20-F 1 k00949e20vf.htm SONY KABUSHIKI KAISHA SONY KABUSHIKI KAISHA
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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, 2005
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,
TOKYO 141-0001, 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.
** 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 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 31, 2005   March 30, 2005
Title of Class   (Tokyo Time)   (New York Time)
         
Common Stock
    997,211,213          
Subsidiary Tracking Stock
    3,072,000          
American Depositary Shares
            135,460,544  
          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 which financial statement item the registrant has elected to follow.
     
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 20, 2005 was 109.42 yen = 1 U.S. dollar.
          As of March 31, 2005, Sony Corporation had 913 consolidated subsidiaries (including variable interest entities). It has applied the equity accounting method with respect to its 56 affiliated companies.
 
 


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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”, “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 euro 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 its products and services, 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, Pictures and Other segments); (iv) Sony’s ability to implement successfully personnel reduction and other business reorganization activities in its Electronics, Music, Pictures and Other segments; (v) Sony’s ability to implement successfully its network strategy for its Electronics, Music, Pictures and Other segments and to develop and implement successful sales and distribution strategies in its Music, Pictures and Other segments in light of the Internet and other technological developments; (vi) 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) shifts in customer demand for financial services such as life insurance and failure to conduct successful Asset Liability Management in the Financial Services segment and (viii) the success of Sony’s joint ventures and alliances. Risks and uncertainties also include the impact of any future events with material unforeseen 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”, “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects”, “Legal Proceedings” included in “Item 8. Financial Information”, Sony’s Consolidated Financial Statements referenced in “Item 8. Financial Information”, and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

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 EX-1.1 ARTICLES OF INCORPORATION
 EX-1.2 REGULATIONS OF THE BOARD OF DIRECTORS
 EX-12.1 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION REQUIRED BY 17 C.F.R. 240. 13a-14(a)
 EX-12.2 PRINCIPAL FINANCIAL OFFICER CERTIFICATION REQUIRED BY 17 C.F.R. 240. 13a-14(a)
 EX-13 CERTIFICATIONS REQUIRED BY 18 U.S.C. SECTION 1350
 EX-15.1 CONSENT OF CHUOAOYAMA PRICEWATERHOUSECOOPERS

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Item 1. Identity of Directors, Senior Management and Advisers
      Not Applicable
Item 2. Offer Statistics and Expected Timetable
      Not Applicable
Item 3. Key Information
Selected Financial Data
                                             
    Fiscal Year Ended March 31
     
    2001   2002   2003   2004   2005
                     
    (Yen in millions, Yen per share amounts)
Income Statement Data:
                                       
 
Sales and operating revenue
    7,314,824       7,578,258       7,473,633       7,496,391       7,159,616  
 
Operating income
    225,346       134,631       185,440       98,902       113,919  
 
Income before income taxes
    265,868       92,775       247,621       144,067       157,207  
 
Income taxes
    115,534       65,211       80,831       52,774       16,004  
 
Income before cumulative effect of accounting changes
    121,227       9,332       115,519       90,628       168,551  
 
Net income
    16,754       15,310       115,519       88,511       163,838  
Data per Share of Common Stock:
                                       
 
Income before cumulative effect of accounting changes
                                       
   
— Basic
    132.64       10.21       125.74       98.26       180.96  
   
— Diluted
    124.36       10.18       118.21       89.03       162.59  
 
Net income
                                       
   
— Basic
    18.33       16.72       125.74       95.97       175.90  
   
— Diluted
    19.28       16.67       118.21       87.00       158.07  
 
Cash dividends declared
                                       
   
Interim
    12.50       12.50       12.50       12.50       12.50  
      (11.15 cents )     (10.07 cents )     (10.50 cents )     (11.37 cents )     (12.12 cents )
   
Fiscal year-end
    12.50       12.50       12.50       12.50       12.50  
      (10.01 cents )     (9.78 cents )     (10.53 cents )     (11.26 cents )     (11.29 cents )
Depreciation and amortization*
    348,268       354,135       351,925       366,269       372,865  
Capital expenditures (additions to fixed assets)
    465,209       326,734       261,241       378,264       356,818  
Research and development costs
    416,708       433,214       443,128       514,483       502,008  
Balance Sheet Data:
                                       
 
Net working capital
    830,734       778,716       719,166       381,140       746,803  
 
Long-term debt
    843,687       838,617       807,439       777,649       678,992  
 
Stockholders’ equity
    2,315,453       2,370,410       2,280,895       2,378,002       2,870,338  
 
Total assets
    7,827,966       8,185,795       8,370,545       9,090,662       9,499,100  
 
Number of shares issued at fiscal year-end (thousands of shares of common stock)
    919,617       919,744       922,385       926,418       997,211  
 
Stockholders’ equity per share of common stock
    2,521.19       2,570.31       2,466.81       2,563.67       2,872.21  
 
Depreciation and amortization includes amortization expenses for intangible assets and for deferred insurance acquisition costs.

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    Average*   High   Low   Period-End
                 
    (Yen)
Yen Exchange Rates per U.S. Dollar:
                               
 
Fiscal year ended March 31
                               
   
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  
   
2005
    107.49       114.30       102.26       107.22  
 
2004
                               
   
December
            105.59       102.56       102.68  
 
2005
                               
   
January
            104.93       102.26       103.55  
   
February
            105.84       103.70       104.25  
   
March
            107.49       103.87       107.22  
   
April
            108.67       104.64       104.64  
   
May
            108.17       104.41       107.97  
   
June (through June 20)
            109.58       106.64       109.42  
 
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 20, 2005 was 109.42 yen = U.S. 1 dollar.
* The average yen exchange rates represent average noon buying rates on the last business day of each month during the respective period.
Notes to Selected Financial Data:
1.  In July 2003, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants issued the Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance 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 annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP 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 4,713 million yen of loss (net of income taxes of 2,675 million yen) as a cumulative effect of an accounting change. In addition, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” on the consolidated balance sheet, were excluded from the category of separate accounts under SOP 03-1. Accordingly, assets previously treated as separate account assets are now treated within general account assets.
 
2.  In July 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 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 shares of common stock issuable upon the conversion of contingently convertible debt instruments (“Co-Cos”) that have not met the conditions to exercise the associated stock acquisition rights. EITF Issue No. 04-8 requires that the maximum number of shares 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 such rights have been met. EITF Issue No. 04-8 is effective for reporting periods ending after December 15, 2004. Sony adopted EITF Issue No. 04-8 during the quarter ended

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December 31, 2004. As a result of the adoption of EITF Issue No. 04-8, Sony’s diluted EPS of its income before cumulative effect of an accounting change and its net income for the fiscal year ended March 31, 2004 were restated respectively. Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the fiscal year ended March 31, 2005 were decreased by 7.26 yen and 7.06 yen, respectively, compared to those before the adoption of EITF Issue No. 04-8.
 
3.  In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletins (“ARB”) No. 51”, and the revised FIN No. 46 was issued in December 2003. This interpretation addresses consolidation by a primary beneficiary of a variable interest entity (“VIE”). Sony adopted FIN No. 46 on July 1, 2003. As a result of the adoption of FIN No. 46, Sony recognized a 2,117 million yen charge as a cumulative effect of an accounting change. Additionally, Sony’s assets and liabilities increased by 96,776 million yen and 97,950 million yen, respectively, including cash and cash equivalents of 1,521 million yen.
 
4.  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 fiscal year ended March 31, 2002 decreased by 3,007 million yen, 3,441 million yen and 2,167 million yen, respectively. Additionally, 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 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.
 
