize the prices of, and allocate the market for and production of, Static Random Access Memory (“SRAM”). There have been numerous similar lawsuits filed in various jurisdictions throughout the United States, which have been consolidated in a single federal court for coordinated pre-trial proceedings. Also there have been similar lawsuits filed in Canada (British Columbia and Ontario) against those Sony entities in addition to Sony of Canada Ltd. and other major SRAM manufacturers. Also, in October 2006, Sony Electronics Inc. received a Grand Jury subpoena related to a Department of Justice investigation of potential antitrust violations in the SRAM industry. Sony has cooperated and intends to cooperate fully with the investigation.
On March 13 and 16, 2007, Sony France S.A., Sony Europe Holding B.V., and Sony Corporation received a Statement of Objections issued by the European Commission competition authorities following inspections carried out in 2002. The Statement of Objections alleges that one or more of these Sony entities entered into agreementsand/or engaged in concerted practices with competing manufacturers of professional videotape in violation of Article 81 of the EC Treaty. The Statement of Objections is a procedural step to provide the addressees with an opportunity to be heard, and the European Commission has not adopted a decision finding the Sony entities in breach of Article 81 EC. Responses to the Statement of Objections were filed separately by each of the Sony entities


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on May 21, 2007. Although there are grounds to contest the allegations made in the Statement of Objections, it is possible that the European Commission may find that each or all of Sony France, Sony Holding, and Sony Corporation infringed Article 81 EC and may impose a fine on each or all of those entities. Should the European Commission render a decision finding an infringement or imposing a fine on any or all Sony entities involved in the proceeding, any such decision could be appealed to the European Court of First Instance.
In addition, Sony Corporation and certain of its subsidiaries are defendants in several other pending lawsuits.legal and regulatory proceedings. However, based upon the information currently available to Sony, management of Sony believes that damagesthe outcome from such lawsuits,legal and regulatory proceedings, if any, would not have a material effect on Sony’s consolidated financial results and condition.

Dividend Policy

Sony believes that continuously increasing corporate value and providing dividends are essential to rewarding shareholders. It is Sony’s policy to utilize retained earnings, after ensuring the perpetuation of stable dividends, to carry out various investments that contribute to an increase in corporate value such as those investments that ensure future growth and strengthen competitiveness.

A fiscal year-end cash dividend of 12.5 yen per share of Sony Corporation Common Stock was approved at the Board of Directors meeting held on April 26, 2004May 15, 2007 and was paid on June 1, 2004.2007. Sony Corporation has already paid an interim dividend for Common Stock of 12.5 yen per share to each shareholder; accordingly, the total annual cash dividend per share of Common Stock is 25.0 yen.

Regarding shares of subsidiary tracking stock issued in Japan by Sony Corporation, Sony Communication Network Corporation (“SCN”) has been working to manage its operations so as to expand cash flow, fully solidify its financial base and increase its retained earnings to aggressively expand its business to strengthen its foundation and respond to the quickly expanding Internet market. For these reasons, SCN does not plan to distribute earnings to SCN shareholders for the time being. As such, Sony Corporation will continue its policy of not paying dividends to shareholders of the subsidiary tracking stock.

Significant Changes

No significant change has occurred since the date of the annual financial statements included in this annual report. Regarding subsequent events after the end of March 2004, refer to “Forecast of Consolidated Results” in “Item 5.Operating and Financial Review and Prospects.”
 
Item 9.The Offer and Listing

Offer and Listing Details

Not Applicable

Plan of Distribution

Not Applicable

Markets

 
Trading Markets

Trading Markets
The principal trading markets for Sony Corporation’s ordinary shares are the Tokyo Stock Exchange (the “TSE”) in the form of Common Stock and the New York Stock Exchange (the “NYSE”) in the

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form of American Depositary Shares (“ADSs”) evidenced by American Depositary Receipts (“ADRs”). Each ADS represents one share of Common Stock.

Sony Corporation’s Common Stock, with no par value per share, has been listed on the TSE since 1958, and is also listed on four otherthe London Stock Exchange in the United Kingdom and the Osaka Securities Exchange in Japan. In October 2005, due to the prevalence of borderless stock exchanges in Japan: Osaka, Nagoya, Fukuokatrading, and Sapporo. In addition, Sony Corporation’s Common Stock is listedthe fact that the trading volume of Sony’s shares on the following stock exchanges outside Japan:has been extremely low, the Board of Directors of Sony Corporation resolved to apply for delisting from the following exchanges: Pacific, Chicago, Toronto, London, Paris, Frankfurt, Düsseldorf, Brussels, Vienna, and Swiss.

The delisting procedures of these stock exchanges was completed as of March 31, 2006.

Sony Corporation’s ADRs have been traded in the U.S. since 1961 and have been listed on the NYSE since 1970 under the symbol “SNE.” Sony Corporation’s ADRs are issued and exchanged by JPMorgan Chase Bank, as Depositary.


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In June 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which iswas intended to be linked to the economic value of Sony Communication Network Corporation (“SCN”)(renamedSo-net as of October 2006), a directly and indirectly wholly-ownedconsolidated subsidiary of Sony Corporation which is engaged in Internet-related services. The subsidiary tracking stock, totaling 3,072,000 shares, was issued at 3,300 yen per share and listed on the TSE. The shares were not offered or sold in the U.S.
 In October 2005, the Board of Directors of Sony Corporation decided to terminate all shares of subsidiary tracking stock with the method of compulsory conversion to shares of Sony’s common stock. All shares of subsidiary tracking stock were converted to shares of Sony’s common stock on December 1, 2005. Refer to “History and Development of the Company” in “Item 4.Information on the Company.”
Trading on the TSE and NYSE
 
Trading on the TSE and NYSE

The following table sets forth for the periods indicated the reported high and low sales prices per share of Sony Corporation’s Common Stock on the TSE and the reported high and low sales prices per share of Sony Corporation’s ADS on the NYSE.
                   
Tokyo Stock ExchangeNew York Stock
Price Per Share ofExchange Price Per
Common StockShare of ADS
HighLowHighLow
(yen)(U.S. dollars)
Annual highs and lows                
 The fiscal year ended March 31, 2000*  16,950   5,360   157.38   44.63 
 The fiscal year ended March 31, 2001  15,100   7,510   141.25   65.40 
 The fiscal year ended March 31, 2002  10,340   3,960   85.75   32.80 
 
Quarterly highs and lows                
 The fiscal year ended March 31, 2003                
  1st quarter  7,460   5,800   59.95   47.91 
  2nd quarter  6,360   4,810   53.49   40.20 
  3rd quarter  5,590   4,850   45.84   39.79 
  4th quarter  5,130   4,070   43.40   34.85 
 The fiscal year ended March 31, 2004                
  1st quarter  4,240   2,720   35.82   23.16 
  2nd quarter  4,450   3,350   38.30   28.33 
  3rd quarter  4,280   3,490   38.04   32.42 
  4th quarter  4,670   3,760   42.81   34.81 

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Tokyo Stock ExchangeNew York Stock
Price Per Share ofExchange Price Per
Common StockShare of ADS
HighLowHighLow
(yen)(U.S. dollars)
Monthly highs and lows                
 2003                
  December  3,830   3,490   34.89   32.42 
 2004                
  January  4,470   3,760   42.00   34.81 
  February  4,610   4,150   42.81   39.52 
  March  4,670   4,120   42.15   38.29 
  April  4,710   4,240   43.67   38.13 
  May  4,340   3,880   39.34   33.95 
  June (through June 21)  4,130   3,910   37.49   35.36 

                 
  Tokyo Stock Exchange
  
  Price Per Share of
 New York Stock
  Common Stock Exchange Price Per Share of ADS
  High Low High Low
  (yen) (U.S. dollars)
 
Annual highs and lows*                
The fiscal year ended March 31, 2003  7,460   4,070   59.95   34.85 
The fiscal year ended March 31, 2004  4,670   2,720   42.81   23.16 
The fiscal year ended March 31, 2005  4,710   3,550   43.67   32.35 
Quarterly highs and lows*                
The fiscal year ended March 31, 2006                
1st quarter  4,410   3,770   40.79   34.38 
2nd quarter  4,100   3,660   36.74   32.38 
3rd quarter  5,020   3,710   41.30   31.80 
4th quarter  6,040   4,700   51.16   40.90 
The fiscal year ended March 31, 2007                
1st quarter  6,200   4,660   52.29   40.67 
2nd quarter  5,360   4,610   46.40   39.30 
3rd quarter  5,190   4,340   43.78   37.24 
4th quarter  6,540   5,120   53.34   42.73 
Monthly highs and lows*                
2006                
December  5,190   4,470   43.78   39.27 
2007                
January  5,830   5,120   48.01   42.73 
February  6,540   5,560   53.34   47.13 
March  6,290   5,650   53.24   48.28 
April  6,660   5,860   55.54   49.77 
May  7,190   6,260   59.84   52.51 
June (through June 20)  7,030   6,500   57.33   52.98 
* The reported high and low share prices of Sony Corporation for the fiscal year ended March 31, 2000 have been restated for the two-for-one stock split that has become effective on May 19, 2000. Stock price data are based on prices throughout the sessions for each corresponding period at each stock exchange.

On June 21, 2004,20, 2007, the closing sales price per share of Sony Corporation’s Common Stock on the TSE was 4,0506,620 yen. On June 21, 2004,20, 2007, the closing sales price per share of Sony Corporation’s ADS on the NYSE was 36.9053.18 U.S. dollars.


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Selling Shareholders

Not Applicable

Dilution

Not Applicable

Expenses of the Issue

Not Applicable
 
Item 10.Additional Information

Share Capital

Not applicable
Applicable

Memorandum and Articles of Association
 
Organization

Organization

Sony Corporation is a joint stock corporation(Kabushiki Kaisha)incorporated in Japan under the Commercial CodeCompany Law(Shoho)(Kaishaho)of Japan. It is registered in the Commercial Register(Shogyo Tokibo)maintained by the ShinagawaMinato Branch Office of the Tokyo Bureau of Legal Affairs.

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Objects and purposes

     Article 3 of the

Objects and purposes
The Articles of Incorporation of Sony Corporation providesprovide that its purpose is to engage in the following business activities:

 (i)manufacture and sale of electronic and electrical machines and equipment, medical instruments, optical instruments and other equipment, machines and instruments;
 
 (ii)planning, production and sale of audio-visual software and computer software programs;
 
 (iii)manufacture and sale of metal industrial products, chemical industrial products and ceramic industrial products, textile products, paper products and wood-crafted articles, daily necessities, foodstuffs and toys, transportation machines, equipment, petroleum and coal products;
 
 (iv)real estate activities, construction business, transportation business and warehousing business;
 
 (v)publishing business and printing business;
 
 (vi)advertising agency business, insurance agency business, broadcasting enterprise, recreation business such as travel, management of sporting facilities, etc. and other service enterprises;
 
 (vii)financial business;
 
 (viii)Type I and Type II telecommunications business under the Telecommunications Business Law;
 
 (ix)investing in stocks and bonds, etc.;
 
 (x)manufacture, sale, export and import of products which are incidental to or related to those mentioned above;
 
 (xi)rendering of services related to those mentioned above;
 
 (xii)investment in businesses mentioned above operated by other companies or persons; and
 
 (xiii)all businesses which are incidental to or related to those mentioned above.


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Directors

Directors

Under the Commercial Code (including theCompany Law, for Special Exceptions to the Commercial Code concerning Audit, etc. ofKabushiki-Kaisha, collectively the “Commercial Code”), Directors have no power to execute the business of Sony Corporation except in limited circumstances as permitted by law. If a Director also serves concurrently as a Corporate Executive Officer, then he or she can execute the business of Sony Corporation in the capacity of Corporate Executive Officer. Under the Commercial Code,Company Law, Directors must refrain from engaging in any business competing with Sony Corporation unless approved by the Board of Directors, and any Director who has a material interest in the subject matter of a resolution to be taken by the Board of Directors cannot vote on such resolution. The amount of remuneration to each Director is determined by the Compensation Committee, which consists of Directors, the majority of whom are outside Directors (refer(Refer to “Board Practices” in “Item 6.Directors, Senior Management and Employees”). No member of the Compensation Committee may vote on a resolution with respect to his or her own compensation as a Director or a Corporate Executive Officer.

     Except as stated below, neither

Neither the Commercial CodeCompany Law nor Sony Corporation’s Articles of Incorporation make a special provision as to the borrowing powers exercisable by Directors (subject to requisite internal authorizations as required by the Company Law), their retirement age, or a requirement to hold any shares of capital stock of Sony Corporation.

     The Commercial Code specifically requires a resolution of the Board of Directors, or a determination of the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors, for Sony Corporation to acquire or dispose of material assets; to borrow a substantial amount of money; to employ or discharge from employment important employees, such as general managers; and to establish, change or abolish a material corporate organization such as a branch office. The Regulations of the Board of Directors of Sony Corporation require a

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resolution of the Board of Directors for Sony Corporation’s lending in an amount not less than one hundred billion yen or its equivalent.
 
Capital stock

Unless otherwise indicated or the context otherwise requires, the following discussion applies equally

For more information on Directors, refer to both the shares of Common Stock“Board Practices” in “Item 6.Directors, Senior Management and the shares of subsidiary tracking stock.Employees.”
 
(General)

     Set

Capital stock
(General)
Unless indicated otherwise, set forth below is information relating to Sony Corporation’s capital stock, including brief summaries of the relevant provisions of Sony Corporation’s Articles of Incorporation and Share Handling Regulations, as currently in effect, and of the Commercial CodeCompany Law and related legislation.

     In

All issued shares are fully-paid and non-assessable, and are in registered form. Transfer of shares is effected by delivery of share certificates, but in order to assert shareholders’ rights against Sony Corporation, a shareholder must, except as set forth below, have its name and address registered on Sony Corporation’s register of shareholders, in accordance with Sony Corporation’s Share Handling Regulations. The registered beneficial holder of deposited shares underlying the American Depositary Shares (“ADSs”) is the Depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders’ rights against Sony Corporation.

Mitsubishi UFJ Trust Bank Limitedand Banking Corporation is the transfer agent for Sony Corporation’s capital stock. As such, it keeps Sony Corporation’s registers of shareholders and beneficial shareholders in its office at 4-3,4-5, Marunouchi1-chome, Chiyoda-ku, Tokyo and records transfers of shares upon presentation of the certificates representing the transferred shares.

A holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan. Participating shareholders must deposit certificates representing all of the shares to be included in this clearing system with Japan Securities Depository Center, Inc., or JASDEC. (“JASDEC”). If a holder is not a participating institution in JASDEC, it must participate through a participating institution, such as a securities company or bank having a clearing account with JASDEC. All shares deposited with JASDEC will be registered in the name of JASDEC on Sony Corporation’s register of shareholders. Each participating shareholder will in turn be registered on Sony Corporation’s register of beneficial shareholders and be treated in the same way as shareholders registered on Sony Corporation’s register of shareholders. Entry of the share transfer in the book maintained by JASDEC for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The registered beneficial shareholders may exercise the rights attached to the shares, such as voting rights, and will receive dividends (if any) and notices to shareholders directly from Sony Corporation. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial shareholder are aggregated for these purposes. Beneficial owners may at any time withdraw their shares from deposit and receive share certificates.


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(Authorized capital)

     Article 5

A law to establish a new central clearing system for shares of listed companies and to eliminate the issuance and use of certificates for such shares was promulgated in June 2004 and the relevant part of the law will come into effect within five years of the date of the promulgation. On the effective date, a new central clearing system will be established and the shares of all Japanese companies listed on any Japanese stock exchange, including the shares of Common Stock of Sony Corporation, will be subject to the new central clearing system. On the same day, all existing share certificates will become null and void. The transfer of such shares will be effected through entry in the books maintained under the new central clearing system.
(Authorized capital)
Under the Articles of Incorporation of Sony Corporation, provides that Sony Corporation may only issue both shares of Common Stock and shares of subsidiary tracking stock. Subsidiary tracking stock is stock which dividend rights track the dividend rights of a particular subsidiary of Sony Corporation. The rights of the holders of such stock may be different from those of the holders of Sony Corporation’s Common Stock in certain other respects such as rights to receive residual assets in the event of liquidation of Sony Corporation.

     Paragraph 2 of Article 5 ofStock. Sony Corporation’s Articles of Incorporation providesprovide that the total number of shares authorized to be issued by Sony Corporation is 3.6 billion shares, of which 3.5 billion shares shall be Common Stock and 100 million shares shall be subsidiary tracking stock. If shares of Common Stock are retired or shares of subsidiary tracking stock are either retired or converted into shares

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shares.

of Common Stock, the respective numbers of shares so retired or converted shall be deducted from the respective total numbers of shares authorized to be issued by Sony Corporation.

All shares of capital stock of Sony Corporation have no par value.
 
(Dividends)

     The Articles

(Distribution of IncorporationSurplus)
Distribution of Surplus — General
Under the Company Law, distributions of cash or other assets by joint stock corporations to their shareholders, so called “dividends,” are referred to as “distributions of Surplus” (“Surplus” is defined in “— Restriction on distributions of Surplus”). Sony Corporation provide that the accounts shall be closed on March 31may make distributions of each year. Year-end dividends, if any, shall be paidSurplus to shareholders beneficial shareholders and pledgeesany number of record astimes per business year, subject to certain limitations described in “— Restriction on distributions of the endSurplus.” Distributions of such day. After the closeSurplus are required in principle to be authorized by a resolution of the fiscal period, a Corporate Executive Officer designatedGeneral Meeting of Shareholders, but Sony Corporation shall authorize distributions of Surplus by a resolution of the Board of Directors prepares, among other things, a proposed allocationas long as its non-consolidated annual financial statements and certain documents for the last business year present fairly its assets and profit or loss, as required by ordinances of profits for dividends and other purposes; this proposal is submittedthe Ministry of Justice.
Distributions of Surplus may be made in cash or in kind in proportion to the Audit Committee and to independent certified public accountants and then submitted for approval to the Boardnumber of Directors. Ifshares of Common Stock held by each independent certified accountant states in his or her audit report the opinion that the financial statements prepared by such Corporate Executive Officer and proposed allocationshareholder. A resolution of profits are in accordance with relevant laws and the Articles of Incorporation, and if the Audit Committee does not state in its audit report any objection to such independent accountants’ opinion or an opinion that the proposed allocation of profits is significantly inappropriate, such proposal shall be deemed to be approved by the shareholders when approved by the Board of Directors. In addition to year-end dividends, the Board of Directors may by its resolution declareor a cashGeneral Meeting of Shareholders authorizing a distribution pursuant to Article 293-5of Surplus must specify the kind and aggregate book value of the Commercial Code (an “interim dividend”)assets to be distributed, the manner of allocation of such assets to shareholders, beneficial shareholders and pledgees of record at the end of each September 30, without shareholders’ approval, but subject to the limitation described below.

     The Commercial Code provides that a company may not make any distribution of profit by way of dividends or interim dividends unless it has set aside in its legal reserve an amount equal to at least one-tenth of the amount paid by way of appropriation of retained earnings for such fiscal period, or equal to one-tenth of the amount of interim dividends, until the aggregate amount of its additional paid-in capital and its legal reserve is at least one-quarter of its stated capital. Under the Commercial Code, Sony Corporation is permitted to distribute profits by way of year-end or interim dividends out of the excess of its net assets, on a non-consolidated basis, over the aggregate of:

(i)its stated capital;
(ii)its additional paid-in capital;
(iii)its accumulated legal reserve;
(iv)the legal reserve to be set aside in respect of the fiscal period concerned; and
(v)such other amounts as are provided for by an ordinance of the Ministry of Justice.

In the case of interim dividends, the net assets are calculated by reference to the non-consolidated balance sheet as at the lasteffective date of the preceding fiscal year, but adjusted to reflect (a) the legal reservedistribution. If a distribution of Surplus is to be set asidemade in respect of interim dividends, (b) any subsequent payment by way of appropriation of retained earnings and transfer to legal reserve in respect thereof, (c) any subsequent transfer of retained earnings to stated capital and (d) ifkind, Sony Corporation has been authorized,may, pursuant to a resolution of an Ordinary General Meeting of Shareholders, a resolution of the Board of Directors or both,(as the case may be) a General Meeting of Shareholders, grant a right to purchasethe shareholders to require Sony Corporation to make such distribution in cash instead of in kind. If no such right is granted to shareholders, the relevant distribution of Surplus must be approved by a special resolution of a General Meeting of Shareholders (refer to “Voting Rights” with respect to a “special resolution”).

Under the Articles of Incorporation of Sony Corporation, year-end dividends and interim dividends may be distributed to shareholders of record as of March 31 and September 30 each year, respectively, in proportion to the number of shares of its Common Stock held by each shareholder following approval by the Board of Directors or shares(as the case may be) the General Meeting of its subsidiary tracking stock (refer to “(Acquisition byShareholders. Sony Corporation is not obliged to pay any dividends unclaimed for a period of its capital stock)” and “Subsidiary tracking stock — (Acquisition by Sony Corporation of its subsidiary tracking stock)” below), the total amount of the purchase price of such shares so authorized by such resolution that may be paid by Sony Corporation and (e) such other amounts as are set out in an ordinance of the Ministry of Justice of Japan, provided that the amount distributable as interim dividends, as described above, will be increased by (x) any amount reduced by Sony Corporation if Sony Corporation reduces the amount of its stated capital, additional paid-in capital or accumulated legal reservefive years after the end of the preceding fiscal year, less the amount paid to shareholders upon such reduction and certain other amounts, and (y) such other amounts as are set out in an ordinance of the Ministry of Justice of Japan.

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date on which they first became payable.

In Japan, the “ex-dividend”ex-dividend date and the record date for dividends precede the date of determination of the amount of the dividenddividends to be paid.

Under its Articles The price of Incorporation,the shares of Common Stock generally goes ex-dividend on the third business day prior to the record date.

Distribution of Surplus — Restriction on distribution of Surplus
In making a distribution of Surplus, Sony Corporation is not obligedmust, until the sum of its additional paid-in capital and legal reserve reaches one quarter of its stated capital, set aside in its additional paid-in capitaland/or legal reserve an amount equal to payone-tenth of the amount of Surplus so distributed.
The amount of Surplus at any dividends which are left unclaimed for a period of five years aftergiven time must be calculated in accordance with the date on which they first became payable.following formula:
A + B + C + D − (E + F + G)


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In the above formula:
 
“A” = the total amount of other capital surplus and other retained earnings, each such amount being that appearing on the non-consolidated balance sheet as of the end of the last business year
“B” = (Stock Splits)if Sony Corporation has disposed of its treasury stock after the end of the last business year) the amount of the consideration for such treasury stock received by Sony Corporation less the book value thereof
“C” = (if Sony Corporation has reduced its stated capital after the end of the last business year) the amount of such reduction less the portion thereof that has been transferred to additional paid-in capital or legal reserve (if any)
“D” = (if Sony Corporation has reduced its additional paid-in capital or legal reserve after the end of the last business year) the amount of such reduction less the portion thereof that has been transferred to stated capital (if any)
“E” = (if Sony Corporation has cancelled its treasury stock after the end of the last business year) the book value of such treasury stock
“F” = (if Sony Corporation has distributed Surplus to its shareholders after the end of the last business year) the total book value of the Surplus so distributed
“G” = certain other amounts set forth in ordinances of the Ministry of Justice, including (if Sony Corporation has reduced Surplus and increased its stated capital, additional paid-in capital or legal reserve after the end of the last business year) the amount of such reduction and (if Sony Corporation has distributed Surplus to the shareholders after the end of the last business year) the amount set aside in additional paid-in capital or legal reserve (if any) as required by ordinances of the Ministry of Justice.
The aggregate book value of Surplus distributed by Sony Corporation may not exceed a prescribed distributable amount (the “Distributable Amount”), as calculated on the effective date of such distribution. The Distributable Amount at any given time shall be equal to the amount of Surplus less the aggregate of the followings:
(a)  the book value of its treasury stock;
(b)  the amount of consideration for any of treasury stock disposed of by Sony Corporation after the end of the last business year; and
(c)  certain other amounts set forth in ordinances of the Ministry of Justice, including (if the sum of one-half of goodwill and the deferred assets exceeds the total of stated capital, additional paid-in capital and legal reserve, each such amount being that appearing on the non-consolidated balance sheet as of the end of the last business year) all or certain part of such exceeding amount as calculated in accordance with ordinances of the Ministry of Justice.
If Sony Corporation has become at its option a company with respect to which consolidated balance sheets should also be considered in the calculation of the Distributable Amount (renketsu haito kisei tekiyo kaisha), Sony Corporation shall further deduct from the amount of Surplus the excess amount, if any, of (x) the total amount of stockholders’ equity appearing on the non-consolidated balance sheet as of the end of the last business year and certain other amounts set forth by ordinances of the Ministry of Justice over (y) the total amount of stockholders’ equity and certain other amounts set forth by ordinances of the Ministry of Justice appearing on the consolidated balance sheet as of the end of the last business year.
If Sony Corporation has prepared interim financial statements as described below, and if such interim financial statements have been approved by the Board of Directors or (if so required by the Company Law) by a General Meeting of Shareholders, then the Distributable Amount must be adjusted to take into account the amount of profit or loss, and the amount of consideration for any of the treasury stock disposed of by Sony Corporation, during the period in respect of which such interim financial statements have been prepared. Sony Corporation may prepare non-consolidated interim financial statements consisting of a balance sheet as of any date subsequent to the end of


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the last business year and an income statement for the period from the first day of the current business year to the date of such balance sheet. Interim financial statements so prepared by Sony Corporation must be audited by the Audit Committee and the independent auditor, as required by ordinances of the Ministry of Justice.
(Stock splits)
Sony Corporation may at any time split shares in issue into a greater number of shares by a resolutionat the determination of the Chief Executive Board.

Officer (“CEO”).

In the event of a stock split, generally, shareholders will not be required to exchange share certificates for new share certificates, but certificates representing the additional shares resulting from the stock split will be issued to shareholders. When a stock split is to be made Sony Corporation must give public notice of the stock split, specifying the record date thereof, at least two weeks prior to such record date. In addition, promptly after the stock split takes effect
(Consolidation of shares)
Sony Corporation may at any time consolidate issued shares into a smaller number of shares by a special shareholders resolution (as defined in “(Voting Rights)”). When a consolidation of shares is to be made, Sony Corporation must give public notice and notice to each shareholder specifyingthat, within a period of not less than one month specified in the numbernotice, share certificates must be submitted to Sony Corporation for exchange. Sony Corporation must disclose the reason for the consolidation of shares to which such shareholder is entitled by virtueat a General Meeting of the stock split.Shareholders.
 
(General Meeting of Shareholders)

(General Meeting of Shareholders)
The Ordinary General Meeting of Shareholders of Sony Corporation for each fiscalbusiness year is normally held in June of each year in Tokyo, Japan. In addition, Sony Corporation may hold an Extraordinary General Meeting of Shareholders whenever necessary by giving notice thereof at least two weeks prior to the date set for the meeting.

Notice of a shareholders’ meeting setting forth the place, time and purpose thereof must be mailed to each shareholder having voting rights (or, in the case of a non-resident shareholder, to such shareholder’s resident proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Under the Commercial Code,Company Law, such notice may be given to shareholders by electronic means, subject to obtaining consent by the relevant shareholders. The record date for an Ordinary General Meeting of Shareholders is March 31 of each year.

Any shareholder or group of shareholders holding at least three percent of the total number of voting rights for a period of six months or more may require the convocation of a General Meeting of Shareholders for a particular purpose. Unless such a shareholders’ meeting is convened promptly or a convocation notice of a meeting which is to be held not later than eight weeks from the day of such demand is dispatched, the requiring shareholder may, upon obtaining a court approval, convene such a shareholders’ meeting.

Any shareholder or group of shareholders holding at least 300 voting rights or one percent of the total number of voting rights for a period of six months or more may propose a matter to be considered at a General Meeting of Shareholders by submitting a written request to Sony Corporation at least eight weeks prior to the date set for such meeting.
 
If the Articles of Incorporation so provide, any of the minimum voting rights or percentages, time periods and number of voting rights necessary for exercising the minority shareholder rights described above may be decreased or shortened.
(Voting rights)

(Voting rights)

So long as Sony Corporation maintains the unit share system, a holder of shares (whether shares of Common Stock or shares of subsidiary tracking stock) constituting one or more units is entitled to one vote for each such unit of stock (refer to “(Unit share system)” below,below; currently 100 shares constitute one unit), except that no voting rights with respect to shares of capital stock of Sony Corporation are afforded to Sony Corporation or any corporate shareholderor certain other entity more than one-quarter of the total voting rights of which are directly or indirectly held by Sony Corporation. If Sony Corporation eliminates from its Articles of Incorporation the provisions relating to units of stock, holders of capital stock will have one vote for each share they


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hold. Except as otherwise provided by law or by the Articles of Incorporation of Sony Corporation, a resolution can be adopted at a General Meeting of Shareholders by a majority of the number of voting rights of all the shareholders represented at the meeting. The Commercial CodeCompany Law and Sony Corporation’s Articles of Incorporation provide, however, that the quorum for the election of

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Directors shall not be less than one-third of the total number of voting rights of all the shareholders. Sony Corporation’s shareholders are not entitled to cumulative voting in the election of Directors. Shareholders may cast their votes in writing and may also exercise their voting rights through proxies, provided that the proxies are also shareholders holding voting rights. Shareholders may also exercise their voting rights by electronic means pursuant to the method designated by Sony Corporation.

The Commercial CodeCompany Law and the Articles of Incorporation of Sony Corporation provide that in order to amend the Articles of Incorporation and in certain other instances, including a reduction of stated capital, the removal of a Director, dissolution, merger or consolidation requiring shareholders resolution, the transfer of the whole or a substantial part of the business, the taking over of the whole of the business of any other corporation requiring shareholders resolution, share exchange or share transfer requiring shareholders resolution for the purpose of establishing 100 percent parent-subsidiary relationships, any splitting of the company into two or more corporations requiring shareholders resolution, any offering of new shares at a “specially favorable” price to any persons other than shareholders, any granting of rights to subscribe for or acquire shares from Sony Corporation (shinkabu-yoyakuken; “stock acquisition rights”) or bonds with stock acquisition rights, under “specially favorable” conditions to any persons other than shareholders, including:
(1) acquisition of its own shares from a specific party other than its subsidiaries;
(2) consolidation of shares;
(3) any offering of new shares at a “specially favorable” price (or any offering of stock acquisition rights to acquire shares of capital stock, or bonds with stock acquisition rights at “specially favorable” conditions) to any persons other than shareholders;
(4) the exemption of liability of a Director, Corporate Executive Officer or independent auditor with certain exceptions;
(5) a reduction of stated capital with certain exceptions;
(6) a distribution of in-kind dividends which meets certain requirements;
(7) dissolution, merger, consolidation, or corporate split with certain exceptions;
(8) the transfer of the whole or a material part of the business;
(9) the taking over of the whole of the business of any other corporation with certain exceptions; or
(10) share exchange or share transfer for the purpose of establishing 100 percent parent-subsidiary relationships with certain exceptions,
the quorum shall be one-third of the total number of voting rights of all the shareholders, and the approval by at least two-thirds of the number of voting rights of all the shareholders represented at the meeting is required (the “special shareholders resolutions”).
 
(Issue of additional shares and pre-emptive rights)

(Issue of additional shares and pre-emptive rights)

Holders of Sony Corporation’s shares of capital stock have no pre-emptive rights under its Articles of Incorporation. Authorized but unissued shares (whether of Common Stock or of subsidiary tracking stock) may be issued at such times and upon such terms as the Board of Directors or the Executive BoardCEO determines, subject to the limitations as to the offering of new shares at a “specially favorable” price mentioned under “(Voting rights)” above. The Board of Directors or the Executive BoardCEO may, however, determine that shareholders of a particular class of stock shall be given subscription rights regarding a particular issue of new shares, of that class, in which case such rights must be given on uniform terms to all shareholders of that class of stock as at a record date of which not less than two weeks’ prior public notice must be given. Each of the shareholders to whom such rights are given must also be given notice of the expiry thereof at least two weeks prior to the date on which such rights expire.

Subject to certain conditions, Sony Corporation may issue stock acquisition rights by a resolution of the Board of Directors or a determination by the Executive Board.CEO. Holders of stock acquisition rights may exercise their rights to acquire a certain number of shares within the exercise period as prescribed in the terms of their stock acquisition rights. Upon exercise of stock acquisition rights, Sony Corporation will be obliged to issue the relevant number of new shares or alternatively to transfer the necessary number of treasury stock held by it.
 
(Liquidation rights)
In cases where a particular issue of new shares or stock acquisition rights (i) violates laws and regulations or Sony Corporation’s Articles of Incorporation, or (ii) will be performed in a manner materially unfair, and


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shareholders may suffer disadvantages therefrom, such shareholders may file an injunction to enjoin such issue with a court.
(Liquidation rights)
In the event of a liquidation of Sony Corporation, the assets remaining after payment of all debts, liquidation expenses and taxes will subject to the rights of the holders of subsidiary tracking stock discussed under “Subsidiary tracking stock —(Distribution of residual assets)” below, be distributed among the holders of shares of Common Stock in proportion to the respective numbers of shares of Common Stock held.
 
(Record date)

(Record date)
As mentioned above, March 31 is the record date for Sony Corporation’s year-end dividends, if declared. So long as Sony Corporation maintains the unit share system, the shareholders and beneficial shareholders who are registered as the holders of one or more unit of stock in Sony Corporation’s register of shareholdersand/or beneficial shareholders at the end of each March 31 are also entitled to exercise shareholders’ rights at the Ordinary General Meeting of Shareholders with respect to the fiscalbusiness year ending on such March 31.

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September 30 is the record date for interim dividends. In addition, Sony Corporation may set a record date for determining the shareholdersand/or beneficial shareholders entitled to other rights and for other purposes by giving at least two weeks prior public notice.

The price of shares generally goes ex-dividend or ex-rights on Japanese stock exchanges on the third business day prior to a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings.

 
(Acquisition by Sony Corporation of its capital stock)
Under the Company Law and the Articles of Incorporation of Sony Corporation, of its capital stock)

Sony Corporation may acquire its own shares through a stock exchange on which such shares are listed (pursuant to an ordinary resolution of an Ordinary General Meeting of Shareholders or a resolution of the Board of Directors), by way of tender offer (pursuant to an ordinary resolution of an Ordinary General Meeting of Shareholders or a resolution of the Board of Directors), by purchaseCommon Stock (i) from a specific partyshareholder other than a subsidiaryany of Sony Corporationits subsidiaries (pursuant to a special resolution of an Ordinarya General Meeting of Shareholders) or, (ii) from a subsidiaryany of Sony Corporationits subsidiaries (pursuant to a resolutiondetermination by the CEO), or (iii) by way of purchase on any Japanese stock exchange on which Sony Corporation’s shares of Common stock are listed or by way of tender offer (as long as its non-consolidated annual financial statements and certain documents for the last business year present fairly its assets and profit or loss, as required by ordinances of the Executive Board). When such acquisition is made by Sony Corporation from a specific party other than a subsidiaryMinistry of Sony Corporation, any other shareholder may make a request to the CompanyJustice) in writing, not later than five days prior to the relevant shareholders’ meeting, to include him/her as a seller in the proposed purchase. Any such acquisition of shares must satisfy certain requirements, including that in cases other than the acquisition by Sony Corporation of its own shareseither case pursuant to a resolution of the Board of Directors or (as the case may be) an ordinary resolution of a General Meeting of Shareholders). In the case of (i) above, any other shareholder may make a request to Sony Corporation that such other shareholder be included as a seller in the proposed purchase, provided that no such right will be available if the purchase price or any other consideration to be received by the relevant specific shareholder will not exceed the last trading price of the shares on the relevant stock exchange on the day immediately preceding the date on which the resolution mentioned in (i) above was adopted (or, if there is no trading in the shares on the stock exchange or if the stock exchange is not open on such day, the price at which the shares are first traded on such stock exchange thereafter).

The total amount of the purchase price of shares of Common Stock may not exceed the sum of the amount of retained earnings available for year-end dividend payments after taking into account any reduction, if any, of the stated capital, additional paid-in capital or legal reserve (if such reduction of the stated capital, additional paid-in capital or legal reserve has been authorized pursuant to a resolution of the relevant Ordinay General Meeting of Shareholders), minus the sum of the amount to be paid by way of appropriation of retained earnings for the relevant fiscal year and the amount to be transferred to stated capital in respect of the relevant fiscal year pursuant to a resolution of such General Meeting of Shareholders. If Sony Corporation purchases shares pursuant to a resolution of the Board of Directors, the total amount of the purchase price may not exceed the amount of the retained earnings available for an interim dividend payment minus the amount of any interim dividend Sony Corporation actually paid. However, if it is anticipated that the net assets on the non-consolidated balance sheet as at the end of the relevant fiscal year will be less than the aggregate amount of the stated capital, additional paid-in capital and other itemsDistributable Amount, as described in (i) through (v) to “(Dividends)“(Distribution of Surplus) — Distributions of Surplus — Restriction on distributions of Surplus.” above, Sony Corporation may not acquire such shares.

Shares acquired by Sony Corporation may be held by it for any period or may be retired by resolutionat the determination of the Executive Board.CEO. Sony Corporation may also transfer (public(by public or private sale or otherwise) to any person the shares held by it, subject to a resolution ofdetermination by the the Executive Board,CEO, and subject also to other requirements similar to those applicable to the issuance of new shares, as described in “(Issue of additional shares and pre-emptive rights)” above. Sony Corporation may also utilize its treasury stock for the purpose of transfer to any person upon exercise of stock acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through exchange of treasury stock for shares or assets of the acquired company.
 
(Unit share system)

(Unit share system)
The Articles of Incorporation of Sony Corporation provide that 100 shares constitute one “unit” of shares of stock. The Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors is permitted to amend the Articles of Incorporation to reduce the number of shares that constitute a unit or to abolish the unit share system entirely. The number of shares constituting one unit cannot exceed 1,000 shares or one-two hundredth (1/200) of the aggregate number of all issued shares.


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Under the unit share system, shareholders have one voting right for each unit of stock that they hold. Any number of shares less than one full unit have noneither voting rights nor rights related to voting rights. The Articles of Incorporation and Share Handling Regulations of Sony Corporation provide that no share certificates mayshall be issued with respect to any number of shares constituting less than one full unit, unless Sony Corporation deems the issue of such share certificates to be necessary for any shareholder(s). As the transfer of shares normally requires delivery of the certificates, therefor, fractions of a unit for which no share certificate has been issued are not transferable.

     Except as otherwise described above, Moreover, holders of the shares constituting less than one full unit will have allno other shareholder rights if Sony Corporation’s Articles of Incorporation so provide, except that such holders may not be deprived of certain rights specified in the rights grantedCompany Law or an ordinance of the Ministry of Justice, including the right to shareholders under the Commercial Code.

receive distribution of Surplus.

A holder of shares constituting less than one full unit may require Sony Corporation to purchase such Shares at their market value in accordance with the provisions of the Share Handling Regulations of Sony Corporation.

The Articles of Incorporation of Sony Corporation provide that a holder of shares constituting less than one full unit may request Sony Corporation to sell to such holder such amount of shares which will, when added together with the shares constituting less than one full unit, constitute one full unit of stock. Such request by a holder and the sale by Sony Corporation must be made in accordance with the provisions of the Share Handling Regulations of Sony Corporation.

A holder who owns ADRsAmerican Depositary Receipts (“ADRs”) evidencing less than 100 ADSs will indirectly own less than one full unit. Although, as discussed above, under the unit share system holders of less than one full unit have the right to require Sony Corporation to purchase their shares or sell shares held by Sony Corporation to such holders, holders of ADRs evidencing ADSs that represent other than integral multiples of whole units are unable to withdraw the underlying shares of capital stock representing less than one full unit and, therefore, are unable, as a practical matter, to exercise the rights to require Sony Corporation to purchase such underlying shares or sell shares held by Sony Corporation to such holders. As a result, access to the Japanese markets by holders of ADRs through the withdrawal mechanism will not be available for dispositions of shares in lots less than one full unit. The unit share system does not affect the transferability of ADSs, which may be transferred in lots of any size.
 
(Sale by Sony Corporation of shares held by shareholders whose location is unknown)

(Sale by Sony Corporation of shares held by shareholders whose location is unknown)
Sony Corporation is not required to send a notice to a shareholder if a notice to such shareholder fails to arrive at the registered address of the shareholder in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation continuously for five years or more.

In addition, Sony Corporation may sell or otherwise dispose of shares of capital stock for which the location of the shareholder is unknown. Generally, if (i) notices to a shareholder fail to arrive continuously for five years or more at the shareholder’s registered address in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation, and (ii) the shareholder fails to receive dividendsdistributions of Surplus on the shares continuously for five years or more at the address registered in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation, Sony Corporation may sell or otherwise dispose of the shareholder’s shares at the then market price of the shares by a determination of thea Corporate Executive Officer serving as Group Chief Strategy Officer and after giving at least three months’ prior public and individual notice, and hold or deposit the proceeds of such sale or disposal of shares for such shareholder.
Subsidiary tracking stock

     By a special resolution of the Extraordinary General Meeting of Shareholders held on January 25, 2001, Sony Corporation’s Articles of Incorporation were amended to enable Sony Corporation to issue shares of subsidiary tracking stock. By resolutions of the Board of Directors dated May 15 and 31, 2001, Sony Corporation created and issued 3,072,000 shares of a series of subsidiary tracking stock. The subsidiary whose economic value this series of subsidiary tracking stock tracks is Sony Communication

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Network Corporation (“SCN”), a Japanese corporation directly and indirectly wholly-owned by Sony Corporation. Except as otherwise stated in the preceding paragraphs and as stated in the following paragraphs, the shares of the subsidiary tracking stock have the same rights and characteristics as those of shares of Common Stock described above.
 
(Dividends)

The dividend (the year-end dividend and the interim dividend) on the sharesReporting of this series of subsidiary tracking stock is payable only when the board of directors of SCN has resolved to pay to the holders of its common stock a dividend (in the case of year-end dividend, SCN’s year-end dividend, and in the case of interim dividend, SCN’s interim dividend) in an amount per share of the subsidiary tracking stock equal to the smaller of the amount of SCN’s dividend per share of its common stock multiplied by the Standard Ratio (as defined in the Articles of Incorporation: currently one one-hundredth, which is subject to adjustment in the occurrence of certain dilutive events) or 100,000 yen multiplied by the Standard Ratio per share (the “Maximum Dividend Amount”), subject to statutory restriction on Sony Corporation’s ability to pay dividends on its shares of capital stock referred to under “Capital stocksubstantial shareholdings —(Dividends)” above. If the amount of interim dividend paid to the holders of shares of a series of subsidiary tracking stock for any fiscal year is less than the amount calculated in accordance with the foregoing formula, such shortfall will be added to the amount of the year-end dividend of such fiscal year. If the amount of dividends paid to the holders of shares of a series of subsidiary tracking stock is less than the amount which should have been paid pursuant to the formula set forth above due to the statutory restriction referred to above or for any other reason, such shortfall will be accumulated and such cumulative amount will be paid to the holders of shares of the subsidiary tracking stock for subsequent fiscal period(s), subject to the statutory limitation set forth above and the Maximum Dividend Amount. Any such dividend on the subsidiary tracking stock is payable in priority to the payment of dividends to the holders of shares of Common Stock. However, the holders of shares of subsidiary tracking stock have no right to participate in the dividends to holders of shares of Common Stock. Furthermore, even if the Board of Directors of SCN does not take a resolution for the payment of dividends to the holders of SCN common stock, Sony Corporation may decide to pay dividends to the holders of its Common Stock.

(Voting rights)

The holders of shares of subsidiary tracking stock have the same voting rights, subject to the same limitation on voting rights, as those of the holders of shares of Common Stock and, thus, are entitled to participate and vote at any General Meeting of Shareholders in the same way as the shareholders of Common Stock. In addition, as each series of subsidiary tracking stock is a separate class of stock different from the Common Stock, if any resolution of the General Meeting of Shareholders for amending the Articles of Incorporation, any granting to shareholders of any series of subsidiary tracking stock certain rights with respect to certain matters including the issue of new shares, stock acquisition rights, bonds with stock acquisition rights, consolidation, split, purchase or retirement of shares, share exchange or share transfer, or a merger or consolidation or splitting of Sony Corporation would adversely affect the rights of the holders of shares of a particular class or classes of subsidiary tracking stock, the holders of shares of each such class of subsidiary tracking stock will have the right to approve or disapprove such resolution by a special resolution of the meeting of holders of shares of that class of subsidiary tracking stock.

(Distribution of residual assets)

     In the event of distribution of residual assets to the shareholders of Sony Corporation, as long as such assets include shares of common stock of SCN, the number of shares of SCN common stock obtained by multiplying the number of shares of the subsidiary tracking stock held by each holder by the Standard Ratio (if the total number of shares of SCN common stock available for distribution is less than the total number so to be distributed, the lesser number adjusted in proportion to the respective numbers of shares of the subsidiary tracking stock held by such holders) or the net proceeds from the sale of the shares of SCN common stock so to be distributed will be distributed to the holders of shares of the subsidiary

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tracking stock. Such distribution will be made in priority to the distribution of residual assets to the holders of shares of Common Stock. No other distribution of residual assets will be made to the holders of shares of subsidiary tracking stock.
 
(Acquisition of shares of tracking stock)

The shares of subsidiary tracking stock may be subject to acquisition in the same manner and under the same restriction as the shares of Common Stock referred to under “Capital stock —(Acquisition by Sony Corporation of its capital stock)” above.

     In addition, Sony Corporation may at any time retire the entire amount of all outstanding shares of that series of subsidiary tracking stock upon paying to the holders thereof an amount equal to the current market price (as defined in the Articles of Incorporation) of shares of the subsidiary tracking stock out of Sony Corporation’s retained earnings available for dividend payments.

Sony Corporation may also retire the shares of a series of subsidiary tracking stock in their entirety pursuant to the procedures prescribed by the Commercial Code for the reduction of capital upon payment to the holders of shares of the subsidiary tracking stock an amount equal to the market value thereof as set forth above.

(Conversion of subsidiary tracking stock)

So long as the shares of Sony Corporation’s Common Stock are listed or registered on any stock exchange or over-the-counter market (a “Stock Exchange”), Sony Corporation may at any time convert the entire amount of all outstanding shares of the subsidiary tracking stock into shares of Sony Corporation’s Common Stock at the rate of the multiple of 1.1 of the market value (as defined in the Articles of Incorporation) of shares of the subsidiary tracking stock divided by the market value (as similarly defined) of shares of Sony Corporation’s Common Stock.

(Compulsory termination)

     If any of the following events occurs, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s Common Stock at the price or rate set forth above:

(i)SCN transfers its assets representing 80 percent or more of the total assets appearing on its most recent consolidated balance sheet or transfers its business as a result of which its consolidated revenue is expected to decrease by 80 percent or more from its most recent consolidated profit and loss statement;
(ii)SCN ceases to be a subsidiary of Sony Corporation;
(iii)the number of shares of capital stock of SCN which Sony Corporation directly holds becomes less than the total number of outstanding shares of tracking stock multiplied by the Standard Ratio and such situation continues for a period of 3 months or more;
(iv)a resolution was taken by SCN’s shareholders for its dissolution;
(v)certain events of bankruptcy; or
(vi)occurrence of any event which causes de-listing or de-registration of the subsidiary tracking stock from all Stock Exchanges where the tracking stock is listed or registered.

     If the shares of capital stock of SCN are approved by any Stock Exchange for listing or registration thereon, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s Common Stock at the price or rate set forth above on the date determined by Sony Corporation’s Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors prior to the date of such approval of the Stock Exchange; or, they may be retired in their entirety by

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distributing the number of shares of SCN common stock to each holder of shares of the subsidiary tracking stock at the rate calculated by multiplying the number of such shares by the Standard Ratio on the date of such listing or registration or the date prior to such date determined by Sony Corporation’s Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors.
(Miscellaneous)

Either or both of the shares of Common Stock and the shares of subsidiary tracking stock may be consolidated or split at the same ratio or at different ratios. The holders of shares of Common Stock and/or the holders of shares of subsidiary tracking stock may be allotted rights to subscribe for new shares (to the holders of Common Stock, new shares of Common Stock, and to the holders of subsidiary tracking stock, new shares of subsidiary tracking stock) at the same ratio or different ratios and on different conditions.

Reporting of substantial shareholdings

The Securities and Exchange Law of Japan and its related regulations require any person, regardless of residence, who has become, beneficially and solely or jointly, a holder of more than five percent of the total issued shares of capital stock of a company listed on any Japanese stock exchange or whose shares are traded on theover-the-counter market in Japan to file with the Director General of the competent RegionalLocal Finance Bureau of the Ministry of Finance within five business days a report concerning such shareholdings.

A similar report must also be filed in respect of any subsequent change of one percent or more in any such holding, with certain exceptions. For this purpose, shares issuable to such persons upon conversion of convertible securities or exercise of share subscription warrants or stock acquisition rights are taken into account in determining both the number of shares held by such holders and the issuer’s total issued share capital. Any such report shall be filed with the Director


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General of the relevant Local Finance Bureau of the Ministry of Finance through the Electronic Disclosure for Investors’ Network (EDINET) system. Copies of such report must also be furnished to the issuer of such shares and all Japanese stock exchanges on which the shares are listed or (in the case of shares traded over-the-counter) the Japan Securities Dealers Association.

shares.

Except for the general limitation under Japanese anti-trust and anti-monopoly regulations against holding of shares of capital stock of a Japanese corporation which leads or may lead to a restraint of trade or monopoly, and except for general limitations under the Commercial CodeCompany Law or Sony Corporation’s Articles of Incorporation on the rights of shareholders applicable regardless of residence or nationality, there is no limitation under Japanese laws and regulations applicable to Sony Corporation or under its Articles of Incorporation on the rights of non-resident or foreign shareholders to hold or exercise voting rights on the shares of capital stock of Sony Corporation.

There is no provision in Sony Corporation’s Articles of Incorporation or by-laws that would have an effect of delaying, deferring or preventing a change in control of Sony Corporation and that would operate only with respect to merger, acquisition or corporate restructuring involving Sony Corporation.

Material Contracts

None

Exchange Controls

The Foreign Exchange and Foreign Trade Law of Japan and its related cabinet orders and ministerial ordinances (the“Foreign(the “Foreign Exchange Regulations”) govern the acquisition and holding of shares of capital stock of Sony Corporation by “exchange non-residents” and by “foreign investors.” The Foreign Exchange Regulations currently in effect do not, however, affect transactions between exchange non-residents to purchase or sell shares outside Japan using currencies other than Japanese yen.

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Exchange non-residents are:

 • individuals who do not reside in Japan; and
 
 • corporations whose principal offices are located outside Japan.

Generally, branches and other offices of non-resident corporations that are located within Japan are regarded as residents of Japan. Conversely, branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents.

Foreign investors are:

 • individuals who are exchange non-residents;
 
 • corporations that are organized under the laws of foreign countries or whose principal offices are located outside of Japan; and
 
 • corporations (1) of which 50 percent or more of their shares are held by individuals who are exchange non-residentsand/or corporations (a) that are organized under the laws of foreign countries or (b) whose principal offices are located outside of Japan or (2) a majority of whose officers, or officers having the power of representation, are individuals who are exchange non-residents.

In general, the acquisition of shares of a Japanese company (such as the shares of capital stock of Sony Corporation) by an exchange non-resident from a resident of Japan is not subject to any prior filing requirements. In certain limited circumstances, however, the Minister of Finance may require prior approval of an acquisition of this type. While prior approval, as described above, is not required, in the case where a resident of Japan transfers shares of a Japanese company (such as the shares of capital stock of Sony Corporation) for consideration exceeding 100 million yen to an exchange non-resident, the resident of Japan who transfers the shares is required to report the transfer to the Minister of Finance within 20 days from the date of the transfer, unless the transfer was made through a bank, securities company or financial futures trader licensed under Japanese law.

If a foreign investor acquires shares of a Japanese company that is listed on a Japanese stock exchange (such as the shares of capital stock of Sony Corporation) or that is traded on anover-the-counter market in Japan and, as a result of the acquisition, the foreign investor, in combination with any existing holdings, directly or indirectly holds


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10 percent or more of the issued shares of the relevant company, the foreign investor must file a report of the acquisition with the Minister of Finance and any other competent Ministers having jurisdiction over that Japanese company within 15 days from and including the date of the acquisition, except where the offering of the company’s shares was made overseas. In limited circumstances, such as where the foreign investor is in a country that is not listed on an exemption schedule in the Foreign Exchange Regulations, a prior notification of the acquisition must be filed with the Minister of Finance and any other competent Ministers, who may then modify or prohibit the proposed acquisition.

Under the Foreign Exchange Regulations, dividends paid on and the proceeds from sales in Japan of shares of capital stock of Sony Corporation held by non-residents of Japan may generally be converted into any foreign currency and repatriated abroad.

Taxation

The following is a summary of the major Japanese national tax and U.S. federal income tax consequences of the ownership, acquisition and disposition of shares of Common Stock of Sony Corporation and of ADRs evidencing ADSs representing shares of Common Stock of Sony Corporation by a non-resident of Japan or a non-Japanese corporation without a permanent establishment in Japan. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular investor, depending on itsand does not take into account any specific individual circumstances.circumstances of any particular investor. Accordingly, holders of shares of Common Stock or

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ADSs of Sony Corporation are encouraged to consult their tax advisors regarding the application of the considerations discussed below to their particular circumstances.

     U.S. holders (as defined below) should note that the United States and Japan have ratified the new income tax convention (the “New Treaty”), which is to replace its predecessor income tax convention signed on March 8, 1971 (the “Prior Treaty”). The New Treaty entered into force on March 30, 2004 and shall be applicable in Japan, in place of the Prior Treaty, (i) with respect to taxes withheld at source, for amounts taxable on or after July 1, 2004, and (ii) with respect to taxes on income which are not withheld at source and the enterprise taxes, as regards income for any taxable year beginning on or after January 1, 2005 (subject to certain transitional rules with respect to both items (i) and (ii) above). The Prior Treaty shall cease to have effect in relation to any tax from the date on which the New Treaty shall be applicable (subject to certain transitional rules allowing for exceptions). Where relevant, U.S. holders are urged to confirm with their tax advisors whether they are entitled to the treaty benefit provided under the Prior Treaty or the New Treaty, as the case may be.

     In addition, this

This summary is based upon the representations of the Depositary and the assumption that each obligation in the deposit agreement in relation to the ADSs dated as of June 1, 1961, as amended and restated as of October 31, 1991, as further amended and restated as of March 17, 1995, and in any related agreement, will be performed underin accordance with its terms.

For purposes of the Prior Treaty and/or New Treatyincome tax convention between Japan and the United States (the “Treaty”) and the U.S. Internal Revenue Code of 1986, as amended (the “Code”), U.S. holders of ADSs generally will be treated as owning theshares of Common Stock of Sony Corporation underlying the ADSs evidenced by the ADRs. For the purposes of the following discussion, a “U.S. holder” is a holder that:

 (i)is a resident of the U.S. for purposes of the Prior Treaty or the New Treaty, as applicable from time to time;Treaty;
 
 (ii)does not maintain a permanent establishment or fixed base in Japan to(a) with which shares of Common Stock or ADSs of Sony Corporation are attributableeffectively connected and through which the beneficial ownerU.S. holder carries on or has carried on business (or, inor (b) of which shares of Common Stock or ADSs of Sony Corporation form part of the case of an individual, performs or has performed independent personal services);business property; and
 
 (iii)is not otherwise ineligibleeligible for benefits under the Prior Treaty or the New Treaty, as applicable, with respect to income and gain derived in connection with shares of Common Stock or ADSs of Sony Corporation.
 
Japanese Taxation

Japanese Taxation
The following is a summary of the principal Japanese tax consequences (limited to national taxes) to holders of shares of Common Stock of Sony Corporation and of ADRs evidencing ADSs representing shares of Common Stock of Sony Corporation who are non-resident individualsnon-residents of Japan or non-Japanese corporations, without a permanent establishment in Japan (“non-resident Holders”).

Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations. Sony Corporation withholds taxes from dividends it pays as required by Japanese law. Stock splits are, in themselves aregeneral, not subject to Japanese income tax.

a taxable event.

In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of Japanese withholding tax or allowing exemption from Japanese withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to individuals who are non-residents of Japan or non-Japanese corporations is generally 20 percent. Withpercent, provided, with respect to dividends paid on listed shares issued by a Japanese corporation (such


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(such as the shares of Common Stock of Sony Corporation) to any non-resident corporate or individual shareholders (including those shareholders who are non-Japanese corporations or Japanese non-resident individuals, such as non-resident Holders), except for other than any individual shareholder who holds 5 percent or more of the total shares issued by the relevant Japanese corporation, the aforementioned 20 percent withholding tax rate is reduced to (i) 7 percent for dividends due and payable on or before

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March 31, 2008,2009, and (ii) 15 percent for dividends due and payable on or after April 1, 2008.2009. As of the date of this document, Japan has income tax treaties, conventions or agreements whereby the above-mentioned withholding tax rate is reduced, in most cases to 15 percent or 10 percent for portfolio investors (15 percent under the income tax treaties with, among other countries, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Thethe Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and 10 percent under the income tax treaties with the U.K. and the United States).

Under the Prior Treaty, the maximum rate of Japanese withholding tax whichthat may be imposed on dividends paid by a Japanese corporation to a U.S. holder that is a portfolio investor was limited to 15does not own directly or indirectly at least 10 percent of the gross amount actually distributed. However, undervoting stock of the New Treaty which would become applicable to dividends declared by Sony Corporation on or after July 1, 2004, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to a U.S. holder that is a portfolio investor is generally limitedreduced to 10 percent of the gross amount actually distributed, and Japanese withholding tax with respect to dividends paid by a Japanese corporation to a U.S. holder that is a pension fund is exempt from Japanese taxation by way of withholding or otherwise unless such dividends are derived from the carrying on of a business, directly or indirectly, by such pension fund.

If the maximum tax rate provided for in the income tax treaty applicable to dividends paid by Sony Corporation to any particular non-resident Holder is lower than the withholding tax rate otherwise applicable under Japanese tax law or any particular non-resident Holder is exempt from Japanese income tax with respect to such dividends under the income tax treaty applicable to such particular non-resident Holder, such non-resident Holder is required to submit an Application Form for Income Tax Convention Regarding Relief from Japanese Income Tax on Dividends (together with any other required forms and documents) in advance through Sony Corporation to the relevant tax authority before the payment of dividends. A standing proxy for non-resident Holders of a Japanese corporation may provide this application service. With respect to ADSs, this reduced rate or exemption is applicable if the Depositary or its agent submits two Application Forms (one before payment of dividends and the other within eight months after Sony Corporation’s fiscal year-end or semi-fiscal year-end). To claim this reduced rate or exemption, a non-resident Holder of ADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the Depositary. A non-resident Holder who is entitled, under an applicable income tax treaty, to a reduced rate which is lower than the withholding tax rate otherwise applicable under Japanese tax law or an exemption from the withholding tax, but failed to submit the required application in advance will be entitled to claim the refund of taxes withheld in excess of the rate under an applicable tax treaty (if such non-resident Holder is entitled to a reduced treaty rate under the applicable income tax treaty) or the full amount of tax withheld (if such non-resident Holder is entitled to an exemption under the applicable income tax treaty) from the relevant Japanese tax authority. Sony Corporation does not assume any responsibility to ensure withholding at the reduced treaty rate or to ensure not withholding for shareholders who would be so eligible under any applicable income tax treaty but do not follow the required procedures as stated above.

Gains derived from the sale of shares of Common Stock or ADSs of Sony Corporation outside Japan by a non-resident Holder holding such shares or ADSs as portfolio investors are, in general, not subject to Japanese income tax or corporation tax. U.S. holders are not subject to Japanese income or corporation tax with respect to such gains under the Prior Treaty or the New Treaty, as applicable.

Treaty.

Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired shares of Common Stock or ADSs of Sony Corporation as a legatee, heir or donee even though neither the individual nor the deceased nor donor is a Japanese resident.

Holders of shares of Common Stock or ADSs of Sony Corporation should consult their tax advisors regarding the effect of these taxes and, in the case of U.S. holders, the possible application of the Estate and Gift Tax Treaty between the U.S. and Japan.


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121

 
United States Taxation with respect to shares of Common Stock and ADSs

United States Taxation with respect to shares of Common Stock and ADSs
The U.S. dollar amount of dividends received (prior to deduction of Japanese taxes) by a U.S. holder of ADSs or Common Stock will be includableable to be included in income as ordinary income for U.S. federal income tax purposes to the extent paid out of current or accumulated earnings and profits of Sony Corporation as determined for U.S. federal income tax purposes. Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 20092011 with respect to the ADSs or Common Stock will be subject to taxation at a maximum rate of 15 percent if the dividends are “qualified dividends.” Dividends paid on the Common Stock or ADSs will be treated as qualified dividends if we wereSony Corporation was not, in the year prior to the year in which the dividend was paid, and areis not, in the year in which the dividend is paid a passive foreign investment company (“PFIC”), foreign personal holding company (“FPHC”) or foreign investment company (“FIC”). Based on ourSony Corporation’s audited financial statements and relevant market and shareholder data, we believeSony Corporation believes that we wereit was not treated as a PFIC FPHC or FIC for U.S. federal income tax purposes with respect to our 2003its 2006 taxable year. In addition, based on ourSony Corporation’s audited financial statements and ourSony Corporation’s current expectations regarding the value and nature of ourits assets, the sources and nature of ourits income, and relevant market and shareholder data, we doSony Corporation does not anticipate becoming a PFIC FPHC or FIC for the 20042007 taxable year. The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs or Common Stock and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to treat dividends as qualified for tax reporting purposes. Because such procedures have not yet been issued, it is not clear whether weSony Corporation will be able to comply with them. Holders of ADSs and Common Stock should consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of the considerations discussed above and their own particular circumstances.

Subject to applicable limitations set out in the Code,and special considerations discussed below, a U.S. holder of ADSs or Common Stock of Sony Corporation will be entitled to a credit for Japanese tax withheld in accordance with the Tax Convention from dividends paid by Sony Corporation. For purposes of the foreign tax credit limitation, dividends will be foreign source income, butand will constitute “passive” or “financial services” income.

Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term of hedged positions and may not be allowed in respect of arrangements in which economic profit, afternon-U.S. taxes, is insubstantial. Holders of Ads and Common Stock should consult their own tax advisors regarding the implications of these rules in light of their particular circumstances.

Dividends paid by Sony Corporation to U.S. corporate holders of ADSs or Common Stock will not be eligible for the dividends-received deduction.

In general, a U.S. holder will recognize capital gain or loss upon the sale or other disposition of ADSs or Common Stock equal to the difference between the amount realized on the sale or disposition and the U.S. holder’s tax basis in the ADSs or Common Stock. Such capital gain or loss will be long-term capital gain or loss if the ADSs or Common Stock have been held for more than one year.year on the date of the sale or disposition. The net amount of long-term capital gain recognized by an individual holder after May 5, 2003 and before January 1, 20092011 generally is subject to taxation at a maximum rate of 15 percent. The net long-term capital gain recognized by an individual holder before May 6, 2003 or after December 31, 20082010 generally is subject to taxation at a maximum rate of 20 percent.

Dividends and Paying Agent

Not Applicable

Statement by Experts

Not Applicable

Documents on Display

It is possible to read and copy documents referred to in this annual report onForm 20-F that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth100 F Street, NW,N.E., Washington, D.C. 20549. Please call


109

the SEC at1-800-SEC-0330 for further information on the public reference rooms and their copy charges. You can also access the documents at the SEC’s home page (http://www.sec.gov/index.html).

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Subsidiary Information

Not Applicable
 
Item 11.Quantitative and Qualitative Disclosures Aboutabout Market Risk

Sony’s normal course of business is continuously exposed to market fluctuations,fluctuation, such as fluctuations in currency exchange rates, interest rates or stock prices. Sony utilizes several derivative instruments, such as foreign exchange forward contracts, foreign currency option contracts, interest rate swap agreements and currency swap agreements in order to hedge the potential downside risk on the cash flow from the normal course of business caused by market fluctuation. Sony uses foreign exchange forward contracts and foreign currency option contracts primarily to reduce the foreign exchange volatility risk that accounts receivable or accounts payable denominated in yen, U.S. dollars, eurosEuros or other currencies have through the normal course of Sony’s worldwide business. Interest rate swap agreements and currency swap agreements are utilized to diversify funding conditions or to reduce funding costs.costs, and in the Financial Services segment, these transactions are used for asset liability management. Sony uses these derivative financial instruments solelymainly for risk-hedging purposes as described above, and nofew derivative transactions, such as bond futures and bond options are held or utilized for trading purposes.purposes in the Financial Services segment. If hedge accounting cannot be applied because the accounts receivablesreceivable or accounts payablespayable to be hedged are not yet booked, or because cash flows from derivative transactions do not coincide with the underlying exposures recorded on Sony’s balance sheet, then Sony understands that such derivatives agreements should be subject to amark-to-market evaluation and their unrealized gains or losses are recognized in earnings. In addition, Sony holds marketable securities such as straight bonds, convertible bonds, and stocks in yen or other currencies in the Financial Services segment in order to realizeobtain interest income or capital gain on the financial assets under management. Sony understands that such investment in marketable securities is also subjectsubjected to market fluctuation.

Sony measures the economic impact of market fluctuations on the value of derivatives agreements and marketable securities by usingValue-at-Risk (“VaR”) analysis in order to comply with Item 11 disclosure requirements. VaR in this context indicates the potential maximum amount of loss in fair value resulting from adverse market fluctuations for a selected period of time and at a selected level of confidence.

     Until March 31, 2004, Sony disclosed market risk solely on a consolidated basis. Henceforth, however, in addition to disclosing market risk on a consolidated basis, Sony will make two additional disclosures: (i) the risk for the Financial Services segment and (ii) the risk for all other segments excluding Financial Services. Sony believes that such a comparative presentation may be useful in understanding and analyzing Sony’s market risk on a consolidated basis, since the risks faced by the Financial Services segment are different from those faced by Sony’s other business segments.

The following table shows the results of VaR. These analyses for the fiscal year endingended March 31, 20042007 indicate the potential maximum loss in fair value as predicted by the VaR analysis resulting from market fluctuations in one day at a 95%95 percent confidence level. The VaR of currency exchange rate risk principally consists of risks arising from the volatility of the exchange rates between the yen and U.S. dollar and between the yen and the euro,Euro, the currencies in which a significant amount of financial assets and liabilities and derivative transactions are maintained on a consolidated basis. The VaR of interest rate risk and stock price risk consistconsists of risks arising from the volatility of the interest rates and stock prices against tradinginvested securities and derivatives transactions in the Financial Services segment.

The net VaR for Sony’s entire portfolio is smaller than the simple aggregate of VaR for each component of market risk. This is due to the fact that market risk factors such as currency exchange rates, interest rates, and stock prices are not completely independent, and potential profits and losses arising from each component of market risk may to some degree be mutually offsetting.


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The disclosed VaR amounts simply representsrepresent the calculated potential maximum loss on the specified datesdate and dodoes not necessarily indicate an estimate of actual or future loss.

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Consolidated
                     
March 31,June 30,September 30,December 31,March 31,
20032003200320032004
(Yen in billions)
Net VaR  0.7   1.1   1.3   1.7   2.1 
VaR of currency exchange rate risk  0.3   0.8   1.2   0.5   1.1 
VaR of interest rate risk  0.1   0.3   0.4   0.4   0.7 
VaR of stock price risk  0.8   0.8   0.6   1.8   1.7 

                 
  June 30,
 September 29,
 December 29,
 March 30,
  2006 2006 2006 2007
  (Yen in billions)
 
Net VaR  4.8   3.8   2.3   2.9 
VaR of currency exchange rate risk  1.3   1.6   0.6   1.3 
VaR of interest rate risk  0.4   0.2   0.4   0.1 
VaR of stock price risk  4.8   3.4   2.4   3.2 
Financial Services
                     
March 31,June 30,September 30,December 31,March 31,
20032003200320032004
(Yen in billions)
Net VaR  0.7   0.8   0.8   1.5   1.5 
VaR of currency exchange rate risk  0.0   0.0   0.0   0.0   0.0 
VaR of interest rate risk  0.1   0.4   0.5   0.5   0.8 
VaR of stock price risk  0.8   0.8   0.6   1.8   1.7 

                 
  June 30,
 September 29,
 December 29,
 March 30,
  2006 2006 2006 2007
  (Yen in billions)
 
Net VaR  4.8   3.5   2.4   3.0 
VaR of currency exchange rate risk  0.5   0.4   0.3   0.6 
VaR of interest rate risk  0.4   0.2   0.3   0.6 
VaR of stock price risk  4.8   3.4   2.4   3.2 
All other segments excluding Financial Services
                     
March 31,June 30,September 30,December 31,March 31,
20032003200320032004
(Yen in billions)
Net VaR  0.3   0.8   1.2   0.5   1.1 
VaR of currency exchange rate risk  0.3   0.8   1.2   0.5   1.1 
VaR of interest rate risk  0.0   0.1   0.2   0.1   0.1 
VaR of stock price risk  0.0   0.0   0.0   0.0   0.0 
                 
  June 30,
 September 29,
 December 29,
 March 30,
  2006 2006 2006 2007
  (Yen in billions)
 
Net VaR  0.9   1.3   0.5   0.8 
VaR of currency exchange rate risk  0.9   1.3   0.5   0.8 
VaR of interest rate risk  0.0   0.0   0.2   0.1 
VaR of stock price risk  0.0   0.0   0.0   0.0 
 
Item 12.Description of Securities Other Than Equity Securities

Not Applicable
 
Item 13.Defaults, Dividend Arrearages and Delinquencies

None
 
Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds

In June 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which is intended to be linked to the economic value of Sony Communication Network Corporation (“SCN”), a directly and indirectly wholly-owned subsidiary of Sony Corporation, which is engaged in Internet-related services. Regarding the rights of holders of Sony Corporation’s Common Stock and subsidiary tracking stock, refer to “Memorandum and Articles of Association” in “Item 10.Additional Information.”

None
 
Item 15.Controls and Procedures

Item 15(a). Disclosure Controls and Procedures
Sony has carried out an evaluation under the supervision and with the participation of Sony’s management, including the Group Chief Executive Officer, Group Chief Strategy OfficerPresident, and Group Chief Financial Officer, of the effectiveness of the design and operation of Sony’s disclosure controls and procedures, as defined inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as of March 31, 2004.2007. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon Sony’s evaluation, the Chief


111

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the Group Chief
Executive Officer, Group Chief Strategy OfficerPresident and Group Chief Financial Officer have concluded that, as of March 31, 2004,2007, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports Sony files andor submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported as and when required.required, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to Sony’s management, including the Chief Executive Officer, President, and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Item 15(b). Management’s Annual Report on Internal Control over Financial Reporting
Sony management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined inRules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934. Sony’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with applicable generally accepted accounting principles. Sony’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Sony;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Sony are being made only in accordance with authorizations of management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Sony’s assets that could have a material effect on the financial statements.
Sony management evaluated the effectiveness of Sony’s internal control over financial reporting as of March 31, 2007 based on the criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the evaluation, management has concluded that Sony maintained effective internal control over financial reporting as of March 31, 2007.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s assessment of the effectiveness of Sony’s internal control over financial reporting as of March 31, 2007 has been audited by PricewaterhouseCoopers Aarata, an independent registered public accounting firm, as stated in its report, presented onpage F-2.
Item 15(c). Attestation Report of the Registered Public Accounting Firm
Refer to the Report of Independent Registered Public Accounting Firm onpage F-2.
Item 15(d) — Changes in Internal Control over Financial Reporting
There has been no change in Sony’s internal control over financial reporting during the fiscal year ended March 31, 20042007 that has materially affected, or is reasonably likely to materially affect, Sony’s internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
 
Item 16.[Reserved]
Item 16A.Audit Committee Financial Expert

Sony’s Board of Directors has determined that Mr. Yoshiaki Yamauchi and Mr. Akihisa Ohnishi eachFueo Sumita both qualify as an “audit committee financial expert” as defined in this Item 16A, and16A. In addition, both are both “independent”independent as defined in Rule 10A-3 under the Securities andNew York Stock Exchange ActCorporate Governance Standards.


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Item 16B. Code of 1934, as amended.Ethics
 
Item 16B.Code of Ethics

Sony has adopted a code of ethics, as defined in Item 16B ofForm 20-F under the Securities Exchange Act of 1934, as amended. The code of ethics applies to Sony’s chief executive officer, chief financial officer,Chief Executive Officer, Chief Financial Officer, chief accounting officer and persons performing similar functions, as well as to directors and all other officers and employees of Sony, Group, as defined in the code of ethics. The code of ethics is available athttp://www.sony.net/SonyInfo/Environment/management/code/pdf/codecompliance/qfhh7c000006e52h-att/code_of_conduct.pdfofconduct.pdf
 
Item 16C.Principal Accountant Fees and Services

Item 16C. Principal Accountant Fees and Services

Audit and Non-Audit Fees

PricewaterhouseCoopers has served as Sony’s principal accountant for the three fiscal years ended March 31, 2004. ChuoAoyama PricewaterhouseCoopers is a member firm of PricewaterhouseCoopers in Japan.

The following table presents fees for audit and other services rendered by PricewaterhouseCoopers for the fiscal years ended March 31, 20032006 and March 31, 2004.
         
March 31
20032004
Yen in millions
Audit Fees  1,690   2,118 
Audit-Related Fees(1)  38   284 
Tax Fees(2)  822   970 
All Other Fees(3)  1,925   150 
   
   
 
   4,475   3,522 
   
   
 

2007.

         
  Fiscal Year Ended
  March 31
  2006 2007
  Yen in millions
 
Audit Fees(1)  2,180   4,900 
Audit-Related Fees(2)  206   204 
Tax Fees(3)  486   110 
All Other Fees(4)  12   16 
         
   2,884   5,230 
         
(1) Audit-RelatedAudit Fees consist primarily of employee benefit plan auditsfees billed for the annual audit services engagement and due diligenceother audit services, which are those services that only the external auditor can provide. Theyear-over-year increase in audit fees for the fiscal year ended March 31, 2007 compared to the prior year is mostly related to mergers.the attestation services in connection with Section 404 of the Sarbanes-Oxley Act of 2002.
 
(2)Audit-Related Fees consist of fees billed for assurance and related services, and mainly include the audits of employee benefit plans. The audit-related fees for the fiscal year ended March 31, 2006 included the advisory services related to the implementation of Sarbanes-Oxley Act Section 404 and employee benefit plan audits.
(3) Tax Fees primarily include tax compliance, tax advice tax planning and expatriate tax services.
(3)(4) All Other Fees comprise fees for all other services not included in any of the other categories noted above. These services for the year ended March 31, 2003 were primarily for system consulting and were incurred prior to the sale of PricewaterhouseCoopers’ consulting business to IBM Corporation in October 2002.

Audit Committee’s Pre-Approval Policies and Procedures

Consistent with U.S. Securities and Exchange Commission rules regarding auditor independence, theSony’s Audit Committee of Sony Corporation is responsible for appointing, reviewing and setting compensation,

125

retaining, and overseeing the work of Sony’s independent auditor, so that the auditor’s independence will not be impaired, including overseeing any separate firm that audits the financial statements of any subsidiary if Sony’s independent auditor expressly relies on the audit report of such firm. The Audit Committee has established a formal policy requiring pre-approval of all audit and permissible non-audit services provided by the independent auditor to Sony or any of its affiliates.subsidiaries. The Audit Committee shall periodically review this policy with due regard to complyingfor compliance with laws and regulations of host countries where Sony is listed.

Prior to the engagement of the independent auditor for the following fiscal year’s audit, management shall submit an application form to the Audit Committee for comprehensive pre-approval of all recurring services expected to be rendered during that year. In order to obtain comprehensive pre-approval, management shall provide sufficient information regarding each service so that each service can be classified into one of four categories (Audit, Audit-related, Tax, or All Other) as well as information regarding the fees expected to be budgeted for each service. Management shall describe each service in detail and indicate precisely and unambiguously the nature and scope of each particular service. Any additional services not contemplated in the application form shall require the Audit Committee’s separate pre-approval on an individual basis. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees, resulting from changes in the scope of services to be provided or from


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other circumstances. The Audit Committee may delegateChairman retains pre-approval authority to a full-time member of the Audit Committee. The full-time member must report any pre-approval decisions to the Audit Committee at its next scheduled meeting.and evaluates items for approval on request basis. The Audit Committee or its designee shall establish procedures to assure that the independent auditor is aware in a timely manner of the services that have been pre-approved.
 
During the fiscal year ended March 31, 2007, the Audit Committee has continued to include individual tax services, recruiting services and corporate tax service to the list of prohibited services stipulated by U.S. Securities and Exchange Commission rules and related regulations to enhance auditor independence. The Audit Committee has carefully checked these services and only permitted exceptional instances where the services had already been pre-approved prior to the effective date and instances in which difficulties were encountered in finding an alternative service provider immediately, or when a brief transitional period has been needed.
Item 16D.Exemptions from the Listing Standards for Audit Committees
Exemptions From Listing Standards for Audit Committees

Not applicable.

 
Not applicable.
Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Not yet applicable.

 
Item 17.Financial Statements

Not applicable

The following table sets out information concerning purchases made by Sony during the fiscal year ended March 31, 2007.
 
                 
      (c) Total
  
      Number of
 (d) Maximum
      Shares
 Number of
      Purchased as
 Shares that
  (a) Total
   Part of Publicly
 May Yet Be
  Number of
 (b) Average
 Announced
 Purchased
  Shares
 Price Paid per
 Plans or
 Under the Plans
Period Purchased Share Programs or Programs
 
April 1st — 30th, 2006
  7,272   5,721.56   N/A   N/A 
May 1st — 31st, 2006
  6,169   5,458.88   N/A   N/A 
June 1st — 30th, 2006
  6,212   4,935.14   N/A   N/A 
July 1st — 31st, 2006
  6,639   4,933.68   N/A   N/A 
August 1st — 31st, 2006
  9,027   5,175.29   N/A   N/A 
September 1st  — 30th, 2006
  8,082   4,983.42   N/A   N/A 
October 1st — 31st, 2006
  7,974   4,700.31   N/A   N/A 
November 1st — 30th, 2006
  6,383   4,741.61   N/A   N/A 
December 1st — 31st, 2006
  12,594   4,920.18   N/A   N/A 
January 1st — 31st, 2007
  12,145   5,530.72   N/A   N/A 
February 1st — 28th, 2007
  13,208   6,024.99   N/A   N/A 
March 1st — 31st, 2007
  9,049   6,151.01   N/A   N/A 
Total  104,754   5,324.93   N/A   N/A 
Under the Company Law of Japan, a holder of shares constituting less than one full unit may require Sony Corporation to purchase such shares at their market value (Refer to “Memorandum and Articles of Association —Capital stock — (Unit share system)” in “Item 10.Additional Information”). During the fiscal year ended March 31, 2007, Sony Corporation purchased 104,754 shares for a total purchase price of 557,807,980 yen upon such requests from holders of shares constituting less than one full unit.
Item 18.
Financial Statements

Item 17. Financial Statements

Not applicable
Item 18. Financial Statements
Refer to Consolidated Financial Statements.


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Item 19. Exhibits
 
Item 19.Exhibits

Documents filed as exhibits to this annual report:
     
 1.1 Articles of Incorporation, as amended (English Translation)
 1.2 Board of Directors Regulations (English Translation)
 8  Significant subsidiaries (as defined in §210.1-02(w) of Regulation S-X) of Sony Corporation, including additional subsidiaries that management has deemed to be significant, as of March 31, 2004: Incorporated by reference to “Business Overview and Organizational Structure” in “Item 4.Information on the Company”
 31  Rule 13a-14(a)/15d-14(a) Certifications
 32  Section 1350 Certifications
8.1Significant subsidiaries (as defined in §210.1-02(w) ofRegulation S-X) of Sony Corporation, including additional subsidiaries that management has deemed to be significant, as of March 31, 2007: Incorporated by reference to “Business Overview and Organizational Structure” in “Item 4. Information on the Company”
12.1302 Certification
12.2302 Certification
13.1906 Certification
15.1(a)Consent of PricewaterhouseCoopers Aarata
15.1(b)Consent of PricewaterhouseCoopers AB


115

126

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

SONY CORPORATION
(Registrant)

SONY CORPORATION
(Registrant)
 By: 
/s/  KATSUMI IHARANOBUYUKI ONEDA
(Signature)
Katsumi Ihara
Executive Deputy President
Group Chief Strategy Officer &
Group Chief Financial Officer

By: /s/ TERUHISA TOKUNAKA
(Signature)
Teruhisa Tokunaka
Member of the Board of Directors
(Group Chief Strategy Officer until
June 22, 2004)

By: /s/ TAKAO YUHARA
(Signature)
Takao Yuhara
Corporate Senior Vice President
(Group Chief Financial Officer until
June 22, 2004)

(Signature)
Nobuyuki Oneda
Executive Vice President
Chief Financial Officer
Date: June 22, 200421, 2007


116

127

Consolidated Financial Statements

Sony Corporation and Consolidated Subsidiaries

March 31, 20042007

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
     
Page
Report of Independent Registered Public Accounting Firm
 F-2
Consolidated Balance Sheets at March 31, 20032006 and 20042007
 F-4
Consolidated Statements of Income for the years ended March 31, 2002, 20032005, 2006 and 20042007
 F-6
Consolidated Statements of Cash Flows for the years ended March 31, 2002, 20032005, 2006 and 20042007
 F-8
Consolidated Statements of Changes in Stockholders’ Equity for the years ended March 31, 2002, 20032005, 2006 and 20042007
 F-10
Index to Notes to Consolidated Financial Statements
 F-13
Notes to Consolidated Financial Statements
 F-14
Financial Statement Schedule II for the years ended March 31, 2002, 20032005, 2006 and 20042007 — Valuation and Qualifying Accounts
 F-73F-71

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.

***********************************************************************
Consolidated Financial Statements of Sony Ericsson Mobile Communications AB
A-1
Report of Independent Auditors
A-28
Consolidated Financial statementsStatements of majority-owned subsidiaries of the registrant not consolidated and of 50% or less owned persons accounted for by the equity method have been omitted because the registrant’s proportionate share of the income from continuing operations before income taxes, and total assets of each such company is less than 20% of the respective consolidated amounts, and the investment in and advancesSony Ericsson Mobile Communications AB are provided pursuant to each company is less than 20% of consolidated total assets.Regulation S-XRule 3-09.


F-1

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of
Sony Corporation (Sony Kabushiki Kaisha)

We have completed an integrated audit of Sony Corporation’s March 31, 2007 consolidated financial statements and of its internal control over financial reporting as of March 31, 2007 and audits of its March 31, 2005 and 2006 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated Financial Statements and Financial Statement Schedule
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Sony Corporation and its subsidiaries (“the Company”Sony”) at March 31, 20032006 and 2004,2007, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2004,2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’sSony’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the CompanySony changed its methods of accounting for derivative instruments and hedging activities and for goodwilldefined benefit pensions and other intangible assets inpostretirement benefits, stock-based compensation and certain hybrid financial instruments during the fiscal year ended March 31, 2002, and its method of accounting for variable interest entities2007.
Internal Control Over Financial Reporting
Also, in our opinion, management’s assessment, included in the year endedaccompanying “Management’s Annual Report on Internal Control over Financial Reporting” appearing under Item 15(b), that Sony maintained effective internal control over financial reporting as of March 31, 2004.

/s/ CHUOAOYAMA PRICEWATERHOUSECOOPERS

2007 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, Sony maintained, in all material respects, effective internal control over financial reporting as of March 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the COSO. Sony’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of Sony’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers Aarata
Tokyo, Japan
May 20, 2004June 6, 2007


F-2

F-2

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F-3

F-3

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
          
March 31
20032004
(Yen in millions)
ASSETS
Current assets:
        
Cash and cash equivalents  713,058   849,211 
Time deposits  3,689   4,662 
Marketable securities  241,520   274,748 
Notes and accounts receivable, trade  1,117,889   1,123,863 
Allowance for doubtful accounts and sales returns  (110,494)  (112,674)
Inventories  625,727   666,507 
Deferred income taxes  143,999   125,532 
Prepaid expenses and other current assets  418,826   431,506 
   
   
 
 Total current assets  3,154,214   3,363,355 
   
   
 
Film costs  287,778   256,740 
   
   
 
Investments and advances:
        
Affiliated companies  111,510   86,253 
Securities investments and other  1,882,613   2,426,697 
   
   
 
   1,994,123   2,512,950 
   
   
 
Property, plant and equipment:
        
Land  188,365   189,785 
Buildings  872,228   930,983 
Machinery and equipment  2,054,219   2,053,085 
Construction in progress  60,383   98,480 
   
   
 
   3,175,195   3,272,333 
Less — Accumulated depreciation  1,896,845   1,907,289 
   
   
 
   1,278,350   1,365,044 
   
   
 
Other assets:
        
Intangibles, net  258,624   248,010 
Goodwill  290,127   277,870 
Deferred insurance acquisition costs  327,869   349,194 
Deferred income taxes  328,091   203,203 
Other  451,369   514,296 
   
   
 
   1,656,080   1,592,573 
   
   
 
   8,370,545   9,090,662 
   
   
 
(Continued on following page.)

F-4

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheets
March 31
         
  Yen in millions 
  2006  2007 
 
ASSETS
        
Current assets:
        
Cash and cash equivalents  703,098   799,899 
Marketable securities  536,968   493,315 
Notes and accounts receivable, trade  1,075,071   1,490,452 
Allowance for doubtful accounts and sales returns  (89,563)  (120,675)
Inventories  804,724   940,875 
Deferred income taxes  221,311   243,782 
Prepaid expenses and other current assets  517,915   699,075 
Total current assets  3,769,524   4,546,723 
Film costs  360,372   308,694 
Investments and advances:
        
Affiliated companies  285,870   448,169 
Securities investments and other  3,234,037   3,440,567 
   3,519,907   3,888,736 
Property, plant and equipment:
        
Land  178,844   167,493 
Buildings  926,783   978,680 
Machinery and equipment  2,327,676   2,479,308 
Construction in progress  116,149   64,855 
   3,549,452   3,690,336 
Less — Accumulated depreciation  2,160,905   2,268,805 
   1,388,547   1,421,531 
Other assets:
        
Intangibles, net  207,034   233,255 
Goodwill  299,024   304,669 
Deferred insurance acquisition costs  383,156   394,117 
Deferred income taxes  178,751   216,997 
Other  501,438   401,640 
   1,569,403   1,550,678 
Total assets:
  10,607,753   11,716,362 
(Continued on following page.)


F-4

SONY CORPORATION AND CONSOLIDATED BALANCE SHEETS —SUBSIDIARIES

Consolidated Balance Sheets (Continued)
          
March 31
20032004
(Yen in millions)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
        
Short-term borrowings  124,360   91,260 
Current portion of long-term debt  34,385   383,757 
Notes and accounts payable, trade  697,385   778,773 
Accounts payable, other and accrued expenses  864,188   812,175 
Accrued income and other taxes  109,199   57,913 
Deposits from customers in the banking business  248,721   378,851 
Other  356,810   479,486 
   
   
 
 Total current liabilities  2,435,048   2,982,215 
   
   
 
Long-term liabilities:
        
Long-term debt  807,439   777,649 
Accrued pension and severance costs  496,174   368,382 
Deferred income taxes  159,079   96,193 
Future insurance policy benefits and other  1,914,410   2,178,626 
Other  255,478   286,737 
   
   
 
   3,632,580   3,707,587 
   
   
 
Minority interest in consolidated subsidiaries
  22,022   22,858 
   
   
 
Stockholders’ equity:
        
Subsidiary tracking stock, no par value —        
 Authorized 100,000,000 shares, outstanding 3,072,000 shares  3,917   3,917 
Common stock, no par value —        
 2003 — Authorized 3,500,000,000 shares, outstanding 922,385,176 shares  472,361     
 2004 — Authorized 3,500,000,000 shares, outstanding 926,418,280 shares      476,350 
Additional paid-in capital  984,196   992,817 
Retained earnings  1,301,740   1,367,060 
Accumulated other comprehensive income —        
 Unrealized gains on securities  17,658   69,950 
 Unrealized losses on derivative instruments  (4,793)  (600)
 Minimum pension liability adjustment  (182,676)  (89,261)
 Foreign currency translation adjustments  (302,167)  (430,048)
   
   
 
   (471,978)  (449,959)
Treasury stock, at cost        
 (2003 — 1,573,396 shares, 2004 — 2,468,258 shares)  (9,341)  (12,183)
   
   
 
   2,280,895   2,378,002 
   
   
 
Commitments and contingent liabilities
        
 
   8,370,545   9,090,662 
   
   
 

         
  Yen in millions 
  2006  2007 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
Current liabilities:
        
Short-term borrowings  142,766   52,291 
Current portion of long-term debt  193,555   43,170 
Notes and accounts payable, trade  813,332   1,179,694 
Accounts payable, other and accrued expenses  854,886   968,757 
Accrued income and other taxes  87,295   70,286 
Deposits from customers in the banking business  599,952   752,367 
Other  508,442   485,287 
Total current liabilities  3,200,228   3,551,852 
Long-term debt  764,898   1,001,005 
Accrued pension and severance costs  182,247   173,474 
Deferred income taxes  216,497   261,102 
Future insurance policy benefits and other  2,744,321   3,037,666 
Other  258,609   281,589 
Total liabilities:
  7,366,800   8,306,688 
Minority interest in consolidated subsidiaries
  37,101   38,970 
Stockholders’ equity:
        
Common stock, no par value —        
2006 — Authorized 3,500,000,000 shares, outstanding 1,001,679,664 shares  624,124     
2007 — Authorized 3,600,000,000 shares, outstanding 1,002,897,264 shares      626,907 
Additional paid-in capital  1,136,638   1,143,423 
Retained earnings  1,602,654   1,719,506 
Accumulated other comprehensive income —        
Unrealized gains on securities  100,804   86,096 
Unrealized losses on derivative instruments  (2,049)  (1,075)
Minimum pension liability adjustment  (39,824)  — 
Pension liability adjustment  —   (71,459)
Foreign currency translation adjustments  (215,368)  (129,055)
   (156,437)  (115,493)
Treasury stock, at cost        
Common stock        
2006 — 740,888 shares  (3,127)    
2007 — 834,859 shares      (3,639)
   3,203,852   3,370,704 
Commitments and contingent liabilities
        
Total liabilities and stockholders’ equity:
  10,607,753   11,716,362 
The accompanying notes are an integral part of these statements.


F-5

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOMEConsolidated Statements of Income
             
Year Ended March 31
200220032004
(Yen in millions)
Sales and operating revenue:
            
Net sales  7,058,755   6,916,042   6,883,478 
Financial service revenue  480,190   509,398   565,752 
Other operating revenue  39,313   48,193   47,161 
   
   
   
 
   7,578,258   7,473,633   7,496,391 
   
   
   
 
Costs and expenses:
            
Cost of sales  5,239,592   4,979,421   5,058,205 
Selling, general and administrative  1,695,897   1,782,367   1,798,239 
Financial service expenses  458,276   486,464   505,550 
Loss on sale, disposal or impairment of assets, net  49,862   39,941   35,495 
   
   
   
 
   7,443,627   7,288,193   7,397,489 
   
   
   
 
Operating income
  134,631   185,440   98,902 
   
   
   
 
Other income:
            
Interest and dividends  16,021   14,441   18,756 
Royalty income  33,512   32,375   34,244 
Foreign exchange gain, net  —   1,928   18,059 
Gain on sales of securities investments, net  1,398   72,552   11,774 
Gain on issuances of stock by subsidiaries and equity investees  503   —   4,870 
Other  44,894   36,232   34,587 
   
   
   
 
   96,328   157,528   122,290 
   
   
   
 
Other expenses:
            
Interest  36,436   27,314   27,849 
Loss on devaluation of securities investments  18,458   23,198   16,481 
Foreign exchange loss, net  31,736   —   — 
Other  51,554   44,835   32,795 
   
   
   
 
   138,184   95,347   77,125 
   
   
   
 
Income before income taxes
  92,775   247,621   144,067 
   
   
   
 
Income taxes:
            
Current  114,930   178,847   87,219 
Deferred  (49,719)  (98,016)  (34,445)
   
   
   
 
   65,211   80,831   52,774 
   
   
   
 
Fiscal Year Ended March 31
             
  Yen in millions 
  2005  2006  2007 
 
Sales and operating revenue:
            
Net sales  6,565,010   6,692,776   7,567,359 
Financial service revenue  537,715   720,566   624,282 
Other operating revenue  88,600   97,255   104,054 
   7,191,325   7,510,597   8,295,695 
Costs and expenses:
            
Cost of sales  5,000,112   5,151,397   5,889,601 
Selling, general and administrative  1,535,015   1,527,036   1,788,427 
Financial service expenses  482,576   531,809   540,097 
Loss on sale, disposal or impairment of assets, net  27,994   73,939   5,820 
   7,045,697   7,284,181   8,223,945 
Operating income
  145,628   226,416   71,750 
Other income:
            
Interest and dividends  14,708   24,937   28,240 
Gain on sale of securities investments, net  5,437   9,645   14,695 
Gain on change in interest in subsidiaries and equity investees  16,322   60,834   31,509 
Other  29,447   23,039   20,738 
   65,914   118,455   95,182 
Other expenses:
            
Interest  24,578   28,996   27,278 
Loss on devaluation of securities investments  3,715   3,878   1,308 
Foreign exchange loss, net  524   3,065   18,835 
Other  25,518   22,603   17,474 
   54,335   58,542   64,895 
Income before income taxes
  157,207   286,329   102,037 
Income taxes:
            
Current  85,510   96,400   67,081 
Deferred  (69,466)  80,115   (13,193)
   16,044   176,515   53,888 
Income before minority interest, equity in net income of affiliated companies and cumulative effect of an accounting change
  141,163   109,814   48,149 
Minority interest in income (loss) of consolidated subsidiaries  1,651   (626)  475 
Equity in net income of affiliated companies  29,039   13,176   78,654 
Income before cumulative effect of an accounting change
  168,551   123,616   126,328 
Cumulative effect of an accounting change            
(2005: Net of income taxes of 2,675 million)  (4,713)  —   — 
Net income
  163,838   123,616   126,328 
(Continued on following page.)


F-6

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Income (Continued)

CONSOLIDATED STATEMENTS OF INCOME — (Continued)

               
Year Ended March 31
200220032004
(Yen in millions)
Income before minority interest, equity in net income (loss) of affiliated companies and cumulative effect of accounting changes
  27,564   166,790   91,293 
Minority interest in income (loss)of consolidated subsidiaries  (16,240)  6,581   2,379 
Equity in net income (loss) of affiliated companies  (34,472)  (44,690)  1,714 
   
   
   
 
Income before cumulative effect of accounting changes  9,332   115,519   90,628 
   
   
   
 
Cumulative effect of accounting changes            
(2002: Net of income taxes of ¥2,975 million            
2004: Net of income taxes of ¥0 million)  5,978   —   (2,117)
   
   
   
 
Net income
  15,310   115,519   88,511 
   
   
   
 
Per share data:
            
Common stock            
 Income before cumulative effect of accounting changes            
  — Basic  10.21   125.74   98.26 
  — Diluted  10.18   118.21   93.00 
 Cumulative effect of accounting changes            
  — Basic  6.51   —   (2.29)
  — Diluted  6.49   —   (2.12)
 Net income            
  — Basic  16.72   125.74   95.97 
  — Diluted  16.67   118.21   90.88 
 Cash dividends  25.00   25.00   25.00 
Subsidiary tracking stock            
 Net income (loss)            
  — Basic  (15.87)  (41.98)  (41.80)
 Cash dividends  —   —   — 
   
   
   
 

             
  Yen 
  2005  2006  2007 
 
 
Per share data:
            
Common stock            
Income before cumulative effect of an accounting change            
 — Basic  180.96   122.58   126.15 
 — Diluted  162.59   116.88   120.29 
Cumulative effect of an accounting change            
 — Basic  (5.06)  —   — 
 — Diluted  (4.52)  —   — 
Net income            
 — Basic  175.90   122.58   126.15 
 — Diluted  158.07   116.88   120.29 
Cash dividends  25.00   25.00   25.00 
Subsidiary tracking stock            
Net income            
 — Basic  17.21   —   — 
The accompanying notes are an integral part of these statements.