5.  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 fiscal year ended March 31, 2002 increased by 20,114 million yen and income before cumulative effect of accounting changes as well as net income for the fiscal year ended March 31, 2002 increased by 18,932 million yen.

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 on 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 produce consumer products that compete against products sold by an increasing number of competitors on the basis of 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, Sony faces increasingly intense pricing pressure in a

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variety of consumer product areas. Sony’s sales and operating income depend on Sony’s ability to continue to develop and offer products at competitive prices that meet changing and increasingly diversified consumer preferences.
Sony is subject to competition from firms that may be more specialized.
      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.
Sony’s sales and profitability are sensitive to economic trends in Sony’s major markets.
      A consumer’s decision to purchase products such as those offered 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 any of Sony’s major markets, causing material declines in Sony’s sales and operating income. In the fiscal year ended March 31, 2005, 29.3 percent, 27.6 percent and 22.6 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.
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 average market rate during each financial period. Sony’s consolidated balance sheets are prepared using local currency-denominated assets and liabilities of each of Sony Corporation’s subsidiaries around the world, which are translated into yen at the market rate at the end of each financial period. A large proportion of Sony’s consolidated financial results, assets and liabilities is accounted for in currencies other than the Japanese yen. For example, only 29.3 percent of Sony’s sales and operating revenue in the fiscal year ended March 31, 2005 were originally recorded in Japan. Accordingly, Sony’s consolidated results, assets and liabilities 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 year ended March 31, 2005, for example, Sony’s consolidated operating income prepared on the basis of Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”) in yen increased from the preceding fiscal year by 15.2 percent; however, if Sony’s consolidated operating income had been prepared on a local currency basis, it would have increased by 26 percent. (Refer to “Operating Results” in “Item 5. Operating and Financial Review and Prospects.”) 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 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.
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 segment largely in Japan, makes this segment particularly sensitive to the yen’s appreciation as the ratio of yen-denominated

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costs to total costs is higher than the ratio of yen-denominated revenue to total revenue. Volatile mid- to long-term changes in exchange rate levels, such as the decade-long strengthening of the yen against major currencies between 1985 and 1995, when the yen appreciated from a level in excess of 260 yen to the U.S. dollar to a level of less than 80 yen to the U.S. dollar, 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 segment, 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 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 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. (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 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 an increase in research and development spending and investments in order to strengthen core businesses, and undertaking restructuring initiatives such as implementing personnel reductions, withdrawal from selected businesses and other programs to reduce fixed costs.
      Restructuring charges recorded on a consolidated basis for Transformation 60 during the fiscal years ended March 31, 2004 and 2005 were 168.1 billion yen and 90.0 billion yen, respectively. Sony expects to incur restructuring charges totaling approximately 330 billion yen through the three-year implementation of Transformation 60. The details of the restructuring plan for the fiscal year ending March 31, 2006 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 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 investments beyond currently projected levels, either of which might increase total costs of the program. Possible external factors could include, for example, increased burdens from regional labor regulations and union contracts 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

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insufficient financial resources to carry out its research and development plans and to invest in targeted growth business areas.
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, which resulted in Sony’s inability to meet demand for its personal computers and audio visual products, and a surplus in certain semiconductors that resulted in the recording of losses when semiconductor prices fell. Sony 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 parts and components, and may affect Sony’s production or the cost of goods sold. Sony’s profitability may also be adversely affected by supply or inventory shortages 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, when inventory exceeds the amount expected to be used, or when the value of the inventory is otherwise recorded at a higher value than net realizable value. Such inventory adjustments have had and, if Sony is not successful in managing its inventory in the future, will have a material adverse effect 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.”)
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, PlayStation 2, PlayStation Portable) and is dependent upon 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 during the year-end holiday season can negatively impact the financial performance of the segment.
      The Electronics segment is also dependent upon year-end holiday season demand and, to a lesser extent than the Games segment, is susceptible to weak sales and supply shortages that prevent it from meeting demand for its products during this season.
Sony’s Music segment, Sony’s investment in SONY BMG MUSIC ENTERTAINMENT, and the Pictures segment are subject to digital piracy, which may become increasingly more prevalent with the development of new technologies.
      In Sony’s Music segment, at 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 segment, 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 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, 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.

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Sony’s Music segment and Sony’s investment in SONY BMG are dependent on establishing new artists, and Sony’s Music and Pictures segments, as well as Sony’s investment in SONY BMG, are subject to increasing prices for talent.
      The success of Sony’s Music segment 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 segment 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 and Pictures segments, as well as SONY BMG, Sony has experienced and may continue to experience significant increases in talent-related spending.
Sony’s Pictures segment is subject to labor interruption.
      The Pictures segment is 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.
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’s motion picture and television productions can materially fluctuate depending primarily upon the cost of such productions and acceptance of such productions by the public, which are difficult to predict. In addition, the commercial success of the Pictures segment’s motion picture and television productions depend upon the acceptance of other competing productions, and the availability of alternative forms of entertainment and leisure activities.
In addition to the need for maintaining a prudent and prescient Asset Liability Management, Sony’s Financial Services segment is subject to valuation losses, shifts in customers’ demand and a variability in claims, at Sony Life Insurance Co., Ltd. and Sony Assurance Inc., as well as mandatory contributions to the Life Insurance Policyholders Protection Corporation of Japan by Sony Life.
      Sony’s Financial Services segment faces rapid shifts in customer demand from more profitable protection-orientated products such as term insurance to less profitable savings-oriented products such as endowment insurance, as well as a risk of unpredictable increases in insurance claims. This segment also may incur valuation losses if the value of securities purchased for investment purposes decreases. In addition, if it fails to conduct Asset Liability Management (“ALM”) in a prudent and prescient manner to pursue an optimal combination of possible risks and expected returns on investment assets and underwriting risks on insurance policy benefits, Sony’s Financial Services segment may not be able to keep providing competitive products and services to customers on a long-term basis. Sony Life Insurance Co., Ltd. (“Sony Life”), which constitutes the largest portion of this segment, is also subject to mandatory contributed reserves for the Life Insurance Policyholders Protection Corporation of Japan (“PPC”), the organization that provides support to insolvent life insurance companies. Sony Life’s estimated required contribution based on the assessments made by the PPC is incorporated in other expenses within Sony Life’s statements of income and long-term liabilities in its balance sheets in Japan. If there are bankruptcies of life insurers, solvent life insurers including Sony Life may be required to contribute additional financial resources.
      In addition, with respect to the companies within the Financial Services segment other than Sony Life, such as Sony Bank Inc., there is a risk of recording valuation losses if the value of securities purchased for investment purposes decreases, or if there is a failure to conduct ALM in a prudent and prescient manner.
Sony may not be successful in implementing its broadband network strategy.
      Sony believes that the utilization of broadband networks to facilitate the integration of hardware and content is essential to differentiating itself in the marketplace. Sony also believes that this strategy will