F-7

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows
CONSOLIDATED STATEMENTS OF CASH FLOWSFiscal Year Ended March 31
                 
Year Ended March 31
200220032004
(Yen in millions)
Cash flows from operating activities:
            
 Net income  15,310   115,519   88,511 
 Adjustments to reconcile net income to net cash provided by operating activities —            
  Depreciation and amortization, including amortization of deferred insurance acquisition costs  354,135   351,925   366,269 
  Amortization of film costs  242,614   312,054   305,786 
  Accrual for pension and severance costs, less payments  14,995   37,858   35,562 
  Loss on sale, disposal or impairment of assets, net  49,862   39,941   35,495 
  Gain on sales of securities investments, net  (1,398)  (72,552)  (11,774)
  Gain on issuances of stock by subsidiaries and equity investees  (503)  —   (4,870)
  Deferred income taxes  (49,719)  (98,016)  (34,445)
  Equity in net (income) losses of affiliated companies, net of dividends  37,537   46,692   1,732 
  Cumulative effect of accounting changes  (5,978)  —   2,117 
  Changes in assets and liabilities:            
   (Increase) decrease in notes and accounts receivable, trade  111,301   174,679   (63,010)
   (Increase) decrease in inventories  290,872   36,039   (78,656)
   Increase in film costs  (236,072)  (317,953)  (299,843)
   Increase (decrease) in notes and accounts payable, trade  (172,626)  (58,384)  93,950 
   Increase (decrease) in accrued income and other taxes  (39,589)  14,637   (46,067)
   Increase in future insurance policy benefits and other  314,405   233,992   264,216 
   Increase in deferred insurance acquisition costs  (71,522)  (66,091)  (71,219)
   Increase in marketable securities held in the insurance business for trading purpose  (55,661)  —   — 
   (Increase) decrease in other current assets  5,543   29,095   (34,991)
   Increase (decrease) in other current liabilities  (19,418)  26,205   44,772 
  Other  (46,492)  48,148   39,100 
   
   
   
 
    Net cash provided by operating activities  737,596   853,788   632,635 
   
   
   
 
             
  Yen in millions 
  2005  2006  2007 
 
Cash flows from operating activities:
            
Net income  163,838   123,616   126,328 
Adjustments to reconcile net income to net cash provided by operating activities —            
Depreciation and amortization, including amortization of deferred insurance acquisition costs  372,865   381,843   400,009 
Amortization of film costs  276,320   286,655   368,382 
Stock-based compensation  (74)  150   3,838 
Accrual for pension and severance costs, less payments  22,837   (7,563)  (22,759)
Gain on the transfer to the Japanese Government of the substitutional portion of employee pension fund, net  —   (73,472)  — 
Loss on sale, disposal or impairment of assets, net  27,994   73,939   5,820 
Gain on sale or loss on devaluation of securities investments, net  (1,722)  (5,767)  (13,387)
Gain on revaluation of marketable securities held in the financial service business for trading purpose, net  (5,246)  (44,986)  (11,857)
Gain on change in interest in subsidiaries and equity investees  (16,322)  (60,834)  (31,509)
Deferred income taxes  (69,466)  80,115   (13,193)
Equity in net (income) losses of affiliated companies, net of dividends  (15,648)  9,794   (68,179)
Cumulative effect of an accounting change  4,713   —   — 
Changes in assets and liabilities:            
(Increase) decrease in notes and accounts receivable, trade  (22,056)  17,464   (357,891)
(Increase) decrease in inventories  34,128   (164,772)  (119,202)
Increase in film costs  (294,272)  (339,697)  (320,079)
Increase (decrease) in notes and accounts payable, trade  31,473   (9,078)  362,079 
Increase (decrease) in accrued income and other taxes  3   29,009   (14,396)
Increase in future insurance policy benefits and other  144,143   143,122   172,498 
Increase in deferred insurance acquisition costs  (65,051)  (51,520)  (61,563)
(Increase) decrease in marketable securities held in the financial service business for trading purpose  (26,096)  (35,346)  31,732 
Increase in other current assets  (29,699)  (8,792)  (35,133)
Increase in other current liabilities  46,545   105,865   73,222 
Other  67,790   (49,887)  86,268 
Net cash provided by operating activities  646,997   399,858   561,028 
(Continued on following page.)


F-8

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS —Consolidated Statements of Cash Flows (Continued)
               
Year Ended March 31
200220032004
(Yen in millions)
Cash flows from investing activities:
            
 Payments for purchases of fixed assets  (388,514)  (275,285)  (427,344)
 Proceeds from sales of fixed assets  37,434   25,711   33,987 
 Payments for investments and advances by financial service business  (689,944)  (1,012,508)  (1,167,945)
 Payments for investments and advances
(other than financial service business)		  (106,396)  (123,839)  (33,329)
 Proceeds from sales of securities investments, maturities of marketable securities and collections of advances by financial service business  330,239   529,395   791,188 
 Proceeds from sales of securities investments, maturities of marketable securities and collections of advances (other than financial service business)  48,842   148,977   35,521 
 (Increase) decrease in time deposits  1,222   1,124   (1,456)
 Cash assumed upon acquisition by stock exchange offering  —   —   3,634 
 Proceeds from the issuance of stock by subsidiaries  —   —   3,952 
   
   
   
 
  Net cash used in investing activities  (767,117)  (706,425)  (761,792)
   
   
   
 
Cash flows from financing activities:
            
 Proceeds from issuance of long-term debt  228,999   12,323   267,864 
 Payments of long-term debt  (171,739)  (238,144)  (32,042)
 Decrease in short-term borrowings  (78,104)  (7,970)  (57,708)
 Increase in deposits from customers in the banking business  106,472   142,023   129,874 
 Proceeds from issuance of subsidiary tracking stock  9,529   —   — 
 Dividends paid  (22,951)  (22,871)  (23,106)
 Other  12,834   21,505   28,401 
   
   
   
 
  Net cash provided by (used in) financing activities  85,040   (93,134)  313,283 
   
   
   
 
Effect of exchange rate changes on cash and cash equivalents  21,036   (24,971)  (47,973)
   
   
   
 
Net increase in cash and cash equivalents  76,555   29,258   136,153 
Cash and cash equivalents at beginning of the fiscal year  607,245   683,800   713,058 
   
   
   
 
Cash and cash equivalents at end of the fiscal year  683,800   713,058   849,211 
   
   
   
 
Supplemental data:
            
Cash paid during the year for —            
 Income taxes  148,154   171,531   114,781 
 Interest  35,371   22,216   22,571 
   
   
   
 
Non-cash investing and financing activities —            
 Obtaining assets by entering into capital lease  10,572   9,034   18,298 
 Contribution of assets into an affiliated company  10,545   —   — 
   
   
   
 

             
  Yen in millions 
  2005  2006  2007 
 
Cash flows from investing activities:
            
Payments for purchases of fixed assets  (453,445)  (462,473)  (527,515)
Proceeds from sales of fixed assets  34,184   38,168   87,319 
Payments for investments and advances by financial service business  (1,309,092)  (1,368,158)  (914,754)
Payments for investments and advances (other than financial service business)  (158,151)  (36,947)  (100,152)
Proceeds from maturities of marketable securities, sales of securities investments and collections of advances by financial service business  923,593   857,376   679,772 
Proceeds from maturities of marketable securities, sales of securities investments and collections of advances (other than financial service business)  25,849   24,527   22,828 
Proceeds from sales of subsidiaries’ and equity investees’ stocks  3,162   75,897   43,157 
Other  2,728   346   (6,085)
Net cash used in investing activities  (931,172)  (871,264)  (715,430)
Cash flows from financing activities:
            
Proceeds from issuance of long-term debt  57,232   246,326   270,780 
Payments of long-term debt  (94,862)  (138,773)  (182,374)
Increase (decrease) in short-term borrowings  11,397   (11,045)  6,096 
Increase in deposits from customers in the financial service business  294,352   190,320   273,435 
Increase (decrease) in call money and bills sold in the banking business  (40,400)  86,100   (100,700)
Dividends paid  (22,978)  (24,810)  (25,052)
Proceeds from the issuance of shares under stock-based compensation plans  105   4,681   5,566 
Proceeds from the issuance of shares by subsidiaries  4,023   6,937   2,217 
Other  (3,692)  128   (2,065)
Net cash provided by financing activities  205,177   359,864   247,903 
Effect of exchange rate changes on cash and cash equivalents  8,890   35,537   3,300 
Net increase (decrease) in cash and cash equivalents  (70,108)  (76,005)  96,801 
Cash and cash equivalents at beginning of the fiscal year  849,211   779,103   703,098 
Cash and cash equivalents at end of the fiscal year  779,103   703,098   799,899 
Supplemental data:
            
Cash paid during the fiscal year for —            
Income taxes  65,477   70,019   104,822 
Interest  18,187   24,651   23,000 
Non-cash investing and financing activities —            
Conversion of convertible bonds  282,744   —   — 
Obtaining assets by entering into capital lease  19,049   19,682   13,784 
Contribution of net assets into the joint venture with Bertelsmann AG  9,402   —   — 
The accompanying notes are an integral part of these statements.


F-9

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYConsolidated Statements of Changes in Stockholders’ Equity
                                
Year Ended March 31
Accumulated
SubsidiaryAdditionalotherTreasury
trackingCommonPaid-InRetainedcomprehensivestock,
StockStockCapitalearningsincomeat costTotal
(Yen in millions)
Balance at March 31, 2001  —   472,002   962,401   1,217,110   (328,567)  (7,493)  2,315,453 
Exercise of stock purchase warrants      26   26               52 
Conversion of convertible bonds      161   162               323 
Issuance of subsidiary tracking stock  3,917       5,612               9,529 
Comprehensive income:                            
 Net income              15,310           15,310 
 Other comprehensive income, net of tax —                            
  Unrealized gains on securities:                            
   Unrealized holding gains or losses arising during the period                  (20,243)      (20,243)
   Less: Reclassification adjustment for gains or losses included in net income                  (1,276)      (1,276)
  Unrealized losses on derivative instruments:                            
   Cumulative effect of an accounting change                  1,089       1,089 
   Unrealized holding gains or losses arising during the period                  2,437       2,437 
   Less: Reclassification adjustment for gains or losses included in net income                  (4,237)      (4,237)
  Minimum pension liability adjustment                  (22,228)      (22,228)
  Foreign currency translation adjustments                  97,432       97,432 
                           
 
Total comprehensive income                          68,284 
                           
 
Stock issue costs, net of tax              (166)          (166)
Dividends declared              (22,992)          (22,992)
Purchase of treasury stock                      (468)  (468)
Reissuance of treasury stock          22           373   395 
   
   
   
   
   
   
   
 
Balance at March 31, 2002  3,917   472,189   968,223   1,209,262   (275,593)  (7,588)  2,370,410 
   
   
   
   
   
   
   
 
Fiscal Year Ended March 31
                             
  Yen in millions 
              Accumulated
       
  Subsidiary
     Additional
     other
  Treasury
    
  tracking
  Common
  paid-in
  Retained
  comprehensive
  stock, at
    
  stock  stock  capital  earnings  income  cost  Total 
 
Balance at March 31, 2004  3,917   476,350   992,817   1,367,060   (449,959)  (12,183)  2,378,002 
Exercise of stock acquisition rights      52   53               105 
Conversion of convertible bonds      141,390   141,354               282,744 
Stock based compensation          340               340 
Comprehensive income:                            
Net income              163,838           163,838 
Other comprehensive income, net of tax —                            
Unrealized gains on securities:                            
Unrealized holding gains (losses) arising during the period                  5,643       5,643 
Less: Reclassification adjustment included in net income                  (12,924)      (12,924)
Unrealized losses on derivative instruments:                            
Unrealized holding gains (losses) arising during the period                  (209)      (209)
Less: Reclassification adjustment included in net income                  (1,681)      (1,681)
Minimum pension liability adjustment                  (769)      (769)
Foreign currency translation adjustments                  74,224       74,224 
                             
Total comprehensive income                          228,122 
                             
Stock issue costs, net of tax              (541)          (541)
Dividends declared              (24,030)          (24,030)
Purchase of treasury stock                      (416)  (416)
Reissuance of treasury stock          (342)  (245)      6,599   6,012 
Balance at March 31, 2005  3,917   617,792   1,134,222   1,506,082   (385,675)  (6,000)  2,870,338 
(Continued on following page.)


F-10

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY —Consolidated Statements of Changes in Stockholders’ Equity (Continued)
                                
Year Ended March 31
Accumulated
SubsidiaryAdditionalotherTreasury
trackingCommonPaid-InRetainedcomprehensivestock,
StockStockCapitalearningsincomeat costTotal
(Yen in millions)
Balance at March 31, 2002  3,917   472,189   968,223   1,209,262   (275,593)  (7,588)  2,370,410 
Conversion of convertible bonds      172   172               344 
Stock issued under exchange offering          15,791               15,791 
Comprehensive income:                            
 Net income              115,519           115,519 
 Other comprehensive income, net of tax —                            
  Unrealized gains on securities:                            
   Unrealized holding gains or losses arising during the period                  (9,627)      (9,627)
   Less: Reclassification adjustment for gains or losses included in net income                  4,288       4,288 
  Unrealized losses on derivative instruments:                            
   Unrealized holding gains or losses arising during the period                  (4,477)      (4,477)
   Less: Reclassification adjustment for gains or losses included in net income                  395       395 
  Minimum pension liability adjustment                  (110,636)      (110,636)
  Foreign currency translation adjustments:                            
   Translation adjustments arising during the period                  (83,993)      (83,993)
   Less: Reclassification adjustment for losses included in net income                  7,665       7,665 
                           
 
 Total comprehensive income                          (80,866)
                           
 
Stock issue costs, net of tax              (19)          (19)
Dividends declared              (23,022)          (23,022)
Purchase of treasury stock                      (1,817)  (1,817)
Reissuance of treasury stock          10           64   74 
   
   
   
   
   
   
   
 
Balance at March 31, 2003  3,917   472,361   984,196   1,301,740   (471,978)  (9,341)  2,280,895 
   
   
   
   
   
   
   
 
                             
  Yen in millions 
              Accumulated
       
  Subsidiary
     Additional
     other
  Treasury
    
  tracking
  Common
  paid-in
  Retained
  comprehensive
  stock, at
    
  stock  stock  capital  earnings  income  cost  Total 
 
Balance at March 31, 2005  3,917   617,792   1,134,222   1,506,082   (385,675)  (6,000)  2,870,338 
Exercise of stock acquisition rights      931   932               1,863 
Conversion of convertible bonds      1,484   1,484               2,968 
Conversion of subsidiary tracking stock  (3,917)  3,917                   — 
Comprehensive income:                            
Net income              123,616           123,616 
Other comprehensive income, net of tax —                            
Unrealized gains on securities:                            
Unrealized holding gains (losses) arising during the period                  79,630       79,630 
Less: Reclassification adjustment included in net income                  (41,495)      (41,495)
Unrealized losses on derivative instruments:                            
Unrealized holding gains (losses) arising during the period                  7,865       7,865 
Less: Reclassification adjustment included in net income                  (7,424)      (7,424)
Minimum pension liability adjustment                  50,206       50,206 
Foreign currency translation adjustments                  140,473       140,473 
Less: Reclassification adjustment included in net income                  (17)      (17)
                            
Total comprehensive income                          352,854 
                            
Stock issue costs, net of tax              (780)          (780)
Dividends declared              (24,968)          (24,968)
Purchase of treasury stock                      (394)  (394)
Reissuance of treasury stock              (1,296)      3,267   1,971 
Balance at March 31, 2006  —   624,124   1,136,638   1,602,654   (156,437)  (3,127)  3,203,852 
(Continued on following page.)


F-11

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (Continued)
                             
  Yen in millions 
              Accumulated
       
  Subsidiary
     Additional
     other
  Treasury
    
  tracking
  Common
  paid-in
  Retained
  comprehensive
  stock, at
    
  stock  stock  capital  earnings  income  cost  Total 
 
Balance at March 31, 2006  —   624,124   1,136,638   1,602,654   (156,437)  (3,127)  3,203,852 
Exercise of stock acquisition rights      2,175   2,175               4,350 
Conversion of convertible bonds      608   608               1,216 
Stock based compensation          3,993               3,993 
Comprehensive income:                            
Net income              126,328           126,328 
Cumulative effect of an accounting change, net of tax              (3,785)          (3,785)
Other comprehensive income, net of tax —                            
Unrealized gains on securities:                            
Unrealized holding gains (losses) arising during the period                  6,963       6,963 
Less: Reclassification adjustment included in net income                  (21,671)      (21,671)
Unrealized losses on derivative instruments:                            
Unrealized holding gains (losses) arising during the period                  6,907       6,907 
Less: Reclassification adjustment included in net income                  (5,933)      (5,933)
Minimum pension liability adjustment                  (2,754)      (2,754)
Foreign currency translation adjustments                  86,313       86,313 
                            
Total comprehensive income                          192,368 
                            
Stock issue costs, net of tax              (22)          (22)
Dividends declared              (25,042)          (25,042)
Purchase of treasury stock                      (558)  (558)
Reissuance of treasury stock          9           46   55 
Adoption of FAS No. 158, net of tax                  (9,508)      (9,508)
Other              19,373   (19,373)      — 
Balance at March 31, 2007  —   626,907   1,143,423   1,719,506   (115,493)  (3,639)  3,370,704 
The accompanying notes are an integral part of these statements.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)

                                
Year Ended March 31
Accumulated
SubsidiaryAdditionalotherTreasury
trackingCommonPaid-InRetainedcomprehensivestock,
StockStockCapitalearningsincomeat costTotal
(Yen in millions)
Balance at March 31, 2003  3,917   472,361   984,196   1,301,740   (471,978)  (9,341)  2,280,895 
Conversion of convertible bonds      3,989   3,988               7,977 
Stock issued under exchange offering          5,409               5,409 
Comprehensive income:                            
 Net income              88,511           88,511 
 Other comprehensive income, net of tax —                            
  Unrealized gains on securities:                            
   Unrealized holding gains or losses arising during the period                  57,971       57,971 
   Less: Reclassification adjustment for gains or losses included in net income                  (5,679)      (5,679)
  Unrealized losses on derivative instruments:                            
   Unrealized holding gains or losses arising during the period                  7,537       7,537 
   Less: Reclassification adjustment for gains or losses included in net income                  (3,344)      (3,344)
  Minimum pension liability adjustment                  93,415       93,415 
  Foreign currency translation adjustments:                            
   Translation adjustments arising during the period                  (129,113)      (129,113)
   Less: Reclassification adjustment for losses included in net income                  1,232       1,232 
                           
 
 Total comprehensive income                          110,530 
                           
 
Stock issue costs, net of tax              (53)          (53)
Dividends declared              (23,138)          (23,138)
Purchase of treasury stock                      (8,523)  (8,523)
Reissuance of treasury stock          (776)          5,681   4,905 
   
   
   
   
   
   
   
 
Balance at March 31, 2004  3,917   476,350   992,817   1,367,060   (449,959)  (12,183)  2,378,002 
   
   
   
   
   
   
   
 

F-12

F-12

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Index to Notes to Consolidated Financial Statements
     
Page
1.  Nature of operationsPage
Notes to Consolidated Financial Statements
  F-14
2.
1.
 Nature of operationsF-14
2.
Summary of significant accounting policies F-17F-14
3.
 Inventories F-25
4.
 Film costs F-26
5.
 Related party transactions F-26
6.
 Accounts receivable securitization programsF-29
7.
Marketable securities and securities investments and other F-28F-29
7.
8.
 Leased assets F-30
8.
9.
 Goodwill and intangible assets F-31
9.
10.
 Insurance-related accounts F-33
10.
11.
 Short-term borrowings and long-term debt F-34
11.
12.
 Deposits from customers in the banking business F-37F-36
12.
13.
 Financial instruments F-37F-36
13.
14.
 Pension and severance plans F-40
14.
15.
 Stockholders’ equity F-45F-46
15.
16.
 Stock-based compensation plans F-50F-49
16.
17.
 Restructuring charges and asset impairments F-53F-52
17.
18.
 Research and development costs, advertising costs and shipping and handling costs F-58F-55
18.
19.
 Gain on issuances of stock bychange in interest in subsidiaries and equity investees F-59F-55
19.
20.
 Income taxes F-59F-57
20.
21.
 Reconciliation of the differences between basic and diluted net income per share (“EPS”) F-62F-60
21.
22.
 Variable interest entities F-64F-61
22.
23.
 Commitments and contingent liabilities F-63
24.
Business segment information F-65
23.
25.
 Business segment informationSubsequent event F-67F-70


F-13

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements
Sony Corporation and Consolidated Subsidiaries
1.  Nature of operations
 
1.Nature of operations

Sony Corporation and its consolidated subsidiaries (hereinafter collectively referred to as “Sony”) are engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer and industrial markets. Sony also develops, produces, manufactures, and markets home-use game consoles and software. Sony’s principal manufacturing facilities are located in Japan, the United States of America, Europe, and Asia. Its electronic products are marketed throughout the world and game products are marketed mainly in Japan, the United States of America and Europe by sales subsidiaries and unaffiliated local distributors as well as direct sales via the Internet. Sony is engaged in the development, production, manufacture, and distribution of recorded music, in all commercial formats and musical genres. Sony is also engaged in the development, production, manufacture, marketing, distribution and broadcasting of image-based software, including film, video and television. Further,television product. Sony is also engaged in various financial service businesses including insurance operations through a Japanese life insurance subsidiary and a non-life insurance subsidiaries,subsidiary, banking operations through a Japanese internet-based banking subsidiary and leasing and credit financing operations in Japan. In addition to the above, Sony is engaged in Internet-related businesses,the development, production, manufacture, and distribution of recorded music, a network service business, an IC cardanimation production and marketing business, and an advertising agency business in Japan.
 
2.
Summary of significant accounting policies

2.  Summary of significant accounting policies

Sony Corporation and its subsidiaries in Japan maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan while its foreign subsidiaries maintain their records and prepare their financial statements in conformity with accounting principles generally accepted in the countries of their domiciles. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These adjustments were not recorded in the statutory books of account.books.
 
(1)Newly adopted accounting pronouncements:
(1)  Newly adopted accounting pronouncements:
 
Employers’ Disclosures about Pensions and Other Postretirement Benefits -

Inventory Costs -

In December 2003,November 2004, the Financial Accounting Standards Board (“FASB”) revisedissued Statement of Financial Accounting Standards (“FAS”) No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”,151, “Inventory Costs, an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4”. This statement requires certain abnormal expenditures to be recognized as expenses in the current period. It also requires that the amount of fixed production overhead allocated to the inventory be based on the normal capacity of the production facilities. Sony adopted FAS No. 87, “Employers’ Accounting for Pensions”, FAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and FAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”.151 on April 1, 2006. The new FAS No. 132 revised employers’ disclosures about pension plans and other postretirement benefit plans. It did not change the measurement or recognition of those plans required by FAS No. 87, 88 and 106. While retaining the disclosure requirementsadoption of FAS No. 132, the new FAS No. 132 requires additional disclosures about assets, obligations, cash flows, and net periodic benefit costs of defined benefit plans and other defined benefit postretirement plans. The provisions of the new FAS No. 132 are generally effective for financial statements with fiscal years ending after December 15, 2003, excluding the disclosure of certain information about foreign plans, which shall be effective for fiscal years ending after June 15, 2004. In accordance with the transition provisions of the new FAS No. 132, Note 13, Pension and severance plans, has been expanded to include the new disclosures as of and for the year ended March 31, 2004.
Consolidation of Variable Interest Entities -

     In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51”. FIN No. 46 addresses consolidation by a primary

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

beneficiary of a variable interest entity (“VIE”). FIN No. 46 was effective immediately for all new VIEs created or acquired after January 31, 2003. Sony has not entered into any new agreements with VIEs on or after February 1, 2003. For VIEs created or acquired prior to February 1, 2003, Sony early adopted the provisions of FIN No. 46 on July 1, 2003. Under FIN No. 46, any difference between the net amount added to the balance sheet and the amount of any previously recognized interest in the VIE shall be recognized as a cumulative effect of accounting changes. As a result of adopting the original FIN No. 46, Sony recognized a one-time charge with no tax effect of 2,117 million yen as a cumulative effect of accounting change in the consolidated statement of income, and Sony’s assets and liabilities increased by 95,255 million yen and 97,950 million yen, respectively. These increases were treated as non-cash transactions in the consolidated statement of cash flows. In addition, cash and cash equivalents increased by 1,521 million yen. See Note 21 for further discussion on the VIEs that are used by Sony.

In December 2003, the FASB issued revised FIN No. 46 (“FIN No. 46R”), which replaces FIN No. 46. FIN No. 46R retains many of the basic concepts introduced in FIN No. 46; however, it also introduces a new scope exception for certain types of entities that qualify as a “business” as defined in FIN No. 46R, revises the method of calculating expected losses and residual returns for determination of a primary beneficiary, and includes new guidance for assessing variable interests. Sony early adopted the provisions of FIN No. 46R upon its issuance. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or impact the way Sony had previously accounted for VIEs.

Impairment of securities investments -

In November 2003, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. EITF Issue No. 03-01 establishes additional disclosure requirements for each category of FAS No. 115 investments in a loss position. In March 2004, the EITF also reached a consensus on the additional accounting guidance for other-than-temporary impairments and its application to debt and equity investments. In accordance with the new disclosure requirements under EITF Issue No. 03-01, Note 6 has been expanded to include certain additional information regarding Sony’s securities investments.

Multiple Element Revenue Arrangements -

In November 2002, the FASB issued EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF Issue No. 00-21 provides guidance on when and how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. Sony adopted EITF Issue No. 00-21 on July 1, 2003. The adoption of EITF Issue No. 00-21151 did not have a material impact on Sony’s results of operations and financial positionposition.

Accounting for the year ended March 31, 2004.Stock-Based Compensation -
 
Derivative instruments and hedging activities -

     On

Effective April 1, 2001,2006, Sony adopted FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by 123 (revised 2004), “Share-Based Payment” (“FAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities — an Amendment123(R)”). This statement requires the use of FASB Statement No. 133”. FAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically, FAS No. 133 requires an entity to recognize all derivatives, including certain derivative instruments embedded in other contracts, as either assets or liabilities in the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders’ equity or net income depending on

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

whether the derivative instruments qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.

     As a result of the adoption of the new standards, Sony’s operating income, income before income taxes and net income for the year ended March 31, 2002 decreased by 3,007 million yen, 3,441 million yen and 2,167 million yen, respectively. Additionally, on April 1, 2001, Sony recorded a one-time non-cash after-tax unrealized gain of 1,089 million yen in accumulated other comprehensive income in the consolidated balance sheet, as well as an after-tax gain of 5,978 million yen in the cumulative effectbased method of accounting changes infor employee stock-based compensation and eliminates the consolidated statement of income. The after-tax gain was primarily attributablealternative to fairuse the intrinsic value adjustments of convertible rights embedded in convertible bonds heldmethod prescribed by Sony’s life insurance subsidiary as available-for-sale debt securities.

In April 2003, the FASB issued FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. This statement amends and clarifies financial accounting and reporting for derivative instruments, including derivative instruments embedded in other contracts and for hedging activities under FAS No. 133. Sony adopted FAS No. 149 on July 1, 2003. The adoption of FAS No. 149 did not have an impact on Sony’s results of operations and financial position.

Accounting for Asset Retirement Obligations -

On April 1, 2003, Sony adopted FAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of FAS No. 143 did not have a material impact on Sony’s results of operations and financial position for the year ended March 31, 2004.

Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity -

In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS No. 150 establishes standards for how certain financial instruments with characteristics of both liabilities and equity shall be classified and measured. Sony adopted FAS No. 150 during the first quarter of the year ended March 31, 2004. The adoption of FAS No. 150 did not have an impact on Sony’s results of operations and financial position for the year ended March 31, 2004.

Accounting for Costs Associated with Exit or Disposal Activities -

In June 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. FAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. FAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. FAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred, rather than the date of an entity’s commitment to an exit plan. Sony adopted FAS No. 146 on January 1, 2003. The adoption of this statement did not have a material effect on Sony’s results of operations and financial position.

Goodwill and other intangible assets -

     In July 2001, Sony elected early adoption, retroactive to April 1, 2001, of FAS No. 142, “Goodwill and Other Intangible Assets” which superseded Accounting Principle Board Opinion (“APB”) No. 17, “Intangible Assets”.25. With limited exceptions, FAS No. 142 addresses123(R) requires that the grant-date fair value of share-based payments to employees be expensed over the period the service is received. Sony had accounted for its employee stock-based compensation in accordance with the provisions prescribed by APB No. 25 and its related interpretations and had disclosed the net effect on net income and net income per share (“EPS”) allocated to the common stock as if Sony had applied the fair value recognition provisions of FAS No. 123 to stock-based compensation as described in (2) Significant accounting policies — Stock-based compensation. Sony has elected the modified prospective method of transition prescribed in FAS No. 123(R), which requires that compensation expense be recorded for acquired goodwill and other intangibleall unvested stock acquisition rights as the requisite service is rendered

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assets. Under FAS No. 142, goodwill and certain other intangible assets that are determined to have an indefinite life are no longer amortized, but rather are tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce

beginning with the fair value below its carrying amount. Prior to the adoptionfirst period of FAS No. 142, goodwill recognized in acquisitions accounted for as purchases was amortized on a straight-line basis principally over a 20 or 40-year period.adoption. As a result of the adoption of FAS No. 142,123(R), Sony’s operating income decreased by 3,670 million yen for the fiscal year ended March 31, 2007.
Derivative Instruments and Hedging Activities -
In February 2006, the FASB issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, an amendment of FAS No. 133 and FAS No. 140. This statement permits an entity to elect fair value remeasurement for any hybrid financial instrument if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under FAS No. 133. The election to measure the hybrid instrument at fair value is made on aninstrument-by-instrument basis and is irreversible. The statement is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s fiscal year beginning after September 15, 2006, with earlier adoption permitted as of the beginning of the fiscal year, provided that financial statements for any interim period of that fiscal year have not been issued. Sony early adopted FAS No. 155 on April 1, 2006. As a result of the adoption of FAS No. 155, Sony’s operating income beforeincreased by 3,828 million yen for the fiscal year ended March 31, 2007. Additionally, on April 1, 2006, Sony recognized a net charge of 3,785 million yen (net of income taxes of 2,148 million yen) as a cumulative-effect adjustment to beginning retained earnings, which consisted of 1,754 million yen (net of income taxes of 996 million yen) of gross gains and 5,539 million yen (net of income taxes of 3,144 million yen) of gross losses.
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans -
In September 2006, the FASB issued FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, an amendment to FASB Statements No. 87, 88, 106 and 132(R). FAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit pension and other postretirement benefit plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. FAS No. 158 was adopted by Sony in the financial statements for the year ended March 31, 2002 increased by 20,114 million yen and income before cumulative effect2007. FAS No. 158 also requires companies to measure the funded status of accounting changesthe plan as well as net incomeof the date of its fiscal year-end, effective for years ending after December 15, 2008. Sony expects to adopt the year endedmeasurement provisions of FAS No. 158 effective March 31, 2002 increased by 18,932 million yen.2009. See Note 14, Pension and severance plans, for further details.
 
(2)Significant accounting policies:
Quantifying Effects of Prior Year Misstatements in Current Year Financial Statements -
 
Basis of consolidation and accounting for investments in affiliated companies -

In September 2006, the U.S. Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effect of Prior Year Misstatement when Quantifying Misstatements in Current Year Financial Statements”. SAB No. 108 requires that registrants quantify errors using both a balance sheet approach, generally referred to as the “Iron Curtain” method, and a statement of operations approach, generally referred to as the “Rollover” method, and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 became effective for Sony as of April 1, 2006. Prior to the application of SAB No. 108, Sony used a statement of operations approach to quantify errors. The application of SAB No. 108 did not have a material impact on Sony’s consolidated financial statements.
(2)  Significant accounting policies:
Basis of consolidation and accounting for investments in affiliated companies -
The consolidated financial statements include the accounts of Sony Corporation and those of its majority-owned subsidiary companies, general partnerships in which Sony has a controlling interest, and all variable interest entities required for which Sony is the primary beneficiary. All intercompany transactions and accounts are eliminated. Investments in business entities in which Sony does not have control, but has the ability to exercise significant influence orover operating and financial policies generally through20-50% ownership, of 20% or more but less than or equal to 50% are accounted for under the equity method. In addition, all investments in limitedgeneral partnerships in which Sony does not have a controlling interest and general limited


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

partnerships are also accounted for under the equity method.method if more than minor influence over the operation of the investee exists (generally through more than 3-5% ownership). When the interest in the partnership is so minor that Sony may have virtually no influence over the operation of the investee, the cost method is used. Under the equity method, investments are stated at cost plus/minus Sony’s portion of equity in undistributed earnings or losses. Consolidated net income includes Sony’s equity in current earnings or losses of such companies, after elimination of unrealized intercompany profits. If the value of an investment has declined and is judged to be other than temporary,other-than-temporary, the investment is written down to its fair value.

On occasion, a consolidated subsidiary or an affiliated company accounted for by the equity method may issue its shares to third parties asin either a public or private offering or upon conversion of convertible debt to common stock at amounts per share in excess of or less than Sony’s average per share carrying value. With respect to such transactions, where the sale of such shares is not part of a broader corporate reorganization and the reacquisition of such shares is not contemplated at the time of issuance, the resulting gains or losses arising from the change in interest are recorded in income for the year the change in interest transaction occurs. If the sale of such shares is part of a broader corporate reorganization, the reacquisition of such shares is contemplated at the time of issuance or realization of such gain is not reasonably assured (i.e., the entity is newly formed, non-operating, a research and development orstart-up/development stage entity, or where the entity’s ability to continue in existence is in question), the transaction is accounted for as a capital transaction.

The excess of the cost over the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for on an equity basis is allocated to identifiable assets and liabilities based on fair values at the date of acquisition. The unassigned residual value of the excess of the cost over theSony’s underlying net equity is recognized as goodwill.goodwill as a component of the investment balance.
 
Use of estimates -

Use of estimates -
The preparation of the consolidated financial statements in conformity with U.S. GAAP 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Translation of foreign currencies -

Translation of foreign currencies -
All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen at appropriate year-end current exchange rates and all income and expense accounts are translated at exchange rates that approximate those rates prevailing at the time of the transactions. The resulting translation adjustments are accumulated as a component of accumulated other comprehensive income.

Foreign currency receivables and payables are translated at appropriate year-end current exchange rates and the resulting translation gains or losses are taken into income.
 
Cash and cash equivalents -

Cash and cash equivalents -

Cash and cash equivalents include all highly liquid investments, generally with original maturities of three months or less, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.
 
Marketable debt and equity securities -

Marketable debt and equity securities -

Debt securities and equity securities designated asavailable-for-sale, whose fair values are readily determinable, are carried at fair value with unrealized gains or losses included as a component of accumulated other comprehensive income, net of applicable taxes. Debt and equity securities classified as trading securities are carried at fair value with unrealized gains or losses included in income. Debt securities that are expected to beheld-to-maturity are carried at amortized cost. Individual securities classified as eitheravailable-for-sale orheld-to-maturity are reduced


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

to net realizable value by a charge to income for other than temporaryother-than-temporary declines in fair value. Realized gains and losses are determined on the average cost method and are reflected in income.
 
Equity securities in non-public companies -

Equity securities in non-public companies -

Equity securities in non-public companies are carried at cost as fair value is not readily determinable. If the value of a non-public equity investment is estimated to have declined and such decline is judged to be other than temporary,other-than-temporary, Sony recognizes the impairment of the investment and the carrying value is reduced to its fair value. Determination of impairment is based on the consideration of suchseveral factors, asincluding operating results, business plans and estimated future cash flows. Fair value is determined through the use of methodologies such methodologies as discounted cash flows, valuation of recent financings and comparable valuations of similar companies.
 
Inventories -

Inventories -

Inventories in electronics game and musicgame as well as non-film inventories for pictures are valued at cost, not in excess of market, cost being determined on the “average cost” basis except for the cost of finished products carried by certain subsidiary companies in electronics which is determined on the “first-in,“first-in, first-out” basis. The market value of inventory is determined as the net realizable value — i.e., estimated selling price in the ordinary course of business less predictable costs of completion and disposal. Sony does not consider a normal profit margin when calculating the net realizable value.
 
Film costs -

Film costs -
Film costs related to theatrical and television productproducts (which includesinclude direct production costs, production overhead and acquisition costs) are stated at the lower of unamortized cost or estimated fair value and classified as non-current assets. Film costs are amortized, and the estimated liabilities for residuals and participations are accrued, for an individual product based on the proportion that current period actual revenues bear to the estimated remaining total lifetime revenues. These estimates are reviewed on a periodic basis.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Property, plant and equipment and depreciation -

Property, plant and equipment and depreciation -

Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is primarily computed on the declining-balance method for Sony Corporation and its Japanese subsidiaries, except for certain semiconductor manufacturing facilities whose depreciation is computed on the straight-line method, and on the straight-line method for its foreign subsidiaries at rates based on estimated useful lives of the assets, principally, ranging from 15 years up to 50 years for buildings and from 2 years up to 10 years for machinery and equipment. Significant renewals and additions are capitalized at cost. Maintenance and repairs, and minor renewals and betterments are charged to income as incurred.
 
Goodwill and other intangible assets -

Goodwill and other intangible assets -
Goodwill and certain other intangible assets that are determined to have an indefinite life are not amortized and are tested annually for impairment on an annual basisduring the fourth quarter of the fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Fair value for those assets is generally determined using a discounted cash flow analysis.

Intangible assets with finite lives that are determined not to have an indefinite life mainly consist of artist contracts, music catalogs, acquired patent rights and software to be sold, leased or otherwise marketed. Artist contracts and music catalogs are amortized on a straight-line basis, principallygenerally, over a period of up10 to 40 years. Acquired patent rights and software to be sold, leased or otherwise marketed are amortized on a straight-line basis, generally, over 3 to 108 years.


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Accounting for computer software to be sold -
 
Accounting for computer software to be sold -

Sony accounts for software development costs in accordance with FAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”.

In the Electronics business,segment, costs related to establishing the technological feasibility of a software product are expensed as incurred as a part of research and development in cost of sales. Costs that are incurred to produce the finished product after technological feasibility is established are capitalized and amortized over the estimated economic life of the product, which is generally three years.
In the Game segment, technological feasibility of game software is established when the product master is completed. Consideration to capitalize game software development costs before this point is limited to the development costs of games for which technological feasibility can be proven to be at an earlier stage.
Sony performs periodic reviews to ensure that unamortized programcapitalized software costs remain recoverable from future revenue.

profits.

In the Game business, technological feasibility of the underlying software is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established are not material, and accordingly, Sony expenses software developmentDeferred insurance acquisition costs for the Game business as incurred as a part of research and development in cost of sales.-
 
Deferred insurance acquisition costs -

Costs that vary with and are primarily related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs include such items as commissions, medical examination and inspection report fees. The deferred insurance acquisition costs for traditional life insurance contracts are being amortized mainly over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves. The deferred insurance acquisition costs for non-traditional life insurance contracts are amortized over the expected life in proportion to the estimated gross profits.
 
Product warranty -

Product warranty -
Sony provides for the estimated cost of product warranties at the time revenue is recognized by either product category group or individual product. The product warranty is calculated based upon product sales, estimated probability of failure and estimated cost per claim. The variables used in the calculation of the provision are reviewed on a periodic basis.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Certain subsidiaries in the Electronics businesssegment offer extended warranty programs. The consideration received through extended warranty service is deferred and amortized on a straight-line basis over the term of the extended warranty.
 
Future insurance policy benefits -

Future insurance policy benefits -

Liabilities for future insurance policy benefits are primarily comprised of the present value of estimated future payments to policyholders. These liabilities are computed by the net level premium method based upon the assumptions, including future investment yield, morbidity, mortality and withdrawals. These assumptions are reviewed on actuarial assumptions.a periodic basis. Liabilities for future insurance policy benefits also include liabilities for guaranteed benefits related to certain non-traditional long-duration life and annuity contracts.
 
Accounting for the impairment of long-lived assets -

Accounting for the impairment of long-lived assets -

Sony periodically reviews the carrying value of its long-lived assets held and used, other than goodwill and intangible assets with indefinite lives, and assets to be disposed of, whenever events or changes in circumstances indicatedindicate that the individual carrying amount of an asset may not be recoverable. Long-lived assets to be held and used are reviewed for impairment by comparing the carrying value of the assets with their estimated undiscounted future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss would be recognized during the period. The impairment loss would be calculated as the difference between the asset carrying value and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance. Long-lived assets that are to be disposed of other than by sale are considered held and used until they are


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

disposed of. Long-lived assets that are to be disposed of by sale are reported at the lower of their carrying value or fair value less cost to sell. Reductions in carrying value are recognized in the period in which the long-lived assets are classified as held for sale.
 
Derivative financial instruments -

     All derivatives, including certain derivative financial instruments embedded in other contracts,-

All derivatives are recognized as either assets or liabilities in the balance sheet at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders’ equity (as a component of accumulated other comprehensive income), depending on whether the derivative financial instrument qualifies as a hedge and the derivative is being used to hedge changes in fair value or cash flows.

In accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, the various derivative financial instruments held by Sony are classified and accounted for as described below.
 
Fair value hedges

Fair value hedges

Changes in the fair value of derivatives designated and effective as fair value hedges for recognized assets or liabilities or unrecognized firm commitments are recognized in earnings as offsets to changes in the fair value of the related hedged assets or liabilities.
 
Cash flow hedges

Cash flow hedges

Changes in the fair value of derivatives designated and effective as cash flow hedges for forecasted transactions or exposures associated with recognized assets or liabilities are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Changes in the fair value of the ineffective portion are recognized in current period earnings.
 
Derivatives not designated as hedges

Derivatives not designated as hedges
Changes in the fair value of derivatives that are not designated as hedges under FAS No. 133 are recognized in current period earnings.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

When applying hedge accounting, Sony formally documents all hedging relationships between the derivatives designated as hedges and hedged items, as well as its risk management objectives and strategies for undertaking various hedging activities. Sony links all hedges that are designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet or to the specific forecasted transaction.transactions. Sony also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are designated as hedges are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, Sony discontinues hedge accounting.
 
Stock-based compensation -

Stock-based compensation -
With the adoption of FAS No. 123(R) effective April 1, 2006, Sony accounts for stock-based compensation using the fair value based method. Sony recognized 3,838 million yen of stock-based compensation expense for the fiscal year ended March 31, 2007. The expense is mainly included in selling, general and administrative expenses. The income tax benefit related to the stock-based compensation expense for the fiscal year ended March 31, 2007, was 790 million yen. Sony has elected the modified prospective method of transition prescribed in FAS No. 123(R) and therefore has not restated the results for prior periods. Under this transition method, stock-based compensation expense for the fiscal year ended March 31, 2007 included the expense for all stock acquisition rights granted prior to, applybut not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provision of FAS No. 123. Stock-based compensation expense for all stock acquisition rights granted after April 1, 2006 is based on the grant-date fair value estimated in accordance with FAS No. 123(R). The fair value is measured on the date of grant using the Black-Scholes option-pricing model. Sony recognizes this compensation expense, net of an estimated forfeiture rate, for only the rights expected to vest ratably over the requisite service period of the


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

stock acquisition rights, which is generally a period of three years. Sony estimated the forfeiture rate for the fiscal year ended March 31, 2007, based on its historical experience in the stock acquisition rights plans where the majority of the vesting terms have been satisfied.
Prior to the adoption of FAS No. 123(R), Sony had applied APB No. 25, “Accounting for Stock Issued to Employees”, and its related interpretations in accounting for its stock-based compensation plans and followsfollowed the disclosure-only provisions of FAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123”. In accordance withAs prescribed by APB No. 25, stock-basedSony had accounted for stock-option compensation cost is recognized in income based onusing the excess, if any, ofintrinsic value method. Compensation expense for the quoted market price of the common stock or subsidiary tracking stock of Sony Corporation at the grant date of the award or other measurement date over the stated exercise price of the award. Asyears ended March 31, 2005 and 2006 was not significant as the exercise prices for Sony’s stock-based compensationthe stock acquisition rights plans are generallywere determined based on the prevailing market price shortly before the date of grant, the compensation expense for these plans is not significant. For awards that generate compensation expense as defined under APB No. 25, Sony calculates the amount of compensation expense and recognizes the expense over the vesting period of the award.

grant.

The following table reflects the net effecteffects on net income and net income per share allocated to the common stock as if Sony had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation”, to its stock-based compensation. See Note 1516 for detailed assumptions.
             
Year Ended March 31
200220032004
(Yen in millions)
Income before cumulative effect of accounting changes allocated to common stock:            
As reported  9,381   115,648   90,756 
Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects  (5,395)  (7,008)  (6,334)
   
   
   
 
Pro forma  3,986   108,640   84,422 
   
   
   
 
Net income allocated to common stock:            
As reported  15,359   115,648   88,639 
Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects  (5,395)  (7,008)  (6,334)
   
   
   
 
Pro forma  9,964   108,640   82,305 
   
   
   
 
         
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006 
 
Income before cumulative effect of an accounting change allocated to common stock:        
As reported  168,498   122,308 
Deduct: Total stock-based compensation expense determined under the fair value based method, net of related tax effects  (4,690)  (4,182)
         
Pro forma  163,808   118,126 
         
Net income allocated to common stock:        
As reported  163,785   122,308 
Deduct: Total stock-based compensation expense determined under the fair value based method, net of related tax effects  (4,690)  (4,182)
         
Pro forma  159,095   118,126 
         

F-21
F-20

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

               
Year Ended March 31
200220032004
(Yen)
Income before cumulative effect of accounting changes allocated to common stock:            
 — Basic EPS:            
  As reported  10.21   125.74   98.26 
  Pro forma  4.34   118.12   91.40 
 — Diluted EPS:            
  As reported  10.18   118.21   93.00 
  Pro forma  4.33   111.20   86.66 
Net income allocated to common stock:            
 — Basic EPS:            
  As reported  16.72   125.74   95.97 
  Pro forma  10.85   118.12   89.11 
 — Diluted EPS:            
  As reported  16.67   118.21   90.88 
  Pro forma  10.82   111.20   84.55 

Net income and net income per share allocated to the subsidiary tracking stock for the years ended March 31, 2002, 2003 and 2004 would not be impacted.
         
  Yen 
  Fiscal Year Ended March 31 
  2005  2006 
 
Income before cumulative effect of an accounting change allocated to common stock:        
— Basic EPS:        
As reported  180.96   122.58 
Pro forma  175.92   118.39 
— Diluted EPS:        
As reported  162.59   116.88 
Pro forma  158.10   112.91 
Net income allocated to common stock:        
— Basic EPS:        
As reported  175.90   122.58 
Pro forma  170.86   118.39 
— Diluted EPS:        
As reported  158.07   116.88 
Pro forma  153.58   112.91 

 
Free distribution of common stock -

Free distribution of common stock -
On occasion, Sony Corporation may make a free distribution of common stock which is accounted for either by a transfer from additional paid-in capital to the common stock account or with no entry if free shares are distributed from the portion of previously issued shares in the common stock account.

Under the Japanese Commercial Code,Company Law, a stock dividend can be effectedaffected by an appropriation of retained earnings to the common stock account, followed by a free share distribution with respect to the amount appropriated by resolution of the Board of Directors’ meeting.

Directors.

Free distribution of common stock is recorded in the consolidated financial statements only when it becomes effective, except for the calculation and presentation of per share amounts.
 
Stock issue costs -

Stock issue costs -

Stock issue costs are directly charged to retained earnings, net of tax, in the accompanying consolidated financial statements as the Japanese Commercial CodeCompany Law prohibits charging such stock issue costs to capital accounts which is the prevailing practice in the United States of America.
 
Revenue recognition -

Revenue recognition -
Revenues from electronics game and musicgame sales are recognized upon delivery which is considered to have occurred when the customer has taken title to the product and the riskrisks and rewards of ownership have been substantively transferred. If the sales contract contains a customer acceptance provision, then sales are recognized after customer acceptance occurs or the acceptance provisions lapse.

Revenues from the theatrical exhibition of motion pictures are recognized as the customer exhibits the film. Revenues from the licensing of feature films and television programming are recorded when the material is available for telecast by the licensee and when any restrictions regarding the exhibition or

F-22

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

exploitation of the product lapse. Revenues from the sale of home videocassettes and DVDs and Blu-ray discs are recognized upon availability of sale to the public.

F-21

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Traditional life insurance policies that the life insurance subsidiary writes,underwrites, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. Premiums from these policies are reported as revenue when due from policyholders.

Amounts received as payment for non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies are recognized as deposits to policyholder account balances and included in future insurance policy benefits and other. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services, which are recognized as policy charges and fee incomeover the period of the contracts, and included in financial service revenue.

Property and casualty insurance policies that the non-life insurance subsidiary writesunderwrites are primarily automotive insurance contracts which are categorized as short-duration contracts. Premiums from these policies are reported as revenue over the period of the contract in proportion to the amount of insurance protection provided.

Revenues from the arrangements that involve the deliveryAccounting for consideration given to a customer or performance of multiple products, services and/or rights to use assets are accounted for in accordance with EITF Issue No. 00-21. Under EITF Issue No. 00-21, the components of an arrangement consisting of multiple products, services and/or rights to use assets should be accounted for separately if the fair value of delivered components have been objectively determined and the delivered components have value to the customer on a stand-alone basis. If there is objective and reliable evidence of the fair value of the undelivered element in an arrangement but no such evidence for the delivered element, Sony allocates revenue to the fair value of the undelivered element first, and allocates the residual revenues to the delivered element. If the above criteria for separate recognition are not met, then revenue is deferred until such criteria are met or until the period over which the last undelivered element is delivered.reseller -
 
Accounting for consideration given to a customer or a reseller -

In accordance with EITFthe Emerging Issue Task Force (“EITF”) IssueNo. 01-09,01-9, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products”, cash consideration given to a customer or a reseller including payments for buydowns, slotting fees and cooperative advertising programs, is accounted for as a reduction of revenue unless Sony receives an identifiable benefit (goods or services) in exchange for the consideration, can reasonably estimate the fair value of thisthe benefit is reasonably estimated and receives documentation from the reseller is received to support the amounts spent. Any paymentspaid to the reseller. Payments meeting these criteria are treatedrecorded as selling, general and administrative expenses. For the fiscal years ended March 31, 2002, 20032005, 2006 and 2004,2007, consideration given to a reseller, primarily for free promotional shipping and cooperative advertising programs included in selling, general and administrative expense totaled 28,683, 29,13527,946 million yen, 29,489 million yen and 30,33831,933 million yen, respectively.
 
Cost of sales -

Cost of sales -
Costs classified as cost of sales relate to the producing and manufacturing of products and include items such items as material cost, subcontractor cost, depreciation of fixed assets, amortization of intangible assets, personnel expenses, research and development costs, and amortization of film costcosts related to theatrical and television products.

F-23

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Research and development costs -

Research and development costs -

Research and development costs are expensed as incurred.
 
Selling, general and administrative -

Selling, general and administrative -
Costs classified as selling expense relate to the promoting and selling of products and include items such items as advertising, promotion, shipping, and warranty expenses.

General and administrative expenses include operating items such as officer’s salaries, personnel expenses, depreciation of fixed assets, office rental for sales, marketing and administrative divisions, a provision for doubtful accounts and amortization of intangible assets.
 
Selling, general and administrative expenses are expensed as incurred.
Financial service expenses -

Financial service expenses -

Financial service expenses include a provision for policy reserves and amortization of deferred insurance acquisition cost, and all other operating costs such as personnel expenses, depreciation of fixed assets, and office rental of subsidiaries in the Financial Services segment.


F-22

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 
Advertising costs -

Advertising costs -

Advertising costs are expensed when the advertisement or commercial appears in the selected media, except for advertising costs for acquiring new insurance policies which are deferred and amortized as part of insurance acquisition costs.
 
Shipping and handling costs -

Shipping and handling costs -

The majority of shipping and handling, warehousing and internal transfer costs for finished goods are included in selling, general and administrative expenses. An exception to this is in the Pictures businesssegment where such costs are charged to cost of sales as they are an integral part of producing and distributing the filmfilms under Statement of Position (“SOP”)SOP 00-2, “Accounting by Producers or Distributors of Films”. All other costs related to Sony’s distribution network are included in cost of sales, including inbound freight charges, purchasing and receiving costs, inspection costs and warehousing costs for raw materials and in-process inventory. In addition, amountsAmounts paid by customers for shipping and handling costs are included in net sales.
 
Income taxes -

Income taxes -

The provision for income taxes is computed based on the pretax income included in the consolidated statements of income.income, and the tax liability attributed to undistributed earnings of subsidiaries and affiliated companies accounted for by the equity methods. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Sony records valuation allowances to reduce deferred tax assets to the amount that management believes is more likely than not to be realized. In assessing the likelihood of realization, Sony considers all currently available evidence for future years, both positive and negative, supplemented by information of historical results for each tax jurisdiction.
 
Net income per share -

Net income per share -
Basic net income per share is computed based on the weighted-average number of shares of common stock outstanding during each period.
Prior to December 1, 2005, Sony calculatescalculated and presentspresented per share data separately for Sony’s common stock and for the subsidiary tracking stock by the “two-class” method based on FAS No. 128, “Earnings per Share”. The128. As the holders of the subsidiary tracking stock havehad the right to participate in earnings, together with common stockholders. Accordingly, Sony calculates per share data by the “two-class” method based on FAS No. 128. Understockholders, under this method, basic net income per share (“EPS”) for each class of stock iswas calculated based on the earnings allocated to each class of stock for the applicable period, divided by the weighted-average number of outstanding shares in each class during the applicable period.

F-24

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The earnings allocated to the subsidiary tracking stock arewere determined based on the subsidiary tracking stock holders’ economic interest in the targeted subsidiary’s earnings available for dividends. As defined by Sony Corporation’s articles of incorporation, the amount distributable to the subsidiary tracking stock holders is based on the declared dividends of the targeted subsidiary, which only may be declared from the amounts available for dividends of the targeted subsidiary. The targeted subsidiary’s earnings available for dividends are, as stipulated by the Japanese Commercial Code, not including those of the targeted subsidiary’s subsidiaries. If the targeted subsidiary has accumulated losses, a change in accumulated losses is also allocated to the subsidiary tracking stock. The subsidiary tracking stock holders’ economic interest is calculated as the number of the subsidiary tracking stock outstanding (3,072,000 shares) divided by the number of the targeted subsidiary’s common stock outstanding (235,520 shares), subject to multiplying by the Standard Ratio (tracking stock: subsidiary’s common stock = 1:100, as defined in the articles of incorporation). The earnings allocated to the common stock arewere calculated by subtracting the earnings allocated to the subsidiary tracking stock from Sony’s net income for the period.
On October 26, 2005, the Board of Directors of Sony Corporation decided to terminate all shares of subsidiary tracking stock and convert such shares to shares of Sony common stock at a conversion rate of 1.114 share of Sony common stock per share of subsidiary tracking stock. All shares of subsidiary tracking stock were converted to shares of Sony common stock on December 1, 2005. As a result of the conversion, for the fiscal year ended March 31, 2006, Sony calculated per share data separately for Sony’s common stock and for the subsidiary tracking stock by the “two-class” method based on FAS No. 128, but did not present per share data for the subsidiary tracking stock. The earnings allocated to common stock for the fiscal year ended March 31, 2006 were calculated by subtracting the earnings allocated to the subsidiary tracking stock for the eight months ended November 30, 2005.


F-23

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

The computation of diluted net income per common stockshare reflects the maximum possible dilution from conversion, exercise, or contingent issuance of securities.

There are no potentially dilutive securities for net income per subsidiary tracking stock, as tracking stock shares outstanding are increased upon potential subsidiary tracking stocks’ being exercised, which results in a proportionate increase in earnings allocatedincluding the conversion of contingently convertible debt instruments (“Co-Cos”) regardless of whether the conditions to exercise the subsidiary tracking stock. However, they couldconversion rights have a dilutive effect on net income per common stock, as earnings allocated to the common stock would be decreased.been met.

 
(3)Recent Pronouncements:
(3)  Recent Pronouncements:
 
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts -

Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts -

In July 2003,September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued the Statement of Position (“SOP”)05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts”.SOP 03-1,05-1 provides guidance on accounting for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in FAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate accounts”. SOP 03-1 provides guidance on accountingRealized Gains and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts.Losses from the Sales of Investments”. This statement shallwill be effective for fiscal years beginning after December 15, 2003.Sony as of April 1, 2007. Although Sony is currently evaluating the impact of adopting this guidance.new pronouncement, the adoption ofSOP 05-1 is not expected to have a material impact on Sony’s results of operations and financial position.
 
(4)Reclassifications:
Accounting for Servicing of Financial Assets -
In March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140”. This statement amends FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement will be effective for Sony as of April 1, 2007. Sony is currently evaluating the impact of adopting this new pronouncement.
Accounting for Uncertainty in Income Taxes -
In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This statement will be effective for Sony as of April 1, 2007. Although Sony is currently evaluating the potential cumulative impact of FIN No. 48 on the consolidated financial statements, the final evaluation is expected to result in a charge to beginning retained earnings and an increase in the tax liabilities.
How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement -
In June 2006, the EITF issued EITF IssueNo. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement”. EITF IssueNo. 06-3 requires disclosure of the accounting policy for any tax assessed by a governmental authority that is imposed concurrently on a specific revenue-producing transaction between a seller and a customer. EITF IssueNo. 06-3 should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. This statement will be effective for Sony as of April 1, 2007. Although Sony is currently evaluating the impact of adopting this new pronouncement, the adoption of EITF IssueNo. 06-3 is not expected to have a material impact on Sony’s results of operations and financial position.


F-24

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CertainFair Value Measurements -
In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements”. FAS No. 157 establishes a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures about the use of fair value measurements. FAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. FAS No. 157 will be effective for Sony beginning April 1, 2008. Sony is currently assessing the potential effect of FAS No. 157 on the financial statements.
Fair Value Option for Financial Assets and Financial Liabilities -
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. FAS No. 159 permits companies to choose to measure, on aninstrument-by-instrument basis, financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Sony is currently evaluating whether to elect the option provided for in this statement. If elected, FAS No. 159 would be effective for Sony as of April 1, 2008.
(4)  Reclassifications:
Effective April 1, 2006, Sony reclassified royalty income as a component of sales and operating revenue, rather than as a component of other income as previously recorded. In connection with this reclassification, sales and operating revenue, operating income and other income for the fiscal years ended March 31, 2005 and 2006 have been reclassified to conform with the presentation of these items for the fiscal year ended March 31, 2007. The amounts of royalty income reclassified from other income to sales and operating revenue for the fiscal years ended March 31, 2005 and 2006 were 31,709 million yen and 35,161 million yen, respectively. In addition to the above, certain reclassifications of the financial statements for the fiscal years ended March 31, 20022005 and 20032006 have been made to conform to the presentation for the fiscal year ended March 31, 2004.2007.
 
3.
Inventories

3.  Inventories

Inventories compriseare comprised of the following:
         
March 31
20032004
(Yen in millions)
Finished products  398,180   427,877 
Work in process  110,008   98,607 
Raw materials, purchased components and supplies  117,539   140,023 
   
   
 
   625,727   666,507 
   
   
 
         
  Yen in millions 
  March 31 
  2006  2007 
 
Finished products  534,766   649,848 
Work in process  123,381   123,539 
Raw materials, purchased components and supplies  146,577   167,488 
         
   804,724   940,875 
         


F-25

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

4.  Film costs

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
4.Film costs

Film costs compriseare comprised of the following:
          
March 31
20032004
(Yen in millions)
Theatrical:        
 Released (including acquired film libraries)  142,168   136,057 
 Completed not released  13,356   7,946 
 In production and development  91,696   79,198 
Television licensing:        
 Released (including acquired film libraries)  40,417   33,378 
 In production and development  141   161 
   
   
 
   287,778   256,740 
   
   
 

         
  Yen in millions 
  March 31 
  2006  2007 
 
Theatrical:        
Released (including acquired film libraries)  153,992   150,396 
Completed not released  13,377   16,255 
In production and development  156,019   93,584 
Television licensing:        
Released (including acquired film libraries)  36,918   48,313 
In production and development  66   146 
         
   360,372   308,694 
         
Sony estimates that approximately 88%89% of unamortized costs of released films (excluding amounts allocated to acquired film libraries) at March 31, 20042007 will be amortized within the next three years. Approximately 83,992 million98 billion yen of released film costs are expected to be amortized during the next twelve months. As of March 31, 2004,2007, unamortized acquired film libraries of approximately 14,833 million8 billion yen remainedare expected to be amortized on a straight-line basis over an average of the remaining lifelives of 63 years. Approximately 83,381 million126 billion yen of accrued participation liabilities included in accounts payable, other and accrued expenses are expected to be paid during the next twelve months.
 
5.Related party transactions

5.  Related party transactions
Sony accounts for its investments in affiliated companies over which Sony has significant influence or ownership of 20% or more but less than or equal to 50% under the equity method. In addition, all investments in limitedgeneral partnerships in which Sony does not have a controlling interest and generallimited partnerships are also accounted for under the equity method. SuchSignificant investments of this nature include, but are not limited to Sony’s interest in Sony Ericsson Mobile Communications, AB (“Sony Ericsson”) (50%), ST Liquid Crystal Display CorporationSONY BMG MUSIC ENTERTAINMENT (“SONY BMG”) (50%), bit Wallet, Inc (37.8%S-LCD Corporation (“S-LCD”), STAR CHANNEL, INC. (17.8%) (50% minus 1 share), and InterTrust Technologies Corporation (49.5%MGM Holdings Inc. (“MGM”) (45%).

Summarized combined financial information that is based on information provided by the equity investees is shown below:
          
March 31
20032004
(Yen in millions)
Current assets  349,414   433,154 
Property, plant and equipment  242,303   94,130 
Other assets  43,272   57,756 
   
   
 
 Total assets  634,989   585,040 
   
   
 
Current liabilities  374,414   397,242 
Long-term liabilities  129,497   27,639 
Stockholders’ equity  131,078   160,159 
   
   
 
 Total liabilities and stockholders’ equity  634,989   585,040 
   
   
 
Number of companies at end of the fiscal year  84   66 
         
  Yen in millions 
  March 31 
  2006  2007 
 
Current assets  991,440   1,428,227 
Property, plant and equipment  376,155   448,199 
Other assets  903,873   888,100 
         
Total assets  2,271,468   2,764,526 
         
Current liabilities  1,009,895   1,178,299 
Long-term liabilities  660,504   668,254 
Stockholders’ equity  601,069   917,973 
         
Total liabilities and stockholders’ equity  2,271,468   2,764,526 
         
Number of companies at end of the fiscal year  58   62 


F-26

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

             
Year Ended March 31
200220032004
(Yen in millions)
Sales and revenue  659,589   785,697   1,009,005 
Gross profit  161,655   140,078   231,083 
Net income (loss)  (68,608)  (81,422)  11,323 

             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Sales and revenue  1,473,273   2,357,172   3,288,212 
Gross profit  477,796   668,226   894,232 
Net income  63,404   32,982   148,495 

Sony Ericsson, Mobile Communications, AB, a 50/50 joint venture with Telefonaktiebolaget LM Ericsson focused on mobile phone handsets, was established in October 2001.

     In April 2002,2001 and is included in affiliated companies accounted for under the equity method. Sony completedEricsson is engaged in the development, design, production, marketing and sale of mobile phones and related accessories.

In addition, Sony Ericsson has been able to differentiate its equityproduct through its close relationship with Sony. Sony Ericsson purchases several key components such as camera modules, memory, batteries and LCD panels from Sony.
S-LCD, a joint venture with Samsung Electronics Co., LTD focused on manufacturing amorphous TFT panel, was established in April 2004 with Sony’s ownership interest in the Telemundo Group which resulted in cash proceeds of 88,37350% minus 1 share. Sony invested 100,073 million yen and a gain of 66,50263,512 million yen. Inyen in S-LCD during the yearfiscal years ended March 31, 2003,2005 and 2007, respectively.
As of August 1, 2004, Sony had deferred 5,939 million yencombined its recorded music business, except for the operations of its recorded music business in Japan, with the recorded music business of Bertelsmann AG in a 50/50 joint venture known as SONY BMG, after approval from, among others, the European Commission competition authorities. As a result, the operations of the gain relatedrecorded music business, except for the recorded music business in Japan, are no longer consolidated, but are accounted for under the equity method. On December 3, 2004, Impala, an international association consisting of 2,500 independent recorded music companies applied for annulment of the decision to clear the salemerger. On July 13, 2006, the European Court of Telemundo asFirst Instance overruled the Commission’s decision to allow the merger to go forward, requiring the Commission to re-examine the merger. The transaction was renotified, in accordance with applicable EU merger control rules, on January 31, 2007, and an in-depth investigation opened on March 1, 2007. While the Commission completes its reexamination, Sony continues to account for the results of Sony BMG under the equity method.
On April 8, 2005, a result of certain indemnifications providedconsortium led by Sony to the acquirer, which was subsequently recognized in April 2003, as these indemnifications expired with no amounts being refunded by Sony.

     In June 2002, SonyCorporation of America (“SCA”) and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, completed the partial saleacquisition of its equity investment in the Columbia House Company (“CHC”), a 50-50 joint venture between AOL Time Warner Inc. and Sony, to Blackstone Capital Partners III LP (“Blackstone”), an affiliate of The Blackstone Group, a private investment bank. The chairman of The Blackstone Group was also a director of Sony until June 2002.MGM. Under the terms of the saleacquisition agreement, the aforementioned investor group acquired MGM for a total purchase price of approximately 5.0 billion U.S. dollars. As part of this transaction, Sony received cash proceedsPictures Entertainment (“SPE”) entered into agreements to co-finance and produce certain new motion pictures with MGM as well as distribute MGM’s existing film and television content in most markets through SPE’s global distribution channels. In June 2006, MGM and SPE modified this arrangement with respect to the co-financing of 17,839motion pictures and also allowed MGM to bring its worldwide television distribution business in-house and to consolidate substantially all of its worldwide home entertainment distribution activities with another major studio. MGM continues to operate under theMetro-Goldwyn-Mayer name as a private company, headquartered in Los Angeles, California, and is focused on new film production and distribution activities. As part of the acquisition, SCA invested 257 million yenU.S. dollars for 20% of the total equity capital, which includes both common stock and a subordinated note receivable from Columbia House Holdings, Inc., a majority owned subsidiary of Blackstone, with a facesignificant amount of 7,827 million yen. The sale resulted innon-voting preferred stock with detachable common stock warrants. Although Sony owns 20% of MGM’s total equity, on a gain of 1,324 million yen. Sony still has a 7.5% ownership interest in CHC, which is no longer accounted for under the equity method but is now accounted forfully diluted basis as a cost method investment.

     In September 2002,result of the warrants dilution, Sony completedowns 45% of the saletotal outstanding common stock and therefore, records 45% of itsMGM’s net income (loss) as equity interest in Sony Tektronix Inc., which resulted in a gainnet income of 3,090 million yen.

     In January 2003, Sony acquired a 49.5% interest in InterTrust Technologies Corporation for 23,076 million yen.

     In May 2003, Sony acquired the remaining 50% interest in American Video Glass Company (“AVGC”) that it did not own from Corning Asahi Corporation.affiliated companies. As a result AVGCof the cumulative losses recorded by MGM through March 31, 2007, the carrying value of Sony’s investment in MGM was written down to zero as of March 31, 2007. As Sony has not guaranteed the obligations of MGM nor is it otherwise committed to provide further financial support to MGM, Sony will no longer accounted for under therecord its share of MGM’s future equity method and is now a consolidated subsidiary. The financial position and operating resultslosses.

F-27

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

In September 2005, Sony sold 230,000 shares of AVGC as of and for the year ended March 31, 2004 are not included in the above summarized combined financial information.

     Effective July 1, 2003, in accordance with FIN No. 46, Sony has consolidated BE-ST Bellevuestrasse Development GmbH & Co. First Real Estate KG, Berlin (“BE-ST”).Monex Beans Holdings, Inc. As a result BE-ST is no longer accounted for under the equity method (Note 21)of this sale, Sony’s ownership interest has been reduced from 20.1% to 10.3%. The financial position and operating results of BE-ST as of and for the year ended March 31, 2004 are not included in the above summarized combined financial information.

     In August 2003, Crosswave CommunicationsTherefore, Monex Beans Holdings, Inc. (“CWC”), of which Sony owned approximately a 23.9% interest, commenced reorganization proceedings under the Corporate Reorganization Law of Japan. As a result, Sony no longer has a significant influence on the decision making of CWC. Therefore, CWC is no longer accounted for under the equity method. The financial position and operating results of CWCMonex Beans Holdings, Inc. as of and for the yearfiscal years ended March 31, 2004 is2006 and 2007 are not included in the above summarized combined financial information.

See Note 19 for more information on this transaction.

Sony’s proportionate share in the underlying net assets of the investees exceeded the carrying value of investments in affiliated companies by 36,875 million yen and 40,534 million yen at March 31, 2006 and 2007, respectively. These differences primarily relate to the differences in the carrying value of the net assets contributed by Sony and Bertelsmann AG upon the formation of SONY BMG in August 2004. The contribution of assets to SONY BMG was accounted for at book value. Acquisitions by Bertelsmann AG’s recorded music business shortly prior to the formation of SONY BMG resulted in goodwill comprising a significant portion of the assets contributed to SONY BMG by Bertelsmann AG, whereas Sony’s contributed assets had a lower historical basis. As a result, Sony’s carrying value of the investment in SONY BMG is below its 50% share of the underlying assets of SONY BMG. Since the contributions for both Sony and Bertelsmann AG were recorded at historical book value by SONY BMG, there is a basis difference attributable to non-depreciable assets which are not being amortized. Differences in the carrying value of Sony’s other equity investments and the proportionate share of the fair value of underlying net assets primarily relate to unamortizable goodwill.
Affiliated companies accounted for under the equity method with an aggregate carrying amount of 4,588 million yen and 5,587 million yen at March 31, 2006 and 2007, were quoted on established markets at an aggregate value of 34,462 million yen and 36,701 million yen, respectively.
Account balances and transactions with affiliated companies accounted for under the equity method are presented below:
         
  Yen in millions 
  March 31 
  2006  2007 
 
Accounts receivable, trade  44,837   45,617 
         
Advances  15,985   20,740 
         
Accounts payable, trade  40,507   51,894 
         
             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Sales  256,799   234,636   299,487 
             
Purchases  101,976   282,071   463,578 
             
As of April 1, 2004, Sony Corporation made Sony Computer Entertainment Inc. (“SCE”) a wholly-owned subsidiary through a stock for stock exchange pursuant to the provision of Article 358 of the Japanese Commercial Code which doesdid not require the approval of the General Meeting of Shareholders.

F-27

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The stock for stock exchange ratio iswas determined based on the estimated equity values of SCE and Sony on a consolidated basis. ByThrough the stock for stock exchange, Sony Corporation provided 1,000,000 shares of its common stock to athe then Executive Deputy President, Corporate Executive Officer of Sony Corporation who had owned 100 shares of SCE’s common stock. This transaction willdid not have a material impact on Sony’s results of operations and financial position for the fiscal year endingended March 31, 2005.

     Affiliated companies accounted for under the equity method with an aggregate carrying amount of 6,342 million yen and 6,081 million yen at March 31, 2003 and 2004, were quoted on established markets at an aggregate value of 6,894 million yen and 37,603 million yen, respectively.

Account balances and transactions with affiliated companies accounted for under the equity method are presented below:

         
March 31
20032004
(Yen in millions)
Accounts receivable, trade  35,132   62,359 
   
   
 
Advances  13,090   561 
   
   
 
Accounts payable, trade  9,964   13,547 
   
   
 
             
Year Ended March 31
200220032004
(Yen in millions)
Sales  72,824   161,983   258,454 
   
   
   
 
Purchases  69,254   102,735   106,100 
   
   
   
 

Dividends from affiliated companies accounted for under the equity method for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 were 3,06513,391 million yen, 2,00222,970 million yen and 3,44610,475 million yen, respectively.


F-28

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 
6.Accounts receivable securitization programs
In Japan, Sony set up several accounts receivable sales programs whereby Sony can sell up to 47,500 million yen of eligible trade accounts receivable. Through these programs, Sony can sell receivables to special purpose entities owned and operated by banks. Sony can sell receivables in which the agreed upon original due dates are no more than 190 days after the sales of receivables. These transactions are accounted for as sales in accordance with FAS No. 140, because Sony has relinquished control of the receivables. The initial sale of these receivables was completed in March 2005 in which Sony sold a total of 10,041 million yen. Total receivables sold for the fiscal years ended March 2006 and 2007 were 146,193 million yen and 152,519 million yen, respectively. Losses from these transactions were insignificant. Although Sony continues servicing the receivables subsequent to being sold, no servicing liabilities are recorded as the costs of collection of the sold receivables are insignificant.
7.  Marketable securities and securities investments and other

Marketable securities and securities investments and other include debt and equity securities of which the aggregate cost, gross unrealized gains and losses and fair value pertaining toavailable-for-sale securities andheld-to-maturity securities are as follows:
                                   
March 31, 2003March 31, 2004
GrossGrossGrossGross
unrealizedunrealizedunrealizedunrealized
CostgainslossesFair ValueCostgainslossesFair Value
(Yen in millions)
Available-for-sale:                                
 Debt securities  1,550,290   37,237   (8,430)  1,579,097   1,938,673   55,922   (2,072)  1,992,523 
 Equity securities  63,786   8,222   (4,330)  67,678   86,517   63,225   (1,886)  147,856 
Held-to-maturity securities  18,153   672   (1)  18,824   26,439   381   (28)  26,792 
   
   
   
   
   
   
   
   
 
  Total  1,632,229   46,131   (12,761)  1,665,599   2,051,629   119,528   (3,986)  2,167,171 
   
   
   
   
   
   
   
   
 

                                 
  Yen in millions 
  March 31, 2006  March 31, 2007 
     Gross
  Gross
        Gross
  Gross
    
     unrealized
  unrealized
        unrealized
  unrealized
    
  Cost  gains  losses  Fair value  Cost  gains  losses  Fair value 
 
Available-for-sale:                                
Debt securities  2,522,864   17,021   (22,810)  2,517,075   2,517,849   23,716   (8,903)  2,532,662 
Equity securities  227,079   171,921   (1,589)  397,411   281,012   128,888   (7,332)  402,568 
Held-to-maturity                                
Securities  33,193   132   (221)  33,104   36,035   165   (127)  36,073 
                                 
Total  2,783,136   189,074   (24,620)  2,947,590   2,834,896   152,769   (16,362)  2,971,303 
                                 
At March 31, 2004,2007, debt securities classified asavailable-for-sale securities andheld-to-maturity securities mainly consist of Japanese government and municipal bonds and corporate debt securities due within 1with maturities of one to 10ten years.

F-28

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Proceeds from sales ofavailable-for-sale securities were 193,048613,035 million yen, 215,554524,268 million yen and 397,817374,612 million yen for the fiscal years ended March 31, 2002, 20032005, 2006 and 2004,2007, respectively. On those sales, gross realized gains computed on the average cost basis were 6,39724,080 million yen, 3,57068,096 million yen and 9,52538,448 million yen and gross realized losses were 3,8035,940 million yen, 3,1253,143 million yen and 1,9064,031 million yen, respectively.

Marketable securities classified as oftrading securities at March 31, 20032006 and 2004 included short-term investments in money market funds of 123,9642007 were 401,561 million yen and 131,044376,541 million yen, respectively.

respectively, which consist of debt and equity securities.

In the ordinary course of business, Sony maintains long-term investment securities, included in securities investments and other, issued by a number of non-public companies. The aggregate carrying amounts of the investments in non-public companies at March 31, 20032006 and 2004, which were valued at the lower of cost or fair value, were 69,5962007, totaled 59,575 million yen and 51,36764,894 million yen, respectively.

     The net change in Non-public equity investments are valued at cost as fair value is not readily determinable. If the unrealized gains or losses on trading securities that has been included in earnings duringvalue is estimated to have declined and such decline is judged to be other than temporary, the impairment of the investment is recognized and the carrying value is reduced to its fair value.

For the fiscal years ended March 31, 2002, 20032005, 2006 and 2004 was insignificant.

     Securities investments2007, Sony booked 5,696 million yen, 45,092 million yen and other as11,550 million yen of March 31, 2003 and 2004 also included separate account assets (Note 9)net unrealized gains on trading securities primarily in the life insurance business, which were carried at fair value. Although the separate account assets consist primarily of debt and equity securities, they are excluded from the above table due to the nature of the assets. Proceeds from sales of available-for-sale securities and gross realized gains or losses described above also exclude the amounts related to the separate account assets. Separate account assets at March 31, 2003 and 2004 were 118,190 million yen and 164,461 million yen, respectively.business.


F-29

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

The following table presents the gross unrealized losses on, and fair value of, Sony’s investment securities with unrealized losses, aggregated by investment category and the length of time that individual investment securities have been in a continuous unrealized loss position, at March 31, 2004.
                           
Less than 12 months12 months or moreTotal
UnrealizedUnrealizedUnrealized
Fair valuelossesFair valuelossesFair valuelosses
(Yen in millions)
Available-for-sale:                        
 Debt securities  421,650   (2,035)  10,370   (37)  432,020   (2,072)
 Equity securities  3,189   (1,533)  1,417   (353)  4,606   (1,886)
Held-to-maturity securities  2,344   (28)  0   (0)  2,344   (28)
   
   
   
   
   
   
 
  Total  427,183   (3,596)  11,787   (390)  438,970   (3,986)
   
   
   
   
   
   
 

2007.

                         
  Yen in millions 
  Less than 12 months  12 months or More  Total 
     Unrealized
     Unrealized
     Unrealized
 
  Fair value  losses  Fair value  losses  Fair value  losses 
 
Available-for-sale:                        
Debt securities  67,840   (124)  404,486   (8,779)  472,326   (8,903)
Equity securities  59,790   (7,104)  962   (228)  60,752   (7,332)
Held-to-maturity                        
Securities  2,110   (6)  14,906   (121)  17,016   (127)
                         
Total  129,740   (7,234)  420,354   (9,128)  550,094   (16,362)
                         
In evaluating the factors foravailable-for-sale securities whose fair values are readily determinable, Sony presumes a decline in value to beother-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally for a period of up to six to twelve months). This criteriacriterion is employed as a threshold to identify securities which may have a decline in value that isother-than-temporary. The presumption of another-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value isother-than-temporary.

For the fiscal years ended March 31, 2005, 2006 and 2007, total impairment losses were 4,198 million yen, 4,029 million yen and 7,413 million yen, respectively.

At March 31, 2004,2007, Sony determined that the decline in value for securities with unrealized losses shown in the above table is notother-than-temporary in nature.

F-29

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES8.  Leased assets

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
7.     Leased assets

Sony leases certain communication and commercial equipment, plant, office space, warehouses, employees’ residential facilities and other assets.

Certain of these leases have renewal and purchase options.

An analysis of leased assets under capital leases is as follows:
         
March 31
Class of property20032004
(Yen in millions)
Land  1,829   174 
Buildings  15,937   12,421 
Machinery, equipment and others  33,733   36,907 
Accumulated depreciation  (21,236)  (19,385)
   
   
 
   30,263   30,117 
   
   
 
         
  Yen in millions 
  March 31 
Class of property
 2006  2007 
 
Land  193   80 
Buildings  7,437   1,859 
Machinery, equipment, film costs, and others  28,870   50,506 
Accumulated depreciation  (14,820)  (13,675)
         
   21,680   38,770 
         
Sony has also entered into capital lease arrangements with third parties to finance certain of its theatrical productions. Film costs under capital leases at March 31, 2006 and 2007, included in the table above, were 6,589 million yen and 23,490 million yen, respectively.


F-30

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

The following is a schedule by year of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2004:
      
Yen in
millions
Year ending March 31:    
 2005  15,940 
 2006  12,100 
 2007  7,926 
 2008  6,467 
 2009  9,213 
 Later years  6,970 
   
 
Total minimum lease payments  58,616 
Less — Amount representing interest  15,927 
   
 
Present value of net minimum lease payments  42,689 
Less — Current obligations  12,667 
   
 
Long-term capital lease obligations  30,022 
   
 

     Minimum2007:

     
  Yen in millions 
 
Fiscal Year Ending March 31:    
2008  14,113 
2009  9,911 
2010  6,756 
2011  4,838 
2012  3,405 
Later years  21,491 
     
Total minimum lease payments  60,514 
Less — Amount representing interest  11,111 
     
Present value of net minimum lease payments  49,403 
Less — Current obligations  12,559 
     
Long-term capital lease obligations  36,844 
     
Total minimum lease payments have not been reduced by minimum sublease income of 12,7809,584 million yen due in the future under noncancelable subleases.

Minimum rentalsrental expenses under operating leases for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 were 104,49781,391 million yen, 94,36480,014 million yen and 92,64985,598 million yen, respectively. Sublease rentals received under operating leases for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 were 7,0061,933 million yen, 6,2401,350 million yen and 2,9232,689 million yen, respectively. The total minimum rentals to be received in the future under noncancelable subleases as of March 31, 20042007 were 15,4978,936 million yen. The minimum rental payments

F-30

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 20042007 are as follows:

      
(Yen in
millions)
Year ending March 31:    
 2005  42,649 
 2006  32,861 
 2007  25,864 
 2008  16,556 
 2009  12,942 
 Later years  56,507 
   
 
Total minimum future rentals  187,379 
   
 
 
8.Goodwill and intangible assets

     
  Yen in millions 
 
Fiscal Year Ending March 31:    
2008  46,154 
2009  36,869 
2010  27,942 
2011  17,322 
2012  13,807 
Later years  60,629 
     
Total minimum future rentals  202,723 
     

9.  Goodwill and intangible assets
Intangible assets acquired during the fiscal year ended March 31, 20042007 totaled 35,84054,155 million yen, which are subject to amortization and primarily consist of music catalogs of 2,526 million yen, acquired patent rights of 7,90324,806 million yen and software to be sold, leased or otherwise marketed of 13,63216,694 million yen. The weighted average amortization period for music catalogs, acquired patent rights and software to be sold, leased or otherwise marketed is 21 years, 87 years and 3 years, respectively.


F-31

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Intangible assets subject to amortization compriseare comprised of the following:
                 
March 31
20032004
GrossGross
carryingAccumulatedcarryingAccumulated
amountAmortizationamountAmortization
Yen in millions
Artist contracts  89,078   (69,281)  80,675   (68,300)
Music catalog  120,242   (48,447)  109,795   (47,610)
Acquired patent rights  46,758   (18,024)  52,996   (23,172)
Software to be sold, leased or otherwise marketed  17,848   (7,267)  31,983   (13,577)
PlayStation format  11,873   (7,719)  11,873   (10,094)
Other  45,257   (20,499)  43,175   (17,328)
   
   
   
   
 
Total  331,056   (171,237)  330,497   (180,081)
   
   
   
   
 

F-31

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                 
  Yen in millions 
  March 31 
  2006  2007 
  Gross carrying
  Accumulated
  Gross carrying
  Accumulated
 
  amount  amortization  amount  amortization 
 
Artist contracts  15,218   (12,218)  15,218   (13,019)
Music catalog  71,921   (24,012)  79,930   (27,669)
Acquired patent rights  67,467   (30,200)  84,482   (37,173)
Software to be sold, leased or otherwise marketed  40,007   (24,194)  42,028   (21,435)
Other  36,833   (15,133)  57,022   (26,287)
                 
Total  231,446   (105,757)  278,680   (125,583)
                 

The aggregate amortization expensesexpense for intangible assets for the fiscal years ended March 31, 2002, 20032005, 2006 and 2004 were 25,5542007 was 24,993 million yen, 27,87128,390 million yen and 28,86633,168 million yen, respectively. The estimated aggregate amortization expense for intangible assets for the next five years is as follows:
      
Yen in
millions
Year ending March 31,    
 2005  26,863 
 2006  21,401 
 2007  13,958 
 2008  12,269 
 2009  11,705 

     
  Yen in millions 
 
Fiscal Year Ending March 31,    
2008  37,334 
2009  31,265 
2010  23,234 
2011  19,534 
2012  7,515 
Total carrying amount of intangible assets having an indefinite life compriseare comprised of the following:
         
March 31
20032004
(Yen in millions)
Trademarks  57,410   57,384 
Distribution agreement  18,834   18,834 
   
   
 
   76,244   76,218 
   
   
 
         
  Yen in millions 
  March 31 
  2006  2007 
 
Trademarks  58,195   58,212 
Distribution agreement  18,848   18,834 
Other  4,145   3,112 
         
   81,188   80,158 
         

     In addition to the amortizable and indefinite-lived intangible assets shown in the above tables, intangible assets at March 31, 2003 and 2004 also include unrecognized prior service costs totaling 22,561 million yen and 21,376 million yen, respectively, which were recorded under FAS No. 87 as discussed in Note 13.
F-32

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

The changes in the carrying amount of goodwill by operating segment for the fiscal years ended March 31, 20032006 and 20042007 are as follows:
                         
ElectronicsGameMusicPicturesOtherTotal
(Yen in millions)
Balance at March 31, 2002  56,853   111,105   58,600   89,392   1,290   317,240 
Goodwill acquired during year  5,380   108   1,837   —   140   7,465 
Reduction under FAS No. 109  (9,054)  —   (17,768)  (6,703)  —   (33,525)
Other *  —   (607)  3,352   (3,992)  194   (1,053)
   
   
   
   
   
   
 
Balance at March 31, 2003  53,179   110,606   46,021   78,697   1,624   290,127 
Goodwill acquired during year  5,634   —   76   1,666   534   7,910 
Impairment losses  (6,049)  —   —   —   —   (6,049)
Other *  (528)  (244)  (3,771)  (9,574)  (1)  (14,118)
   
   
   
   
   
   
 
Balance at March 31, 2004  52,236   110,362   42,326   70,789   2,157   277,870 
   
   
   
   
   
   
 

                         
  Yen in millions 
           Financial
       
  Electronics  Game  Pictures  Services  All Other  Total 
 
Balance at March 31, 2005  70,815   114,740   77,934   441   19,993   283,923 
Goodwill acquired during year  3,337   1,317   947   536   382   6,519 
Reallocated from music business to Electronics segment  634   —   —   —   (634)  — 
Impairment losses  —   —   —   —   (534)  (534)
Other *  1,577   207   7,031   —   301   9,116 
                         
Balance at March 31, 2006  76,363   116,264   85,912   977   19,508   299,024 
Goodwill acquired during year  371   301   8,595   698   1,068   11,033 
Impairment losses  (5,620)  —   —   —   (237)  (5,857)
Other *  155   80   (321)  —   555   469 
                         
Balance at March 31, 2007  71,269   116,645   94,186   1,675   20,894   304,669 
                         
* Other primarily consists of translation adjustments and reclassification to/from other accounts.

Consistent with the presentation of business segment information in Note 24, the music business is included within All Other. Effective April 1, 2005, the Japan based disc manufacturing businesses formerly included within the music business, were reclassified to the Electronics segment, and accordingly, Sony reclassified 634 million yen of goodwill from All Other to the Electronics segment.
As described in Note 2, Sony performs an annual impairment test for goodwill. During the fiscal year ended March 31, 2003,2006, Sony realized tax benefits from operating loss carryforwards that were acquired in connection with Sony’s acquisition of companies within the Electronics, Music and Pictures businesses. Under FAS No. 109, “Accounting for Income Taxes”, the reversal of the valuation allowance upon the realization of tax benefits from the operating loss carryforwards was applied to reduce a portion of the goodwill relating to the acquisition of these companies.

F-32

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the year ended March 31, 2004, Sony performed the annual impairment test for goodwill and recorded an impairment loss of 6,049534 million yen in a reporting unit included in All Other. During the fiscal year ended March 31, 2007, Sony recorded impairment losses of 5,620 million yen in reporting units in the Electronics business. Thissegment, of which 5,320 million yen was related to the CRT TV business which was downsized in the U.S., and an impairment chargeloss of 237 million yen in a reporting unit included in All Other. These impairment charges reflected the overall decline in the fair value of a subsidiary within the Electronics business.subsidiaries. The fair valuevalues of that reporting unit wasthe subsidiaries were estimated principally using the expected present value of future cash flows.

 
9.Insurance-related accounts

10.  Insurance-related accounts
Sony’s life and non-life insurance subsidiaries in Japan maintain their accounting records as described in Note 2 in accordance with the accounting principles and practices generally accepted in Japan, which vary in some respects from U.S. GAAP.

Those differences are mainly that insurance acquisition costs for life and non-life insurance are charged to income when incurred in Japan whereas in the United States of America those costs are deferred and amortized generally over the premium-paying period of the related insurance policies, and that future policy benefits for life insurance calculated locally under the authorization of the supervisory administrative agencies are comprehensively adjusted to a net level premium method with certain adjustments of actuarial assumptions for U.S. GAAP purposes. For purposes of preparing the consolidated financial statements, appropriate adjustments have been made to reflect suchthe accounting for these items in accordance with U.S. GAAP.

The amounts of statutory net equity of the subsidiaries as of March 31, 2003 and 2004 were 100,441 million yen and 146,540 million yen, respectively.

 
(1)
Insurance policies:

(1)  Insurance policies:

Life insurance policies that the life insurance subsidiary writes,underwrites, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. The life insurance revenues for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 were 430,019426,774 million yen, 450,363


F-33

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

453,496 million yen and 437,835481,764 million yen, respectively. Property and casualty insurance policies that the non-life insurance subsidiary writesunderwrites are primarily automotive insurance contracts, which are categorized as short-duration contracts. The non-life insurance revenues for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 were 13,16435,454 million yen, 21,26942,743 million yen and 28,37148,937 million yen, respectively.
 
(2)
Deferred insurance acquisition costs:

(2)  Deferred insurance acquisition costs:

Insurance acquisition costs, including such items as commission, expenses, medical examination and inspection report fees, etc., that vary with and are primarily related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs for traditional life insurance productscontracts are amortized mainly over the premium-paying period of the policy.related insurance policies using assumptions consistent with those used in computing policy reserves. The deferred insurance acquisition costs for non-traditional life insurance contracts are mainly amortized over the expected life if the contracts are in proportion to the estimated gross profits. Amortization charged to income for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 amounted to 31,00047,120 million yen, 44,57842,933 million yen and 50,49251,027 million yen, respectively.
 
(3)Future insurance policy benefits:

(3)  Future insurance policy benefits:
Liabilities for future policy benefits are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities are computed by the net level premium method based upon estimates as to future investment yield, mortality, morbidity and withdrawals. Future policy benefits are computed using interest rates ranging from approximately 1.00%0.90% to 5.50%5.00%. Mortality, morbidity and withdrawal assumptions for all policies are based on either the subsidiaries’subsidiary’s own experience or various actuarial tables. At March 31, 20032006 and 2004,2007, future insurance policy benefits amounted to 1,734,6731,901,716 million yen and 1,952,6862,085,715 million yen, respectively.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(4)Separate account assets:

Separate account assets are funds on which investment income and gains or losses accrue directly to certain policyholders. Separate account assets are legally segregated. They are not subject to the claims that may arise out of any other business of a life insurance subsidiary. Separate account assets, which consist primarily of debt and equity securities, are carried at fair value and included in securities investments and other (Note 6). The related liabilities are recognized as separate account liabilities and included in future insurance policy benefits and other. Fees earned for administrative and contract-holder services performed for the separate accounts are recognized as financial service revenue.

10.11.  Short-term borrowings and Long-Term Debt

Short-term borrowings compriseand long-term debt

Short-term borrowings are comprised of the following:
           
March 31
20032004
(Yen in millions)
Unsecured commercial paper:        
  with weighted-average interest rate of 0.13%  52,820   — 
Unsecured loans, principally from banks:        
 with weighted-average interest rate of 3.55%  36,840     
 with weighted-average interest rate of 1.80%      26,260 
Secured call money:        
 with weighted-average interest rate of 0.01%  34,700   65,000 
   
   
 
   124,360   91,260 
   
   
 

         
  Yen in millions 
  March 31 
  2006  2007 
 
Unsecured loans:        
with a weighted-average interest rate of 3.63%  32,066     
with a weighted-average interest rate of 4.14%      42,291 
Secured call money:        
with a weighted-average interest rate of 0.01%  40,000     
with a weighted-average interest rate of 0.21%      10,000 
Secured bills sold:        
with a weighted-average interest rate of 0.01%  70,700   — 
         
   142,766   52,291 
         
At March 31, 2004, marketable securities and2007, securities investments with a book value of 71,77510,000 million yen were pledged as collateral for call money issued by aSony’s Japanese bank subsidiary.


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Long-term debt comprisesis comprised of the following:
          
March 31
20032004
(Yen in millions)
Secured loans, representing obligations principally to banks:        
 Due 2004 to 2008 with interest ranging from 2.20% to 3.73% per annum  —   58,786 
Unsecured loans, representing obligations principally to banks:        
 Due 2003 to 2018 with interest ranging from 1.26% to 5.66% per annum  43,260     
 Due 2004 to 2017 with interest ranging from 1.77% to 5.89% per annum      77,646 
Medium-term notes of consolidated subsidiaries:        
 Due 2003 to 2006 with interest ranging from 1.28% to 4.95% per annum  78,099     
 Due 2004 to 2006 with interest ranging from 1.09% to 4.95% per annum      60,537 
Unsecured 1.4% convertible bonds, due 2003, convertible at 2,707.8 for one common share, redeemable before due date  8,058   — 
Unsecured 1.4% convertible bonds, due 2005, convertible currently at 3,995.5 yen for one common share, redeemable before due date  287,762   287,753 
Unsecured zero coupon convertible bonds, due 2008, convertible currently at 5,605 yen for one common share, redeemable before due date  —   250,000 
Unsecured 0.03% bonds, due 2004 with detachable warrants, net of unamortized discount  3,919   3,981 
Unsecured 0.1% bonds, due 2005 with detachable warrants, net of unamortized discount  3,867   3,924 
Unsecured 1.55% bonds, due 2006 with detachable warrants  12,000   12,000 
Unsecured 0.9% bonds, due 2007 with detachable warrants  7,300   7,300 
Unsecured 0.9% bonds, due 2007 with detachable warrants of subsidiary tracking stock  150   150 
Unsecured 1.42% bonds, due 2005, net of unamortized discount  99,990   99,994 
Unsecured 0.64% bonds, due 2006, net of unamortized discount  99,992   99,994 
Unsecured 2.04% bonds, due 2010, net of unamortized discount  49,978   49,981 
Unsecured 1.52% bonds, due 2011, net of unamortized discount  49,996   49,996 
Unsecured 2.0% bonds, due 2005  15,000   15,000 
Unsecured 1.99% bonds, due 2007  15,000   15,000 
Unsecured 2.35% bonds, due 2010  4,900   4,900 
Capital lease obligations:        
 Due 2003 to 2014 with interest ranging from 2.15% to 17.29% per annum  39,899     
 Due 2004 to 2014 with interest ranging from 2.15% to 22.93% per annum      42,689 
Guarantee deposits received  22,654   21,775 
   
   
 
   841,824   1,161,406 
Less — Portion due within one year  34,385   383,757 
   
   
 
   807,439   777,649 
   
   
 

     At March 31, 2004, buildings with a book value of 61,912 million yen and machinery and equipment with a book value of 4,883 million yen were pledged as collateral for secured loans, representing obligations principally to banks.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

         
  Yen in millions 
  March 31 
  2006  2007 
 
Unsecured loans, representing obligations principally to banks:        
Due 2006 to 2015, with interest rates ranging from 0.13% to 5.89% per annum  128,148     
Due 2007 to 2018, with interest rates ranging from 0.51% to 5.89% per annum      374,091 
Medium-term notes of consolidated subsidiaries:        
Due 2006 with an interest rate of 4.95% per annum  58,698   — 
Unsecured zero coupon convertible bonds, due 2008, convertible currently at 5,605 yen for one common share, redeemable before due date  250,000   250,000 
Unsecured 1.55% bonds, due 2006 with detachable warrants  12,000   — 
Unsecured 0.9% bonds, due 2007 with detachable warrants  7,300   7,300 
Unsecured 0.9% bonds, due 2007 with detachable warrants  150   150 
Unsecured 0.64% bonds, due 2006, net of unamortized discount  99,999   — 
Unsecured 1.01% bonds, due 2010, net of unamortized discount  39,996   39,997 
Unsecured 2.04% bonds, due 2010, net of unamortized discount  49,987   49,990 
Unsecured 0.80% bonds, due 2010, net of unamortized discount  49,991   49,993 
Unsecured 1.52% bonds, due 2011, net of unamortized discount  49,997   49,998 
Unsecured 1.16% bonds, due 2012, net of unamortized discount  39,981   39,985 
Unsecured 1.52% bonds, due 2013, net of unamortized discount  34,997   34,997 
Unsecured 1.57% bonds, due 2015, net of unamortized discount  29,980   29,982 
Unsecured 1.75% bonds, due 2015, net of unamortized discount  24,993   24,993 
Unsecured 1.99% bonds, due 2007  15,000   15,000 
Unsecured 2.35% bonds, due 2010  4,900   4,900 
Capital lease obligations:        
Due 2006 to 2019, with interest rates ranging from 1.45% to 16.00% per annum  38,280     
Due 2007 to 2020, with interest rates ranging from 1.50% to 17.57% per annum      49,403 
Guarantee deposits received  24,056   23,396 
         
   958,453   1,044,175 
Less — Portion due within one year  193,555   43,170 
         
   764,898   1,001,005 
         

There are no significant adverse debt covenants or cross-default provisions relatingrelated to Sony’sthe above borrowings.