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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 utilization of joint ventures and alliances within strategic business areas may not be successful.
      The composition of Sony 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 and to achieve operating efficiencies through cooperation with other companies.
      Sony currently has investments in several joint ventures, including Sony Ericsson Mobile Communications, AB (“Sony Ericsson”), S.T. Liquid Crystal Display Corporation (“ST-LCD”), a joint venture with Toyota Industries Corporation, and other companies. In April 2004, Sony established S-LCD Corporation a joint venture with Samsung for the production of 7th generation amorphous TFT LCD panels. In August 2004, Sony combined its recorded music business outside of Japan, with the recorded music business of Bertelsmann AG forming the jointly-owned company, SONY BMG. In April 2005, a consortium led by Sony Corporation of America 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”). If 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 by the establishment of those alliances, joint ventures and strategic investments even if Sony and its partners remain on course to achieve those common objectives. Recent examples of how Sony’s financial performance has been adversely affected in the course of these types of relationships are the equity in net loss of Sony Ericsson incurred in the fiscal year ended March 31, 2003, totaling 20.8 billion yen and the equity in net loss recorded at SONY BMG in the fiscal year ended March 31, 2005, totaling 3.4 billion yen, primarily as the result of restructuring costs.
Sony’s physical facilities and information systems are subject to damage as a result of disasters, outages, malfeasance or similar events.
      Sony’s 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 earthquake 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, logistics, sales and services are located throughout the world and are subject to possible destruction, temporary stoppage or disruption as a result of any number of unexpected events. 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 become more important to Sony’s operating activities, network and information system shutdowns caused by unforeseen events such as power outages, disasters, terrorist attack, hardware or software defects, computer viruses and computer hacking pose increasing risks. Such an event could also result in the disruption of Sony’s operations, delay production, shipments and 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 caused by misappropriation, misuse, leakage, falsification, and disappearance of internal databases, including customer and vendor data.
      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

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“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 undertaking efforts to educate operators and administrators who have access to databases about appropriate ways to protect such information, these measures may be insufficient, and Sony may be unable to avoid or prevent such events.
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. 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 in connection with, for example, product recalls, service and lawsuits, and Sony’s brand image and reputation as a producer of high-quality products may suffer.
Sony may be adversely affected by its employee benefit obligations.
      Sony recognizes an unfunded pension obligation (in an amount equal to (i) its Projected Benefit Obligation (“PBO”) less (ii) the fair value of plan assets and accrued pension and severance costs) as a pension cost in a systematic and gradual manner over employees’ average remaining service periods as required under FAS No. 87, “Employers’ Accounting for Pensions”. Any decrease of pension asset value due to low returns from investments or increases in PBO due to a lower discount rate may increase unfunded pension obligations, resulting in an increase in pension expenses recorded as cost of sales or as a selling, general and administrative expense. Refer to Note 14 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”.
      Most pension assets and liabilities recognized on Sony’s consolidated balance sheets relate to Japanese plans, which are subject to the Japanese Defined Benefit Corporate Pension Plan Act pursuant to which Sony is required to meet certain financial criteria including periodic actuarial revaluation and annual settlement of gain or loss of the plan. In the eventuality that the actuarial reserve required by law exceeds 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 others’ intellectual property rights
      Sony’s products incorporate a wide variety of technologies. Claims could be asserted against Sony that such technology infringes intellectual property owned by others, and the outcome of any such claim would be uncertain.
Sony is dependent upon certain intellectual property rights of others, and Sony may not be able to continue to obtain necessary licenses to employ technology covered by such rights
      Many of Sony’s products are designed to include intellectual property licensed from third parties. 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.
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 (including LCD panels for televisions), and technologies (such as operating software for PCs). In addition, it consigns to external suppliers extensive activities including procurement, manufacturing, logistics, sales and other services. Reliance on outside sources increases the chance that Sony will be unable to prevent products from

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incorporating defective or 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 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 relating to matters such as reductions or prohibitions in the use of harmful 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 the recycling of products, batteries and packaging materials. The European Parliament and the Council of the European Union have published directives on waste electrical and electronic equipment and on the restriction of the use of certain hazardous substances in electrical and electronic equipment. These directives will require electronics producers after August 2005 to bear the cost of collection, treatment, recovery 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 before regulations are adopted in individual member states, it may be substantial. In the event it is determined that Sony has not complied in a material way with certain environmental laws and regulations, Sony may incur remediation costs or sustain injury to its brand image. Sony’s activities also may be limited if Sony is unable to comply with such regulations, which could adversely affect Sony’s results.
Sony is subject to the risks of operations in different countries.
      A substantial portion of Sony’s activities are conducted outside 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.
      International operations bring challenges. Production in China and other Asian countries of electronics 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 production of personal computer components in China and Taiwan could lead to production interruptions if a 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, 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 repatriation of returns from foreign investments.
American Depositary Share 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 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 is incorporated in Japan with limited liability. A substantial portion of the assets of Sony are located outside the U.S. As a result, it may be more difficult for investors to enforce against Sony judgments obtained in U.S. courts predicated upon the civil liability provisions of the Federal securities laws of the U.S. or

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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 Federal securities laws of the U.S.
Item 4. Information on the Company
History and Development of the Company
      Sony Corporation, the ultimate parent company of Sony, 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). 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 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 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 a wholly-owned subsidiary of Sony Corporation.
      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 1993, Sony established Sony Computer Entertainment Inc. (“SCEI”) in Japan.
      In January 2000, acquisition transactions by way of exchanges of stock were completed such that SMEJ, Sony Chemicals Corporation, and Sony Precision Technology Inc. became wholly-owned subsidiaries of Sony Corporation. 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”). Sony Corporation recently announced its intention to terminate the shares of subsidiary tracking stock. (For further information regarding subsidiary tracking stock refer to “Memorandum and Articles of Association” in “Item 10. Additional Information.”)
      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.
      In October 2002, Aiwa Co., Ltd. (“Aiwa”) became a wholly-owned subsidiary of Sony Corporation. In December 2002, Sony Corporation merged with Aiwa.
      In June 2003, Sony Corporation adopted the “Company with Committees” system in line with the revised Japanese Commercial Code. (Refer to “Board Practices” in “Item 6. Directors, Senior Management and Employees”.)
      In April 2004, Sony Corporation established Sony Financial Holdings Inc. (“SFH”) in Japan.

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      In April 2004, S-LCD Corporation, a joint venture between Sony Corporation and Samsung Electronics Co., Ltd. of Korea, 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 jointly-owned company, SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”) in the U.S. and Europe.
      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, Tokyo 141-0001, Japan, telephone +81-3-5448-2111.
      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
      In the fiscal years ended March 31, 2003, 2004 and 2005, Sony’s capital expenditures (additions to fixed assets on the balance sheets) were 261.2 billion yen, 378.3 billion yen and 356.8 billion yen, respectively. Sony’s capital expenditures are expected to be 410 billion yen during the fiscal year ending March 31, 2006. For a breakdown of principal capital expenditures and divestitures (including interests in other companies), refer to “Item 5. Operating and Financial Review and Prospects”. Sony invested approximately 150 billion yen in the semiconductor business during the fiscal year ended March 31, 2005. Sony plans to invest 160 billion yen in the semiconductor business in the fiscal year ending March 31, 2006. To finance 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, and key devices, including display devices, Sony raised 250 billion yen through the issuance of euro yen zero coupon convertible bonds in December 2003. Refer to “Property, Plant and Equipment” below for a geographic distribution of these investments.
Business Overview
Important Changes during the Fiscal Year
      As of August 1, 2004, Sony combined its recorded music business outside of Japan, with the recorded music business of Bertelsmann AG. 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 equity method and, since August 1, 2004, 50 percent of the net profits or losses of this business have been included under “equity in net income (loss) of affiliated companies.”
      In connection with the establishment of this joint venture, Sony’s non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment, have been reclassified to the Electronics segment to recognize the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. Results for the previous fiscal year in the Electronics and Music segments have been restated to account for this reclassification.
      In the Music segment, results for this fiscal year only include the results of SMEI’s recorded music business for the months of April through July 2004, and results of SMEI’s music publishing business and SMEJ’s for the entire fiscal year. However, results for the previous fiscal year in the Music segment include the consolidated results for SMEI’s recorded music business for all twelve months of the fiscal year, as well as the full fiscal year results for SMEI’s music publishing business and SMEJ.
      In July 2004, Sony completed the integration of its semiconductor manufacturing business in order to establish a more efficient and coordinated semiconductor supply structure 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

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within the “Semiconductor” category in the Electronics segment. The results for the same period of the prior fiscal years have not been restated as such comparable figures cannot be practically obtained given that the semiconductor manufacturing operation was not operated as a separate line of business within the Game segment. This integration of the semiconductor manufacturing businesses is a part of Sony’s semiconductor strategy of utilizing semiconductor technologies and manufacturing equipment originally developed or designed for the Game business within Sony as a whole.
      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. Under the terms of the acquisition agreement, the aforementioned investor group acquired MGM for $12.00 in cash per MGM share, for a total purchase price of approximately $5.0 billion. 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. MGM will continue to operate under the Metro-Goldwyn-Mayer name as a private company headquartered in Los Angeles. As part of the acquisition, SCA invested $257 million in exchange for 20 percent of the total equity capital. However, based on the percentage of common stock owned, Sony will record 45 percent of MGM’s net income (loss) as equity in net income of affiliated companies.
      Commencing April 1, 2004, Sony partly realigned its product category configuration in the Electronics segment. Accordingly, results of the previous fiscal year have been reclassified. The primary changes are as follows;
         
Main Product   Previous Product Category   New Product Category
         
AIWA
  “Other”   “Audio” or “Video” or “Televisions”
Set-top box
  “Video”   “Televisions”
Products and Services
      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.
                                                   
    Fiscal Year Ended March 31
     
    2003   2004   2005
             
    (Yen in millions)
Electronics
                                               
 
Audio
    784,114       (10.5 )     675,496       (9.0 )     571,864       (8.0 )
 
Video
    828,308       (11.1 )     949,261       (12.7 )     1,034,736       (14.5 )
 
Televisions
    981,655       (13.1 )     925,501       (12.3 )     957,122       (13.4 )
 
Information and Communications
    836,724       (11.2 )     834,757       (11.1 )     778,374       (10.9 )
 
Semiconductors
    204,710       (2.7 )     253,237       (3.4 )     246,314       (3.4 )
 
Components
    527,782       (7.1 )     623,799       (8.3 )     619,477       (8.6 )
 
Other
    460,888       (6.2 )     576,217       (7.7 )     578,349       (8.1 )
                                     
 
Segment Total
    4,624,181       (61.9 )     4,838,268       (64.5 )     4,786,236       (66.9 )
                                     
Game
    936,274       (12.5 )     753,732       (10.1 )     702,524       (9.8 )
                                     
Music
    433,147       (5.8 )     409,487       (5.5 )     216,779       (3.0 )
                                     
Pictures
    802,770       (10.7 )     756,370       (10.1 )     733,677       (10.2 )
                                     
Financial Services
    509,398       (6.8 )     565,752       (7.5 )     537,715       (7.5 )
                                     
Other
    167,863       (2.3 )     172,782       (2.3 )     182,685       (2.6 )
                                     
 
Sales and operating revenue
    7,473,633       (100.0 )     7,496,391       (100.0 )     7,159,616       (100.0 )
                                     

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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, the recognition method of insurance premiums received on certain products at 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 fiscal year ended March 31, 2004 and in the fiscal year ended March 31, 2005, by 30.8 billion yen and 67.5 billion yen, respectively. This change did not have a material effect on operating income in the Financial Services segment.
Electronics
      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 and 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 still cameras, video decks, and DVD-Video players/recorders.
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.
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 sales to outside customers, such as sales of mobile phone handsets to Sony Ericsson, by Sony EMCS Corporation (“Sony EMCS”), CD and DVD disc manufacturing and physical distribution businesses, and products and services which are not included in the above categories.

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Game
      SCEI develops, produces, manufactures, markets and distributes PlayStation, PS one, PlayStation 2 (“PS2”) and PlayStation Portable hardware and related software in Japan, and is developing the PLAYSTATION 3 entertainment system. Sony Computer Entertainment America Inc. (“SCEA”) and Sony Computer Entertainment Europe Ltd. (“SCEE”) market and distribute PlayStation, PS one, PS2 and PlayStation Portable 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, through its ownership of SONY BMG, a 50 percent owned joint venture with Bertelsmann AG (the financial results of which impact Sony’s equity in net income (loss) of affiliated companies), and SMEJ produce recorded music and music videos through contracts with many artists worldwide in all musical genres. SMEJ also produces, manufactures, markets and distributes CDs, MDs, DVDs, UMDs, Super Audio CDs, and pre-recorded audio and video cassettes and produces and manufactures CD-ROMs and DVD-ROMs.
      SMEI’s operations primarily consist of its music publishing business which owns and acquires rights to musical compositions, exploits and markets these compositions and receives royalties or fees for their use.
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 and online distribution; and operation of studio facilities.
      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 Sony Pictures Home Entertainment, Sony Pictures Releasing and Sony Pictures Releasing International. SPE is an equity investor 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. 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.
      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 and cable markets.
      Sony Pictures Digital operates SPE’s digital production and online distribution businesses including Sony Online Entertainment, as well as operating Sony Pictures Imageworks, Sony Pictures Animation and Sony Pictures Digital Sales & Marketing.
      SPE manages a studio facility, Sony Pictures Studios, which includes post production facilities, at SPE’s world headquarters in Culver City, California. A second studio facility, The Culver Studios, which was owned and operated by SPE, was sold by SPE in April 2004. SPE is leasing back a portion of this facility for a two-year period.

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Financial Services
      In the Financial Services segment, on April 1, 2004 Sony established a wholly-owned subsidiary, SFH, a holding company composed of Sony Life, Sony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”) with the aim of integrating various financial services including savings and loans, and offering individual customers high value-added products and high-quality services.
      Sony conducts insurance operations primarily through Sony Life, a Japanese life insurance company, and Sony Assurance, a Japanese non-life insurance company, both wholly owned by SFH. Sony also operates an Internet-based banking business in Japan through Sony Bank, which is an 84.2 percent directly owned subsidiary of SFH. Sony is also engaged in a leasing and credit financing business in Japan through Sony Finance International Inc. (“Sony Finance”).
Other
      The Other segment is mainly comprised of an advertising agency business in Japan; Sony Communication Network (“SCN”), an Internet-related service business subsidiary operating mainly in Japan; a retail seller of imported general merchandise in Japan; an in-house facilities management business in Japan and an Integrated Circuit (“IC”) card business.
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 for which the particular market accounts.
                                                   
    Fiscal Year Ended March 31
     
    2003   2004   2005
             
    (Yen in millions)
Japan
    2,093,880       (28.0 )     2,220,747       (29.6 )     2,100,793       (29.3 )
United States
    2,403,946       (32.2 )     2,121,110       (28.3 )     1,977,310       (27.6 )
Europe
    1,665,976       (22.3 )     1,765,053       (23.6 )     1,612,536       (22.6 )
Other Areas
    1,309,831       (17.5 )     1,389,481       (18.5 )     1,468,977       (20.5 )
                                     
 
Sales and operating revenue
    7,473,633       (100.0 )     7,496,391       (100.0 )     7,159,616       (100.0 )
                                     
Electronics
      Sony’s electronics products and services are marketed throughout the world under the trademark “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. 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 seasonal, 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.