     In accordance with the requirements of FAS No. 133, the hedged portion of Sony’s fixed-rate debt is reflected in the consolidated balance sheet at fair value, which reflects any adjustment in the value attributable to movements in related market interest and foreign exchange rates.

A summary of the exercise rights of the detachable warrants as of March 31, 20042007 is as follows:
           
ExerciseNumber of shares per
Issued onExercisable duringpricewarrantStatus of exercise
(Yen)
August 17, 1998September 1, 1999 through August 16, 2004  6,264Exercise price  319Number of shares of common stock of Sony Corporation
 230 warrants exercised; 1,770 warrants outstanding
August 23, 1999
Issued on
 September 1, 2000 through August 22, 2005Exercisable duringYen  7,167per warrant 279 sharesStatus of common stock of Sony Corporation2,000 warrants outstandingexercise
October 19, 2000November 1, 2001 through October 18, 200612,457100 shares of common stock of Sony Corporation9,600 warrants outstanding
December 21, 2001 January 6, 2003 through December 20, 2007  6,039  100 shares of11,459 warrants
through Decembercommon stock of Sony Corporation 11,534 warrants outstanding
December 21, 2001 June 20, 2002 through June 20, 2007  3,300  75 shares of subsidiary tracking stockSony Corporation 600 warrants outstanding


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Aggregate amounts of annual maturities of long-term debt during the next five years are as follows:
     
Year ending March 31Yen in millions
2005  383,757 
2006  160,334 
2007  168,878 
2008  26,313 
2009  284,594 

     
Fiscal Year Ending March 31
 Yen in millions 
 
2008  43,170 
2009  296,659 
2010  165,419 
2011  209,841 
2012  69,008 
At March 31, 2004,2007, Sony had unused committed lines of credit amounting to 817,538700,426 million yen and can generally borrow up to 90 days from the banks with whom Sony has committed line contracts. Furthermore, Sony has Commercial Paper Programs, the size of which was 1,873,4501,326,630 million yen. There was no commercial paper outstanding at March 31, 2004.2007. Under those programs, Sony can issue commercial paper for thea period generally not in excess of 270 days up to the size of the programs. In addition, Sony has Medium Term Notes programs, the size of which was 845,200590,450 million yen. At March 31, 2004, the total outstanding balance ofThere were no Medium Term Notes was 60,537 million yen.

     In the United States of America, Sony has an accounts receivable securitization program which provides for the accelerated receipt of up to 52,825 million yen of cash on eligible trade accounts receivable of Sony’s U.S. electronics subsidiary. Through this program, Sony can securitize and sell a percentage of undivided interest in that pool of receivables to several multi-seller commercial paper conduits owned and operated by a bank.

     The basic agreements with certain banks in Japan include provisions that collateral (including sums on deposit with such banks) or guarantors will be furnished upon the banks’ request and that any collateral furnished, pursuant to such agreements or otherwise, will be applicable to all present or future indebtedness to such banks.

F-36

outstanding at March 31, 2007.

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11.12.  Deposits from customers in the banking Businessbusiness

All deposits from customers in the banking business are interest bearing deposits, and are owned by aSony’s Japanese bank subsidiary which was established as an Online Internet bank for individuals. At March 31, 20032006 and 2004,2007, the balancesbalance of time deposits issued in amounts of 10 million yen or more were 39,62075,459 million yen and 55,164116,220 million yen, respectively.

At March 31, 2004,2007, aggregate amounts of annual maturities of time deposits with a remaining term of more than one year include 23,951 million yen and 22,284 million yen for the years ending March 31, 2006 and 2007, respectively. There are no deposits having a maturity date after March 31, 2007.

as follows:

     
Fiscal Year Ending March 31
 Yen in millions 
 
2009  25,296 
2010  15,143 
2011  4,415 
2012  6,570 
2013  697 
12.13.  Financial instruments

(1)  Derivative instruments and hedging activities:

Sony has certain financial instruments including financial assets and liabilities incurredacquired in the normal course of business. Such financial instruments are exposed to market risk arising from the changes of foreign currency exchange rates and interest rates. In applying a consistent risk management strategy for the purpose of reducing such risk, Sony uses derivative financial instruments, which include foreign exchange forward contracts, foreign currency option contracts, and interest rate and currency swap agreements. Sony does not use derivative financial instruments for trading or speculative purposes. Foreign exchange forward contracts and foreign currency option contracts are utilized primarily to limit the exposure affected by changes in foreign currency exchange rates on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies. Interest rate and currency swap agreements are utilized primarily to lower funding costs, to diversify sources of funding and to limit Sony’s exposure associated with underlying debt instruments andavailable-for-sale debt securities resulting from adverse fluctuations in interest rates, and/or foreign currency exchange rates.

rates and changes in the fair value. These instruments are executed with creditworthy financial institutions, and virtually all foreign currency contracts are denominated in U.S. dollars, euros and other currencies of major countries. Although Sony may be exposed to losses in the event of nonperformance by counterparties or unfavorable interest and currency rate movements, it does not anticipate significant losses due to the nature of Sony’s counterparties or the hedging arrangements. These derivatives generally mature or expire within 6 months after the balance sheet date. Sony does not use these derivative financial

��    
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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

instruments for trading or speculative purposes, except for certain derivatives utilized for portfolio investments such as interest rate swap agreements and bond future contracts in the Financial Services segment. These derivative transactions utilized for portfolio investments in the Financial Services segment are executed within a certain limit in accordance with an internal risk management policy.
Derivative financial instruments held by Sony are classified and accounted for as described below pursuant to FAS No. 133.
 
Fair value hedges

Fair value hedges
The derivatives designated as fair value hedges include interest rate and currency swap agreements.

Both the derivatives designated as fair value hedgehedges and the hedged items are reflected at fair value in the consolidated balance sheet. Changes in the fair value of the derivatives designated as fair value hedgehedges as well as offsetting changes in the carrying value of the underlying hedged items are recognized in income.

The

For the fiscal year ended March 31, 2005, the amount of ineffectiveness of these fair value hedges, that was reflected in earnings, was not material formaterial. For the fiscal years ended March 31, 20032006 and 2004.2007, these fair value hedges were fully effective. In addition, there were no amounts excluded from the assessment of hedge effectiveness of fair value hedges.
 
Cash flow hedges

Cash flow hedges
The derivatives designated as cash flow hedges include foreign exchange forward contracts, foreign currency option contracts and interest rate and currency swap agreements.

F-37

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings.

For the fiscal year ended March 31, 2005, the amount of ineffectiveness of these cash flow hedges that was reflected in earnings was not material. For the fiscal years ended March 31, 20032006 and 2004,2007, these cash flow hedges were fully effective. In addition, there were no amounts excluded from the assessment of hedge effectiveness of cash flow hedges. At March 31, 2004,2007, amounts related to derivatives qualifying as cash flow hedges amounted to a net reduction of equity of 6001,075 million yen. Within the next twelve months, 1,212311 million yen is expected to be reclassified from equity into earnings as profit. For the year ended March 31, 2004, there were no forecasted transactions that failed to occur which resulted in the discontinuance of cash flow hedges.a loss.

 
Derivatives not designated as hedges

Derivatives not designated as hedges
The derivatives not designated as hedges under FAS No. 133 include foreign exchange forward contracts, foreign currency option contracts, interest rate and currency swap agreements, convertible rights included in convertible bondsinterest rate and other.

bond future contracts, stock price index option contracts and other derivatives. Changes in the fair value of derivatives not designated as hedges are recognized in income.

A description of the purpose and classification of the derivative financial instruments held by Sony is as follows:
 
Foreign exchange forward contracts and foreign currency option contracts

Foreign exchange forward contracts and foreign currency option contracts
Sony enters into foreign exchange forward contracts and purchased and written foreign currency option contracts primarily to fix the cash flows from intercompany accounts receivable and payable and forecasted transactions denominated in the functional currencies (Japanese yen, U.S. dollars and euros) of Sony’s major operating units. The majority of written foreign currency option contracts are a part of range forward contract arrangements and expire in the same month with the corresponding purchased foreign currency option contracts.

     Since July 1, 2002, In January, 2007, certain foreign currency option contracts havederivatives that had been previously designated as cash flow hedges of forecasted intercompany transactions in lineaccordance with changes in hedging schemes regarding Sony’s derivative activities, under which such derivative transactions meet the requirements for hedge accounting, including correlation, as stipulated under FAS No. 133, were no longer designated as cash flow hedges and, FAS No. 138.accordingly, changes in the fair value of those derivatives were recognized into income after January, 2007. At March 31, 2007, the notional amount and the


F-37

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

estimated fair value of those derivatives remaining to be designated as cash flow hedges were 50,936 million yen and 169 million yen, respectively.
Sony also enters into foreign exchange forward contracts, which effectively fix the cash flows from foreign currency denominated debt. Accordingly, these derivatives have been designated as cash flow hedges in accordance with FAS No. 133.

Foreign exchange forward contracts and foreign currency option contracts that do not qualify as hedges aremarked-to-market with changes in value recognized in other income and expense.

These derivatives generally mature or expire within four months afterexpenses.

Foreign exchange forward contracts and foreign currency option contracts held by certain subsidiaries in the balance sheet date.Financial Services segment aremarked-to-market with changes in value recognized in financial service revenue.
 
Interest rate and currency swap agreements

Interest rate and currency swap agreements
Sony enters into interest rate and currency swap agreements, which are used for reducing the risk arising from the changes in the fair value of fixed rate debt andavailable-for-sale debt securities. For example, Sony enters into interest rate and currency swap agreements, which effectively swap foreign currency denominated fixed rate debt for functional currency denominated variable rate debt. These derivatives are considered to be a hedge against changes in the fair value of Sony’s foreign denominated fixed-rate obligations. Accordingly, these derivatives have been designated as fair value hedges in accordance with FAS No. 133.

F-38

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Sony also enters into interest rate and currency swap agreements that are used for reducing the risk arising from the changes in anticipated cash flowflows of variable rate debt and foreign currency denominated debt. For example, Sony enters into interest rate and currency swap agreements, which effectively swap foreign currency denominated variable rate debt for functional currency denominated fixed rate debt. These derivatives are considered to be a hedge against changes in the anticipated cash flowflows of Sony’s foreign denominated variable rate obligations. Accordingly, these derivatives have been designated as cash flow hedges in accordance with FAS No. 133.

Certain subsidiaries in the Financial Services segment have interest rate swap agreements as part of their portfolio investments, which aremarked-to-market with changes in value recognized in financial service revenue. Interest rate and currency swap agreements held by certain subsidiaries in the Financial Services segment are alsomarked-to-market with changes in value recognized in financial service revenue.
Any other interest rate and currency swap agreements that do not qualify as hedges, which are used for reducing the risk arising from changes of variable rate and foreign currency dominated intercompany debt, aremarked-to-market with changes in value recognized in other income and expense.expenses.
 
Embedded derivatives

     The

Interest rate and bond future contracts
Certain subsidiaries in the Financial Services segment have interest rate and bond future contracts as part of their portfolio investments, which aremarked-to-market with changes in value recognized in financial service revenue.
Bond option contracts and Stock price index option contracts
Certain subsidiaries in the Financial Services segment have bond option and stock price index option contracts as part of their portfolio investments, which aremarked-to-market with changes in value recognized in financial service revenue.
Embedded derivatives
Until March 31, 2006, changes in the fair value of embedded derivatives thatheld by certain subsidiaries in the Financial Services segment as part of their portfolio investments, which must be separatedbifurcated from the host contracts and accounted for as derivative instruments under FAS No. 133 arewere recognized in income. For example, the convertible rights included in convertible bonds held by Sony’s life insurance subsidiary, which are classified as available-for-sale debt securities, are consideredSony early adopted FAS No. 155 on April 1, 2006 and measures embedded derivatives andat fair value as hybrid financial instruments


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

without bifurcating them. These embedded derivatives aremarked-to-market with changes in value recognized in financial service revenue.

See Note 2, for further details of the adoption of FAS No. 155.

(2)  Fair value of financial instruments:

The estimated fair values of Sony’s financial instruments are summarized as follows. The following summary excludes cash and cash equivalents, time deposits, notes and accounts receivable, trade, short-term borrowings, notes and accounts payable, trade and deposits from customers in the banking business that are carried at amounts which approximate fair value. The summary also excludes debt and equity securities which are disclosed in Note 6.
                         
March 31
20032004
NotionalCarryingEstimatedNotionalCarryingEstimated
amountamountfair valueamountamountfair value
(Yen in millions)
Long-term debt including the current portion  —   (841,824)  (924,665)  —   (1,161,406)  (1,235,669)
Foreign exchange forward contracts  1,139,330   (11,753)  (11,753)  1,348,157   (994)  (994)
Currency option contracts purchased  484,456   2,868   2,868   375,582   10,781   10,781 
Currency option contracts written  238,760   (1,975)  (1,975)  124,925   (1,000)  (1,000)
Interest rate swap agreements  181,443   (8,446)  (8,446)  218,101   (4,229)  (4,229)
Interest rate and currency swap agreements  24,588   (1,330)  (1,330)  8,574   384   384 
Embedded derivatives  446,463   1,755   1,755   421,416   12,885   12,885 

7.

                         
  Yen in millions 
  March 31 
  2006  2007 
  Notional
  Carrying
  Estimated
  Notional
  Carrying
  Estimated
 
  amount  amount  fair value  amount  amount  fair value 
 
Long-term debt including the current portion  —   (958,453)  (981,006)  —   (1,044,175)  (1,075,359)
Foreign exchange forward contracts  1,489,213   1,184   1,184   1,768,609   (291)  (291)
Currency option contracts purchased  457,380   2,540   2,540   287,833   2,404   2,404 
Currency option contracts written  163,746   (2,576)  (2,576)  67,180   (462)  (462)
Interest rate swap agreements  172,430   (165)  (165)  272,608   (1,512)  (1,512)
Interest rate and currency swap agreements  14,518   (488)  (488)  8,718   (816)  (816)
Interest rate future contracts  —   —   —   115,291   9   9 
Bond future contracts  13,934   111   111   6,993   1   1 
Bond option contracts written  —   —   —   49,964   130   130 
Stock price index option purchased  26,650   40   40   —   —   — 
Embedded derivatives  411,252   70,712   70,712   —   —   — 
The following are explanatory notes regarding the estimation method of fair values in the above table.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Long-term debt including the current portion

Long-term debt including the current portion

The fair values of long-term debt, including the current portion, were estimated based on either the market value or the discounted amounts of future cash flows using Sony’s current incremental debt rates for similar liabilities.
 
Derivative financial instruments

Derivative financial instruments
The fair values of foreign exchange forward contracts, and foreign currency option contracts, interest rate future contracts, bond future contracts, and stock price index option contracts were estimated based on market quotations. The fair values of interest rate and currency swap agreements were estimated based on the discounted amounts of future net cash flows. The fair values of convertible rights, whichbond option contracts were based on the price obtained from brokers. As a majorityresult of the adoption of FAS No. 155, the fair values of the embedded derivatives were estimated based onevaluated as hybrid financial instruments without bifurcating them and the market priceinformation of stock which will be acquired by the exercise.these transactions are disclosed in Note 7 as debt securities.


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

13.14.  Pension and severance plans

Upon terminating employment, employees of Sony Corporation and its subsidiaries in Japan are entitled, under most circumstances, to lump-sum indemnities or pension payments as described below. For employees voluntarily retiring, under normal circumstances, minimum payment is an amount based on current rates of pay and lengths of service. In calculating the minimum payment for employees involuntarily retiring, including employees retiring due to meeting mandatory retirement age requirements, Sony may grant additional benefits.

     In June, 2003, Sony adopted the new corporate governance system, “Company with Committees”, based on the revised Japanese commercial Code. Under the previous corporate governance system, with respect to directors’ and statutory auditors’ resignations, lump-sum severance indemnities are calculated using a similar formula aforementioned and are normally paid subject to the approval of Sony’s shareholders. Under the “Company with Committees” system, with respect to directors’, corporate executive officers’ and executive officers’ resignations, lump-sum severance indemnities calculated based on the compensation committee’s bylaw are paid subject to the approval of compensation committee.

July, 2004, Sony Corporation and mostcertain of its subsidiaries in Japan have contributory funded defined benefitamended their pension plans which are pursuant to the Japanese Welfare Pension Insurance Law. The contributory pension plans coverand introduced a portion of the governmental welfare pension program,point-based plan under which a point is added every year reflecting the contributions are made by the companies and their employees, and an additional portion representing the substituted noncontributory pension plans.individual employee’s performance over that year. Under the contributory pension plans,point-based plan, the defined benefits representingamount of payment is determined based on sum of cumulative points from past services and interest points earned on the noncontributory portioncumulative points regardless of whether or not the employee is voluntarily retiring.

Under the plans, in general, the defined benefits cover 60%65% of the indemnities under the existing regulations to employees. The remaining indemnities are covered by severance payments by the companies. The pension benefits are determined based on years of service and the compensation amounts, as stipulated in the aforementioned regulations, are payable at the option of the retiring employee either in a lump-sum amount or on a monthly pension.pension payments. Contributions to the plans are funded through several financial institutions in accordance with the applicable laws and regulations.

     Many

Sony Corporation and most of its subsidiaries in Japan had contributory funded defined benefit pension plans pursuant to the Japanese Welfare Pension Insurance Law, which consisted of a substitutional portion of the governmental welfare pension program and an additional portion which was established at the discretion of each employer. In June, 2001, the Japanese Government issued the Defined Benefit Corporate Pension Plan Act, which permitted each employer and employees’ pension fund plan to separate the substitutional portion from its employees’ pension fund and transfer the obligation and related assets to the government. In July, 2004, in accordance with the law, the Japanese Government approved applications submitted by Sony Corporation and most of its subsidiaries in Japan for an exemption from the obligation to pay benefits for future employee services related to the substitutional portion of the governmental welfare pension program. In January 2005, the government also approved applications for an exemption from the obligation to pay benefits for past employee services related to the substitutional portion. On September 20, 2005, the benefit obligation for past employee services related to the substitutional portion and the related government-specified portion of the plan assets were transferred to the government. As a result of the transfer to the government of the substitutional portion, as of March 31, 2006, Sony Corporation and most of its subsidiaries in Japan maintain funded defined benefit plans, which were established by succeeding the additional portion established at the discretion of each employer, pursuant to the Defined Benefit Corporate Pension Plan Act.
EITF IssueNo. 03-2, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities”, requires employers to account for the entire separation process of a substitutional portion from an entire plan upon completion of the transfer of the substitutional portion of the benefit obligation and related plan assets to the government as the culmination of a series of steps in a single settlement transaction. For the fiscal year ended March 31, 2006, in accordance with EITF IssueNo. 03-2, Sony recognized a government subsidy of 133,322 million yen which is the net of the amount of the accumulated benefit obligation settled and the plan assets transferred to the government. Sony also recognized a settlement loss of 59,850 million yen, the amount of which is the net of 100,253 million yen of unrecognized losses related to the substitutional portion and 40,403 million yen for the derecognition of previously accrued salary progression. The net gain of 73,472 million yen is included in selling, general and administrative expenses.
Several of Sony’s foreign subsidiaries have defined benefit pension plans or severance indemnity plans, which substantially cover all of their employees, under whichemployees. Under such plans, the related cost of benefits is currently funded or accrued. Benefits awarded under these plans are based primarily on the current rate of pay and length of service.

Sony uses a measurement date of March 31 for substantially all of its pension and severance plans.
In September 2006, the FASB issued FAS No. 158 which requires an employer to fully recognize the over-funded or under-funded status of its pension and other postretirement benefit plans as an asset or liability in its financial statements. In addition, the company is required to recognize as a component of other comprehensive income, net of tax, the actuarial gains or losses and prior service costs or credits that arise during the period but are not immediately recognized as components of net periodic benefit cost. FAS No. 158 should be implemented on a


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

prospective basis rather than retrospective basis. As of March 31, 2007, Sony adopted FAS No. 158 and as a result, recognized the funded status of each applicable plan on the balance sheet. The initial impact of adopting FAS No. 158 was a 9,508 million yen reduction in accumulated other comprehensive income, net of tax. Previously established additional minimum liabilities and related intangible assets were derecognized upon the adoption of FAS No. 158.
The effect of adopting FAS No. 158 on the individual line items on the balance sheet as of March 31, 2007 was as follows:
             
  Before
     After
 
  Adoption of
     Adoption of
 
  FAS No. 158  Adjustments  FAS No. 158 
 
Intangibles  114   (114)  0 
Other assets  2,198   (1,711)  487 
Deferred income tax assets  22,214   5,412   27,626 
Other current liabilities  6,067   489   6,556 
Accrued pension and severance costs  157,047   8,269   165,316 
Other long term liabilities  14,138   2,850   16,988 
Deferred income tax liabilities  41   1,487   1,528 
Accumulated other comprehensive Income (loss)  (61,951)  (9,508)  (71,459)
The components of net pension and severanceperiodic benefit costs which exclude employee termination benefits paid in restructuring activities, for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 were as follows:
 
Japanese plans:
             
Year Ended March 31
200220032004
(Yen in millions)
Service cost  48,609   47,884   54,501 
Interest cost  21,232   20,857   19,489 
Expected return on plan assets  (26,286)  (25,726)  (22,812)
Amortization of net transition asset  (375)  (375)  (375)
Recognized actuarial loss  12,639   20,655   31,019 
Amortization of prior service cost  611   (939)  (939)
Gains on curtailments and settlements  —   (1,380)  — 
   
   
   
 
Net periodic benefit cost  56,430   60,976   80,883 
   
   
   
 
Japanese plans:
 
Foreign plans:
             
Year Ended March 31
200220032004
(Yen in millions)
Service cost  15,161   13,954   11,252 
Interest cost  7,944   8,478   8,566 
Expected return on plan assets  (7,416)  (7,319)  (6,812)
Amortization of net transition asset  (87)  (47)  (27)
Recognized actuarial (gain) loss  (351)  1,452   1,569 
Amortization of prior service cost  848   (208)  (117)
(Gains) losses on curtailments and settlements  —   (460)  5,574 
   
   
   
 
Net periodic benefit cost  16,099   15,850   20,005 
   
   
   
 
             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Service cost  31,971   26,561   27,175 
Interest cost  21,364   16,504   13,494 
Expected return on plan assets  (16,120)  (17,290)  (17,299)
Amortization of net transition asset  (375)  (104)  — 
Recognized actuarial loss  20,236   14,393   10,072 
Amortization of prior service costs  (7,216)  (10,229)  (10,321)
Gains on curtailments and settlements  (876)  —   — 
Settlement loss resulting from the transfer of the substitutional portion  —   59,850   — 
             
Net periodic benefit costs  48,984   89,685   23,121 
             


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign plans:
             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Service cost  6,419   6,852   7,664 
Interest cost  8,091   8,318   10,179 
Expected return on plan assets  (6,712)  (7,112)  (9,123)
Amortization of net transition asset  (18)  21   27 
Recognized actuarial loss  1,637   1,674   2,536 
Amortization of prior service costs  (114)  (240)  (295)
Losses on curtailments and settlements  1,713   915   120 
             
Net periodic benefit costs  11,016   10,428   11,108 
             
The estimated net actuarial loss, prior service cost and obligation (asset) existing at transition for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit costs over the next fiscal year are 12,958 million yen, 10,373 million yen and 20 million yen, respectively.
The changes in the benefit obligation and plan assets as well as the funded status and composition of amounts recognized in the consolidated balance sheets were as follows:
                  
Japanese plansForeign plans
March 31March 31
2003200420032004
(Yen in millions)(Yen in millions)
Change in benefit obligation:                
 Benefit obligation at beginning of the fiscal year  869,142   1,031,760   143,210   157,580 
 Service cost  47,884   54,501   13,954   11,252 
 Interest cost  20,857   19,489   8,478   8,566 
 Plan participants’ contributions  5,148   5,802   706   644 
 Amendments  —   —   (23)  3,900 
 Actuarial (gain) loss  114,665   (81,873)  9,019   431 
 Foreign currency exchange rate changes  —   —   (9,551)  (17,082)
 Curtailments and settlements  (1,010)  —   (1,092)  (66)
 Benefits paid  (24,926)  (36,137)  (7,121)  (9,387)
   
   
   
   
 
 Benefit obligation at end of the fiscal year  1,031,760   993,542   157,580   155,838 
   
   
   
   
 
Change in plan assets:                
 Fair value of plan assets at beginning of the fiscal year  456,678   405,248   82,602   67,937 
 Actual return (loss) on plan assets  (66,682)  93,154   (10,466)  13,065 
 Foreign currency exchange rate changes  —   —   (3,287)  (3,420)
 Employer contribution  21,296   23,243   5,235   16,475 
 Plan participants’ contributions  5,148   5,802   706   644 
 Benefits paid  (11,192)  (14,352)  (6,853)  (9,039)
   
   
   
   
 
 Fair value of plan assets at end of the fiscal year  405,248   513,095   67,937   85,662 
   
   
   
   
 
Funded status  626,512   480,447   89,643   70,176 
Unrecognized actuarial loss  (513,012)  (328,467)  (38,702)  (27,550)
Unrecognized net transition asset  854   479   (180)  (211)
Unrecognized prior service cost  21,579   20,784   1,283   748 
   
   
   
   
 
Net amount recognized  135,933   173,243   52,044   43,163 
   
   
   
   
 
Amounts recognized in the consolidated                
balance sheet consist of:                
 Accrued pension and severance costs, including current portion  444,636   322,677   72,048   58,843 
 Intangibles  (22,433)  (21,263)  (128)  (113)
 Accumulated other comprehensive income  (286,270)  (128,171)  (19,876)  (15,567)
   
   
   
   
 
 Net amount recognized  135,933   173,243   52,044   43,163 
   
   
   
   
 
                 
  Japanese plans  Foreign plans 
  Yen in millions  Yen in millions 
  March 31  March 31 
  2006  2007  2006  2007 
 
Change in benefit obligation:                
Benefit obligation at beginning of the fiscal year  901,726   619,869   153,598   194,169 
Service cost  26,561   27,175   6,852   7,664 
Interest cost  16,504   13,494   8,318   10,179 
Plan participants’ contributions  —   —   609   557 
Amendments  (11,522)  (1,693)  238   (898)
Actuarial (gain) loss  (3,200)  (7,053)  20,183   4,693 
Foreign currency exchange rate changes  —   —   17,506   9,040 
Curtailments and settlements  —   —   (4,465)  — 
Benefits paid  (18,630)  (15,251)  (8,670)  (8,524)
Transfer of the substitutional portion to the government  (291,570)  —   —   — 
                 
Benefit obligation at end of the fiscal year  619,869   636,541   194,169   216,880 
                 


F-42

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

                 
  Japanese plans  Foreign plans 
  Yen in millions  Yen in millions 
  March 31  March 31 
  2006  2007  2006  2007 
 
Change in plan assets:                
Fair value of plan assets at beginning of the fiscal year  534,451   489,328   92,025   104,394 
Actual return on plan assets  51,766   4,199   11,209   14,393 
Foreign currency exchange rate changes  —   —   5,059   13,268 
Employer contribution  32,867   37,032   5,493   21,820 
Plan participants’ contributions  —   —   609   557 
Curtailments and settlements  —   —   (4,006)  (120)
Benefits paid  (11,911)  (11,299)  (5,995)  (8,524)
Transfer of the substitutional portion to the government  (117,845)  —   —   — 
                 
Fair value of plan assets at end of the fiscal year  489,328   519,260   104,394   145,788 
                 
Funded status at end of year  (130,541)  (117,281)  (89,775)  (71,092)
                 
Unrecognized actuarial loss  169,915   —   41,587   — 
Unrecognized net transition asset  —   —   153   — 
Unrecognized prior service cost  (135,733)  —   (911)  — 
                 
Net amount recognized  (96,359)  (117,281)  (48,946)  (71,092)
                 

Amounts recognized in the consolidated balance sheet consist of:
                 
  Japanese plans  Foreign plans 
  Yen in millions  Yen in millions 
  March 31  March 31 
  2006  2007  2006  2007 
 
Noncurrent assets  2,650   14   1,383   473 
Current liabilities  —   —   —   (6,556)
Noncurrent liabilities  (134,849)  (117,295)  (70,986)  (65,009)
Accumulated other comprehensive income — Minimum pension liabilities  35,840   —   20,657   — 
                 
Ending Balance  (96,359)  (117,281)  (48,946)  (71,092)
                 
Amounts recognized in accumulated other comprehensive income, excluding tax effects, consist of:
                 
  Japanese plans  Foreign plans 
  Yen in millions  Yen in millions 
  March 31  March 31 
  2006  2007  2006  2007 
 
Minimum pension liabilities  35,840   —   20,657   — 
Prior service cost (credit)  —   (127,106)  —   (1,403)
Net actuarial loss (gain)  —   200,618   —   38,474 
Obligation (asset) existing at transition  —   —   —   343 
                 
Ending Balance  35,840   73,512   20,657   37,414 
                 

F-43

NOTES TOSONY CORPORATION AND CONSOLIDATED FINANCIAL STATEMENTS — (Continued)SUBSIDIARIES

The accumulated benefit obligation for all defined benefit pension plan asplans follows:
                 
Japanese plansForeign plans
March 31March 31
2003200420032004
(Yen in millions)(Yen in millions)
   855,116   830,898   118,387   129,879 

     Under FAS No. 87 Sony has recorded a pension liability to cover the amount of the projected benefit obligation in excess of plan assets, considering unrealized items and the minimum pension liability. The minimum pension liability represents the excess of the accumulated benefit obligation over plan assets and accrued pension and severance costs already recognized before recording the minimum pension liability. A corresponding amount was recognized as an intangible asset to the extent of the unrecognized prior service cost, and the balance was recorded as a component of accumulated other comprehensive income, net of tax.

                 
  Japanese plans  Foreign plans 
  Yen in millions  Yen in millions 
  March 31  March 31 
  2006  2007  2006  2007 
 
Accumulated benefit obligation  613,055   635,603   143,031   181,356 
The projected benefit obligations, the accumulated benefit obligations and the fair value of plan assets for the pension plans which Sony has recognized the minimum pension liabilitywith accumulated benefit obligations in excess of plan assets were as follows:
                 
Japanese plansForeign plans
March 31March 31
2003200420032004
(Yen in millions)(Yen in millions)
Projected benefit obligations  1,016,889   978,357   124,055   124,447 
Accumulated benefit obligations  843,463   821,020   102,313   110,539 
Fair value of plan assets  405,009   512,720   63,024   72,031 

                 
  Japanese plans  Foreign plans 
  Yen in millions  Yen in millions 
  March 31  March 31 
  2006  2007  2006  2007 
 
Projected benefit obligations  617,883   638,560   158,353   187,637 
Accumulated benefit obligations  612,410   634,847   139,431   171,735 
Fair value of plan assets  488,588   518,375   99,798   136,361 
Weighted-average assumptions used to determine benefit obligations as of March 31, 2002, 20032006 and 20042007 were as follows:
 
Japanese plans:
             
March 31
200220032004
Discount rate  2.4%  1.9%  2.4%
Rate of compensation increase  3.0   3.0   3.0 
Japanese plans:
 
Foreign plans:
             
March 31
200220032004
Discount rate  6.6%  6.3%  5.8%
Rate of compensation increase  4.5   4.1   4.0 

         
  March 31 
  2006  2007 
 
Discount rate  2.2%  2.3%
Rate of compensation increase  3.2   2.5 

Foreign plans:
         
  March 31 
  2006  2007 
 
Discount rate  5.1%  5.3%
Rate of compensation increase  3.7   3.6 
Weighted-average assumptions used to determine the net pension and severanceperiodic benefit costs for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 were as follows:
 
Japanese plans:
             
Year Ended March 31
200220032004
Discount rate  2.7%  2.4%  1.9%
Expected return on plan assets  4.0   4.0   4.0 
Rate of compensation increase  3.0   3.0   3.0 
Japanese plans:
             
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Discount rate  2.4%  2.3%  2.2%
Expected return on plan assets  3.2   3.5   3.7 
Rate of compensation increase  3.0   3.3   3.2 
Foreign plans:
             
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Discount rate  5.8%  5.4%  5.1%
Expected return on plan assets  7.8   7.8   7.3 
Rate of compensation increase  4.0   3.7   3.6 

F-43
F-44

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign plans:
             
Year Ended March 31
200220032004
Discount rate  6.8%  6.6%  6.3%
Expected return on plan assets  7.7   8.1   8.3 
Rate of compensation increase  4.6   4.5   4.1 

As required under FAS No. 87, “Employers’ Accounting for Pensions”, the assumptions are reviewed in accordance with changes in circumstances.

To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as historical and expected long-term rate of returns on various categories of plan assets.

Following FAS No. 132(R), “Employers’ Disclosure about Pensions and Other Postretirement Benefits”, the weighted-average rate of compensation increase is calculated based on the pay-related plans only. The point-based plans discussed above are excluded from the calculation because payments made under the plan are not based on employee compensation.
Weighted-average pension plan asset allocations based on the fair value of such assets as of March 31, 20032006 and 20042007 were as follows:
 
Japanese plans:
         
March 31
20032004
Equity securities  53.0%  39.0%
Debt securities  34.4   14.7 
Cash  8.8   42.7 
Other  3.8   3.6 
   
   
 
Total  100%  100%
   
   
 
Japanese plans:
 
Foreign plans:
         
March 31
20032004
Equity securities  66.0%  63.2%
Debt securities  25.1   26.6 
Real estate  1.6   3.2 
Other  7.3   7.0 
   
   
 
Total  100%  100%
   
   
 

         
  March 31 
  2006  2007 
 
Equity securities  38.1%  38.6%
Debt securities  47.7   48.6 
Cash  6.0   5.3 
Other  8.2   7.5 
         
Total  100.0%  100.0%
         

Foreign plans:
         
  March 31 
  2006  2007 
 
Equity securities  69.1%  69.0%
Debt securities  20.8   18.4 
Real estate  6.8   6.3 
Other  3.3   6.3 
         
Total  100.0%  100.0%
         
For the pension plans of Sony Corporation and most of its subsidiaries in Japan, Sony’s asset investment policy is set so as to compensate the appropriate level for employee’s benefit over the long term.

     For Sony’s principal pension plans, the target allocation as of March 31, 2004,2007, is, as a result of our Asset Liability management, 67%34% of public equity, and 33%56% of fixed income securities. However, when the performancesecurities and 10% of public equity markets is considered to be below a certain level described in our investment guidelines, the allocation of assets to public equity securities is decreased to 51% of total assets.other. When determining an appropriate asset allocation, diversification among assets is duly considered. The actual asset allocation as of March 31, 2004 for Sony’s principal pension plans does not meet the aforementioned target allocation. As Sony’s investment policy including target allocation is currently being reviewed and revised aiming for the revision of the pension plan scheduled in the first half of the year ending March 31,

F-44

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2005, actual asset allocation to cash, for example, as of March 31, 2004 is tentatively increased for transition purpose.

Sony makes contributions to its contributory funded defined benefit pension plans as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected return on plan assets and the present value of benefit obligations. Sony expects to contribute approximately 2337 billion yen to the Japanese plans and approximately 175 billion yen to the foreign plans forduring the fiscal year ending March 31, 2005.2008.


F-45

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

The expected future benefit payments for the Japanese plans are expected as follows:
     
Japanese plans
(Yen in
millions)
Year ending March 31,    
2005  22,168 
2006  23,864 
2007  24,093 
2008  25,537 
2009  29,243 
2010 - 2014  190,312 

14.     Stockholders’ equity

         
  Japanese plans  Foreign plans 
  Yen in millions  Yen in millions 
 
Fiscal Year Ending March 31, 2008  19,204   9,310 
2009  21,096   8,034 
2010  25,443   8,893 
2011  28,984   9,824 
2012  30,357   10,337 
2013 — 2017  169,549   68,489 
15.  Stockholders’ equity
(1)  Subsidiary tracking stock:

On June 20, 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which iswas intended to be linked to the economic value of Sony Communication Network Corporation (“SCN”), a directly and indirectly wholly ownedwholly-owned subsidiary of Sony Corporation which is engaged in Internet-related services. The subsidiary tracking stock holders havehad no direct rights in the equity or assets of SCN or the assets of Sony Corporation. Except as summarized below,
On October 26, 2005, the Board of Directors of Sony Corporation decided to terminate all shares of subsidiary tracking stock have the same rights and characteristics as those ofconvert such shares to shares of Sony common stock.

     The dividend on the All shares of this series of subsidiary tracking stock is payable only when the Boardwere converted to shares of Directors of SCN has resolved to pay to itsSony common stock holderson December 1, 2005. As a dividend in an amount per shareresult of the subsidiary tracking stock equal to the amount of SCN’s dividend per share of its common stock multiplied by the Standard Ratio (as defined in the articles of incorporation), subject to statutory restriction on Sony Corporation’s ability to pay dividends on its shares of capital stock and the maximum dividend amount (as defined in the articles of incorporation). If the amount of dividends paid to the subsidiary tracking stock holders is less than the amount, which should have been paid pursuant to the formula set forth above due to the statutory restriction referred to above or for any other reason, such shortfall will be accumulated and such cumulative amount will be paid to the subsidiary tracking stock holders for subsequent fiscal years. Any such dividend on the subsidiary tracking stock is payable in priority to the payment of dividends to the common stock holders. However, the subsidiary tracking stockholders have no right to participate in the dividends to common stock holders. Furthermore, even if the Board of Directors of SCN does not take a resolution for the payment of dividends to SCN’s common stock holders, Sony Corporation may decide to pay dividends to its common stock holders.

     The subsidiary tracking stockholders have the same voting rights as those of the common stock holders and, thus, are entitled to participate and vote at any General Meeting of Shareholders in the same way as the common stock holders. In addition, as each series of subsidiary tracking stock is a separate class of stock different from common stock, if any resolution of the General Meeting of Shareholders

F-45

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

would adversely affect the rights of the shareholders of a particular class of subsidiary tracking stock, the shareholders of each class of subsidiary tracking stock will have the right to approve or disapprove such resolution by a special resolution of the meeting of shareholders of that class of subsidiary tracking stock.

     In the event of distribution of residual assets to the shareholders of Sony Corporation where, as long as such assets include shares of common stock of SCN,conversion, the number of shares of SCNSony common stock obtainedto be issued upon conversion was calculated by multiplying the number of shares of the subsidiary tracking stock heldas of November 30, 2005 by each holder by the Standard Ratio or the net proceeds from the sale of the shares of SCN common stock so to be distributed will be distributed to the holders of the subsidiary tracking stock.

     The shares of subsidiary tracking stock may be subject to repurchase and retirement in the same manner and under the same restriction as the shares of common stock. In addition, at any time after the passage of three years from the date of the initial issuance of shares of a series of subsidiary tracking stock, it may retire the entire amount of all outstanding shares of that series of subsidiary tracking stock upon paying to the shareholders thereof an amount equal to the current market price of the subsidiary tracking stock out of Sony Corporation’s retained earnings available for dividend payments. Sony Corporation may also retire the shares of a series of subsidiary tracking stock in their entirety pursuant to the procedures prescribed by the Japanese Commercial Code for the reduction of capital upon payment to the subsidiary tracking stock holders an amount equal to the market value thereof as set forth above.

     At any time after the passage of three years from the date of the initial issuance of shares of a series of subsidiary tracking stock, it may convert the entire amount of all outstanding shares of the subsidiary tracking stock into the shares of Sony Corporation’s common stock at the rate of the multiple of 1.1 of the market value (as defined in the articles of incorporation) of shares of the subsidiary tracking stock divided by the market value (as similarly defined) of the shares of Sony Corporation’s common stock.

     If any events (as defined in the articles of incorporation) occur, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s common stock at the price or rate set forth above.

1.114. The number of shares of the subsidiary trackingSony common stock issued and outstanding at March 31, 2004upon conversion was 3,072,000. At March 31, 2004, 136,454 shares of the subsidiary tracking stock would be issued upon exercise of warrants and stock acquisition rights outstanding.

3,452,808. SCN subsequently changed its name toSo-net Entertainment Corporation(“So-net”) in October, 2006.

(2)  Common stock:

Changes in the number of shares of common stock issued and outstanding during the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 have resulted from the following:
     
Number of shares
Balance at March 31, 2001 919,617,134
ExerciseNumber of stock purchase warrants8,301
Conversion of convertible bonds118,920
 
  
shares		 
Balance at March 31, 2002919,744,355
Conversion of convertible bonds138,330
Stock issued under exchange offering2,502,491
Balance at March 31, 2003922,385,176
Conversion of convertible bonds2,944,800
Stock issued under exchange offering1,088,304
 
Balance at March 31, 2004  926,418,280 
Conversion of convertible bonds  
70,765,533
Exercise of stock acquisition rights27,400
Balance at March 31, 2005997,211,213
Conversion of convertible bonds484,200
Conversion of subsidiary tracking stock3,452,808
Exercise of stock acquisition rights531,443
Balance at March 31, 20061,001,679,664
Conversion of convertible bonds197,700
Exercise of stock acquisition rights1,019,900
Balance at March 31, 20071,002,897,264
 

F-46

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At March 31, 2004, 83,885,5632007, 58,790,733 shares of common stock would be issued upon the conversion or exercise of all convertible bonds, warrants and stock acquisition rights outstanding.

     On October 1, 2002, Sony Corporation implemented a share exchange as a result of which Aiwa Co., Ltd. became a wholly-owned subsidiary. As a result of this share exchange, Sony Corporation issued 2,502,491 new shares, the minority interest in Aiwa Co., Ltd. was eliminated from the balance sheet, and additional paid-in capital increased 15,791 million yen.
F-46

     On May 1, 2003, Sony Corporation implemented a share exchange as a result of which CIS Corporation became a wholly-owned subsidiary. As a result of this share exchange, Sony Corporation issued 1,088,304 new shares, and additional paid-in capital increased 5,409 million yen.

     On November 20, 1991, Sony Corporation made a free share distribution of 33,908,621 shares in ratios of one share for each ten shares held for which no accounting entry was required in Japan. Had the distribution been accounted for in the manner adopted by companies in the United States of America, 201,078 million yen would have been transferred from retained earnings to the appropriate capital accounts. This has been the only free distribution of common stock where no accounting entry was required in Japan.

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Conversions of convertible bonds into common stock are accounted for in accordance with the provisions of the Japanese Commercial CodeCompany Law by crediting approximately one-half of the conversion proceeds to the common stock account and the remainder to the additional paid-in capital account.

     The Ordinary General Meeting of Shareholders held on June 27, 1997 authorized Sony Corporation, pursuant to the Japanese regulations, to acquire and retire up to a total not exceeding 30 million outstanding shares of its common stock with its profit, whenever deemed necessary by the Board of Directors in view of general economic conditions, Sony’s business performance and financial condition and other factors. Subsequently, the Ordinary General Meeting of Shareholders held on June 29, 2000 increased the maximum number of shares of its common stock up to 90 million shares on and after June 30, 2000 and the Extraordinary General Meeting of Shareholders held on January 25, 2001 authorized Sony Corporation to acquire and retire the subsidiary tracking stock as well as its common stock on and after January 26, 2001.

     The Ordinary General Meeting of Shareholders held on June 26, 1998 approved that (a) in addition to the shares discussed in the preceding paragraph, Sony Corporation could, by a resolution of the Board of Directors, acquire and retire up to a total not exceeding 30 million outstanding shares of its common stock with its additional paid-in capital at prices in total not exceeding 400 billion yen and (b) Sony Corporation may grant share subscription rights to directors and/or employees pursuant to the Japanese regulations. Subsequently, the Extraordinary General Meeting of Shareholders held on January 25, 2001 authorized Sony Corporation to acquire and retire the subsidiary tracking stock as well as its common stock on and after January 26, 2001.

     Prior to the amendments to the Japanese Commercial Code enacted on April 1, 2002, purchase and retirement by Sony Corporation of its own shares could be made at any time by resolution of the Board of Directors. No common stock and subsidiary tracking stock had been acquired under the approval during the year ended March 31, 2002.

     Following the amendments to the Japanese Commercial Code enacted on April 1, 2002, purchase by Sony Corporation of its own shares was subject to the prior approval of shareholders at the Ordinary General Meeting of Shareholders, which included the maximum number of shares and the maximum total amount to be purchased for each class of stock. Once such approval of shareholders was obtained, Sony Corporation could purchase its own shares at any time during the period up to the conclusion of next Ordinary General Meeting of Shareholders.

F-47

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The Ordinary General Meeting of Shareholders held on June 20, 2002 approved that Sony Corporation acquire up to a total not exceeding 90 million outstanding shares of its common stock at an amount in a total not exceeding 650 billion yen and a total not exceeding 300 thousand outstanding shares of the subsidiary tracking stock at an amount in total not exceeding 1 billion yen until the conclusion of the General Meeting of Shareholders held for the year ended March 31, 2003. As a result, no common stock and subsidiary tracking stock had been acquired under this approval.

     The Ordinary General Meeting of Shareholders held on June 20, 2003 approved that Sony Corporation acquire up to a total not exceeding 90 million outstanding shares of its common stock at an amount in a total not exceeding 400 billion yen and a total not exceeding 300 thousand outstanding shares of the subsidiary tracking stock at an amount in total not exceeding 1 billion yen. As a result, Sony Corporation had acquired 2 million outstanding shares of its common stock at an amount in 8,200 million yen. No subsidiary tracking stock had been acquired under this approval.

     The Ordinary General Meeting of Shareholders held on June 22, 2004 approved to amend the articles of incorporation that Sony Corporation may purchase its own shares by a resolution of the Board of Directors, in accordance with the amendments to the Japanese Commercial code enacted on September 25, 2003. With the amendment of the articles of incorporation,

Sony Corporation may purchase its own shares at any time by a resolution of the Board of Directors up to the retained earnings available for dividends to shareholders.

shareholders, in accordance with Japanese Company Law. No common stock and subsidiary tracking stock had been acquired by the resolution of the Board of Directors during the fiscal years ended March 31, 2006 and 2007.

(3)  Retained earnings:

The amount of statutory retained earnings of Sony Corporation available for dividends to shareholders as of March 31, 20042007 was 524,111660,036 million yen. The appropriation of retained earnings for the fiscal year ended March 31, 20042007, including cash dividends for the six-month period ended March 31, 20042007, has been incorporated in the accompanying consolidated financial statements. This appropriation of retained earnings was approved at the meeting of the Board of Directors of Sony Corporation held on April 26, 2004May 15, 2007 and was then recorded in the statutory books of account, in accordance with the Japanese Commercial Code.

Company Law.

Retained earnings include Sony’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of 2,96713,557 million yen and 2,261102,216 million yen at March 31, 20032006 and 2004,2007, respectively.