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United States:
        Sony markets its electronics products and services through Sony Electronics Inc. and other wholly-owned subsidiaries in the U.S.
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 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, and SCEE market and distribute PlayStation, PS one, PS2, and PlayStation Portable 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.
Music
      SMEJ produces, manufactures, markets, and distributes CDs, MDs, DVDs, Super Audio CDs, and pre-recorded audio and video software. SMEJ conducts business in Japan under “Sony Records”, “Epic Records”, “Ki/oon Records”, “SMEJ Associated Records”, “Defstar Records”, and other labels.
      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 in countries other than Japan primarily under the Sony/ ATV Music Publishing name.
      SMEI, through its 50 percent ownership of SONY BMG, a joint venture with Bertelsmann AG (the financial results of which impact Sony’s equity in net income (loss) of affiliated companies), produces revenue through the marketing, sales and licensing of recorded music in physical and digital formats and conducts business under “Columbia Records “, “Epic Records”, “Arista Records”, “RCA 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 SONY BMG 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, videocassette and DVD distribution, pay and free television exhibition and other markets. SPE also acquires distribution rights to motion pictures produced by other companies, and jointly produces films with other studios or production companies. These rights may be limited to particular geographic regions, specific forms of media or period of time. SPE uses its own distribution service business, Sony Pictures Releasing, for the U.S. theatrical release of its films and for theatrical release of films acquired from and produced by others.

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      Outside the U.S., SPE generally distributes and markets its films through one of its Sony Pictures Releasing International subsidiaries. In certain countries, however, SPE has joint distribution arrangements with other studios or arrangements with independent local distributors.
      SPE’s theatrical release strategy focuses on offering a diverse slate of films with a mix of genres, talent and budgets. For the fiscal year ending March 31, 2006, 51 films are currently slated for release by SPE, including 13 films under the Columbia banner, seven films under the Screen Gems or TriStar banner, 19 Sony Pictures Classics releases, four Revolution Studios releases, and eight films co-financed with MGM. SPE has a motion picture library of over 3,500 feature films, including 12 with Best Picture Academy Awards®. Currently, SPE is converting its library (including acquired product) to a digital format and approximately 1,800 titles have been converted. In addition, SPE and four other motion picture studios are equal investors in Movielink LLC, an online movie download service offering feature films on an on-demand basis.
      The worldwide home entertainment distribution of SPE’s motion pictures and television programming (and programming acquired or licensed from others) is handled through Sony 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 videocassette and DVD formats.
      SPE produces local language programming in key markets around the world in conjunction with local partners and sells SPE-owned formats in approximately 25 countries. This programming, along with SPE’s library of television programming and motion 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 owns and operates the cable channel GSN (formerly Game Show Network) jointly with Liberty Media Corporation. SPE also has investments in almost 40 international networks, which are available in more than 100 countries worldwide.
Financial Services
      Sony Life conducts a life insurance business primarily in Japan, using Lifeplanner financial consultants to serve individual customers. As of March 31, 2005, Sony Life employed 4,163 such consultants. Sony Life maintains an extensive service network including 83 Lifeplanner branch offices, 26 regional sales offices, and 2,176 independent agencies in Japan. In addition, Sony has aimed to apply Sony Life’s insurance expertise in countries other than Japan, operating Sony Life Insurance (Philippines) Corporation in the Philippines since November 1999.
      Sony Assurance has conducted a non-life insurance business in Japan since October 1999. Using a direct marketing model that Sony believes is tailored to today’s networked society, Sony Assurance is working to build a new type of relationship between insurer and insured. Sony Assurance principally sells automobile and medical insurance directly to individuals by telephone and over the Internet.
      Sony Bank has conducted banking operations in Japan since June 2001, and, as a general rule, provides its services via the Internet 24 hours a day, 365 days a year. By using the MONEYKit tool, account holders can invest and manage assets according to their life plans 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.
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 cost of production rises. During the fiscal year ended March 31, 2005, prices of raw materials including iron and crude oil were high, and as a

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result, products that consume these materials in the manufacturing process rose significantly. Furthermore, there is growing concern that the supply of certain silicon devices such as NAND flash memory and analog semiconductors may become limited because of the growing demand among manufacturers for digital audio player components.
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 subsidiaries.
      In line with the industry practice 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, covering repairs, free of charge, in the case of malfunctions in the course of ordinary use of the product. In the case of broadcast- 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 where it is marketed.
      To further ensure customer satisfaction, Sony maintains customer information centers in its principal markets.
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 products. Sony products that employ DVD-Video player functions, including PS2 hardware, are substantially dependent upon certain patents licensed by MPEG LA LLC, Dolby Laboratories Licensing Corporation and Nissim Corp. These patents relate to technologies essential to DVD specification. 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.
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’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 artists who can achieve a high degree of public acceptance. In terms of music distribution, it is important to make appropriate investments in new technologies for secure, high-quality music distribution, while maintaining customer convenience.

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      In the Pictures segment, SPE faces intense competition from other major motion picture studios and, to a lesser extent, from independent production companies. SPE competes to attract the attention of the movie-going public worldwide and to obtain exhibition outlets and optimal release dates for its products. 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. Competition in television production, distribution, and syndication is also intense because available broadcast time is limited and the audience is increasingly 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, it is critical for Sony Life, Sony Assurance and Sony Bank to maintain customer confidence particularly in the face of several insolvencies of large financial institutions in Japan over the past decade. To be credible and competitive in the financial services market, it is important to offer attractive rates of return on customer investments. In addition, in order to meet diversifying customer demand, it is critical to provide attractive services to customers through unique marketing channels, such as Lifeplanner financial consultants at Sony Life, and through direct communication by telephone and over the Internet at Sony Assurance and Sony Bank. Sony Finance faces competitive pressure to achieve a leading position in the new arena of secure payment systems on the Internet by utilizing new technology.
      In the Other segment, SCN faces competition in Japan from many existing, large companies, as well as new entrants to the market. Telecommunication companies that possess a large Internet-ready infrastructure and other entrants that compete solely on 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 users are able to change Internet service providers with increasing ease. The penetration of mobile Internet services provided by telecommunications companies may also provide a substitute to the home-centric Internet service provided by SCN.
Government Regulations
      Sony’s business activities are subject to various governmental regulations in countries in which it operates, including regulations relating to business/investment approvals, import and export regulations including customs and export control, antitrust, intellectual property, consumer and business taxation, exchange controls, and environmental and recycling requirements. In Japan, insurance and banking businesses are subject to approvals and oversight from the Financial Services Agency. In addition, satellite broadcasting and telecommunication businesses are subject to approvals from the Ministry of Internal Affairs and Communications. An increasing number of countries have enacted or are contemplating enactment of personal information protection related laws and regulations. In Japan, comprehensive laws and regulations covering the private sector entered into force as of April 1, 2005. Under these laws, various obligations are imposed upon enterprises handling more than a certain amount of personal information, and possible administrative actions including fines and other penalties, may be imposed for compliance failures. 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 segments. Refer to “Risk Factors” in “Item 3. Key Information”.

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Organizational Structure
      The following table sets forth the significant subsidiaries owned, directly or indirectly, by Sony Corporation.
                 
    Country of   (As of March 31, 2005)
Name of company   incorporation   Percentage owned
         
Sony EMCS Corporation
    Japan       100.0  
Sony Semiconductor Kyushu Corporation
    Japan       100.0  
Sony Marketing (Japan) Inc. 
    Japan       100.0  
Sony Computer Entertainment Inc. 
    Japan       100.0  
Sony Music Entertainment (Japan) Inc. 
    Japan       100.0  
Sony Financial Holdings, Inc. 
    Japan       100.0  
Sony Life Insurance Co., Ltd. 
    Japan       100.0  
Sony Americas Holding Inc. 
    U.S.A.       100.0  
Sony Corporation of America
    U.S.A.       100.0  
Sony Electronics Inc. 
    U.S.A.       100.0  
Digital Audio Disc Corporation
    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. 
    Holland       100.0  
Sony Europe G.m.b.H. 
    Germany       100.0  
Sony Computer Entertainment Europe Ltd. 
    U.K.       100.0  
Sony Global Treasury Services Plc. 
    U.K.       100.0  
Sony Holding (Asia) B.V. 
    Holland       100.0  
Sony Electronics Asia Pacific Pte. Ltd. 
    Singapore       100.0  
Property, Plant and Equipment
      Sony has a number of offices, plants and warehouses throughout the world. Most of the buildings 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, 2005 with respect to plants 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 space   Principal products manufactured
         
    (square feet)    
In Japan:
           
 
Nagasaki
(Sony Semiconductor Kyushu Corporation
           
 
— Nagasaki TEC and SCEI)
    2,232,000     Semiconductors
 
Kokubu, Kagoshima
(Sony Semiconductor Kyushu Corporation
           
 
— Kokubu TEC)
    1,146,000     Semiconductors
 
Kumamoto
(Sony Semiconductor Kyushu Corporation
           
 
— Kumamoto TEC)
    980,000     Semiconductors
 
Kohda, Aichi
(Sony EMCS Corporation — Kohda TEC)
    953,000     Video cameras, digital still cameras, Memory Sticks, and printers
 
Inazawa, Aichi
(Sony EMCS Corporation — Inazawa TEC)
    859,000     CRT televisions
 
Ichinomiya, Aichi
(Sony EMCS Corporation — Ichinomiya TEC)
    833,000     CRT televisions, flat panel televisions, and digital still cameras
 
Kanuma, Tochigi
(Sony Chemicals Corporation)
    819,000     Magnetic and optical storage media and batteries
 
Tochigi, Tochigi
(Sony Energy Devices Corporation)
    609,000     Magnetic tapes, adhesives, and electronic components
 
Kisarazu, Chiba
(Sony EMCS Corporation — Kisarazu TEC)
    601,000     DVD Recorders and PCs
 
Koriyama, Fukushima
(Sony Energy Devices Corporation)
    584,000     Batteries
 
Kosai, Shizuoka
(Sony EMCS Corporation — Kosai TEC)
    562,000     Broadcast- and professional-use video equipment
 
Minokamo, Gifu
(Sony EMCS Corporation — Minokamo TEC)
    528,000     Video cameras, digital still cameras, mobile phones, and modules

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    Approximate    
Location   floor space   Principal products manufactured
         
    (square feet)    
Overseas:
           
 
Pittsburgh, Pennsylvania, U.S.A.
(Sony Electronics Inc.)
    2,820,000     CRT televisions, rear projection televisions, and CRTs
 
San Diego, California, U.S.A.
(Sony Electronics Inc.)
    1,249,000     CRTs
 
Wuxi, China
(Sony Electronics (Wuxi) Co., Ltd. and Sony (China) Ltd.)
    1,160,000     Batteries, televisions, PCs, and digital still cameras
 
Penang, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — PG TEC)
    988,000     Audio equipment and data storage systems
 
Tijuana, Mexico
(Sony de Tijuana Este, S.A. de C.V.)
    935,000     CRT televisions, rear projection televisions, TV tuners, computer displays, and audio equipment
 
Jurong, Singapore
(Sony Display Device (Singapore))
    838,000     CRTs
 
Dothan, Alabama, U.S.A.
(Sony Electronics Inc.)
    809,000     Magnetic tape products and polarized film for LCD
 
Bangi, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — KL TEC)
    797,000     CRT televisions, rear projection televisions, TV tuners, DVD players, and VTRs
 
Bridgend, Wales, U.K.
(Sony Manufacturing Company U.K.)
    752,000     CRTs and TV components
 
Pencoed, Wales, U.K.
(Sony Manufacturing Company U.K.)
    707,000     CRT televisions, broadcast cameras, and professional-use displays
 
Terre Haute, Indiana, U.S.A.
(Digital Audio Disc Corporation)
    655,000     CDs, CD-ROMs, DVDs, and DVD-ROMs
 
Nuevo Laredo, Mexico
(Sony Electronics Inc.)
    608,000     Magnetic storage media and batteries
 
Pitman, New Jersey, U.S.A.
(Sony Music Entertainment Inc.)
    568,000     CDs, CD-ROMs, DVDs, and DVD-ROMs
 
Viladecavallas, Spain
(Sony Espana, S.A.)
    566,000     CRT televisions, TV components, projectors, and flat panel televisions
 
Huizou, China
(Sony Precision Devices (Huizou) Co., Ltd.)
    526,000     Optical pickups and DVD players

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      Sony plans to increase its semiconductor manufacturing capacity at Sony Semiconductor Kyushu Corporation. Sony plans to invest 160.0 billion yen in semiconductor fabrication facilities and equipment. This investment includes investment in the production capacity for chips used for PLAYSTATION 3, LCD televisions, LCD rear projection televisions, and mobile products.
      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.
      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, The Culver Studios, which was owned and operated by SPE was sold by SPE in April 2004. SPE is leasing back a portion of this facility for a two-year period. SPE also leases office space and motion picture and television support facilities from affiliates of Sony Corporation and other third parties in various worldwide locations. SPE’s film and videotape storage operations are located in various leased locations in the U.S. and Europe.
      In December 2001, SCA entered into a lease for its corporate headquarters. The aggregate floor space of this building is approximately 723,000 square feet.
Item 5. Operating and Financial Review and Prospects
OPERATING RESULTS
Operating Results for the Fiscal Year Ended March 31, 2005 compared with the Fiscal Year Ended March 31, 2004
Overview
      After translation of Sony’s financial results into yen (the currency in which Sony’s financial statements are prepared), in accordance with Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”). Sony’s sales and operating revenue (“sales”) for the fiscal year ended March 31, 2005 decreased 4.5 percent compared with the previous fiscal year. 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), sales for the fiscal year decreased approximately 3 percent. This decrease is mainly due to the fact that, as of August 1, 2004, the sales of Sony’s overseas recorded music business are no longer recorded within Sony’s consolidated sales as a result of the establishment of SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), which is accounted for by the equity method, through the merger of Sony’s overseas recorded music business with Bertelsmann AG’s recorded music business, and a change in the method of recognizing insurance premiums received on certain products at Sony Life, as of the third quarter beginning October 1, 2003, from being recorded as revenues to being offset against the related provision for future insurance policy benefits.
      Operating income increased 15.2 percent compared with the previous fiscal year. On a local currency basis, operating income increased approximately 26 percent compared with the previous fiscal year. In addition to a decrease in restructuring charges compared to the previous fiscal year, several segments experienced an improvement in profitability such as the Pictures segment, where Spider-Man 2 was a significant contributor, and the Music segment, where several best-selling albums and singles in Japan contributed to improved profitability. On the other hand, the Electronics segment, where the cost of sales ratio deteriorated due to pricing pressures, and the Game segment, where there was a decrease in hardware sales, both experienced deteriorated profitability.