F-48

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(4)  Other comprehensive income:

Other comprehensive income for the fiscal years ended March 31, 2002, 20032005, 2006 and 2004 were as follows:
                 
Pre-taxTaxNet-of-tax
amountexpenseamount
(Yen in millions)
For the year ended March 31, 2002:            
 Unrealized gains on securities —            
   Unrealized holding gains or losses arising during the period  (24,857)  4,614   (20,243)
   Less: Reclassification adjustment for gains or losses included in net income  (2,594)  1,318   (1,276)
  Unrealized losses on derivative instruments —            
   Cumulative effect of an accounting change  2,040   (951)  1,089 
   Unrealized holding gains or losses arising during the period  5,470   (3,033)  2,437 
   Less: Reclassification adjustment for gains or losses included in net income  (7,200)  2,963   (4,237)
 Minimum pension liability adjustment  (38,391)  16,163   (22,228)
 Foreign currency translation adjustments  101,483   (4,051)  97,432 
   
   
   
 
    Other comprehensive income  35,951   17,023   52,974 
   
   
   
 
For the year ended March 31, 2003:            
 Unrealized gains on securities —            
   Unrealized holding gains or losses arising during the period  (18,575)  8,948   (9,627)
   Less: Reclassification adjustment for gains or losses included in net income  3,421   867   4,288 
  Unrealized losses on derivative instruments —            
   Unrealized holding gains or losses arising during the period  (6,268)  1,791   (4,477)
   Less: Reclassification adjustment for gains or losses included in net income  682   (287)  395 
 Minimum pension liability adjustment  (181,725)  71,089   (110,636)
 Foreign currency translation adjustments — Translation adjustments arising during the period  (87,103)  3,110   (83,993)
   Less: Reclassification adjustment for losses included in net income  7,665   —   7,665 
   
   
   
 
    Other comprehensive income  (281,903)  85,518   (196,385)
   
   
   
 
2007 is comprised of the following:
             
  Yen in millions 
     Tax
  Net-of-tax
 
  Pre-tax amount  benefit/(expense)  amount 
 
For the fiscal year ended March 31, 2005:            
Unrealized gains on securities —            
Unrealized holding gains (losses) arising during the period  7,184   (1,541)  5,643 
Less: Reclassification adjustment included in net income  (18,140)  5,216   (12,924)
Unrealized losses on derivative instruments —            
Unrealized holding gains (losses) arising during the period  (2,015)  1,806   (209)
Less: Reclassification adjustment included in net income  (2,848)  1,167   (1,681)
Minimum pension liability adjustment  (1,700)  931   (769)
Foreign currency translation adjustments —            
Translation adjustments arising during the period  76,585   (2,361)  74,224 
             
Other comprehensive income  59,066   5,218   64,284 
             

F-49
F-47

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                 
Pre-taxTaxNet-of-tax
amountexpenseamount
(Yen in millions)
For the year ended March 31, 2004:            
 Unrealized gains on securities —            
   Unrealized holding gains or losses arising during the period  89,861   (31,890)  57,971 
   Less: Reclassification adjustment for gains or losses included in net income  (7,371)  1,692   (5,679)
  Unrealized losses on derivative instruments —            
   Unrealized holding gains or losses arising during the period  11,586   (4,049)  7,537 
   Less: Reclassification adjustment for gains or losses included in net income  (5,961)  2,617   (3,344)
 Minimum pension liability adjustment  162,408   (68,993)  93,415 
 Foreign currency translation adjustments —            
   Translation adjustments arising during the period  (134,312)  5,199   (129,113)
   Less: Reclassification adjustment for losses included in net income  1,232   —   1,232 
   
   
   
 
    Other comprehensive income  117,443   (95,424)  22,019 
   
   
   
 

             
  Yen in millions 
     Tax
  Net-of-tax
 
  Pre-tax amount  benefit/(expense)  amount 
 
For the fiscal year ended March 31, 2006:            
Unrealized gains on securities —            
Unrealized holding gains (losses) arising during the period  125,263   (45,633)  79,630 
Less: Reclassification adjustment included in net income  (64,953)  23,458   (41,495)
Unrealized losses on derivative instruments —            
Unrealized holding gains (losses) arising during the period  14,888   (7,023)  7,865 
Less: Reclassification adjustment included in net income  (12,597)  5,173   (7,424)
Minimum pension liability adjustment  88,941   (38,735)  50,206 
Foreign currency translation adjustments —            
Translation adjustments arising during the period  143,888   (3,415)  140,473 
Less: Reclassification adjustment included in net income  (17)  —   (17)
             
Other comprehensive income  295,413   (66,175)  229,238 
             
For the fiscal year ended March 31, 2007:            
Unrealized gains on securities —            
Unrealized holding gains (losses) arising during the period  6,242   721   6,963 
Less: Reclassification adjustment included in net income  (34,416)  12,745   (21,671)
Unrealized losses on derivative instruments —            
Unrealized holding gains (losses) arising during the period  10,786   (3,879)  6,907 
Less: Reclassification adjustment included in net income  (10,056)  4,123   (5,933)
Minimum pension liability adjustment  (8,160)  5,406   (2,754)
Foreign currency translation adjustments —            
Translation adjustments arising during the period  88,957   (2,644)  86,313 
             
Other comprehensive income  53,353   16,472   69,825 
             

During the yearsfiscal year ended March 31, 2003 and 2004, 7,665 million yen and 1,2322006, gains of 17 million yen of foreign currency translation adjustments waswere transferred respectively from other comprehensive income and charged to net income as a result of the liquidation of certain foreign subsidiaries.

15.     Stock-based compensation plansF-48

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

16.  Stock-based compensation plans
Sony has four types of stock-based compensation plans as incentive plans for selected directors, corporate executive officers and selected employees.

(1)  Warrant plan:

Upon issuance of unsecured bonds with detachable warrants, which are described in Note 10,11, Sony Corporation has purchased all of the detachable warrants and distributed them to theselected directors, corporate executive officers and selected employees of Sony. By exercising a warrant, directors, corporate executive officers and selected employees can purchase the common stock or subsidiary tracking stock of Sony Corporation, the number of which is designated by each plan. The warrants generally vest ratably over a period of three years, and are exercisable up to six years from the date of grant.

Presented below is a summary of the activities regarding common stock warrants during the fiscal year ended March 31, 2007.
                 
  Fiscal Year Ended March 31 
  2007 
     Weighted-
  Weighted-
  Total
 
  Number of
  average
  average
  Intrinsic
 
  
Shares
  exercise price  remaining life  Value 
     Yen  Years  Yen in millions 
 
Outstanding at beginning of the fiscal year  2,068,300   8,901         
Expired  (922,400)  12,457         
                 
Outstanding at end of the fiscal year  1,145,900   6,039   0.75   — 
                 
Exercisable at end of the fiscal year  1,145,900   6,039   0.75   — 
                 
There were no warrants granted or exercised during the fiscal years ended March 31, 2005, 2006 and 2007. All outstanding warrants were exercisable at March 31, 2007.
(2)  Convertible Bond plan:

Sony has an equity-based compensation plan for selected executives of Sony’s United States of AmericaU.S. subsidiaries using U.S. dollar-denominated non-interest bearing convertible bonds, which have characteristics similar to that of an option plan. Each convertible bond can be converted into 100 shares of the common stock of Sony Corporation at an exercise price based on the prevailing market rate shortly before the date of grant. The convertible bonds vest ratably over a three-year period and are exercisable up to ten years from the date of grant. As the convertible bonds were issued in exchange for a non-interest bearing employee loan and a right of offset exists between the convertible bonds and the employee loans, no accounting recognition was given to either the convertible bonds or the employee loans in Sony’s consolidated balance sheet as a right of offset exists between the convertible bonds and the employee loans.sheet.

F-50
F-49

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Presented below is a summary of the activities regarding the convertible bond plan during the fiscal year ended March 31, 2007.
                 
  Fiscal Year Ended March 31 
  2007 
     Weighted-
  Weighted-
  Total
 
  Number of
  average
  average
  Intrinsic
 
  
Shares
  exercise price  remaining life  Value 
     Yen  Years  Yen in millions 
 
Outstanding at beginning of the fiscal year  2,493,500   8,133         
Exercised  (197,700)  5,975         
Expired  (560,500)  6,186         
                 
Outstanding at end of the fiscal year  1,735,300   9,008   4.27   — 
                 
Exercisable at end of the fiscal year  1,735,300   9,008   4.27   — 
                 
There were no shares granted under the convertible bond plan during the fiscal years ended March 31, 2005, 2006 and 2007. The total intrinsic value of shares exercised under the convertible bond plan during the fiscal years ended March 31, 2006 and 2007 was 122 million yen and 73 million yen, respectively. There were no shares exercised under the convertible bond plan during the fiscal year ended March 31, 2005. All shares under the convertible bond plan were exercisable as of March 31, 2007.
(3)  Stock Acquisition Rights:Rights plan:

During the fiscal year ended March 31, 2003, Sony adopted an equity-based compensation plan that issues common stock acquisition rights for the purpose of granting stock options to theselected directors, corporate executive officers and selected employees of Sony, and subsidiary tracking stock acquisition rights for the purpose of granting stock options to the directors and selected employees of Sony Communication Network Corporation, pursuant to the Commercial Code of Japan. The stock acquisition rights generally vest ratably over a period of three years and are exercisable up to ten years from the date of grant.

Presented below is a summary of the activity for common stock warrant, convertible bond and stock acquisition rights plans for the years shown:

                         
Year Ended March 31
200220032004
Weighted-Weighted-Weighted-
averageaverageaverage
Number ofexerciseNumber ofexerciseNumber ofexercise
SharespriceSharespriceSharesprice
(Yen)(Yen)(Yen)
Outstanding at beginning of the fiscal year  2,800,270   9,911   5,853,892   8,648   9,640,892   7,832 
Granted  3,397,300   6,877   3,874,100   5,313   4,148,700   4,434 
Exercised  (8,294)  6,264   —   —   —   — 
Forfeited  (335,384)  6,384   (87,100)  8,306   (556,700)  6,760 
   
       
       
     
Outstanding at end of the fiscal year  5,853,892   8,648   9,640,892   7,832   13,232,892   5,831 
   
       
       
     
Exercisable at end of the fiscal year  2,082,640   8,127   4,314,292   9,773   6,828,992   7,002 
   
       
       
     

A summary of common stock warrants, convertible bond options and stock acquisition rights outstanding and exercisable at March 31, 2004 is as follows:

                       
OutstandingExercisable
Weighted-Weighted-Weighted-
Exercise priceNumber ofaverageaverageNumber ofaverage
rangeSharesexercise priceremaining lifeSharesexercise price
(Yen)(Yen)(Years)(Yen)
 3,864~7,000   10,534,192   4,777   7.78   4,329,092   5,191 
 7,001~12,992   2,698,700   9,946   4.23   2,499,900   10,138 
     
           
     
 3,864~12,992   13,232,892   5,831   7.05   6,828,992   7,002 
     
           
     

A summary of subsidiary tracking stock warrants and stock acquisition rights outstanding and exercisable at March 31, 2004 is as follows:

                       
OutstandingExercisable
Weighted-Weighted-Weighted-
Exercise priceNumber ofaverageaverageNumber ofaverage
rangeSharesexercise priceremaining lifeSharesexercise price
(Yen)(Yen)(Years)(Yen)
 815~3,300   136,454   1,702   7.40   45,100   2,533 

     As the exercise prices for the warrant, convertible bond and stock acquisition rights plans were determined based on the prevailing market price shortly before the date of grant, the compensation

F-51

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

expense for these plans was not significant for the years ended March 31, 2002, 2003 and 2004, respectively.

The weighted-average fair value per share at the date of grant for common stock warrants, convertible bond options andof stock acquisition rights granted during the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 were 2,5541,085 yen, 1,7071,585 yen and 1,2301,770 yen, respectively. The fair value of common stock warrants, convertible bond options and stock acquisition rights granted on the date of grant which is amortizedand used to recognize compensation expense overfor the vesting period in determiningfiscal year ended March 31, 2007, and the pro forma impact, ispro-forma impacts on net income for the fiscal years ended March 31, 2005 and 2006 were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:
             
Year Ended March 31
Weighted-average assumptions200220032004
Risk-free interest rate  2.58%   1.73%   1.27% 
Expected lives  3.28  years   3.30  years   3.56  years 
Expected volatility  50.81%   44.54%   43.70% 
Expected dividend  0.40%   0.49%   0.63% 
             
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Weighted-average assumptions            
Risk-free interest rate  2.04%  2.90%  3.28%
Expected lives  3.54 years   6.14 years   6.30 years 
Expected volatility  35.56%  39.50%  34.17%
Expected dividends  0.62%  0.61%  0.53%


F-50

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Presented below is a summary of the activities regarding the stock acquisition rights plan during the fiscal year ended March 31, 2007.
                 
  Fiscal Year Ended March 31 
  2007 
     Weighted-
  Weighted-
  Total
 
  Number of
  average
  average
  Intrinsic
 
  
Shares
  exercise price  remaining life  Value 
     Yen  Years  Yen in millions 
 
Outstanding at beginning of the fiscal year  9,100,700   4,351         
Granted  2,519,300   4,693         
Exercised  (1,019,900)  4,235         
Forfeited or expired  (301,500)  4,457         
                 
Outstanding at end of the fiscal year  10,298,600   4,461   7.97   15,606 
                 
Exercisable at end of the fiscal year  4,796,300   4,470   6.92   7,237 
                 
The total intrinsic value of shares exercised under the stock acquisition rights plan during the fiscal years ended March 31, 2005, 2006 and 2007 was 12 million yen, 383 million yen and 1,622 million yen, respectively.
Presented below is a summary of the activities regarding the nonvested stock acquisition rights during the fiscal year ended March 31, 2007.
         
  Fiscal Year Ended March 31 
  2007 
     Weighted-
 
     average
 
  Number of
  Grant-date
 
  Shares  Fair value 
     Yen 
 
Outstanding at beginning of the fiscal year  5,964,500   1,437 
Granted  2,519,300   1,770 
Vested  (2,734,500)  1,362 
Forfeited or expired  (247,000)  1,483 
         
Outstanding at end of the fiscal year  5,502,300   1,625 
         
As of March 31, 2007, there was 4,249 million yen of total unrecognized compensation expense related to nonvested stock acquisition rights. This expense is expected to be recognized over a weighted-average period of 1.89 years. The total fair value of stock acquisition rights vested during the fiscal years ended March 31, 2005, 2006 and 2007 was 4,690 million yen, 4,182 million yen and 3,670 million yen, respectively.
The total cash received from the exercises under all the stock-based compensation plans during the fiscal years ended March 31, 2005, 2006 and 2007 was 105 million yen, 4,681 million yen and 5,566 million yen, respectively. There was no actual income tax benefit realized for tax deductions from the exercise for the fiscal year ended March 31, 2005. The actual income tax benefit realized for tax deductions from the exercise of all the stock-based compensation plans totaled 152 million yen for the fiscal year ended March 31, 2006. There was no actual income tax benefit realized for tax deductions from the exercise for the fiscal year ended March 31, 2007.
As a result of the establishment of the joint venture between Sony’s recorded music business with the recorded music business of Bertelsmann AG (Note 5), employees of Sony’s recorded music business who were granted options under the convertible bond and stock acquisition rights plans prior to the establishment of the joint venture are no longer considered employees of Sony under FAS No. 123 as these individual are now employees of SONY BMG which is accounted for under the equity method. As a result, a compensation charge of 340 million yen was


F-51

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

recorded in the fiscal year ended March 31, 2005 based on the fair value method of accounting for stock-based compensation using the Black-Scholes option-pricing model.
(4)  SAR plan:

     Sony grants stock appreciationsStock appreciation rights (“SARs”) plan:

Sony granted SARs in Japan, Europe and the United States of America for selected employees. Under the terms of these plans, employees onupon exercise of such rights receive cash equal to the amount that the market price of Sony Corporation’s common stock exceeds the strike price of the SARs. The SARs generally vest ratably over a period of three years, and are generally exercisable up to six to ten years from the date of grant. Sony holds treasury stock for the SAR plan in Japan to minimize cash flow exposure associated with the SARs. In addition, Sony uses various strategies to minimize the compensation expense associated with the SAR plans in the United States of America and Europe.

     In December 2001, Sony

There were no SARs granted options under its convertible bond plan to certain employees in exchange forduring the employees agreeing to cancel an equal numberfiscal years ended March 31, 2005, 2006 and 2007. As of outstanding SARs. Under FASB Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation — an interpretation of APB Opinion No. 25”, no compensation charge was recorded as the number and terms of the new options under the convertible bond planMarch 31, 2007, there were substantially the same as the SARs that were cancelled.

F-52

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The status of the SAR plans is summarized as follows:

                         
Year Ended March 31
200220032004
Weighted-Weighted-Weighted-
Number ofaverageNumber ofaverageNumber ofaverage
SARsexercise priceSARsexercise priceSARsexercise price
(Yen)(Yen)(Yen)
Outstanding at beginning of the fiscal year  3,565,246   6,218   2,410,394   6,644   2,343,028   6,341 
Granted  141,525   7,813   28,750   6,323   —   — 
Exercised  (91,330)  5,862   (11,800)  5,727   —   — 
Cancelled  (1,192,672)  5,951   —   —   —   — 
Expired or forfeited  (12,375)  8,520   (84,316)  7,274   (816,460)  5,494 
   
       
       
     
Outstanding at end of the fiscal year  2,410,394   6,644   2,343,028   6,341   1,526,568   6,424 
   
       
       
     
Exercisable at end of the fiscal year  1,864,928   6,282   2,176,319   6,211   1,462,391   6,421 
   
       
       
     

A summary of111,200 SARs outstanding and the weighted-average exercise price was 9,133 yen. All SARs were exercisable atas of March 31, 2004 is as follows:

                       
OutstandingExercisable
Weighted-Weighted-Weighted-
Exercise priceNumber ofaverageaverageNumber ofaverage
rangeSARsexercise priceremaining lifeSARsexercise price
(Yen)(Yen)(Years)(Yen)
 3,183~5,000   302,984   4,079   2.18   282,365   4,035 
 5,001~10,000   1,199,459   6,886   1.70   1,155,901   6,868 
 10,001~15,000   24,125   12,938   4.71   24,125   12,938 
     
           
     
 3,183~15,000   1,526,568   6,424   1.84   1,462,391   6,421 
     
           
     

     In accordance with APB2007.

As all outstanding SARs were fully vested upon the adoption of FAS No. 25 and its related interpretations,123(R), compensation expense for the SARs continues to be accounted for under the intrinsic value method in which compensation expense is measured as the excess of the quoted market price of Sony Corporation’s common stock over the SARs strike price, which is consistent withwas the accounting treatment prescribed for SAR plans inmethod used under FAS No. 123. For the yearsfiscal year ended March 31, 2002 and 2003,2005, Sony recognized a reduction in SARs compensation expense of 4,74874 million yen. For the fiscal years ended March 31, 2006 and 2007, Sony recognized 70 million yen and 670 million yen, respectively, due to the decline in Sony’s stock price during the years. For the year ended March 31, 2004, Sony recognized 1057 million yen of SARs compensation expense.

16.     Restructuring charges and asset impairments

17.  Restructuring charges and asset impairments
As part of its effort to improve the performance of the various businesses, Sony has undertaken a number of restructuring initiatives within theits Electronics Musicsegment, Pictures segment and Pictures businesses.All Other. For the fiscal years ended March 31, 2002, 20032005, 2006 and 2004,2007, Sony recorded total restructuring charges of 106,97489,963 million yen,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

106,251 138,692 million yen and 168,09138,770 million yen, respectively. Significant restructuring charges and asset impairments include the following:

 
Electronics Segment

Electronics Segment

In an effort to improve the performance of the Electronics segment, Sony has undergone a number of restructuring efforts to reduce its operating costs. For the fiscal years ended March 31, 2002, 20032005, 2006 and 2004,2007, Sony recorded total restructuring charges of 86,85283,227 million yen, 72,473125,802 million yen and 143,31037,421 million yen, respectively, within the Electronics segment. Significant restructuring activities are the following:as follows:
 
Downsizing of computer display CRT operations -

     In the year ended March 31, 2002, as flat panel monitors became more popular in the marketplace, the demand for computer

Downsizing of CRT TV display CRTs was drastically reduced. In this situation, Sony decided to abandon certain manufacturing equipment for computer display CRTs mainly in the U.S. in the second quarter of the year ended March 31, 2002. Restructuring charges totaling 19,639 million yen consisted of non-cash equipment write-down and other costs of 6,261 million yen, costs relatedoperations -
Due to the buy-out and cancellation of operating leases totaling 11,264 million yen and other costs related to the disposal of equipment of 2,114 million yen. Of the total restructuring charges recorded, 946 million yen was recorded in cost of sales; 13,257 million yen was included in selling, general and administrative expense, and 5,436 million yen was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. The restructuring activity was completed in the year ended March 31, 2003 and no liability existed as of March 31, 2004.

In the year ended March 31, 2003, due to furtherworldwide market shrinkage and demand shift from CRT displays to LCDs,LCD panel displays, Sony has implemented a worldwide plan to rationalize production facilities of CRT TV display and has been downsizing its business over several years.

In the fiscal year ended March 31, 2005, as part of this restructuring program, Sony recorded a non-cash impairment charge of 7,479 million yen for CRT TV display manufacturing facilities located in Europe.
In the fiscal year ended March 31, 2006, Sony continued to restructure its CRT TV operations. As part of this restructuring program, Sony made a decision to discontinue certain computerCRT TV display CRT manufacturing operations in Japan and Southeast Asia to rationalize production facilities and downsize its business.the U.S. Restructuring charges totaling 6,90232,488 million yen consisted of personnel related costs of 1,208 million yen, non-cash equipment impairment and disposal and other costs of 4,010 million yen and contract termination and other costs of 1,684 million yen. Of the total restructuring charges, 1,264 million yen was recorded in cost of sales; 1,684 million yen was included in selling, general and administrative expense, and 3,954 million yen was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. The restructuring activity was completed in the year ended March 31, 2003 and no liability existed as of March 31, 2004.
Downsizing of TV display CRT operations -

     In the year ended March 31, 2004, due to market shrinkage and demand shift from CRT displays to plasma and LCD panel displays, Sony made a decision to discontinue certain TV display CRT manufacturing operations in Japan to rationalize production facilities and downsize its business. Restructuring charges totaling 8,478 million yen consisted of personnel related costs of 3,1391,962 million yen and non-cash equipment impairment, disposal and other costs of 5,33930,526 million yen. Of the total restructuring charges, 1586,982 million yen was recorded in cost of sales; 3,139 million yen was included in selling, generalsales, and administrative expense, and 5,18125,506 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. This restructuring activity was completed asIn addition, Sony recorded a non-cash impairment charge of March 31, 2004 and no further costs are expected to be incurred for this restructuring activity. The remaining liability balance as of March 31, 2004 was 2,2272,856 million yen and will be paid or settled through the year ending March 31, 2005.for CRT TV display manufacturing facilities located in Southeast Asia.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Aiwa Co., Ltd. restructuring -

In the fiscal year ended March 31, 2002, in response to a decline in performance2007, as part of Aiwa Co., Ltd., and its subsidiaries (“Aiwa”), Aiwa underwent a drasticthis restructuring program, to eliminate the causesSony recorded a non-cash impairment charge of this downward trend and to return to profitability. Aiwa recorded restructuring charges totaling 25,4841,670 million yen for CRT TV display manufacturing facilities located in the year ended March 31, 2002, which included a reduction of unprofitable product lines, plant closures and a reductionU.S. The impairment charges were calculated as the difference between the carrying value of the work force. Theseasset group and the present value of estimated future cash flows. The charges consisted of non-cash equipment write-down and disposal costs of 10,244 million yen, personnel related costs of 8,209 million yen, and other costs of 7,031 million yen including the devaluation of inventory. Among these charges 5,734 million yen was recorded in cost of sales; 9,506 million yen was included in selling, general and administrative expense, and 10,244 million yen waswere recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. Aiwa eliminated its employees from various employee levels, business functions, operating units and geographic regions.

Due to the continued decline in the operating results of Aiwa, theThese restructuring program that was initiated in the year endedprograms were all completed by March 31, 2002 was accelerated and additional restructuring charges of 23,007 million yen were recorded in the year ended March 31, 2003. Additional restructuring included further cuts in staffing levels and shutdown of remaining production facilities. These charges consisted of non-cash equipment impairment and disposal costs of 3,504 million yen, personnel related costs of 7,647 million yen, devaluation of inventory of 6,144 million yen, operating lease termination costs of 3,823 million yen and other costs of 1,889 million yen Among these charges 13,791 million yen was recorded in cost of sales; 5,712 million yen was included in selling, general and administrative expense, and 3,504 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. The restructuring program was completed in the year ended March 31, 20032007 and no reserveliability existed as of March 31, 2003. Aiwa Co., Ltd. was merged into Sony Corporation as2007.

Closing of December 1, 2002.a semiconductor plant in the U.S. -
 
Closing of a semiconductor plant in the U.S. -

Due to a significant decline in the business conditions of the U.S. semiconductor industry, Sony made a decision in the fourth quarter of the fiscal year ended March 31, 2003, to close a semiconductor plant in the U.S. DuringIn connection with this restructuring activity, Sony sold the facilities and recorded a gain on disposal of 1,794 million yen during the fiscal year ended March 31, 2004, the scope of the restructuring program2005. The gain was revised and the total restructuring costs are now estimated to be 6,984 million yen, of which 6,730 million yen has been incurred through March 31, 2004. During the year ended March 31, 2003, Sony recorded restructuring charges totaling 5,856 million yen, which consisted of the accelerated depreciation of equipment of 3,128 million yen, personnel related costs of 1,329 million yen, the devaluation of inventory and other costs of 1,399 million yen. These charges were all recorded in cost of sales in the consolidated statements of income.

     During the year ended March 31, 2004, Sony recorded net restructuring charges totaling 874 million yen which consisted of the accelerated depreciation and write-down of equipment of 1,982 million yen, gain on disposal of assets of 1,962 million yen, and 854 million yen of other costs including lease contract termination costs. Among these charges 1,760 million yen was recorded in cost of sales, while asset write-down and disposal costs of 1,076 million yen and the gain on asset disposals of 1,962 million yen were included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. This restructuring program is expected to beactivity was completed byin the endfiscal year ended March 31, 2005 and total restructuring charges of 4,936 million yen, net of the year endinggain on the sale of the facilities discussed above, have been incurred through March 31, 2005. TheNo liability existed as of March 31, 2007.

Downsizing of LCD rear-projection televisions operations -
Due to a significant decline in the business conditions of the European LCD rear-projection television industry, Sony made a decision in the fiscal year ended March 31, 2007, to discontinue LCD rear-projection television production in Europe. Restructuring charges totaling 3,844 million yen consisted of inventory write downs and accruals for supplier claims. Of the total restructuring charges, 3,782 million yen was recorded in cost of sales in the consolidated statements of income. This phase of the restructuring program was completed in the fiscal year ended March 31, 2007 and the remaining liability balance as of March 31, 20042007 was 5601,190 million yen and willwith the balance of the liabilities expected to be paid or settled throughduring the fiscal year ending March 31, 2005.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES2008.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Retirement Programs -

Retirement Programs -

In addition to the restructuring efforts disclosed above, Sony has undergone several headcount reduction programs to further reduce operating costs in theits Electronics segment. As a result of these programs, Sony recorded restructuring charges totaling 22,93050,960 million yen, 17,60945,116 million yen and 114,0019,704 million yen for the fiscal years ended March 31, 2002, 20032005, 2006 and 2004,2007, respectively, and these charges were included in selling, general and administrative expenseexpenses in the consolidated statements of income. These staff reductions were achieved worldwide mostly through the implementation of early retirement programs. The remaining liability balance as of March 31, 20042007 was 18,2607,226 million yen and will be paid throughthroughout the fiscal year ending March 31, 2005.2008. Sony will continue offering early retirementto implement programs to reduce headcount by streamlining business operations, including closure and consolidation of manufacturing sites, as well as headquarters and administrative functions.
Pictures Segment
In an effort to improve the performance of the Pictures segment, Sony underwent a fixed cost reduction program during the fiscal year ended March 31, 2005 to reduce its operating costs. The Pictures segment completed the fixed cost reduction program during the fiscal year ended March 31, 2005 and recorded 385 million yen of restructuring costs. These restructuring charges consisted primarily of personnel related costs of 292 million yen, which were included in order to further reduce fixed costsselling, general and administrative expenses in the Electronics segment.consolidated statements of income. There were no restructuring charges incurred for the fiscal years ended March 31, 2006 and 2007 and no liability existed for this activity as of March 31, 2007.
 
Music Segment

All Other (Music Business)
Due to the continued contraction of the worldwide music market, due to slow worldwide economic growth, the saturation of the CD market, the effects of piracy and other illegal duplication, parallel imports, pricing pressures and the diversification of customer preferences, Sony has been actively repositioning the Music segmentmusic business for the future by looking to create a more effective and profitable business model. As a result, the Music segment has undergone a worldwide part of this


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

restructuring program, sinceSony combined its recorded music business with the recorded music business of Bertelsmann AG to form SONY BMG, a joint venture that is accounted for under the equity method. See Note 5 for more information on this transaction. The most significant restructuring charge in the music business for the past three years was in the fiscal year ended March 31, 2001 to reduce staffing and other costs through the consolidation and rationalization2005, where a charge of facilities worldwide. For the years ended March 31, 2002, 2003 and 2004, Sony recorded total restructuring charges of 8,5993,025 million yen 22,350 million yen and 10,691 million yen, respectively, withinwas recorded. This worldwide restructuring of the Music segment excluding Japan. Duringmusic business was completed during the fiscal year ended March 31, 2004, Sony broadened the scope of its worldwide restructuring of the Music segment2006, and the total restructuring cost of thisthe program is now estimated to be 55,359was 52,702 million yen, of which 49,548 million yen was incurred from the inception of the program through the fiscal year ended March 31, 2004. Total estimated2006. The restructuring costs within the music business do not take into accountinclude the impactrestructuring costs of SONY BMG since the establishment of the proposed merger of the recorded music business of Sony and Bertlesmann AG. See Note 22 for more information on this proposed merger. Should this merger take place, the recorded music business may incur additional restructuring costs.joint venture. At March 31, 2004,2007, the remaining liability balance was 6,214211 million yen, with most of the liabilities being paid or settled during the year ending March 31, 2005. Without taking into account the proposed merger with Bertlesmann AG, the worldwide restructuring programwhich is expected to be completed bysettled during the fiscal year endingended March 31, 2006. 2008.
In addition to the above, Sony also recorded restructuring charges of 1,519803 million yen, 346 million yen and 1,2911,329 million yen for the fiscal years ended March 31, 20032005, 2006 and 2004,2007, respectively, in Japan, which were primarily personnel related costs included in selling, general and administrative expenseexpenses in the consolidated statementstatements of income. Significant restructuring activities included
During the following:

     In thefiscal year ended March 31, 2002,2005, in continuation of the worldwide restructuring program and in connection with the establishment of the joint venture with Bertelsmann AG (Note 5), Sony recorded restructuring charges totaling 8,5993,025 million yen.yen within the music business. Restructuring activities included the rationalizationshutdown of digital media initiatives and portfolio investment businesses in order to focus on core music activities and staff reductions. Charges incurred in the year ended March 31, 2002 consisted of personnel related costs of 5,100 million yen, non-cash asset impairment and disposal costs of 787 million yen, and other costs of 2,712 million yen including lease termination costs. Among these charges 7,812 million yen was included in selling, general and administrative expense, and 787 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income.

     In the year ended March 31, 2003, restructuring charges related to the worldwide restructuringcertain distribution operations that were no longer required as a result of the Music segment totaled 22,350 million yen. Restructuring activities included the further consolidation of operations through the shutdown of a cassette and CD manufacturing and distribution center in Holland and a CD manufacturing facility in the U.S.recorded music joint venture with Bertelsmann AG as well as further staff reductions in other areas. The restructuring charges consisted of personnel related costs of 14,932 million yen, non-cash asset impairment

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and disposal costs of 3,256 million yen and other costs of 4,162 million yen including lease termination costs. Among these charges 19,094 million yen was recorded in selling, general and administrative expense, and 3,256 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. Employees were eliminated across various employee levels, business functions, operating units, and geographic regions during this phase of the worldwide restructuring program.

During the year ended March 31, 2004, Sony broadened the scope of its worldwide restructuring of the Music segment, which resulted in restructuring charges totaling 10,691 million yen. Restructuring activities included the continuation of the shutdown of the CD manufacturing facility in the U.S. as well as the restructuring of music label operations and the further rationalization of overhead functions through staff reductions. The restructuring charges consisted of personnel related costs of 5,137 million yen, lease abandonment costs of 1,323883 million yen and other related costs of 4,2312,142 million yen including non-cash asset impairment and disposal costs. Mostyen.

All Other (U.S. Entertainment Complex)
As part of these charges are included in selling, general and administrative expense in the consolidated statements of income. Employees were eliminated across various employee levels, business functions, operating units, and geographic regions during this phase of the worldwide restructuring program.
Pictures Segment

In an effort to improve the performance of the Pictures segment, Sony has undergone a number of restructuringits efforts to reduce its operating costs. For the years endedrestructure and eliminate certain non-core businesses, Sony reached an agreement to sell a U.S. entertainment complex in March 31, 2002, 2003 and 2004, Sony recorded total restructuring charges of 8,452 million yen, 480 million yen and 4,611 million yen, respectively, within the Pictures segment. Significant restructuring activities are the following:

Consolidation of Television Operations -

Due to changes within the television production and distribution business, the competition between network owned production companies and other production and distribution companies to license product to the major televisions networks is becoming more intense. This competitive environment has resulted in fewer opportunities to produce shows for the networks and a shorter lifespan for ordered shows that do not immediately achieve favorable ratings. This trend has resulted in an increase in the number of new programs being distributed yet canceled in their first or second season, which are generally less profitable, and a decrease in the number of network programs that are able to achieve syndication, which are generally more profitable.2006. As a result, in the year ended March 31, 2002, Sony decided to consolidate its television operations and downsize the network television production business in the Pictures segment. Sony recorded restructuring charges totaling 8,452an impairment charge of 8,522 million yen which consisted of personnel related costs of 1,753 million yen, non-cash assetyen. The impairment and disposal costs of 1,767 million yen, and other costs of 4,932 million yen including those relating tocharge was based on the buy-out of term deal commitments. These restructuring charges were all recorded in cost ofnegotiated sales in the consolidated statements of income. In the year ended March 31, 2003, additional restructuring charges totaling 480 million yen were recorded. These costs were included in cost of sales in the consolidated statements of income. No further costs are expected to be incurred for this restructuring activity. The remaining liability balance was 211 million yen as of March 31, 2004 and will be paid or settled through the year ending March 31, 2005. The restructuring plan is expected to be completed by the second quarterprice of the year ending March 31, 2005.

Fixed Cost Reduction Program -

     During the year ended March 31, 2004, the Pictures segment implemented a fixed cost reduction program to further reduce its operating costs. This restructuring program primarily related to the reduction of staffing levelscomplex, and the disposal of certain long-lived assets. The total estimated cost of this restructuring

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

program is 4,928 million yen, of which 4,611 million yen has incurred through March 31, 2004. These restructuring charges consisted of personnel related costs of 993 million yen, non-cash asset impairment and disposal costs of 1,746 million yen, and other costs of 1,872 million yen including those relating to the buy-out of term deal commitments. Of the restructuring costs incurred, 1,525 million yen was included in cost of sales, 1,340 million yen was included in selling, general and administrative expense, and 1,746 million yen was includedrecorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. This restructuring program is expected to be completed over the next year and 317 million yen is expected to be incurred


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

The changes in the next fiscal year. At March 31, 2004, the remaining liability balance was 216 million yen which will be paid or settled over the next year.

The following table displays the balance of the accrued restructuring charges recorded for the fiscal years ended March 31, 2002, 20032005, 2006 and 2004.

                  
EmployeeNon-cash
terminationwrite-downsOther associated
benefitsand disposalscostsTotal
(Yen in millions)
Balance at March 31, 2001  1,261   —   1,088   2,349 
 Restructuring costs  38,123   39,598   29,253   106,974 
 Non-cash charges  —   (39,598)  —   (39,598)
 Cash payments  (33,291)  —   (16,907)  (50,198)
 Adjustments  150   —   203   353 
   
   
   
   
 
Balance at March 31, 2002  6,243   —   13,637   19,880 
 Restructuring costs  46,953   42,768   16,530   106,251 
 Non-cash charges  —   (42,240)  —   (42,240)
 Cash payments  (38,548)  —   (23,172)  (61,720)
 Adjustments  136   (528)  (1,208)  (1,600)
   
   
   
   
 
Balance at March 31, 2003  14,784   —   5,787   20,571 
 Restructuring costs  133,367   19,170   15,554   168,091 
 Non-cash charges  —   (19,170)  —   (19,170)
 Cash payments  (124,674)  —   (13,686)  (138,360)
 Adjustments  1,173   0   333   1,506 
   
   
   
   
 
Balance at March 31, 2004  24,650   —   7,988   32,638 
   
   
   
   
 
2007 are as follows:
                 
  Yen in millions 
  Employee
  Non-cash
       
  termination
  write-downs and
  Other associated
    
  benefits  disposals  costs  Total 
 
Balance at March 31, 2004  24,650   —   7,988   32,638 
Restructuring costs  53,563   25,564   10,836   89,963 
Non-cash charges  —   (25,564)  —   (25,564)
Cash payments  (61,523)  —   (10,427)  (71,950)
Adjustments*  (1,705)  —   (3,096)  (4,801)
                 
Balance at March 31, 2005  14,985   —   5,301   20,286 
Restructuring costs  48,255   76,999   13,438   138,692 
Non-cash charges  —   (76,999)  —   (76,999)
Cash payments  (42,152)  —   (7,929)  (50,081)
Adjustments  (1,227)  —   3   (1,224)
                 
Balance at March 31, 2006  19,861   —   10,813   30,674 
Restructuring costs  10,790   15,467   12,513   38,770 
Non-cash charges  —   (15,467)  —   (15,467)
Cash payments  (23,052)  —   (14,705)  (37,757)
Adjustments  (152)  —   1,277   1,125 
                 
Balance at March 31, 2007  7,447   —   9,898   17,345 
                 
* Adjustments primarily consist of the transfer of the accrued restructuring charges to SONY BMG, a joint venture with Bertelsmann AG (Note 5).
 
17.18.  Research and development costs, advertising costs and shipping and handling costs
 
(1)
Research and development costs:

(1)  Research and development costs:

Research and development costs charged to cost of sales for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 were 433,214502,008 million yen, 443,128531,795 million yen and 514,483543,937 million yen, respectively.
 
(2)Advertising costs:

(2)  Advertising costs:
Advertising costs included in selling, general and administrative expenses for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 were 401,960359,661 million yen, 442,741419,508 million yen and 421,433505,462 million yen, respectively.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES(3)  Shipping and handling costs:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
(3)Shipping and handling costs:

Shipping and handling costs for finished goods included in selling, general and administrative expenses for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 were 98,800107,983 million yen, 98,195114,500 million yen and 106,590120,442 million yen, , respectively, which included the internal transfertransportation costs of finished goods.
 
18.19.  Gain on issuances of stock bychange in interest in subsidiaries and equity investees

     Total gains on issuances

On August 2, 2004, Monex Inc., which provided on-line security trading services in Japan, and Nikko Beans, Inc. established Monex Beans Holdings, Inc. by way of stock by equity investees were 503 million yen for the year ended March 31, 2002. There were no gains on issuances of stock for subsidiaries and equity investees for the year ended March 31, 2003.

     In January 2004, FeliCa Networks, Inc., whose field of business is Mobile FeliCa IC chip development and production/sales licensing and operationshare transfer of the Mobile FeliCa service platform, issued 115,000then existing shares at 100,000 yen perof Monex Inc. and Nikko Beans, Inc. At this establishment, 1 share valued at 11,500 million yen yen in connection with its private offering.of Monex Beans Holdings, Inc. was allotted to each share of Monex Inc. and 3.4 shares of Monex Beans Holdings, Inc. were allotted to each share of Nikko Beans, Inc. As a result of this issuance,


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

share transfer, Monex Beans Holdings, Inc. issued 2,344,687 shares and Sony recorded a gain of 3,3648,951 million yen and provided deferred taxes on this gain. This issuance reduced Sony’s ownership interest from 100%29.9% to 60%20.1%.

In September 2004,So-net M3 Inc., which provides medical services via the Internet in Japan, issued 2,800 shares at 850,000 yen per share with a total value of 2,380 million yen in connection with its initial public offering.So-net, a parent company ofSo-net M3 Inc., sold 3,260 shares ofSo-net M3 Inc., at 790,500 yen per share with a total value of 2,577 million yen. In October 2004,So-net sold 740 shares ofSo-net M3 Inc., at 790,500 yen per share with a total value of 585 million yen. As a result of these transactions, Sony recorded a 1,823 million yen gain on issuance of stock bySo-net M3 Inc. and provided deferred taxes on this gain. In addition, Sony recorded a 2,876 million yen gain on the sale of its shares ofSo-net M3 Inc. These transactions reduced Sony’s ownership interest from 90.0% to 74.8%.
In January 2005, DeNA Co., Ltd., whose field of business is the operation of on-line auction websites in Japan, issued 14,000 shares at 204,600 yen per share with a total value of 2,864 million yen in connection with its initial public offering. In March 2005,So-net, which had owned a 27.7% interest in DeNA Co., Ltd., sold 2,000 shares of DeNA Co., Ltd. at 204,600 yen per share with a total value of 409 million yen. As a result of these transactions, Sony recorded a 686 million yen gain on issuance of stock by DeNA Co., Ltd. and provided deferred taxes on this gain. In addition, Sony recorded a 76 million yen gain on the sale of its shares of DeNA Co., Ltd. These transactions reduced Sony’s ownership interest from 27.7% to 24.8%.
In addition to the above transaction,transactions, for the fiscal year ended March 31, 2004,2005, Sony recognized 1,5061,911 million yen of other gains on issuances of stock bychange in interest in subsidiaries and equity investees resulting in total gains of 4,87016,322 million yen.
In June 2005,So-net sold 17,935 shares ofSo-net M3 Inc., at 694,600 yen per share with a total value of 12,458 million yen. As a result of this sale, Sony recorded an 11,979 million yen gain and provided deferred taxes on this gain. This sale reduced Sony’s ownership interest from 74.8% to 60.8%.
In June 2005,So-net sold 7,000 shares of DeNA Co., Ltd. at 863,040 yen per share with a total value of 6,041 million yen. In March 2006, DeNA Co., Ltd. issued 14,300 shares at 314,138 yen per share with a total value of 4,492 million yen in connection with its private offering. As a result of these transactions, Sony recorded an 821 million yen gain on issuance of stock by DeNA Co., Ltd. and provided deferred taxes on this gain. In addition, Sony recorded a 5,817 million yen gain on the sale of its shares of DeNA Co., Ltd. These transactions reduced Sony’s ownership interest from 24.8% to 19.1%.
In September 2005, Sony Corporation sold 230,000 shares of Monex Beans Holdings, Inc. at 119,040 yen per share with a total value of 27,379 million yen. As a result of this sale, Sony recorded a 20,590 million yen gain and provided deferred taxes on this gain. This sale reduced Sony’s ownership interest from 20.1% to 10.3%. See Note 5 for more information on this transaction.
In December 2005,So-net issued 20,000 shares at 320,960 yen per share with a total value of 6,419 million yen in connection with its initial public offering. Sony Corporation and Sony Finance International Inc., which had owned 82.6% and 17.4% interests inSo-net, respectively, sold 66,000 shares and 4,000 shares ofSo-net, respectively, at 320,960 yen per share with a total value of 22,467 million yen. In January 2006, Sony Corporation sold 12,000 shares ofSo-net at 320,960 yen per share with a total value of 3,852 million yen. As a result of these transactions, Sony recorded a 4,226 million yen on gain on issuance of stock bySo-net and provided deferred taxes on this gain. In addition, Sony recorded a 17,321 million yen gain on the sale of its shares ofSo-net. These transactions reduced Sony’s ownership interest from 100% to 60.1%.
In addition to the above transactions, for the fiscal year ended March 31, 2006, Sony recognized 80 million yen of other gains on change in interest in subsidiaries and equity investees resulting in total gains of 60,834 million yen.
In June 2006, Sony sold 51.0% of its ownership interest in StylingLife Holdings Inc., a holding company covering six retail companies within Sony Group previously included within All Other. In November 2006, Sony sold an additional portion of its ownership interest in StylingLife Holdings Inc. These transactions reduced Sony’s


F-56

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

ownership interest from 100% to 22.5%. As a result of this sale, Sony recorded a 27,398 million yen gain and provided deferred taxes on this gain.
In addition to the above transaction, for the fiscal year ended March 31, 2007, Sony recognized 4,111 million yen of other gains on change in interest in subsidiaries and equity investees resulting in total gains of 31,509 million yen.
These transactions were not part of a broader corporate reorganization and the reacquisition of such shares was not contemplated at the time of issuance.
 
19.20.  Income Taxestaxes

Income before income taxes and income tax expense compriseis comprised of the following:
              
Year Ended March 31
200220032004
(Yen in millions)
Income (loss) before income taxes:            
 Sony Corporation and subsidiaries in Japan  (5,103)  (7,998)  (84,571)
 Foreign subsidiaries  97,878   255,619   228,638 
   
   
   
 
   92,775   247,621   144,067 
   
   
   
 
Income taxes — Current:            
 Sony Corporation and subsidiaries in Japan  55,641   69,311   22,286 
 Foreign subsidiaries  59,289   109,536   64,933 
   
   
   
 
   114,930   178,847   87,219 
   
   
   
 
Income taxes — Deferred:            
 Sony Corporation and subsidiaries in Japan  (46,082)  (90,016)  (32,845)
 Foreign subsidiaries  (3,637)  (8,000)  (1,600)
   
   
   
 
   (49,719)  (98,016)  (34,445)
   
   
   
 

     Sony is subjected to a number of different income taxes. Due to changes in Japanese income tax regulations, a consolidated tax filing system was introduced on April 1, 2002. Sony applied to file its return under the consolidated tax filing system beginning with the year ended March 31, 2004. Under the Japanese consolidated tax filing system, a 2% surtax was imposed only for the year ended March 31, 2004. As a result, the statutory tax rate was 43.9% for the year ended March 31, 2004.

F-59

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     For the year ending March 31, 2005, a corporation size-based enterprise tax is introduced which supersedes the current enterprise tax. As a result, the statutory tax rate for the year ending March 31, 2005 is approximately 41% effective April 1, 2004. The newly enacted rate was used in calculating the future expected tax effects of temporary differences as of March 31, 2004. The effect of the changes in the tax rates on the balance of deferred tax assets and liabilities was insignificant.

             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Income (loss) before income taxes:            
Sony Corporation and subsidiaries in Japan  5,005   243,927   174,689 
Foreign subsidiaries  152,202   42,402   (72,652)
             
   157,207   286,329   102,037 
             
Income taxes — Current:            
Sony Corporation and subsidiaries in Japan  23,497   55,154   51,395 
Foreign subsidiaries  62,013   41,246   15,686 
             
   85,510   96,400   67,081 
             
Income taxes — Deferred:            
Sony Corporation and subsidiaries in Japan  4,976   105,938   27,331 
Foreign subsidiaries  (74,442)  (25,823)  (40,524)
             
   (69,466)  80,115   (13,193)
             
Total income tax expense  16,044   176,515   53,888 
             

Reconciliation of the differences between the statutory tax rate and the effective income tax rate is as follows:
              
Year Ended March 31
200220032004
Statutory tax rate  42.0%  42.0%  43.9%
Increase (reduction) in taxes resulting from:            
 Income tax credits  (2.1)  (1.9)  (2.4)
 Change in valuation allowances  55.5   5.5   6.5 
 Decrease in deferred tax liabilities on undistributed earnings of foreign subsidiaries  (21.6)  (14.8)  (9.2)
 Reversal of foreign tax reserves  (6.5)  —   — 
 Other  3.0   1.8   (2.2)
   
   
   
 
Effective income tax rate  70.3%  32.6%  36.6%
   
   
   
 
             
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Statutory tax rate  41.0%  41.0%  41.0%
Increase (reduction) in taxes resulting from:            
Non deductible expenses  1.5   0.9   12.2 
Income tax credits  (0.1)  (1.3)  (28.8)
Change in valuation allowances  (22.7)  21.6   (2.9)
Increase (decrease) in deferred tax liabilities on undistributed earnings of foreign subsidiaries and affiliates  (4.0)  4.5   12.8 
Lower tax rate applied to life and non-life insurance business in Japan  (1.9)  (3.2)  (4.0)
Foreign income tax differential  (3.1)  (1.4)  13.1 
Adjustments to tax accrual and reserves  3.1   (1.2)  4.9 
Other  (3.6)  0.7   4.5 
             
Effective income tax rate  10.2%  61.6%  52.8%
             


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

The significant components of deferred tax assets and liabilities are as follows:
           
March 31
20032004
(Yen in millions)
Deferred tax assets:        
 Operating loss carryforwards for tax purposes  130,473   196,308 
 Accrued pension and severance costs  213,284   150,073 
 Film costs  33,907   54,194 
 Warranty reserve and accrued expenses  64,094   45,664 
 Accrued bonus  32,694   36,285 
 Future insurance policy benefits  34,734   35,855 
 Inventory — intercompany profits and write-down  34,423   30,241 
 Depreciations  15,724   14,108 
 Reserve for doubtful accounts  20,256   14,005 
 Tax credit carryforwards  33,762   13,740 
 Other  119,671   141,731 
   
   
 
  Gross deferred tax assets  733,022   732,204 
  Less: Valuation allowance  (116,068)  (127,577)
   
   
 
  Total deferred tax assets  616,954   604,627 
   
   
 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

           
March 31
20032004
(Yen in millions)
Deferred tax liabilities:        
 Insurance acquisition costs  (118,689)  (125,768)
 Unbilled accounts receivable in the Pictures business  (68,462)  (71,586)
 Unrealized gains on securities  (15,041)  (45,239)
 Undistributed earnings of foreign subsidiaries  (46,449)  (44,778)
 Intangible assets acquired through exchange offerings  (38,882)  (36,490)
 Gain on securities contribution to employee retirement benefit trust  (17,438)  (16,899)
 Other  (9,543)  (39,435)
   
   
 
  Gross deferred tax liabilities  (314,504)  (380,195)
   
   
 
Net deferred tax assets  302,450   224,432 
   
   
 

         
  Yen in millions 
  March 31 
  2006  2007 
 
Deferred tax assets:        
Operating loss carryforwards for tax purposes  146,206   174,685 
Accrued pension and severance costs  95,226   97,791 
Film costs  51,937   54,881 
Warranty reserve and accrued expenses  52,008   87,775 
Future insurance policy benefits  24,785   40,784 
Accrued bonus  27,353   24,723 
Inventory — intercompany profits and write-down  47,578   80,580 
Depreciation  34,052   31,519 
Tax credit carryforwards  39,443   54,075 
Reserve for doubtful accounts  7,479   6,312 
Impairment of investments  52,658   50,582 
Deferred revenue in the Pictures segment  16,713   28,476 
Other  144,337   92,069 
         
Gross deferred tax assets  739,775   824,252 
Less: Valuation allowance  (150,899)  (174,408)
         
Total deferred tax assets  588,876   649,844 
         
Deferred tax liabilities:        
Insurance acquisition costs  (136,919)  (143,329)
Unbilled accounts receivable in the Pictures segment  (49,953)  (55,680)
Unrealized gains on securities  (63,739)  (50,273)
Intangible assets acquired through stock exchange offerings  (34,627)  (33,067)
Undistributed earnings of foreign subsidiaries and affiliates  (66,719)  (97,429)
Gain on securities contribution to employee retirement benefit trust  (3,992)  (5,315)
Other  (65,151)  (80,156)
         
Gross deferred tax liabilities  (421,100)  (465,249)
         
Net deferred tax assets  167,776   184,595 
         

The valuation allowance mainly relates to deferred tax assets of Sony Corporation and certain consolidated subsidiaries with operating loss carryforwards and tax credit carryforwards for tax purposes that are not expected to be realized. The net changes in the total valuation allowance were an increasea decrease of 53,59538,467 million yen for the fiscal year ended March 31, 2002, a decrease2005 and increases of 136,14061,789 million yen and 23,509 million yen for the fiscal years ended March 31, 2006 and 2007, respectively. The increase during the fiscal year ended March 31, 20032006 resulted from a provision for additional valuation allowances due to continued losses recorded by Sony Corporation and ancertain subsidiaries, mainly in the electronics business. The increase of 11,509 million yen forduring the fiscal year ended March 31, 2004.2007 resulted from a provision for additional valuation allowances due to continued losses recorded by certain subsidiaries, mainly in the electronics business.
As a result of operating losses in the past, certain consolidated subsidiaries in the U.S. had recognized valuation allowances against deferred tax assets for the U.S. federal and certain state taxes. However, because of improved operating results in recent years and a sound outlook for the future operating performance of certain

     As discussed
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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

consolidated subsidiaries in Note 8, 33,525the U.S., Sony reversed 67,892 million yen of the decrease in the valuation allowance, resulting in a reduction of income tax expenses for the fiscal year ended March 31, 2003 relates2005.
Although Sony Computer Entertainment Inc. (“SCEI”) and Sony Computer Entertainment America Inc. (“SCEA”) have recorded cumulative losses in recent years, both companies plan to the realization of tax benefits from operating loss carryforwards that were acquired in connection with Sony’s acquisition of companiesrecover these losses within the Electronics, Music and Pictures businesses. The reversal ofnext 5 years as the PlayStation 3 is expected to establish the same successful business model that it achieved with the PlayStation 2, which has sold over 100 million units. Given sufficiently strong evidence to support the conclusion that a valuation allowance upon realization ofis not necessary, Sony has decided not to record a valuation allowance for SCEI and SCEA’s deferred tax benefit from operating loss carryforwards resulted in the reduction of goodwill.

assets.

Tax benefits which have been realized through the utilization of operating loss carryforwards for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007, were approximately 31,700 million30 billion yen, 19,000 million42 billion yen and 12,000 million56 billion yen, respectively.

Net deferred tax assets are included in the consolidated balance sheets as follows:
          
March 31
20032004
(Yen in millions)
Current assets — Deferred income taxes  143,999   125,532 
Other assets — Deferred income taxes  328,091   203,203 
Current liabilities — Other  (10,561)  (8,110)
Long-term liabilities — Deferred income taxes  (159,079)  (96,193)
   
   
 
 Net deferred tax assets  302,450   224,432 
   
   
 

         
  Yen in millions 
  March 31 
  2006  2007 
 
Current assets — Deferred income taxes  221,311   243,782 
Other assets — Deferred income taxes  178,751   216,997 
Current liabilities — Other  (15,789)  (15,082)
Long-term liabilities — Deferred income taxes  (216,497)  (261,102)
         
Net deferred tax assets  167,776   184,595 
         
At March 31, 2004, no2007, deferred income taxes have not been provided on undistributed earnings of foreign subsidiaries not expected to be remitted in the foreseeable future totaling 902,567969,477 million yen, and on the gain of 61,544 million yen on a subsidiary’s sale of stock arising from the issuance of common stock of Sony Music Entertainment (Japan) Inc. in a public offering to third parties in November 1991, as Sony does not anticipate any significant tax consequences on possible future disposition of its investment based on its tax planning strategies. The unrecognized deferred tax liabilities as of March 31, 20042007 for such temporary differences amounted to 206,052 million yen.

F-61

can not be determined.

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Operating loss carryforwards for corporate income tax and local income tax purposes of Sony Corporation and certain consolidated subsidiaries in Japan at March 31, 20042007 amounted to 346,43142,318 million yen and 512,362368,189 million yen, respectively, which are available as an offset against future taxable income. Deferred tax assetassets provided on the operating loss carryforwards for corporate income taxtaxes and local income taxtaxes in Japan are calculated by multiplyingusing effective tax rates of approximately 28% and 13%, respectively.

Operating loss carryforwards for income tax purposes of certain foreign consolidated subsidiaries at March 31, 20042007 amounted to 85,095364,175 million yen.

With the exception of 68,217127,149 million yen with no expiration period, total available operating loss carryforwards expire at various dates primarily up to 710 years.

Tax credit carryforwards for tax purposes at March 31, 20042007 amounted to 13,74053,116 million yen. With the exception of 9,5189,565 million yen with no expiration period, total available tax credit carryforwards expire at various dates primarily up to 915 years.
Realization is dependent on such companies generating sufficient taxable income priorof deferred tax assets related to expiration of the loss carryforwards and tax credit carryforwards.carryforwards is dependent on whether sufficient taxable income will be generated prior to the expiration period. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, less valuation allowance, will be realized. TheHowever, the amount of such net deferred tax assets considered realizable, however, could be changedchange in the near term if estimates of future taxable income during the carryforward period are changed.change.


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

 
20.21.  Reconciliation of the differences between basic and diluted net income per share (“EPS”)
 
(1)Income before cumulative effect of accounting changes and net income allocated to each class of stock:
             
Year Ended March 31
200220032004
(Yen in millions)
Income before cumulative effect of accounting changes allocated to the common stock  9,381   115,648   90,756 
Income before cumulative effect of accounting changes allocated to the subsidiary tracking stock  (49)  (129)  (128)
   
   
   
 
Income before cumulative effect of accounting changes  9,332   115,519   90,628 
   
   
   
 
Net income allocated to the common stock  15,359   115,648   88,639 
Net income allocated to the subsidiary tracking stock  (49)  (129)  (128)
   
   
   
 
Net income  15,310   115,519   88,511 
   
   
   
 

             
  Yen in millions 
  Fiscal Year Ended March 31, 
  2005  2006  2007 
 
Income before cumulative effect of an accounting change allocated to common stock  168,498   122,308   126,328 
Income allocated to subsidiary tracking stock  53   1,308   — 
             
Income before cumulative effect of an accounting change  168,551   123,616   126,328 
             
Net income allocated to common stock  163,785   122,308   126,328 
Net income allocated to subsidiary tracking stock  53   1,308   — 
             
Net income  163,838   123,616   126,328 
             
As discussed in Note 2, the earnings allocated to the subsidiary tracking stock arewere determined based on the subsidiary tracking stockholders’ economic interest.

The statutory retained earningsaccumulated losses of SCN (the subsidiary tracking stock entity as discussed in Note 14) available15) used for dividendscomputation of net income per share attributable to the shareholderssubsidiary tracking stock were 2091,358 million yen as of March 31, 2002, which decreased by 374 million yen during2005.

As discussed in Notes 2 and 15, on October 26, 2005, the Board of Directors of Sony Corporation decided to terminate all shares of subsidiary tracking stock and convert such shares to shares of Sony common stock at a conversion rate of 1.114 share of Sony common stock per share of subsidiary tracking stock. All shares of subsidiary tracking stock were converted to shares of Sony common stock on December 1, 2005. As a result of the conversion, the earnings allocated to common stock for the fiscal year ended March 31, 2002 after2006 are calculated by subtracting the date of issuance.

earnings allocated to the subsidiary tracking stock for the eight months ended November 30, 2005. The accumulated lossesgains of SCN used for computation of net income per share attributable to subsidiary tracking stock were 779 million yen and 1,7648,578 million yen as of March 31, 2003 and 2004, respectively.

F-62

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIESNovember 30, 2005.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
(2)EPS attributable to common stock:

Reconciliation of the differences between basic and diluted EPS for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 is as follows:
              
Year Ended March 31
200220032004
(Yen in millions)
Income before cumulative effect of accounting changes allocated to the common stock  9,381   115,648   90,756 
Effect of dilutive securities:            
 Convertible bonds  —   2,398   2,260 
   
   
   
 
Income before cumulative effect of accounting changes allocated to the common stock for diluted EPS computation  9,381   118,046   93,016 
   
   
   
 
              
Thousands of shares
Weighted-average shares  918,462   919,706   923,650 
Effect of dilutive securities:            
 Warrants  108   12   48 
 Convertible bonds  2,664   78,873   76,517 
   
   
   
 
Weighted-average shares for diluted EPS computation  921,234   998,591   1,000,215 
   
   
   
 
             
Yen
Basic EPS  10.21   125.74   98.26 
   
   
   
 
Diluted EPS  10.18   118.21   93.00 
   
   
   
 
             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Income before cumulative effect of an accounting change allocated to common stock    168,498     122,308     126,328 
Effect of dilutive securities:            
Convertible bonds  1,209   —   — 
Subsidiary tracking stock  (0)  (29)  — 
             
Income before cumulative effect of an accounting change allocated to common stock for diluted EPS computation  169,707   122,279   126,328 
             

     For the year ended March 31, 2002, 75,201 thousand
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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

             
  Thousands of shares 
 
Weighted-average shares  931,125   997,781   1,001,403 
Effect of dilutive securities:            
Warrants and stock acquisition rights  61   915   2,413 
Convertible bonds  112,589   47,468   46,355 
             
Weighted-average shares for diluted EPS computation  1,043,775   1,046,164   1,050,171 
             

             
  Yen 
 
Basic EPS     180.96      122.58      126.15 
             
Diluted EPS  162.59   116.88   120.29 
             
Potential shares of potential common stock upon the conversion of convertible bonds were excluded from the computation of diluted EPS due to their antidilutive effect.

     44,603 thousand shares of potential common stock upon the conversion of 250,000 million yen convertible bond issued dated December 18, 2003 were excluded from the computation of the number of weighted-average shares for diluted EPS since the conditions to exercise the stock acquisition rights were not met during the year ended March 31, 2004 after the date of issuance.

     Potential common stock upon the exercise of warrants and stock acquisition rights, which were excluded from the computation of diluted EPS since they have an exercise price in excess of the average market value of Sony’s common stock during theeach fiscal year, were 2,6657,987 thousand shares, 4,14110,483 thousand shares and 6,79610,541 thousand shares for the fiscal years ended March 31, 2002, 20032005, 2006 and 2004,2007, respectively.

     Warrants and stock acquisition rights of subsidiary tracking stock for the years ended March 31, 2002, 2003 and 2004, which have a potentially dilutive effect by decreasing net income allocated to common stock, were excluded from the computation of diluted EPS since they did not have a dilutive effect.

Stock options issued by affiliated companies accounted for under the equity method for the fiscal years ended March 31, 2002, 20032005, 2006 and 2004,2007, which have a potentially dilutive effect by decreasing net income allocated to common stock, were excluded from the computation of diluted EPS since such stock options did not have a dilutive effect.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On October 1, 2002, Sony implemented a share exchange as a result of which Aiwa became a wholly-owned subsidiary. As a result of this share exchange, Sony issued 2,502 thousand shares. The shares were included in the computation of basic and diluted EPS.

 
(3)EPS attributable to subsidiary tracking stock:

Weighted-average shares used for the computation of EPS attributable to subsidiary tracking stock for the yearsfiscal year ended March 31, 2002, 2003 and 20042005 were 3,072 thousand shares.
As discussed, in Note 2, there were no potentially dilutive securities for EPSall shares of subsidiary tracking stock outstanding atwere converted to shares of Sony common stock on December 1, 2005. As a result of the conversion, net income per share of the subsidiary tracking stock for the fiscal year ended March 31, 2002, 2003 and 2004.2006 was not presented.
 
21.22.  Variable interest entities

Sony has, from time to time, entered into various arrangements with VIEs.variable interest entities (“VIEs”). These arrangements consist ofinclude facilities which provide for the leasing of certain property, the financing of film production, the development and operation of a multi-use real estate complex and the implementation of a stock option plan for Japanese employees. As described in Note 2,employees and the U.S. based music publishing business. The FASB issued FIN No. 46 (revised), “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletin No. 51”, which requires the consolidation or disclosure of VIEs. The VIEs that have been consolidated by Sony are described as follows:

Sony leases the headquarters of its U.S. subsidiary from a VIE, which has been consolidated by Sony since July 1, 2003. Upon consolidation of the VIE, assets and liabilities increased by 25,277 million yen and 27,035 million yen, respectively, and a cumulative effect of accounting change of 1,729 million yen was charged to net income with no tax effect.VIE. Sony has the option to purchase the building at any time during the lease term which expires in December 2008 for 26,941255 million yen.U.S. dollars. The debt held by the VIE is unsecured. At the end of the lease term, Sony has agreed to either renew the lease, purchase the building or remarket it to a third party on behalf of the owner. If the sales price is less than 26,941255 million yen,U.S. dollars, Sony is obligated to make up the lesser of the shortfall or 22,609214 million yen.

U.S. dollars. There is no recourse to the creditors outside of Sony.

A subsidiary in the Pictures businesssegment entered into a joint venture agreement with a VIE for the purpose of funding the acquisition of certain international film rights. The subsidiary acquired the international distribution rights, as defined, to twelve pictures meeting certain minimum requirements within the time period provided in the agreement. The subsidiary is required to distribute the product internationally, for contractually defined fees determined as percentages of gross receipts, as defined, and is responsible for all distribution and marketing

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expenses, which are recouped from such distribution fees. The VIE was capitalized with total financing of 42,894406 million yen.U.S. dollars. Of this amount, 1,16211 million yenU.S. dollars was contributed by the subsidiary, 10,03795 million yenU.S. dollars was provided by unrelated third party investors and the remaining funding is provided through a 31,695300 million yenU.S. dollars bank credit facility. On July 1, 2003, Sony consolidated this entity. Upon consolidation of the VIE, assets and liabilities increased by 10,179 million yen and 10,586 million yen, respectively, and a cumulative effect of accounting change of 388 million yen was charged to net income with no tax effect. As of March 31, 2004, the total2007, there were no amounts outstanding under the bank credit facility was 15,251 million yen.facility. Under the agreement, the subsidiary’s 1,16211 million yenU.S. dollars equity investment is the last equity to be repaid. Additionally, it must pay to the third party investors up to 2,00719 million yenU.S. dollars of any losses out of a portion of its distribution fees. Any losses incurred byAs of March 31, 2007, the VIE over and above 3,170 million yen will be shared by the other investors. The subsidiary is obligated to acquire the international distribution rights, as defined, for twelve pictures meeting certain minimum requirements within a 3.5 to 4.5 year period and transfer those rights to the VIE at cost plus a 5 percent fee. Sony has certain limited obligations to repay any outstanding balance under the bank credit facility up to certain amounts as defined in the agreement. Separately, if the subsidiary is unable to deliver twelve pictures to the VIE and the bank credit facility orremaining unpaid portion of the third party equity investors are not paid in full by March 10, 2008 (or earlier upon the occurrence of certain events), the subsidiary is required to reimburse the VIE to the extent necessary to repay the bank credit facility in full and pay

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

certain minimum returns to the third party equity investors. See Note 22 for more information on the contingent liability on this agreement.

     Sony has utilized a VIE to erect and operate a multi-use real estate complex in Berlin, Germany, which had been accounted for under the equity method by Sony until June 30, 2003. On July 1, 2003, Sony consolidated this entity. Upon consolidation of the VIE, assets and liabilities increased by 61,320investors’ investment was 5 million yen and 60,329 million yen, respectively. However, there was no impact to Sony’s net income. The VIE was capitalized with 89,650 million yen of total funding, 32,343 million yen was provided by equity investors with the remaining funding of 57,307 million yen being provided through a syndicated bank loan which matures in November 2004. The syndicated bank loan is secured by the multi-use real estate complex, of which book value was 61,912 million yen at March 31, 2004. Creditors of the VIE have no recourse to the general credit of Sony.

U.S. dollars.

Sony has utilized a VIE to implement a stock optionSAR plan (Note 16) for selected Japanese employees. The VIE has been consolidated by Sony since its establishment. With respect to this entity, there was no impact to Sony’s results of operations and financial position upon the adoption of FIN No. 46. Under the terms of the stock optionSAR plan, upon exercise, Japanese employees receive cash equal to the amount that the market price of Sony Corporation’s common stock exceeds the strikegrant price of the plan. In order to minimize cash flow exposure associated with the plan, Sony holdsheld treasury stock through the VIE. The VIE purchased the common stock with funding provided by the employee’s cash contribution and a bank loan. The SAR plan was terminated during the fiscal year ended March 31, 2006.
Sony’s U.S. based music publishing subsidiary is a joint venture with a third party investor and has been determined to be a VIE. The subsidiary owns and acquires rights to musical compositions, exploits and markets these compositions and receives royalties or fees for their use. Under the terms of the joint venture, Sony has the obligation to fund any working capital deficits. In addition, the third party investor receives a guaranteed annual dividend of up to 8.5 million U.S. dollars. Sony has also issued a guarantee to a creditor of the third party investor in which Sony will provide a minimum offer of 300 million U.S. dollars to the creditor to purchase certain assets that are being held as collateral by the third party creditor against the obligation of the third party investor. The assets of the third party investor that are being used as collateral were placed in a separate trust which was established in April 2006. The trust is also a VIE in which Sony has had a significant variable interest since establishment, but is not the primary beneficiary. Included in the assets held by the trust is the third party investor’s 50% ownership interest in the music publishing subsidiary. At March 31, 2004,2007, the balancefair value of the bank loan was 5,046assets held by the trust exceeded 300 million yen.

There is no VIEU.S. dollars.

VIEs in which Sony holds a significant variable interest, but is not the primary beneficiary are described as follows:
As described in Note 5, on April 8, 2005, a consortium led by SCA and its equity partners completed the acquisition of MGM. Sony has reviewed the investment and determined that MGM is a VIE. However, MGM is not consolidated but accounted for under the equity method as Sony is not the primary beneficiary.beneficiary of this VIE as Sony absorbs less than 50% of expected losses and does not have the right to receive greater than 50% of expected residual returns. MGM continues to operate as a private company and continues to engage in the production and distribution of film content. Through its current ownership of MGM’s common stock, Sony records 45% of MGM’s net income (loss) as equity in net income of affiliated companies. As a result of the cumulative losses recorded by MGM through March 31, 2007, the carrying value of Sony’s investment in MGM was written down to zero as of March 31, 2007. As Sony has not guaranteed any obligations of MGM, nor has it otherwise committed to provide further financial support to MGM, Sony will no longer record its share of MGM’s future equity losses.
On December 30, 2005, a subsidiary in the Pictures segment entered into a production/co-financing agreement with a VIE to co-finance 11 films that were released over the 15 months ended March 31, 2007. The subsidiary received 373 million U.S. dollars over the term of the agreement to fund the production or acquisition cost of films (including fees and expenses). The subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE. On April 28, 2006, the subsidiary entered into a second production/co-financing agreement with a VIE to co-finance additional films. Nine films are anticipated to be released under this financing arrangement. The subsidiary will receive approximately 240 million U.S. dollars over the term of the agreement to fund the production


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or acquisition cost of films (including fees and expenses). Similar to the first agreement, the subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. As of March 31, 2007, three co-financed films have been released by the subsidiary and 37 million U.S. dollars has been received from the VIE under this agreement. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE. On January 19, 2007, the subsidiary entered into a third production/co-financing agreement with a VIE to co-finance a majority of the films to be submitted through March 2012. The subsidiary has received a commitment from the VIE that the VIE will fund up to 525 million U.S. dollars on a revolving basis to fund the production or acquisition cost of films (including fees and expenses). As of March 31, 2007, no films of the subsidiary have been funded by this VIE. Similar to the first two agreements, the subsidiary is responsible for marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE.
 
22.23.  Commitments and contingent liabilities
 
(1)  Commitments:
(1)A.  Commitments:Loan Commitments

Commitments outstanding at March 31, 2007 totaled to 374,909 million yen. The main components of these commitments are as follows:
Subsidiaries in the Financial Services segment have entered into loan agreements with their customers in accordance with the condition of the contracts. As of March 31, 2007, the total unused portion of the line of credit extended under these contracts was 348,359 million yen.
In August 2004, Sony and Bertelsmann AG combined their recorded music businesses in a joint venture. In connection with the establishment of the SONY BMG joint venture, Sony and Bertelsmann AG have entered into a 5 year Revolving Credit Agreement with the joint venture. Under the terms of the Credit Agreement, Sony and Bertelsmann have each agreed to provide one-half of the funding. The Credit Agreement, which matures on August 5, 2009, provides for a base commitment of 300 million U.S. dollars and additional incremental borrowings of up to 150 million U.S. dollars. As of March 31, 2007, the joint venture had no borrowings outstanding under the Credit Agreement. Accordingly, Sony’s outstanding commitment under the Credit Agreement as of March 31, 2007 was 26,550 million yen.
The aggregate amounts of futureyear-by-year payments for these loan commitments cannot be determined.
B.  Purchase Commitments and other
Commitments outstanding at March 31, 2007 amounted to 316,066296,080 million yen. The major components of these commitments are as follows:

In the ordinary course of business, Sony makes commitments for the purchase of property, plant and equipment. As of March 31, 2004,2007, such commitments outstanding were 20,79643,329 million yen.

     Certain subsidiaries in the Music business have entered into long-term contracts with recording artists and companies for the production and/or distribution of prerecorded music and videos. These contracts cover various periods mainly through March 31, 2007. As of March 31, 2004, these subsidiaries were committed to make payments under such long-term contracts of 39,073 million yen.

Certain subsidiaries in the Pictures businesssegment have entered into agreements with creative talent for the development and production of films and television programming as well as agreements with third parties to acquire completed films, or certain rights therein. These agreements mainly cover various periods mainly through March 31, 2006.2011. As of March 31, 2004,2007, these subsidiaries were committed to make payments under such contracts of 32,21256,466 million yen.


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A subsidiary in the Pictures businesssegment has also entered into a distribution agreement with a third party to distribute, in certain markets and territories, all feature length films produced or acquired by the third party during the term of the agreement. The distribution agreement expiresexpired on December 31, 2006 if2006. The third party produced, put into production or acquired a total of 41 films under the distribution agreement (a minimum of 36 films have been delivered as of that date. If 36 films have not been delivered by December 31, 2006, the distribution agreement expires on the earlier of the delivery of the 36th film or May 25, 2007. It is estimated that the third party will produce or acquire a total of 43 films under the distribution agreement.were required). The subsidiary has the right to distribute the films for 15 years from the initial theatrical release of the film. Under the terms of the distribution agreement, the subsidiary must fund a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

portion of the production cost and is responsible for all distribution and marketing expenses. As of March 31, 2004, 262007, 38 films have been released or funded by the subsidiary. The subsidiary’s estimated commitment to fund the production of the remaining films under this agreement is 63,02011,250 million yen.

     On March 8, 2004,

In April 2005, Sony Corporation signedhas entered into a partnership program contract with Fédération Internationale de Football Association (“FIFA”). Through this program Sony Corporation will be able to exercise various rights as an agreement withofficial sponsor of FIFA events including the FIFA World Cuptm*( from 2007 to 2014. As of March 31, 2007, Sony Corporation was committed to make payments under such contract of 30,939 million yen.
In July 2006, Sony Corporation and Samsung Electronics Co., Ltd. (“Samsung”) to establish asigned the final contract for constructing an 8th generation amorphous TFT-LCD panel manufacturing line at their joint venture, named S-LCD Corporation. As of March 31, 2007, Sony Corporation (“S-LCD”), for the production of amorphous TFT LCD products. In April 2004, S-LCD was formally established through the joint venture investments of Sony and Samsung. Sony’s ownership interest in the joint venture will be 50% less one share of the issued and outstanding shares of S-LCD. S-LCD will be accounted for by Sony under the equity method. Under the joint venture agreement, Sony is committed to fund a totalmake payments under such contract of 96,28550,200 million yen during the year ending March 31, 2005.

yen.

The schedule of the aggregate amounts ofyear-by-year payment of purchase commitments during the next five years and thereafter is as follows:
      
Year ending March 31,Yen in millions
2005  184,734 
2006  65,890 
2007  36,175 
2008  8,930 
2009  1,661 
Thereafter  18,676 
   
 
 Total  316,066 
   
 

In December 2003, Sony and Bertlesmann AG signed a binding agreement to combine their recorded music businesses in a joint venture. The newly formed company will be 50% owned by each parent company. The merger is subject to regulatory approvals in the U.S. and European Union.

 
(2)Contingent liabilities:

     
Fiscal Year Ending March 31,
 Yen in millions 
 
2008  176,943 
2009  53,947 
2010  10,057 
2011  7,704 
2012  6,841 
Thereafter  40,588 
     
Total  296,080 
     

(2)  Contingent liabilities:
Sony had contingent liabilities including guarantees given in the ordinary course of business, which amounted to 59,86221,681 million yen at March 31, 2004.2007. The major components of the contingent liabilities are as follows:

Sony has issued loan guarantees to related parties comprised of affiliated companies accounted for under the equity method and unconsolidated subsidiaries. The terms of these guarantees are mainly up to 3 years.for a period of one year. Sony would be required to perform under these guarantees upon non-performance of the primary borrowers. The contingent liability related to these guarantees was 19,90311,100 million yen and was not recorded on the consolidated balance sheet as of March 31, 2004.

     As discussed in Note 21, a subsidiary in2007.

In the Pictures business entered into a joint venture agreement with a VIE. Atsecond quarter of the fiscal year ended March 31, 2004,2007, Sony recorded a provision for 51,200 million yen that relates to charges incurred as a result of the maximum amountrecalls by Dell Inc., Apple Inc. and Lenovo, Inc. of potential futurenotebook computer battery packs that use lithium-ion battery cells manufactured by Sony and the subsequent global replacement program initiated by Sony for certain notebook computer battery packs used by Sony and several other notebook computer manufacturers that use lithium-ion battery cells manufactured by Sony. Sony expects that payments or product replacements related to the recalls and global replacement program will be substantially made or provided by March 31, 2008.
(* FIFA World Cuptm is a registered trademark of FIFA.


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The European Commission (“EC”) issued the Waste Electrical and Electronic Equipment (“WEEE”) directive in February 2003. The WEEE directive requires electronics producers after August 2005 to finance the cost for collection, treatment, recovery and safe disposal of waste products. In most member states of the European Union (“EU”), the directive has been transposed into national legislation subject to which Sony recognizes the liability for obligations associated with this agreement was 38,153 million yen. Of this amount, 20,198WEEE. As of the fiscal year ended March 31, 2007, the accrued amounts in respect to the above mentioned WEEE responsibilities total 946 million yen was recorded on the consolidated balance sheet and the contingent liability was 17,955cost incurred amount to 1,855 million yen asfor all European countries. However, since the regulation has not been finally adopted and put into practice in all individual member states, Sony will continue to evaluate the impact of March 31, 2004.

this regulation.

Sony has agreed to indemnify certain third parties against tax losses resulting from transactions entered into in the normal course of business. The maximum amount of potential future payments under these guarantees cannot be estimated at this time. These guarantees were not recorded on the consolidated balance sheet as of March 31, 2004.

2007.

Sony Corporation and certain of its subsidiaries are defendants in several pending lawsuits.lawsuits and are subject to inquiries by various government authorities. However, based upon the information currently available to both Sony and its legal counsel, management of Sony

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

believes that damages from such lawsuits or inquiries, if any, wouldare not likely to have a material effect on Sony’s consolidated financial statements.

The changes in product warranty liability for the fiscal years ended March 31, 20032006 and 20042007 are as follows:
         
Year Ended March 31,
20032004
(Yen in millions)
Balance at beginning of the fiscal year  53,671   51,892 
Provision for warranty reserve  47,260   51,569 
Settlements (in cash or in kind)  (46,628)  (46,971)
Changes in estimate for pre-existing warranty reserve  (2,032)  (2,970)
Translation adjustment  (379)  (2,850)
   
   
 
Balance at end of the fiscal year  51,892   50,670 
   
   
 
 
23.
         
  Yen in millions 
  Fiscal Year Ended March 31, 
  2006  2007 
 
Balance at beginning of the fiscal year  44,919   49,470 
Additional liabilities for warranties  48,471   77,418 
Settlements (in cash or in kind)  (45,162)  (72,368)
Changes in estimate for pre-existing warranty reserve  70   (2,954)
Translation adjustment  1,172   3,738 
         
Balance at end of the fiscal year  49,470   55,304 
         
24.  Business Segment Information

     Effective for the year ended March 31, 2004, Sony has partly changed its business segment configuration as described below.

     Expenses incurred in connection with the creation of a network platform business have been transferred out of the Other segment and reclassified as unallocated corporate expenses, because the expected future benefits of this business will be spread across the Sony Group. Sony Music Entertainment, (Japan), Inc. (“SMEJ”), which is a subsidiary focused on Music business in Japan, has transferred those business operations not part of its core Music business to Sony Culture Entertainment, Inc. (“SCU”) The separation of these business operation which include such businesses as media, animation, character, cosmetics etc., will allow the management of SMEJ to focus on its core Music business and more quickly react to the changes in the Music industry on a worldwide level. The businesses now integrated under SCU have been moved from the Music segment to the Other segment.

     In accordance with these realignments, business segment information for the years ended March 31, 2002 and 2003 have been restated to conform to the presentation for the year ended March 31, 2004.

The Electronics segment designs, develops, manufactures and distributes audio-visual, informational and communicative equipment, instruments and devices throughout the world. The Game segment designs, develops and sells PlayStation 2, PlayStation 3 and PlayStation 2Portable game consoles and related software mainly in Japan, the United States of America and Europe, manufactures semiconductors used in the game consoles in Japan, and licenses to third party software developers. The Music segment is mainly engaged worldwide in the development, production, manufacture, and distribution of recorded music, in all commercial formats and musical genres. The Pictures segment develops, produces and manufactures image-based software, including film, video, and television mainly in the United States of America, and markets, distributes and broadcasts in the worldwide market. The Financial Services segment represents primarily individual life insurance and non-life insurance businesses in the Japanese market, leasing and credit financing businesses and a bank business in Japan. TheAll Other segment consists of various operating activities, primarily including a music business, focused ona network service business, including Internet-related services, an in-house oriented information system service businessanimation production and an IC cardmarketing business, and an advertising agency business in Japan. Sony’s products and services are generally unique to a single operating segment.
In July 2004, in order to establish a more efficient and coordinated semiconductor supply structure, the Sony group has integrated its semiconductor manufacturing business by transferring Sony Computer Entertainment’s semiconductor manufacturing operation from the Game segment to the Electronics segment. As a result of this transfer, sales revenue and expenditures associated with this operation are now recorded within the “Semiconductor” category in the Electronics segment. The results for the three months ended June 30, 2004 have not been restated as such comparable figures cannot be practically obtained given that it was not operated as a separate line business within the Game segment. This integration of the semiconductor manufacturing businesses is a part of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Sony’s semiconductor strategy of utilizing semiconductor technologies and manufacturing equipment originally developed or designed for the Game business within the Sony group as a whole.
The operating segments reported below are the segments of Sony for which separate financial information is available and for which operating profit or loss amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.
 
Business segments -
Business segments -
 
Sales and operating revenue:
                
Year Ended March 31
200220032004
(Yen in millions)
Sales and operating revenue:            
 Electronics —            
  Customers  4,772,550   4,543,313   4,758,400 
  Intersegment  513,631   397,137   138,995 
   
   
   
 
   Total  5,286,181   4,940,450   4,897,395 
 Game —            
  Customers  986,529   936,274   753,732 
  Intersegment  17,185   18,757   26,488 
   
   
   
 
   Total  1,003,714   955,031   780,220 
 Music —            
  Customers  541,418   512,908   487,457 
  Intersegment  58,633   84,598   72,431 
   
   
   
 
   Total  600,051   597,506   559,888 
 Pictures —            
  Customers  635,841   802,770   756,370 
  Intersegment  0   0   0 
   
   
   
 
   Total  635,841   802,770   756,370 
 Financial Services —            
  Customers  480,190   509,398   565,752 
  Intersegment  28,932   27,878   27,792 
   
   
   
 
   Total  509,122   537,276   593,544 
 Other —            
  Customers  161,730   168,970   174,680 
  Intersegment  99,733   137,323   155,712 
   
   
   
 
   Total  261,463   306,293   330,392 
 Elimination  (718,114)  (665,693)  (421,418)
   
   
   
 
Consolidated total  7,578,258   7,473,633   7,496,391 
   
   
   
 

Sales and operating revenue:
             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Sales and operating revenue:            
Electronics —            
Customers  4,827,663   4,782,173   5,421,384 
Intersegment  266,874   394,206   629,087 
             
Total  5,094,537   5,176,379   6,050,471 
Game —            
Customers  702,524   918,252   974,218 
Intersegment  27,230   40,368   42,571 
             
Total  729,754   958,620   1,016,789 
Pictures —            
Customers  733,677   745,859   966,260 
Intersegment  —   —   — 
             
Total  733,677   745,859   966,260 
Financial Services —            
Customers  537,715   720,566   624,282 
Intersegment  22,842   22,649   25,059 
             
Total  560,557   743,215   649,341 
All Other —            
Customers  389,746   343,747   309,551 
Intersegment  81,201   82,297   68,087 
             
Total  470,947   426,044   377,638 
Elimination  (398,147)  (539,520)  (764,804)
             
Consolidated total  7,191,325   7,510,597   8,295,695 
             
Electronics intersegment amounts primarily consist of transactions with the Game business.

     Music intersegment amounts primarily consist of transactions with the Gamesegment, Pictures segment and Pictures businesses.

All Other.

All Other intersegment amounts primarily consist of transactions with the Electronics business.and Game segments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Segment profit or loss:
                
Year Ended March 31
200220032004
(Yen in millions)
Operating income (loss):            
 Electronics  (1,158)  41,380   (35,298)
 Game  82,915   112,653   67,578 
 Music  22,132   (7,867)  18,995 
 Pictures  31,266   58,971   35,230 
 Financial Services  21,822   22,758   55,161 
 Other  (18,249)  (24,983)  (10,030)
   
   
   
 
   Total  138,728   202,912   131,636 
 Elimination  17,148   15,897   14,530 
 Unallocated amounts:            
  Corporate expenses  (21,245)  (33,369)  (47,264)
   
   
   
 
Consolidated operating income  134,631   185,440   98,902 
Other income  96,328   157,528   122,290 
Other expenses  (138,184)  (95,347)  (77,125)
   
   
   
 
Consolidated income before income taxes  92,775   247,621   144,067 
   
   
   
 

Segment profit or loss:
             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Operating income (loss):            
Electronics  2,881   6,913   156,745 
Game  43,170   8,748   (232,325)
Pictures  63,899   27,436   42,708 
Financial Services  55,490   188,323   84,142 
All Other  5,063   20,525   32,417 
             
Total  170,503   251,945   83,687 
Elimination  3,782   1,187   4,802 
Unallocated amounts:            
Corporate expenses  (28,657)  (26,716)  (16,739)
             
Consolidated operating income  145,628   226,416   71,750 
Other income  65,914   118,455   95,182 
Other expenses  (54,335)  (58,542)  (64,895)
             
Consolidated income before income taxes  157,207   286,329   102,037 
             
Operating income is sales and operating revenue less costs and operating expenses. Unallocated corporate expenses include stock-based compensation expenses (Note 15).

In the quarter beginning October 1, 2003, the recognition method for insurance premiums received on certain products by Sony Life was changed from being recorded as revenues to being offset against the related provision for future insurance policy benefits, reducing revenue in the Financial Services segment in the year ended March 31, 2004, by approximately 30.8 billion yen. This change did not have a material effect on operating income.

 
Assets:
               
March 31
200220032004
(Yen in millions)
Total assets:            
 Electronics  3,089,791   2,848,492   2,876,490 
 Game  722,021   673,208   684,226 
 Music  675,186   604,311   575,276 
 Pictures  960,266   868,395   856,517 
 Financial Services  2,482,536   2,897,119   3,475,039 
 Other  315,984   350,521   393,291 
   
   
   
 
  Total  8,245,784   8,242,046   8,860,839 
 Elimination  (268,416)  (261,407)  (313,245)
 Corporate assets  208,427   389,906   543,068 
   
   
   
 
Consolidated total  8,185,795   8,370,545   9,090,662 
   
   
   
 

F-69

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIESAssets:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

         
  Yen in millions 
  March 31 
  2006  2007 
 
Total assets:        
Electronics  3,529,363   4,049,712 
Game  520,394   832,791 
Pictures  1,029,907   1,024,591 
Financial Services  4,568,128   4,977,642 
All Other  630,232   599,517 
         
Total assets  10,278,024   11,484,253 
Elimination  (361,841)  (435,432)
Corporate assets  691,570   667,541 
         
Consolidated total  10,607,753   11,716,362 
         
Unallocated corporate assets consist primarily of cash and cash equivalents, marketable securities investments and property, plant and equipment maintained for general corporate purposes.
 
Other significant items:
               
Year Ended March 31
200220032004
(Yen in millions)
Depreciation and amortization:            
 Electronics  211,910   190,836   196,185 
 Game  49,655   53,496   57,256 
 Music  33,388   32,605   30,826 
 Pictures  10,619   8,552   7,844 
 Financial Services, including deferred insurance acquisition costs  37,227   52,041   56,586 
 Other  8,015   10,157   13,455 
   
   
   
 
  Total  350,814   347,687   362,152 
 Corporate  3,321   4,238   4,117 
   
   
   
 
Consolidated total  354,135   351,925   366,269 
   
   
   
 
Capital expenditures for segment assets:            
 Electronics  220,032   170,323   242,696 
 Game  47,822   40,986   100,360 
 Music  20,882   20,284   12,935 
 Pictures  11,501   7,138   6,013 
 Financial Services  16,023   3,655   4,618 
 Other  5,861   16,993   10,124 
   
   
   
 
  Total  322,121   259,379   376,746 
 Corporate  4,613   1,862   1,518 
   
   
   
 
Consolidated total  326,734   261,241   378,264 
   
   
   
 
Total assets are net of an allowance of approximately 25 billion yen and 100 billion yen at March 31, 2006 and 2007, respectively, to reduce the cost of inventory for PlayStation 3 hardware to its net realizable value.


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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Other significant items:
             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Depreciation and amortization:            
Electronics  276,704   304,561   310,575 
Game  16,504   5,087   7,947 
Pictures  5,598   7,401   8,464 
Financial Services, including deferred insurance acquisition costs  52,788   47,736   56,068 
All Other  17,012   12,755   11,406 
             
Total  368,606   377,540   394,460 
Corporate  4,259   4,303   5,549 
             
Consolidated total  372,865   381,843   400,009 
             
Capital expenditures for segment assets:            
Electronics  312,216   328,625   351,482 
Game  18,824   8,405   16,770 
Pictures  5,808   10,097   10,970 
Financial Services  3,845   4,456   6,836 
All Other  7,928   4,186   5,617 
             
Total  348,621   355,769   391,675 
Corporate  8,197   28,578   22,463 
             
Consolidated total  356,818   384,347   414,138 
             
The capital expenditures in the above table represent the additions to fixed assets of each segment.

The following table is a breakdown of Electronics sales and operating revenue to external customers by product category. The Electronics businesssegment is managed as a single operating segment by Sony’s management. Effective for the fiscal year ended March 31, 2004,2007, Sony has partly changed its product category configuration. The main changes arechange is that the computer displaylow-temperature polysilicon thin film transistor LCD product group which includes LCD television and computer display, has been moved from “Information and Communications”“Semiconductors” to “Televisions”, and the set-top box product group which includes digital set-top boxes has been moved from

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

“Televisions” to “Video”“Components”. Accordingly, sales and operating revenue for the fiscal years ended March 31, 20022005 and 20032006 have been restated to conform to the presentation for the fiscal year ended March 31, 2004.

              
Year Ended March 31
200220032004
(Yen in millions)
Audio  747,469   682,517   623,582 
Video  847,311   851,064   948,111 
Televisions  984,290   950,166   917,207 
Information and Communications  998,773   836,724   834,757 
Semiconductors  182,276   204,710   253,237 
Components  511,579   527,782   623,799 
Other  500,852   490,350   557,707 
   
   
   
 
 Total  4,772,550   4,543,313   4,758,400 
   
   
   
 
2007.
 
Geographic information -
             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Audio  571,864   536,187   522,879 
Video  1,036,328   1,021,325   1,143,120 
Televisions  921,195   927,769   1,226,971 
Information and Communications  816,150   842,537   950,461 
Semiconductors  184,235   172,249   205,757 
Components  751,097   800,716   852,981 
Other  546,794   481,390   519,215 
             
Total  4,827,663   4,782,173   5,421,384 
             


F-68

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Geographic information -
Sales and operating revenue which are attributed to countries based on location of customers for the fiscal years ended March 31, 2002, 20032005, 2006 and 20042007 and long-lived assets as of March 31, 2002, 20032006 and 20042007 are as follows:
               
Year Ended March 31
200220032004
(Yen in millions)
Sales and operating revenue:            
 Japan  2,248,115   2,093,880   2,220,747 
 U.S.A.   2,461,523   2,403,946   2,121,110 
 Europe  1,609,111   1,665,976   1,765,053 
 Other  1,259,509   1,309,831   1,389,481 
   
   
   
 
  Total  7,578,258   7,473,633   7,496,391 
   
   
   
 
               
March 31
200220032004
(Yen in millions)
Long-lived assets:            
 Japan  1,462,709   1,365,160   1,430,443 
 U.S.A.   812,309   713,524   671,534 
 Europe  156,560   164,459   211,147 
 Other  174,070   148,616   133,640 
   
   
   
 
  Total  2,605,648   2,391,759   2,446,764 
   
   
   
 

             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Sales and operating revenue:            
Japan  2,132,462   2,203,812   2,127,841 
U.S.A.   1,977,310   1,957,644   2,232,453 
Europe  1,612,576   1,715,775   2,037,658 
Other  1,468,977   1,633,366   1,897,743 
             
Total  7,191,325   7,510,597   8,295,695 
             
         
  Yen in millions 
  March 31 
  2006  2007 
 
Long-lived assets:        
Japan  1,449,997   1,469,652 
U.S.A.   757,055   685,255 
Europe  165,352   187,768 
Other  159,647   171,639 
         
Total  2,532,051   2,514,314 
         
There are not any individually material countries with respect to the sales and operating revenue and long-lived assets included in Europe and Other areas.

Transfers between reportable business or geographic segments are made at arms-length prices.

There arewere no sales and operating revenue with aany single major external customer for the fiscal years ended March 31, 2002, 20032005, 2006 and 2004.

F-71

2007.

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following information shows sales and operating revenue and operating income by geographic origin for the fiscal years ended March 31, 2002, 20032005, 2006 and 2004.2007. In addition to the disclosure requirements under FAS No. 131, Sony discloses this supplemental information in accordance with disclosure requirements of the Japanese Securities and Exchange Law, to which Sony, as a Japanese public company, is subject.
                
Year Ended March 31
200220032004
(Yen in millions)
Sales and operating revenue:            
 Japan —            
  Customers  2,498,641   2,247,030   2,352,923 
  Intersegment  2,312,718   2,433,998   2,514,698 
   
   
   
 
   Total  4,811,359   4,681,028   4,867,621 
 U.S.A. —            
  Customers  2,637,861   2,632,176   2,341,304 
  Intersegment  184,966   189,502   198,450 
   
   
   
 
   Total  2,822,827   2,821,678   2,539,754 
 Europe —            
  Customers  1,440,281   1,520,930   1,647,694 
  Intersegment  91,329   121,598   66,950 
   
   
   
 
   Total  1,531,610   1,642,528   1,714,644 
 Other —            
  Customers  1,001,475   1,073,497   1,154,470 
  Intersegment  853,324   789,444   813,798 
   
   
   
 
   Total  1,854,799   1,862,941   1,968,268 
 Elimination  (3,442,337)  (3,534,542)  (3,593,896)
   
   
   
 
Consolidated total  7,578,258   7,473,633   7,496,391 
   
   
   
 
Operating income:            
 Japan  36,188   11,444   (70,029)
 U.S.A.   30,704   98,762   85,290 
 Europe  24,460   62,206   78,822 
 Other  76,061   63,773   70,543 
 Corporate and elimination  (32,782)  (50,745)  (65,724)
   
   
   
 
Consolidated total  134,631   185,440   98,902 
   
   
   
 
             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Sales and operating revenue:            
Japan —            
Customers  2,281,217   2,288,365   2,242,861 
Intersegment  2,576,629   3,265,747   4,349,915 
             
Total  4,857,846   5,554,112   6,592,776 
U.S.A. —            
Customers  2,166,323   2,197,304   2,553,834 
Intersegment  235,362   279,203   319,666 
             
Total  2,401,685   2,476,507   2,873,500 

F-72
F-69

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

             
  Yen in millions 
  Fiscal Year Ended March 31 
  2005  2006  2007 
 
Europe —            
Customers  1,524,222   1,575,849   1,843,559 
Intersegment  52,417   50,400   60,486 
             
Total  1,576,639   1,626,249   1,904,045 
Other —            
Customers  1,219,563   1,449,079   1,655,441 
Intersegment  804,721   1,038,827   1,738,602 
             
Total  2,024,284   2,487,906   3,394,043 
Elimination  (3,669,129)  (4,634,177)  (6,468,669)
             
Consolidated total  7,191,325   7,510,597   8,295,695 
             
Operating income:            
Japan  28,527   230,473   167,448 
U.S.A.   72,414   11,291   (94,005)
Europe  12,226   (25,101)  (62,425)
Other  58,554   41,953   76,282 
Corporate and elimination  (26,093)  (32,200)  (15,550)
             
Consolidated total  145,628   226,416   71,750 
             

25.  Subsequent event
On May 29, 2007, Sony’s U.S. based music publishing subsidiary entered into a contract for the acquisition of Famous Music Inc. from Viacom Inc. for a purchase price of 370 million U.S. dollars plus closing adjustments. The closing of this transaction is subject to the receipt of regulatory approvals.