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Restructuring
      In the fiscal year ended March 31, 2005, Sony recorded restructuring charges of 90.0 billion yen, a decrease from the 168.1 billion yen recorded in the previous fiscal year. The primary restructuring activities were in the Electronics and Music segments.
      Of the total 90.0 billion yen, Sony recorded 53.6 billion yen in personnel related costs. This expense was incurred because 12,000 people, mainly in Japan, the U.S. and Western Europe, left the company 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, 2005 were 81.8 billion yen, compared to 143.3 billion yen in the previous fiscal year. Of these restructuring charges, restructuring charges of 2.1 billion yen and 1.1 billion yen, for the years ended March 31, 2004 and 2005, respectively, were recorded in the non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment but reclassified to the Electronics segment. See Note 24 of Notes to the Consolidated Financial Statements for more information on this reclassification.
      In the fiscal 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 as a result of a shift in demand from CRT televisions to plasma and liquid crystal display (“LCD”) panel televisions. In the year ended March 31, 2005, as part of this restructuring program, Sony recorded a non-cash impairment charge of 7.5 billion yen for the CRT TV display manufacturing facilities located in Europe. The impairment charge was calculated as the difference between the carrying value of the asset group and the present value of estimated future cash flows. The charge was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income.
      In addition to the above restructuring efforts, Sony undertook several headcount reduction programs to further reduce operating costs in the Electronics segment. As a result of these programs, Sony recorded restructuring charges of 50.3 billion yen for the fiscal year ended March 31, 2005, 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, 2005 was 14.0 billion yen and will be paid through the fiscal year ending March 31, 2006. Sony will continue seeking the appropriate headcount level to optimize the workforce in the Electronics segment.
Music
      Restructuring charges in the Music segment, including at Sony Music Entertainment (Japan) Inc. (“SMEJ”), for the fiscal year ended March 31, 2005 were 3.8 billion yen, compared to 9.9 billion yen in the previous fiscal year.
      Due to the continued contraction of the worldwide music market caused by 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 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.
      During the fiscal year ended March 31, 2005, in continuation of the worldwide restructuring program and in connection with the merger of its recorded music business into a joint venture with Bertelsmann AG, Sony recorded restructuring charges totaling 3.0 billion yen within the Music segment. These restructuring charges exclude restructuring charges that were recorded in the non-Japan based disc manufacturing and physical

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distribution businesses that were formerly included in the Music segment but have now been reclassified to the Electronics segment. Restructuring activities included the shutdown of certain distribution operations after the establishment of the recorded music joint venture with Bertelsmann AG as well as the further rationalization of overhead functions through staff reductions. The restructuring charges consisted of personnel related costs of 0.9 billion yen and other related costs of 2.1 billion yen. These charges are included in selling, general and administrative expenses in the consolidated statements of income. Positions were eliminated across various employee levels, business functions, operating units, and geographic regions during this phase of the worldwide restructuring program.
Operating Performance
                         
    Fiscal Year Ended    
    March 31    
         
    2004   2005   Percent change
             
    (Yen in billions)    
Sales and operating revenue
    7,496.4       7,159.6       -4.5 %
Operating income
    98.9       113.9       +15.2  
Income before income taxes
    144.1       157.2       +9.1  
Equity in net income of affiliated companies
    1.7       29.0       +1,594.2  
Net income
    88.5       163.8       +85.1  
Sales
      Sales for the fiscal year ended March 31, 2005 decreased by 336.8 billion yen, or 4.5 percent, to 7,159.6 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 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 service revenue. This is because Financial Service expenses are recorded separately from cost of sales and selling, general and administrative expenses. Furthermore, in the analysis 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. The calculations of all ratios below that pertain to business segments include intersegment transactions.
Cost of Sales and Selling, General and Administrative Expenses
      Cost of sales for the fiscal year ended March 31, 2005 decreased by 58.1 billion yen, or 1.1 percent, to 5,000.1 billion yen compared with the previous fiscal year, but increased from 73.5 percent to 76.2 percent as a percentage of sales. Year on year, the cost of sales ratio rose from 78.9 percent to 81.8 percent in the Electronics segment and increased from 70.1 percent to 73.0 percent in the Game segment. On the other hand, the cost of sales ratio decreased from 58.5 percent to 57.2 percent in the Music segment and improved in the Pictures segment from 60.0 percent to 58.7 percent.
      In the Electronics segment, there was a deterioration in the cost of sales ratio particularly within the CRT television, portable audio, DVD recorder (including PSX) and video camera businesses. In the Game segment, there was an increase in the cost of sales ratio as a result of costs associated with both the launch of the PlayStation Portable and the changeover to the new PlayStation 2 (“PS2”) model. The cost of sales ratio in the Music segment improved due to the establishment of SONY BMG which is accounted for under the equity method resulting in a higher percentage of sales being derived from SMEJ which benefited from the contribution of greatest hits album sales. In the Pictures segment, the cost of sales ratio also improved primarily due to the substantial contribution from Spider-Man 2.
      Personnel related costs included in cost of sales decreased by 52.5 billion yen compared with the previous fiscal year, primarily within the Electronics segment.

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      Research and development costs (all research and development costs are included within cost of sales) for the fiscal year ended March 31, 2005 decreased by 12.5 billion yen to 502.0 billion yen compared with the previous fiscal year. The ratio of research and development costs to sales was 7.6 percent compared to 7.5 percent in the previous fiscal year.
      Selling, general and administrative expenses for the fiscal year ended March 31, 2005 decreased by 263.2 billion yen, or 14.6 percent, to 1,535.0 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales improved from 25.9 percent in the previous fiscal year to 23.2 percent. Year on year, the ratio of selling, general and administrative expenses to sales improved from 21.2 percent to 19.0 percent in the Electronics segment, from 21.1 percent to 21.0 percent in the Game segment, and improved from 41.8 percent to 38.9 percent in the Music segment, and from 35.0 percent to 32.5 percent in the Pictures segment.
      Personnel related costs in selling, general and administrative expenses decreased by 169.3 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, and the fact that personnel related costs in Sony’s recorded music business outside Japan are no longer recorded within Sony’s consolidated selling, general and administrative expenses due to the establishment of SONY BMG mentioned above. In addition, advertising and publicity expenses for the fiscal year decreased by 51.6 billion yen compared to the previous fiscal year. This was primarily due to the fact that advertising and publicity expenses that were recorded in the Music segment decreased due to the establishment of SONY BMG and a reduction in advertising and publicity expenses in the Pictures segment.
      Loss on sale, disposal or impairment of assets, net was 28.0 billion yen, compared with 35.5 billion in the previous fiscal year. Although losses were recorded on the sale, disposal and impairment of CRT and CRT television production equipment in the Electronics segment, gains were recorded mainly from the sale of land and buildings in both the Electronics and Other segments.
Operating Income
      Operating income for the fiscal year ended March 31, 2005 increased by 15.0 billion yen, or 15.2 percent, to 113.9 billion yen compared with the previous fiscal year. The operating income margin increased from 1.3 percent to 1.6 percent. The business segments that contributed the most to operating income, in descending order by amount of financial impact, were the Pictures, Financial Services and Game segments. On the other hand, the Electronics segment recorded an operating loss mainly due to the appreciation of the yen against the U.S. dollar as well as an increase in cost of sales that exceeded the reduction in selling, general and administrative expenses. For a further breakdown of operating income for each segment, please refer to “Operating Performance by Business Segment” below.
Other Income and Expenses
      In the consolidated results for the fiscal year ended March 31, 2005, other income decreased by 24.7 billion yen, or 20.2 percent, to 97.6 billion yen, while other expenses decreased by 22.8 billion yen, or 29.5 percent, to 54.3 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 43.3 billion yen, a decrease of 1.9 billion yen, or 4.2 percent, compared with the previous fiscal year.
      A net foreign exchange loss of 0.5 billion yen was recorded in the fiscal year ended March 31, 2005, compared to a net foreign exchange gain of 18.1 billion yen recorded in the previous fiscal year. The net foreign exchange loss was recorded because the value of the yen, especially during the first quarter of the fiscal year ended March 31, 2005, was lower 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.