F-70

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
                      
Additions
Charged
Balance atto CostsBalance
BeginningandDeductionsOtherat End
of PeriodExpenses(Note 1)(Note 2)of Period
(Yen in millions)
Year ended March 31, 2002:                    
 Allowance for doubtful accounts and sales returns  109,648   68,434   (64,657)  7,401   120,826 
   
   
   
   
   
 
Year ended March 31, 2003:                    
 Allowance for doubtful accounts and sales returns  120,826   87,330   (89,284)  (8,378)  110,494 
   
   
   
   
   
 
Year ended March 31, 2004:                    
 Allowance for doubtful accounts and sales returns  110,494   78,323   (65,281)  (10,862)  112,674 
   
   
   
   
   
 

                     
  Yen in millions 
     Additions
          
  Balance
  charged to
        Balance
 
  at beginning
  costs and
  Deductions
  Other
  at end
 
  of period  expenses  (Note 1)  (Note 2)  of period 
 
Fiscal Year Ended March 31, 2005:                    
Allowance for doubtful accounts and sales returns  112,674   56,863   (84,507)  2,679   87,709 
                     
Fiscal Year Ended March 31, 2006:                    
Allowance for doubtful accounts and sales returns  87,709   52,422   (56,772)  6,204   89,563 
                     
Fiscal Year Ended March 31, 2007:                    
Allowance for doubtful accounts and sales returns  89,563   83,440   (55,711)  3,383   120,675 
                     
Notes:

1. Amounts written off.
2. Translation adjustment.

                      
Balance atBalance
BeginningOtherat End
of PeriodAdditionsDeductions(Note 1)of Period
Year ended March 31, 2002:                    
 Valuation allowance — Deferred tax assets  198,613   77,519   (35,147)  11,223   252,208 
   
   
   
   
   
 
Year ended March 31, 2003:                    
 Valuation allowance — Deferred tax assets  252,208   72,303   (189,843)  (18,600)  116,068 
   
   
   
   
   
 
Year ended March 31, 2004:                    
 Valuation allowance — Deferred tax assets  116,068   63,936   (39,199)  (13,228)  127,577 
   
   
   
   
   
 

1. Amounts written off.
2. Translation adjustment.
                     
  Balance
           Balance
 
  at beginning
        Other
  at end
 
  of period  Additions  Deductions  (Note 1)  of period 
 
Fiscal Year Ended March 31, 2005:                    
Valuation allowance - Deferred tax assets  127,577   67,889   (104,670)  (1,686)  89,110 
                     
Fiscal Year Ended March 31, 2006:                    
Valuation allowance - Deferred tax assets  89,110   72,340   (11,234)  683   150,899 
                     
Fiscal Year Ended March 31, 2007:                    
Valuation allowance - Deferred tax assets  150,899   42,910   (20,002)  601   174,408 
                     
Note:

1. Translation adjustment.

F-73
F-71

SONY ERICSSON MOBILE COMMUNICATIONS
Consolidated Financial Statements of Sony Ericsson Mobile Communications AB


A-1

[THIS PAGE INTENTIONALLY LEFT BLANK]


A-2

SONY ERICSSON MOBILE COMMUNICATIONS
Table of Contents
Consolidated Income Statement
A-4
Consolidated Balance Sheet
A-5
Consolidated Cash Flow
A-6
Notes to the Financial Statements
A-7


A-3

SONY ERICSSON MOBILE COMMUNICATIONS

Consolidated Income Statement
January 1 - December 31, TEUR
               
  Notes 2006 2005 2004
 
Net sales 2  10,959,233   7,268,149   6,524,498 
Cost of sales    (7,775,448)  (5,259,893)  (4,712,325)
               
GROSS PROFIT ��  3,183,785   2,008,256   1,812,173 
               
Selling expenses    (861,482)  (654,588)  (614,398)
General and Administration expenses 26  224,648   (147,049)  (142,851)
               
Research and Development expenses    (905,811)  (740,000)  (582,923)
Other operating revenues 3  72,126   39,759   18,656 
Other operating expenses 3  (7,436)  (5,463)  (4,587)
               
OPERATING INCOME 6, 7, 24, 25  1,256,534   500,915   486,070 
Result from securities and receivables accounted for as fixed assets 4  —   —   970 
Interest income and similiar profit items 4  42,288   17,964   13,290 
Interest expense and similiar loss items 4  (1,118)  (6,840)  (12,555)
               
NET INCOME BEFORE TAXES    1,297,704   512,039   487,775 
               
Income taxes for the year 5  (267,056)  (134,587)  (149,436)
               
Minority interest    (33,329)  (27,110)  (16,320)
               
               
NET INCOME    997,319   350,342   322,019 


A-4

SONY ERICSSON MOBILE COMMUNICATIONS

Consolidated Balance Sheet
December 31, TEUR
             
  Notes 2006 2005
 
ASSETS
            
Fixed assets:
            
Intangible assets  6   47,235   34,683 
Tangible assets  7   126,252   101,333 
Financial assets:
            
Securities held as fixed assets  8   91,942   81,683 
Other non current assets  9   203,248   56,050 
Total fixed and financial assets      468,677   273,749 
Current assets:
            
Inventories  11   437,462   306,105 
Accounts receivable  12   1,652,754   851,710 
Other assets  13   309,766   178,368 
Other short-term cash investments  14   1,580,077   900,272 
Cash and bank      692,622   637,004 
Total current assets      4,672,681   2,873,459 
Total assets
      5,141,358   3,147,208 
SHAREHOLDERS’ EQUITY AND LIABILITIES
            
Shareholders’ equity:
  15         
Share capital      100,000   100,000 
Restricted reserves      722,889   720,422 
Non-restricted reserves      (39,599)  (100,869)
Net income for the year      997,319   350,342 
Total equity      1,780,609   1,069,895 
Minority interest      45,148   46,488 
Provisions            
Pensions and other similar commitments  16   19,409   18,418 
Other provisions  17   421,226   295,312 
Total provisions      440,635   313,730 
LIABILITIES
            
Long-term liabilities            
Liabilities to financial institutions      —   576 
Other long-term liabilities      677   455 
Total long-term liabilities  18   677   1,031 
Current liabilities:
            
Liabilities to financial institutions      511   6,911 
Advances from customers      2,919   13,112 
Accounts payable      1,276,478   807,065 
Income tax liabilities      427,975   93,932 
Other current liabilities  19   1,166,406   795,044 
Total current liabilities      2,874,289   1,716,064 
Total shareholders’ equity and liabilities:
      5,141,358   3,147,208 
Assets pledged as collateral  20   3,973   158 
Contingent liabilities  21   12,428   12,383 


A-5

SONY ERICSSON MOBILE COMMUNICATIONS

Consolidated Cash Flow
January 1 - December 31, TEUR
                 
  Notes 2006 2005 2004
 
OPERATIONS                
Operating income      1,256,534   500,915   486,070 
Depreciation      85,029   70,884   65,822 
Other non cash items  22   112,688   34,186   85,749 
       1,454,251   605,985   637,641 
Interest, obtained      42,288   17,964   13,290 
Dividends received      —   —   970 
Interest paid      (38,386)  (6,840)  (12,555)
Income taxes, paid      (34,357)  (52,839)  (55,720)
       1,423,796   564,270   583,626 
Change in inventories      (117,207)  (122,435)  (68,659)
Change in accounts receivables      (764,993)  39,787   (191,969)
Change in other receivables      (180,662)  7,423   (6,966)
Change in accounts payable      463,955   109,753   113,452 
Change in other liabilities      352,115   131,655   7,131 
Cash flow from operating activities      1,182,004   730,453   436,615 
INVESTMENTS                
Investments in intangible assets      (29,311)  (25,792)  (18,545)
Sales of intangible assets      161   869   243 
Investments in tangible assets      (96,105)  (70,712)  (74,108)
Sales of tangible assets      19,198   6,281   4,912 
Investment in subsidiary  22   (15,501)  —   (12,752)
Investments / Sales of other financial assets      (12,462)  (5,715)  (67,113)
Sales/Amortization of other financial assets      177   —   — 
Cash flow from investing activities      (133,843)  (95,069)  (167,363)
FINANCING                
Borrowing      245   183   1,218 
Repayment of debt      (576)  (1,294)  (694)
Change in current financial liabilities      —   (19,096)  11,462 
Dividend to minority      (30,427)  (19,219)  — 
Dividend paid      (247,000)  —   — 
Cash flow from financing activities      (277,758)  (39,426)  11,986 
Net change in cash      770,403   595,958   281,238 
Cash, beginning of period      1,537,275   915,931   640,393 
Translation difference in Cash      (34,980)  25,386   (5,700)
Cash, end of period      2,272,698   1,537,275   915,931 


A-6

SONY ERICSSON MOBILE COMMUNICATIONS

Notes to the Financial Statements
Contents
1.
Accounting PrinciplesA-8
2.
Net sales by market areaA-12
3.
Other operating revenues and other operating expensesA-12
4.
Interest income and similar profit items and interest expense and similar loss itemsA-13
5.
Income taxes for the yearA-13
6.
Intangible assetsA-14
7.
Tangible assetsA-15
8.
Other securities held as fixed assetsA-16
9.
Other non current assetsA-17
10.
Group companiesA-17
11.
InventoryA-17
12.
Accounts Receivables — TradeA-17
13.
Other current assetsA-18
14.
Short term cash investmentsA-18
15.
Shareholders’ equityA-18
16.
PensionsA-19
17.
ProvisionsA-19
18.
Long-term liabilitiesA-20
19.
Other liabilitiesA-20
20.
Assets pledged as collateralA-20
21.
Contingent liabilitiesA-20
22.
Cash flow analysisA-20
23.
Translation to SEKA-21
24.
LeasingA-21
25.
Wages, salaries and social security expensesA-21
26.
Fees to auditorsA-23
27.
Financial risksA-24
28.
Reconciliation to accounting principles generally accepted in the United StatesA-24


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SONY ERICSSON MOBILE COMMUNICATIONS

1.  Accounting Principles
The consolidated financial statements of Sony Ericsson Mobile Communications AB and its subsidiaries are prepared in accordance with accounting principles generally accepted in Sweden, applying the Swedish Accounting Standards Board’s (Bokföringsnämnden, BFN) recommendations and the Swedish Annual Accounts Act (ÅRL).
Principle of Consolidation
The consolidated financial statements include the accounts of the Parent Company and all subsidiaries in which the company has a voting majority. The inter company transactions and internal profit have been eliminated. The consolidated financial statements have been prepared in accordance with the purchase method, whereby consolidated stockholders’ equity includes equity earned only after acquisition. Minority interest in net earnings is reported in the consolidated income statement. Minority interest in the equity of subsidiaries is reported as a separate item in the consolidated balance sheet.
Translation of financial statements in foreign currency
Sony Ericsson’s results are presented in EUR which is the reporting currency and the functional currency of the parent company. The group has sales and cost of sales in a large number of currencies. For all companies, including subsidiary companies, the functional (business) currency is the currency in which the companies primarily generate and expend cash. Their financial statements plus goodwill related to such companies are translated to EUR by translating assets and liabilities at the closing rate on the balance sheet day and income statement items at average exchange rates, with translation adjustments reported directly in consolidated equity.
Revenue recognition
Sales revenue is recorded upon the delivery of products according to contractual terms and represents amounts realized, excluding value-added tax, and is net of goods returned, trade discounts and allowances. Sales revenue is recognized with reference to all significant contractual terms when the product has been delivered, when the revenue amount is fixed or determinable and when collection is reasonably assured.
Accruals for sales bonuses such as cash discounts, quarterly and yearly bonuses, quality bonus, co-op and stock protection are shown as deductions from gross sales to arrive at net sales.
For product and equipment sales, delivery generally does not occur until the products or equipment have been shipped, risk of loss has transferred to the customer, and objective evidence exists that customer acceptance provisions, if any, have been met. The Company records revenue when allowances for discounts, price protection, returns and customer incentives can be reliably estimated. Recorded revenues are reduced by these allowances. The Company bases its estimates on historical experience taking into consideration the type of products sold, the type of customer, and the type of transaction specific in each arrangement.
Costs related to shipping and handling are included in cost of sales in the Consolidated Income Statement.
Research and development costs
Research and development costs are charged to expenses as incurred. Expenses related to the third party development of new platforms for mobile phones are capitalized as other non-current asset and are amortized when the platforms are put into commercial use. Such costs are capitalized as intangible assets when technological feasibility has been established and when future economic benefits can be demonstrated.
Hedge accounting
The Group applies hedge accounting for financial instruments intended to hedge foreign currency exposures having a future impact on results.


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SONY ERICSSON MOBILE COMMUNICATIONS

At the point in time at which the contract is established, the relationship between the hedging instrument and the hedged item is documented, as well as the purpose of this risk management and the strategy for taking various hedging measures. The company also documents its assessment, both when the contract is entered into and on an ongoing basis, as to whether the derivative used in the hedging transaction is effective in counteracting changes in fair value or income statement effects, in terms of the hedged items in question.
The hedging is designed in such a manner as to ensure, to the greatest degree possible, its effectiveness. The changes in fair value for those derivative instruments which do not meet the conditions for hedge accounting are reported directly in the income statement.
Future foreign currency exposures are hedged primarily by forward cover agreements but also via currency options. The effective portion of changes in the fair value of hedging instruments is recognized in equity. Any gain or loss relating to the ineffective portion is recognized in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods in which the hedged item affects profit or loss, for example, when the forecasted sale which is hedged takes place.
Intangible and tangible fixed assets
Intangible and tangible fixed assets are stated at cost less accumulated depreciation and impairment losses. Annual depreciation is reported as plan depreciation, generally using the straight line method with estimated useful lives ranging from 3 years up to 10 years for machineries and equipments. Intangible assets are amortized over a period ranging from 3 years up to 5 years or based on the contract’s economic reality. Land improvements are amortized in 20 years. The costs of computer software developed or obtained for internal use are capitalized as intangible assets when technological feasibility has been established and when future economic benefits can be demonstrated.
Tooling
Tooling owned by Sony Ericsson but used in its manufacturing partners operations is capitalized and amortized over useful life.
Financial assets
Financial assets that are intended for long-term holding are accounted at acquisition value and depreciations are made if a permanent decrease in the value can be stated. These assets include strategic long-term investments in private companies over which Sony Ericsson does not have the ability to exercise significant influence.
Impairment test of assets
Impairment tests are performed on a regular basis whenever there is an indication of possible impairment. An impairment loss is determined based on the amount by which the carrying value exceeds the fair value of those assets.
Leases
Leases on terms in which Sony Ericsson assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset, although the depreciation period would not exceed the lease term. Other leases are operating leases, and the leased assets under such contracts are not recognized on the balance sheet. Costs under operating leases are recognized in the income statement on a straight-line bases over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. Sony Ericsson has not identified any financial leases for the reported periods.


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SONY ERICSSON MOBILE COMMUNICATIONS

Income tax
Reported income tax includes tax, which is to be paid or received, regarding the current year, adjustments concerning the previous years’ current taxes and changes in deferred taxes.
All income tax liabilities and receivables are valued at their nominal amount according to the tax regulations and are measured at the tax rate that is expected to be applied to the temporary differences when they reverse, based on the tax laws that have been enacted or substantively enacted by the reporting date. An adjustment of deferred tax asset/liability balances due to a change in the tax rate is recognized in the income statement unless it relates to a temporary difference earlier recognized directly in equity, in which case the adjustment is also recognized in equity.
In the case of items reported in the income statement, the related tax effects are also reported in the income statement. The tax effects of items that are accounted for directly against equity are also reported directly against equity.
Deferred tax is calculated according to the balance sheet method on all temporary differences arising between the reported value and the tax value of the assets and liabilities.
Receivables
Receivables with maturities greater than 12 months after balance sheet date are reported as fixed assets, and other receivables as current assets. Receivables are reported in the amounts at which they are expected to be received, on the basis of individual assessment.
Accounts Receivables
Accounts receivables are reported as current assets in the amounts at which they are expected to be received net of individual bad debt assessment.
Inventories
Inventories, which include the cost of materials, labor and overhead, are measured at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis. Risk of obsolescence have been measured by estimating market value based on future customer demand and customer acceptance of new products.
Borrowings
Borrowings are reported initially at fair value, net of transaction costs incurred. If the reported amount differs from the amount to be repaid at maturity date, then the difference is allocated as interest expense or interest income over the tenure of the loan. In this manner, the initial amount reported agrees, at maturity date, with the amount to be repaid.
Financial liabilities first cease to be reported when they have been settled on the basis of repayment or when repayment has been waived.
All transactions are reported on settlement date.
Provisions
Provisions are made when there are legal or constructive obligations as a result of past events and when it is probable that an outflow of resources will be required to settle the obligations and the amounts can be reliably estimated. However, the actual outflow as a result of the obligation may differ from such estimate.
Warranty provisions include provisions for faulty products based on estimated return rates and costs. The best estimate is based on sales, contractual warranty periods and historical failure data of products sold.


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Post-employment benefits
The Group has both defined benefit and defined contribution plans.
A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions. The contributions are recognized as employee benefit expenses when they are due.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee or former employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The Group is responsible for the fulfillment of the pension obligation. Part of the pension plans in Sweden is secured through an insurance solution with the insurance company Alecta. This part is classified as a multi-employer defined benefit plan. It has not been possible, however, for Sony Ericsson to get sufficient information to account for the plan as a defined benefit plan. The plan has therefore been accounted for as a defined contribution plan.
The schemes are both funded and unfunded.
The liability or receivable recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, unrecognized actuarial gains and losses and unrecognized past service cost.
Independent actuaries using the Projected Unit Credit Method calculate the defined benefit obligations and expenses annually. This method indicates that past-service costs are amortized on a straight-line basis over the vesting period. The present value of the defined benefit obligation is determined by discontinuing the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.
Actuarial gains and losses, arising from experience adjustments and changes in actuarial assumptions, to the extent theses exceed 10% of the pension obligations’ present value or the fair value of plan assets are charged or credited to income over the employees’ expected average remaining working lives The used principle for defined benefit plans is only effective in the consolidated financial statements.
Contingent liabilities
The Business records a liability when a loss is known or considered probable and the amount can be reasonably estimated. If a loss is not probable or a probable loss cannot be reasonably estimated, a liability is not recorded. If a reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate, the minimum amount of the range is accrued. Legal costs expected to be incurred in connection with loss contingencies are expensed as incurred.
Statement of Cash Flow
Foreign subsidiaries’ transactions are translated at the average exchange rate during the period. Subsidiaries purchased and/or sold, net of cash acquired/sold, are reported as cash flow from investment activities and do not affect reported cash flow from operations. Cash and cash equivalents consist of cash and bank and short term cash investments. The statement of Cash Flow for 2004, 2005 and 2006 complies with International Accounting Standards (IAS) No. 7.
Related party transactions
Transactions and balances related to Sony and Ericsson are classified as external items.


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SONY ERICSSON MOBILE COMMUNICATIONS

Changed accounting principles 2005
As per 1 January 2005, the Group and parent company changed the principles for hedge accounting, which implies that the effective portion of the change in fair value of unrealized currency hedging effects is reported in equity. The effects of this principle are disclosed in Note 15 in the item “Fair value reserve” (TEUR 1 624).
Dividend
Each year the Board of Directors assesses the company’s and the group’s results and financial position in order to determine the appropriate disposition of earnings. This disposition, including any payment of dividends, is based on a number of factors including: the latest profit and loss account, the company’s equity, the company’s and the group’s cash flows, the equity ratio and liquidity of the company and the group after the proposed dividend in relation to the industry standards in which the company and the group conducts its business, and both the company’s and the group’s ability to fulfill both their short and long-term obligations.
As a result of this assessment, dividends of TEUR 247,000 were paid in 2006. No dividends were paid in either 2005 or 2004. In April, 2007, the Board of Directors proposed the payment of dividends totaling TEUR 548,000.
2.  Net sales by market area
             
  2006 2005 2004
 
Europe, Middle East & Africa  5,865,030   3,957,567   3,397,384 
America  1,550,179   923,647   873,375 
Asia  3,544,024   2,386,935   2,253,739 
             
Total
  10,959,233   7,268,149   6,524,498 
3.  Other operating revenues and other operating expenses
             
  2006 2005 2004
 
Other operating revenues
            
Gains on sales of intangible and tangible assets  16,409   151   854 
Commissions, license fees and other operating revenues  53,227   30,945   9,919 
Other income  2,490   7,714   7,098 
Gains on foreign exchange  —   949   785 
             
Total other operating revenues
  72,126   39,759   18,656 
Other operating expenses
            
Losses on sales of intangible and tangible assets  (341)  (144)  (177)
Other expenses  (3,312)  (2,255)  (3,978)
Losses on foreign exchange  (3,783)  (3,064)  (432)
             
Total other operating expenses
  (7,436)  (5,463)  (4,587)


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SONY ERICSSON MOBILE COMMUNICATIONS

4.  Interest income and similar profit items and interest expense and similar loss items
             
  2006 2005 2004
 
Interest income and similar profit items
            
Interest income external and similar items  42,288   17,964   13,290 
             
Total
  42,288   17,964   13,290 
Interest expense and similar loss items
            
Interest expenses external and similar items  (1,118)  (6,840)  (12,555)
             
Total
  (1,118)  (6,840)  (12,555)
Result from securities and receivables accounted for as a fixed assets
            
Group dividends  —��  —   970 
             
   —   —   970 
Financial Net
  41,170   11,124   1,705 
5.  Income taxes for the year
Income statement
The following items are included in income taxes for the year:
             
  2006 2005 2004
 
Current income taxes for the period  (368,308)  (114,810)  (63,108)
Deferred income/expense (-) taxes related to temporary differences  101,252   (15,134)  39,832 
Deferred income/expense (-) taxes related to tax loss carryforwards  —   (4,643)  (126,160)
             
Income taxes for the period  (267,056)  (134,587)  (149,436)
A reconciliation between actual tax income (-expense) for the year and the theoretical tax income (expense) that would arise when applying statutory tax rate in Sweden, 28 percent on income before taxes, is shown in the table:
             
  2006 2005 2004
 
Income before taxes  1,297,704   512,039   487,775 
Tax rate in Sweden (28%)  (363,357)  (143,371)  (136,577)
Effect of foreign tax rates  29,020   21,687   (2,094)
Current income taxes related to prior years  (876)  745   1,435 
Tax effect of expenses that are non deductible for tax purpose  (4,858)  (1,839)  (3,210)
Tax effect of income that are non-taxable for tax purpose  10,014   4,775   646 
Tax effect of changes in tax rates  19   (16,584)  5,500 
Release of valuation allowance*  62,982   —   — 
Tax effect of tax losses carryforwards, net  —   —   (15,136)
             
Income taxes for the year
  (267,056)  (134,587)  (149,436)
* The release of valuation allowance mainly refers to temporary differences in Japan and US.


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SONY ERICSSON MOBILE COMMUNICATIONS

Balance sheet
Deferred tax assets and liabilities
Tax effects of temporary differences have resulted in deferred tax assets and liabilities as follows:
         
  2006 2005
 
Deferred tax assets  139,621   41,455 
Deferred tax liabilities  (13)  643 
Deferred tax assets relate to temporary differences due to certain provisions such as warranty and scrap liabilities. Deferred tax assets are amounts recognized in countries where we expect to be able to generate corresponding taxable income in the future to benefit from tax reductions.
6.  Intangible assets
             
  Licenses, software
    
  trademarks and
    
2006
 similar rights Patents Total
 
Accumulated acquisition costs
            
Opening balance January 1, 2006
  81,504   —   81,504 
Acquisitions  25,333   3,978   29,311 
Balances regarding acquired and sold companies  1,316   —   1,316 
Sales/disposals  (714)  —   (714)
Translation difference for the year  (4,019)  —   (4,019)
             
Closing balance December 31, 2006
  103,420   3,978   107,398 
Accumulated depreciation
            
Opening balance January 1, 2006
  (46,821)  —   (46,821)
Depreciation  (15,381)  (341)  (15,722)
Balances regarding acquired and sold companies  (593)  —   (593)
Sales/disposals  553   —   553 
Translation difference for the year  2,420   —   2,420 
             
Closing balance December 31, 2006
  (59,822)  (341)  (60,163)
Net carrying value
  43,598   3,637   47,235 


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SONY ERICSSON MOBILE COMMUNICATIONS

             
  Licenses, software
    
  trademarks and
    
2005
 similar rights Patents Total
 
Accumulated acquisition costs
            
Opening balance January 1, 2005
  56,516   —   56,516 
Acquisitions  25,792   —   25,792 
Sales/disposals  (1,994)  —   (1,994)
Translation difference for the year  1,190   —   1,190 
             
Closing balance December 31, 2005
  81,504   —   81,504 
Accumulated depreciation
            
Opening balance January 1, 2005
  (34,799)  —   (34,799)
Depreciation  (12,571)  —   (12,571)
Sales/disposals  1,125   —   1,125 
Translation difference for the year  (576)  —   (576)
             
Closing balance December 31, 2005
  (46,821)  —   (46,821)
Net carrying value
  34,683   —   34,683 

7.  Tangible assets
                 
  Land and
   Other
  
2006
 buildings Machinery equipment Total
 
Accumulated acquisition costs
                
Opening balance January 1, 2006
  9,283   52,120   171,568   232,971 
Acquisitions  3,646   19,103   68,147   90,896 
Balances regarding acquired and sold companies  5,363   17,796   764   23,923 
Sales/disposals  (8)  (8,647)  (7,601)  (16,256)
Translation difference for the year  (597)  (6,045)  (12,257)  (18,899)
                 
Closing balance December 31, 2006
  17,687   74,327   220,621   312,635 
Accumulated depreciation
                
Opening balance January 1, 2006
  (2,685)  (25,731)  (102,967)  (131,383)
Depreciation  (939)  (12,824)  (55,544)  (69,307)
Balances regarding acquired and sold companies  (1,639)  (8,116)  (621)  (10,376)
Sales/disposals  2   6,268   6,856   13,126 
Translation difference for the year  125   3,167   8,371   11,663 
                 
Closing balance December 31, 2006
  (5,136)  (37,236)  (143,905)  (186,277)
Accumulated writedowns
                
Opening balance January 1, 2006
  —   (245)  (10)  (255)
Write down  —   (61)  (311)  (372)
Sales/disposal  —   194   312   506 
Translation difference for the year  —   14   1   15 
                 
Closing balance December 31, 2006
  —   (98)  (8)  (106)
Net carrying value
  12,551   36,993   76,708   126,252 

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SONY ERICSSON MOBILE COMMUNICATIONS

                 
  Land and
   Other
  
2005
 buildings Machinery equipment Total
 
Accumulated acquisition costs
                
Opening balance January 1, 2005
  8,492   37,740   154,787   201,019 
Acquisitions  —   20,456   50,256   70,712 
Sales/disposals  —   (10,774)  (36,218)  (46,992)
Translation difference for the year  791   4,698   2,743   8,232 
                 
Closing balance December 31, 2005
  9,283   52,120   171,568   232,971 
Accumulated depreciation
                
Opening balance January 1, 2005
  (2,055)  (17,007)  (90,836)  (109,898)
Depreciation  (544)  (16,289)  (41,480)  (58,313)
Sales/disposals  —   9,835   30,732   40,567 
Translation difference for the year  (86)  (2,270)  (1,383)  (3,739)
                 
Closing balance December 31, 2005
  (2,685)  (25,731)  (102,967)  (131,383)
Accumulated write-downs
                
Opening balance January 1, 2005
  —   (410)  (604)  (1,014)
Write down  —   —   (8)  (8)
Sales/disposal  —   221   603   824 
Translation difference for the year  —   (56)  (1)  (57)
                 
Closing balance December 31, 2005
  —   (245)  (10)  (255)
Net carrying value
  6,598   26,144   68,591   101,333 

8.  Other securities held as fixed assets
         
  2006 2005
 
Accumulated acquisition costs
        
Opening balance
  83,652   77,820 
Acquisitions  12,462   5,205 
Translation difference for the year  (301)  639 
Reclassifications  (3,871)  (12)
         
Closing balance
  91,942   83,652 
Accumulated write-downs
        
Opening balance
  (1,969)  (1,667)
Translation difference for the year  142   (302)
Reclassification  1,827   — 
         
Closing balance
  —   (1,969)
Net carrying value
  91,942   81,683 
The major part of the investment is related to investment in Symbian Software Ltd. The reclassification made in 2006 is referring to Sony Ericsson Mobile Communications (China) Co. Ltd. investment in Beijing Suohong Electronics Co. Ltd. (BSE). In 2006 BSE became a fully owned subsidiary.

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SONY ERICSSON MOBILE COMMUNICATIONS

9.  Other non current assets
         
  2006 2005
 
Deferred tax assets  139,621   41,455 
External development projects  —   14,085 
Other non current assets  63,627   510 
         
Total  203,248   56,050 
10.  Group companies
Percentage of
Company
Domicileownership
Sony Ericsson Mobile Communications ABSweden
Sony Ericsson Mobile Communications International ABSweden100%
Sony Ericsson Mobile Communications Management Ltd. United Kingdom100%
Sony Ericsson Mobile Communications S.p.A. Italy100%
Sony Ericsson Mobile Communications Iberia S.LSpain100%
Sony Ericsson Mobile Communications Hellas S.A. Greece100%
Sony Ericsson Hungary Mobile Communications Ltd. Hungary100%
Sony Ericsson Mobile Communications do Brazil Ltd. Brasil100%
Sony Ericsson Mobile Communications S.A. de C.V. Mexico100%
Sony Ericsson Servicios Móviles S.A. de C.V. Mexico100%
Sony Ericsson Mobile Communications Japan Inc. Japan100%
Sony Ericsson Mobile Communications (USA) Inc. USA100%
Sony Ericsson Mobile Communications (Thailand) Co. LimitedThailand100%
Sony Ericsson Mobile Communications (China) Co. Ltd. China100%
Beijing Suohong Electronics Co. Ltd (BSE)China100%
Beijing SE Putian Mobile Communications Co. Ltd (BMC)China51%
During 2006 Sony Ericsson acquired Beijing Souhong Electronics Co. Ltd. (BSE) and during 2004 Sony Ericsson made a strategic investment in a jointly owned manufacturing facility called Beijing SE Putian Mobile Communications Co. Ltd (BMC). For further disclosures please refer to note 22.
11.  Inventory
         
  2006 2005
 
Manufacturing work in process  143,076   64,516 
Finished products and goods for resale  294,386   241,589 
         
Inventories, net
  437,462   306,105 
Reported amounts are net of obsolescence reserves by TEUR 18,611 (TEUR 9,578 in 2005).
12.  Accounts Receivables — Trade
         
  2006 2005
 
Trade receivables  1,657,111   854,130 
Provision for doubtful debts*  (4,357)  (2,420)
         
Trade receivables, net
  (1,652,754)  (851,710)
* Provisions for doubtful debts has been estimated based on commercial risk evaluations.


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13.  Other current assets
         
  2006 2005
 
Prepaid,expenses  55,232   38,786 
Prepaid, tooling  15,927   14,693 
Other, receivables*  238,607   124,889 
         
Total
  309,766   178,368 
* The major part of other receivables are related to withholding tax and VAT.
14.  Short term cash investments
         
  2006 2005
 
Net book value  1,580,077   900,272 
Market value  1,581,671   901,430 
The short term cash investments are held in money-market funds and is treated as cash equivalents with an initial maturity at the time of acquisition of 3 months or less.
15.  Shareholders’ equity
Changes in stockholders’ equity:
                 
      Non-
  
      restricted
  
      reserves and
 Total
  Share
 Restricted
 net profit/loss
 shareholders’
  capital* receives for the year equity
 
Shareholder’s equity December 31, 2003  100,000   712,619   (434,733)  377,886 
                 
Changes in accumulated translation differences  —   (12,760)  6,090   (6,670)
Net income for the year  —   —   322,019   322,019 
                 
Shareholder’s equity December 31, 2004  100,000   699,859   (106,624)  693,235 
Changes in cumulative translation adjustments  —   20,563   4,131   24,694 
Fair value reserve  —   —   1,624   1,624 
Net income for the year  —   —   350,342   350,342 
                 
Shareholder’s equity December 31, 2005  100,000   720,422   249,473   1,069,895 
Changes in cumulative translation adjustments****  —   (14,534)  (18,027)  (32,561)
                 
Fair value reserve**  —   —   (7,044)  (7,044)
Transfer between non-restricted and restricted reserves***  —   17,001   (17,001)  — 
Net income for the year  —   —   997,319   997,319 
Dividend  —   —   (247,000)  (247,000)
                 
Shareholder’s equity December 31, 2006  100,000   722,889   957,720   1,780,609 
*Share capital consists of 100 000 200 shares at a quota value of EUR 1 per share.
**The fair value reserve is related to the effective portion of changes in the fair value of hedging instruments that is recognized in equity. Amounts accumulated in equity are recycled in the income statement in the periods in which the hedged item affects profit or loss, for example, when the forecasted sale which is hedged takes place.
***The transfer between non-restricted and restricted reserves is in accordance with the proposals of the respective companies’ boards of directors. In evaluating the consolidated financial position, it should be


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noted that earnings in foreign companies may be subject to taxation when transferred to Sweden and, in some instances, such transfer of earnings may be limited by currency restrictions.
****Cumulative translation adjustments have been distributed among unrestricted and restricted stockholders equity.

16.  Pensions
Sony Ericsson participates in local pension plans in countries in which we operate. There are principally two types of pension plans:
• Defined contribution plans, where the Company’s only obligation is to pay fixed pension premiums into a separate entity (a fund or insurance company) on behalf of the employee. No provision for pensions is recognized in the balance sheet other than accruals for premium pensions earned, but not yet paid.
• Defined benefit plans, where the Company’s undertaking is to provide pension benefits that the employees will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
In Sony Ericsson most of the companies have defined contribution plans and therefore no pension provisions on the balance sheet. The subsidiaries companies in Japan and UK have defined benefit plans. In Sweden, the total pension benefits are accounted as defined contribution plans, even though the Financial Accounting Standards Council’s interpretations committee defined the ITP pension plan, financed through insurance with Alecta as a defined benefit plan. Sony Ericsson did not have access to information from Alecta that would have made it possible for this plan to be reported as a benefit plan.
         
  Consolidated
  2006 2005
 
Pensions and similar commitments  19,409   18,418 
The following table summarizes the total pension cost during 2006 for Sony Ericsson:
Total annual pension cost:
                     
2006
 Sweden UK Japan Others Total
 
Pension cost for defined benefit plans  —   592   3,780   —   4,372 
Pension cost for defined contributions plans  24,436   415   —   5,007   29,858 
                     
Total
  24,436   1,007   3,780   5,007   34,230 
Provisions for pensions and similar benefits:
                     
2006
 Sweden UK Japan Others Total
 
Provision for post-employment benefits  —   4,204   12,734   —   16,938 
Other employee benefits  —   —   —   2,471   2,471 
                     
Total
  —   4,204   12,734   2,471   19,409 
17.  Provisions
         
  2006 2005
 
Warranty commitments*  378,074   254,563 
Other provisions  43,152   40,749 
         
Total
  421,226   295,312 
* Warranty commitments include provisions for faulty products based on estimated return rates and costs. The best estimate is based on sales, contractual warranty periods and historical failure data of products sold.


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18.  Long-term liabilities
Maturity date for the group long-term liabilities, TEUR 677, is within 1-5 years.
19.  Other liabilities
         
  2006 2005
 
Accrued personnel related expenses  141,851   85,053 
Accrued sales related expenses*  679,485   468,572 
Other accrued expenses  252,452   190,148 
Other short term liabilities  92,618   51,271 
         
Total
  1,166,406   795,044 
* Accrued sales related expenses includes sales bonuses, such as cash discounts, quarterly and yearly bonuses, quality bonus, co-op and stock protection.
20.  Assets pledged as collateral
                         
  Liabilities
 Advances
   Liabilities
 Advances
  
  to financial
 from
 Total
 to financial
 from
 Total
  institutions customers 2006 institutions customers 2005
 
Bank deposits*  3,950   —   3,950   —   —   — 
Other  23   —   23   158   —   158 
                         
Total
  3,973   —   3,973   158   —   158 
* Bank deposits are collateral for hedging activities.
21.  Contingent liabilities
         
  2006 2005
 
Other contingent liabilities*  12,428   12,383 
         
Total  12,428   12,383 
* Other contingent liabilities mainly include guarantees for loans and other types of guarantees.
22.  Cash flow analysis
             
  2006 2005 2004
 
Change in provisions (note 16,17)  126,905   26,786   77,253 
Write down of tangible assets  134   8   450 
Gains on disposal of equipment  (16,068)  144   177 
Other  1,717   7,248   7,869 
             
Total  112,688   34,186   85,749 


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Investments in subsidiaries: During 2006 Sony Ericsson Mobile Communications AB acquired Beijing Souhong Electronics Co. Ltd. (BSE). During 2004 Sony Ericsson made a strategic investment in a jointly owned manufacturing facility called Beijing SE Putian Mobile Communications Co. Ltd (BMC) situated in Beijing, China. The total acquisition cash flow effects are:
             
  2006 2005 2004
 
Fixed assets  14,272   —   11,533 
Other assets  53,746   —   189,614 
Other liabilities  (46,874)  —   (166,711)
Minority interest  —   —   (18,765)
Net book value of pre owned share in subsidiary  (2,203)  —   (2,919)
             
Total acquisition  18,941   —   12,752 
Cash in acquired subsidiaries  (3,440)  —   — 
             
Cash flow effect from acquisitions in subsidiaries  15,501   —   12,752 
             
Total cash flow effect from acquisitions in subsidiaries  15,501   —   12,752 
23.  Translation to SEK
The exchange rate for SEK is 9.04 (9.42) for balance sheet items and the average exchange rate for the period is 9.26 (9.28).
24.  Leasing
     
  2006
 
Future payments for operating leases and rents    
2007  38,835 
2008  36,788 
2009  32,052 
2010  30,623 
2011  25,041 
2012 and future  60,005 
The purpose of the leases mainly refers to rents and office equipment.
25.  Wages, salaries and social security expenses
             
  2006 2005 2004
 
Wages and salaries  390,556   327,937   268,672 
Social security expenses  114,872   100,429   89,490 
Of which pension costs  34,230   28,239   17,481 
Of which CO compensation  1,082   999   901 
CO pension costs  190   142   577 
bonus & similar to CO  268   269   1,002 
Severance pay
For the President and the Corporate Management the following applies. Severance payments are not payable if an employee resigns voluntarily, or if the employment is terminated as a result of flagrant disregard of responsibilities. An exception to this is if the notice of termination given by the employee is due directly to significant structural changes or other events that affect the content of work or the condition of the position. In such an instance,


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the notice is treated as if it were given by the Company and severance payments are made to the individual. Upon termination of employment, severance pay amounting to one years’ salary is normally paid. The severance payments will be paid out currently during agreed severance period.
Pension
Sony Ericsson’s policy regarding pension is to follow the competitive practice in the home country of the executive. For the president and corporate management there is in principal one pension plan in which the pension based salary is calculated on the fixed salary and a target value of the variable short-term incentive plan. The company pays to the capital insurance company on salary portions in excess of 20 base amounts (one base amount = SEK 39,700) a percentage of the executive’s total pension based salary, between 25 and 35 percent per year, depending on the age of the executive.
Long term incentive
Sony Ericsson operates a synthetic option plan for selected employees. The option price is determined on an annual basis by independent valuation and is approved by the Remuneration Committee of the Board. The options granted under the plan will vest in three years. Financial commitments’ resulting from the price trend of the synthetic options are reported amongst operating costs and the calculated future payments for such options have been expensed according to following;
             
  2006  2005  2004 
 
Calculated future payments for synthetic option plan charged to operating costs  20,826   12,018   17,300 
At 31 December 2006, a provision in the amount of TEUR 33,415 (TEUR 24,578) was established for payments under the synthetic options plan.
             
Wages and salaries by geographical area
 2006  2005  2004 
 
Europe* and            
Middle East & Africa  224,702   179,713   151,167 
North America  67,504   65,481   41,855 
Latin America  4,267   3,698   2,624 
China  26,041   16,296   13,664 
Japan  58,369   55,534   52,285 
Asia Pacific  9,673   7,215   7,077 
Total
  390,556   327,937   268,672 
* Of which Sweden  157,416   121,605   96,899 
* Of which EU excl. Sweden  35,122   37,720   38,093 


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Number of employees
                 
  2006  2005 
  Men  Women  Men  Women 
 
Europe * and                
Middle East & Africa  2,245   842   1,967   748 
North America  528   176   521   175 
Latin America  41   16   32   13 
China  942   1,168   590   441 
Japan  839   205   776   183 
Asia Pacific  102   71   90   63 
Total  4,697   2,478   3,976   1,623 
* Of which Sweden  1,696   593   1,473   551 
* Of which EU excl. Sweden  395   163   363   131 
Distribution of male and female for the Board of Directors and other persons in leading positions
                 
  2006 2005
  Number on
 whereof
 Number on
 whereof
  balance day men balance day men
 
Consolidated (including subsidiaries)                
Members of the board  86   91.9%   71   94.4% 
Presidents and Executive Vice presidents  13   100%   12   100% 
Parent Company                
Members of the board  10   100%   10   100% 
President and Executive Vice president  2   100%   2   100% 
Absence due to illness for employees in Sweden
         
  Jan. 1 2006-
 Jan. 1 2005-
  Dec. 31 2006 Dec. 31 2005
 
% of total ordinary worktime        
Total absence due to illness  1.6   1.8 
— long term absence due to illness  0.8   1.8 
— absence due to illness for men  1.1   1.2 
— absence due to illness for women  2.9   3.4 
— employees — 29 years  0.8   0.9 
— employees 30 — 49 years  1.7   2.0 
— employees 50 years-  2.3   1.7 
26.Fees to auditors
             
  2006 2005 2004
 
PricewaterhouseCoopers            
Audit fees  916   881   696 
Fees for other services  897   1,291   1,083 
             
Total  1,813   2,172   1,779 


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27. Financial risks
Foreign exchange risk — Transaction exposure
Sony Ericsson’s results are presented in EUR which is the reporting currency and the functional currency of the parent company. The group has sales and cost of sales in a large number of currencies. The company’s hedging activities are designed to mitigate the risk posed by exchange rate fluctuations over time between the EUR and these other currencies. The main part of the net exposure is concentrated to the parent company. The group’s currency exposures are hedged up to 6 months. The group’s net exposure is to 80% USD, JPY and GBP. The currency exposures are primarily hedged with forward contracts. The market value of derivatives not being used to revalue balance sheet items by December 31, 2006 was EUR -8.4 Million; all of these derivatives were forward contracts. Hence, these losses correspond to net gains in the underlying future sales and purchases during the hedged period.
Foreign exchange risk — Translation exposure
All equity in the groups companies is translated in accordance with the “current method” hence the translation exposure is taken directly in to equity in the balance sheet. This type of currency exposure is not hedged.
Interest rate risk
Sony Ericsson’s interest rate risk is primarily derived from cash and short term deposits, other balance sheet items are to a very small extent affected by shifts in the interest rate. Cash and short-term deposits, EUR 2 273 Million at year end, are primarily held in short and medium term money market funds with highest possible rating given the duration.
Credit Risk
Credit risk is divided into two categories; credit risk in trade receivables and financial credit risk.
Credit risk in Trade receivables The value of outstanding trade receivables were at year end EUR 1 653 Million. Provisions for expected losses at year end were EUR 4.4 Million. Over 59% of the trade receivables are towards countries with a country risk in the interval “negligible to moderate”.
Financial credit risk
Financial instruments carry an element of risk in that counterparts may be unable to fulfill their payment obligations. These exposures arise in the investments of cash and cash equivalents and from derivative positions with positive unrealized result against banks and other counterparties. Sony Ericsson mitigates these risks by investing cash in a well diversified portfolio of money market funds with the highest possible rating. Part of the liquidity is also deposited with a few chosen banks with the highest possible short-term rating. How much to be invested with each fund and bank is regulated in the policy.
Liquidity risk
The liquidity risk is that Sony Ericsson is unable to meet its short term payment obligations due to insufficient or illiquid cash reserves. At year end Sony Ericsson had a very large net cash position invested in liquid funds and very short deposits with banks. Sony Ericsson has decided to have a minimum cash level of 15% of annual turnover. The company’s net cash widely exceeds this requirement at year end.
28.  Reconciliation to accounting principles generally accepted in the United States
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Sweden for unlisted companies, applying the Swedish Accounting Standards Board’s (Bokföringsnämnden, BFN) recommendations and the Swedish Annual Accounts Act (ÅRL) (the “Swedish GAAP”), which differs in certain significant respects from the generally accepted accounting principles in the United States


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(“US GAAP”). Sony Ericsson Mobile Communication has reconciled its net income / loss and equity under Swedish GAAP to the accounting principles according to generally accepted principles in the United States.
The principle differences between Swedish GAAP and US GAAP that affect our net income, as well as our stockholders equity relate to the treatment of business combinations (negative goodwill) and synthetic option plan.
Business combinations — Negative Goodwill
Under both Swedish GAAP and US GAAP, when the fair value of net assets acquired exceeds total purchase price, the Company first assess whether all acquired assets and assumed liabilities have been properly identified and valued. Under Swedish GAAP, negative goodwill is not subject to amortization and any excess remaining after reassessment is recognized in income statement immediately. During 2004, a negative goodwill amounted to TEUR 3 717 was identified by the Company in connection with the acquisition of Beijing SE Putian Mobile Communications Co. Ltd (BMC), and it was recognized in income statement by the end of 2004.
Under US GAAP, the Company must first reassess whether all acquired assets and assumed liabilities have been identified and properly valued. If an amount of negative goodwill still results after this reassessment, all acquired assets (including research and development assets) are then subject to pro rata reduction, except for (1) financial assets other than investments accounted for by the equity method, (2) assets to be disposed of by sale, (3) deferred taxes, (4) prepaid assets relating to pension and other postretirement benefit plans, and (5) any other current assets. If all eligible assets are reduced to zero and an amount of negative goodwill still remains, the remaining unallocated negative goodwill must be recognized immediately as an extraordinary gain. A negative goodwill was identified by the Company amounted to TEUR 3,717, and it was recognized in income statement by the end of 2004. All adjustments according to US GAAP are specified in this report (see separate information for adjustments).
Provision for social security cost on synthetic option plan
Under Swedish GAAP, the Company accrues social security costs for the synthetic option plan during the vesting period. Under US GAAP, no social security cost is recorded until the options are exercised or matching of the options takes place, which increases net income by TEUR 1,472 (TEUR 906 in 2005).
Deferred Income Taxes
Deferred tax is calculated on US GAAP adjustments and the US GAAP balance sheet reflects the gross recognition of deferred tax assets and liabilities.
Non-current and current assets
Swedish GAAP requires deferred tax assets to be classified as non-current assets on the balance sheet. Under US GAAP, deferred tax liabilities and assets are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference. The balance sheet shows a difference in non-current and current assets between Swedish GAAP and US GAAP which relates to the classification of deferred tax assets.
Adjustment of net income, comprehensive income, equity and balance sheet items
Application of US GAAP as described above would have had the following effects on consolidated net income.


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Adjustment of Net Income
         
  2006 2005
 
Net income per Swedish GAAP  997,319   350,342 
US GAAP adjustments before taxes:        
Business Combination  918   918 
Synthetic Option Plan  1,472   906 
Tax effect of US GAAP adjustment  (522)  (364)
         
Net income in accordance with US GAAP  999,186   351,802 
Comprehensive income
         
  2006 2005
 
Net income in accordance with US GAAP  999,186   351,802 
Other comprehensive income Gain/loss on cash flow hedges  (9,544)  2,260 
Translation adjustment  (32,561)  24,694 
Deferred tax  2,499   (636)
Total other comprehensive income  (39,605)  26,318 
         
Comprehensive income in accordance with US GAAP  959,581   378,119 
Adjustments of of stockholders’ equity
         
  2006 2005
 
Equity as reported per Swedish GAAP  1,780,609   1,069,895 
         
US GAAP adjustments before taxes:        
Business Combination  (964)  (1,882)
Synthetic Option Plan  2,377   906 
Deferred tax effect of US GAAP adjustment  (550)  (28)
         
Stockholders’ equity in accordance with US GAAP  1,781,472   1,068,891 
         
Balance sheet
Balance sheet items according to Swedish GAAP and US GAAP:
                 
  Swedish GAAP US GAAP
  Dec. 31
 Dec. 31
 Dec. 31
 Dec. 31
  2006 2005 2006 2005
 
Non-current assets  468,677   273,749   328,207   230,638 
Current assets  4,672,681   2,873,459   4,811,636   2,914,660 
                 
Total Assets  5,141,358   3,147,208   5,139,844   3,145,298 
                 
Stockholders equity  1,780,609   1,069,895   1,781,472   1,068,891 
Minority interest  45,148   46,488   45,148   46,488 
Provisions  440,635   313,730   440,635   313,730 
Non-current liabilities  677   1,031   677   1,031 
Current liabilities  2,874,289   1,716,064   2,871,912   1,715,158 
                 
Total stockholders’ equity and liabilities  5,141,358   3,147,208   5,139,844   3,145,298 
                 


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Multi-employer plan
The Swedish ITP pension plan financed through insurance with Alecta is a multi-employer plan defined by Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions, and therefore it is accounted for as a defined contribution plan.


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Report of Independent Auditors
To the Shareholders of Sony Ericsson Mobile Communications AB
We have audited the accompanying consolidated balance sheets of Sony Ericsson Mobile Communications AB and its subsidiaries as of December 31, 2006 and December 31, 2005 and the related consolidated statements of income and of cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 financial position of Sony Ericsson Mobile Communications AB and its subsidiaries at December 31, 2006 and December 31, 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in Sweden.
Accounting principles generally accepted in Sweden vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 28 to the consolidated financial statements.
/s/ PricewaterhouseCoopers AB
Stockholm, June 17, 2007


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