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      For the fiscal year ended March 31, 2005, a loss on devaluation of securities investments of 3.7 billion yen was recorded, an improvement of 12.8 billion yen, or 77.5 percent, compared with the previous year. This improvement was primarily due to the recording of valuation losses of 10.3 billion yen in the previous fiscal year related to securities issued by a privately held Japanese company engaged in cable broadcasting and other businesses which Sony accounted for under the cost method.
      The gain on change in interest in subsidiaries and equity investees increased by 11.5 billion yen, or 235.2 percent compared to the previous fiscal year to 16.3 billion yen. This was mainly the result of gains of 9.0 billion yen from a change in interest from Monex Inc., an equity affiliate of Sony, following its business integration by way of share transfer with Nikko Beans, Inc and total gains of 4.7 billion yen from the sale of stock and a change in interest in a subsidiary resulting from the initial public offering of So-net M3 Inc., a consolidated subsidiary of Sony Communication Network Corporation.
      In addition, the net gain recorded on sales of securities investments decreased 6.3 billion yen, or 53.8 percent, to 5.4 billion yen. This was primarily a result of the recording of a deferred gain of 6.0 billion yen in the fiscal year ended March 31, 2004, from Sony’s sale, during the fiscal year ended March 31, 2003, of its equity 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.
Income before Income Taxes
      Income before income taxes for the fiscal year ended March 31, 2005 increased 13.1 billion yen, or 9.1 percent, to 157.2 billion yen compared with the previous fiscal year, as a result of the increase in operating income and the decrease in net amount of other income and other expenses mentioned above.
Income Taxes
      Income taxes for the fiscal year ended March 31, 2005 decreased by 36.7 billion yen, or 69.6 percent, to 16.0 billion yen. Compared to an effective tax rate of 36.6 percent in the previous fiscal year, the effective tax rate was 10.2 percent in the current fiscal year. As a result of the recording of operating losses in the past, the U.S. subsidiaries of Sony have had valuation allowances against deferred tax assets for U.S. federal taxes and certain state taxes. However, in the fiscal year ended March 31, 2005, based on both improved operating results in recent years and a sound outlook for the future operating performance at Sony’s U.S. subsidiaries, Sony reversed 67.9 billion yen of such valuation allowances, resulting in a reduction to income tax expense. On the other hand, certain of Sony’s subsidiaries recorded new valuation allowances against deferred tax assets during the fiscal year ended March 31, 2005.
Results of Affiliated Companies Accounted for under the Equity Method
      Equity in net income of affiliated companies during the fiscal year ended March 31, 2005 was 29.0 billion yen, an increase of 27.3 billion yen, or 1,594.2 percent, compared to 1.7 billion yen recorded in the previous fiscal year. Equity in net income of Sony Ericsson Mobile Communications AB (“Sony Ericsson”), a joint venture focused on mobile phone handsets, was 17.4 billion yen, an increase of 11.0 billion yen, or 171.9 percent, compared to the 6.4 billion yen recorded in the previous fiscal year. Equity in net income of affiliated companies for the current fiscal year includes the recording of 12.6 billion yen as equity in net income from InterTrust Technologies Corporation (“InterTrust”). This amount reflects InterTrust’s proceeds from a license agreement with Microsoft Corporation arising from the settlement of a patent-related lawsuit. In addition, due to significant restructuring costs, an equity loss of 3.4 billion yen was recorded at SONY BMG. Furthermore, equity in net loss was recorded at affiliates such as Star Channel Inc., a Japan-based subscription television company specializing in the broadcast of movies, and S-LCD Corporation (“S-LCD”), a joint-venture with Samsung Electronics Co., Ltd. for the manufacture of amorphous TFT LCD panels.
Minority Interest in Income of Consolidated Subsidiaries
      In the fiscal year ended March 31, 2005, minority interest in income of consolidated subsidiaries decreased by 0.7 billion yen, or 30.6 percent, to 1.7 billion yen. This decrease was primarily due to the

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recording of minority interest at certain television and home entertainment subsidiaries in the Pictures segment in the previous fiscal year.
Net Income
      Net income for the fiscal year ended March 31, 2005 increased by 75.3 billion yen, or 85.1 percent, to 163.8 billion yen compared with the previous fiscal year. This increase was the result primarily of the abovementioned increase in income before income taxes, a decrease in the effective tax rate, as well as an increase in equity in net income of affiliated companies. As a percentage of sales, net income increased from 1.2 percent to 2.3 percent. Return on stockholders’ equity increased from 3.8 percent to 6.2 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, 2005.)
      Basic net income per share was 175.90 yen compared with 95.97 yen in the previous fiscal year, and diluted net income per share was 158.07 yen compared with 87.00 yen in the previous fiscal year. Refer to Notes 2 and 21 of Notes to Consolidated Financial Statements.
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 24 of Notes to Consolidated Financial Statements.
Business Segment Information
                           
    Fiscal Year Ended    
    March 31    
         
    2004   2005   Percent change
             
    (Yen in billions)    
Sales and operating revenue
                       
 
Electronics
    5,042.3       5,021.6       -0.4 %
 
Game
    780.2       729.8       -6.5  
 
Music
    440.3       249.1       -43.4  
 
Pictures
    756.4       733.7       -3.0  
 
Financial Services
    593.5       560.6       -5.6  
 
Other
    268.3       254.4       -5.2  
 
Elimination
    (384.7 )     (389.6 )      
                   
Consolidated
    7,496.4       7,159.6       -4.5  
                   
                           
    Fiscal Year Ended    
    March 31    
         
    2004   2005   Percent change
             
    (Yen in billions)    
Operating income (loss)
                       
 
Electronics
    (6.8 )     (34.3 )      
 
Game
    67.6       43.2       -36.1 %
 
Music
    (6.0 )     8.8        
 
Pictures
    35.2       63.9       +81.4  
 
Financial Services
    55.2       55.5       +0.6  
 
Other
    (12.1 )     (4.1 )      
                   
Total
    133.1       133.0       -0.1  
 
Elimination and unallocated corporate expenses
    (34.2 )     (19.0 )      
                   
Consolidated
    98.9       113.9       +15.2  
                   

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      As of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses, excluding Sony’s Japanese recorded music business, 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 equity method and, since August 1, 2004, 50 percent of net profits or losses of this business have been included under equity in net income (loss) of affiliated companies.
      In connection with the establishment of this joint venture, Sony’s non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment, have been reclassified to the Electronics segment to reflect the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. Results for the previous fiscal year in the Electronics and Music segments have been restated to account for this reclassification.
      In the Music segment, results for the fiscal year ended March 31, 2005 only include the results of Sony Music Entertainment Inc.’s (“SMEI”) recorded music business for the months of April through July 2004, and the twelve months results of SMEI’s music publishing business and SMEJ. However, results for the previous fiscal year in the Music segment include the consolidated results for SMEI’s recorded music business for all twelve months of the fiscal year, as well as the full year’s results for SMEI’s music publishing business and SMEJ.
      In July 2004, in order to establish a more efficient and coordinated semiconductor supply structure, Sony completed the integration of 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 same period of the previous fiscal year have not been restated as such comparable figures cannot be practically obtained given that it was not operated as a separate business within the Game segment. This integration of the semiconductor manufacturing businesses is a part of Sony’s semiconductor strategy of utilizing semiconductor technologies and manufacturing equipment originally developed or designed for the Game business within Sony as a whole.
Electronics
      Sales for the fiscal year ended March 31, 2005 decreased 20.7 billion yen, or 0.4 percent, to 5,021.6 billion yen compared with the previous fiscal year. An operating loss of 34.3 billion in the Electronics segment was recorded compared to the operating loss of 6.8 billion yen in the previous fiscal year. Sales to outside customers on a yen basis decreased 1.1 percent compared to the previous fiscal year. Regarding sales to outside customers by geographical area, although sales decreased in Japan by 10 percent and in the U.S. by 4 percent, they remained almost unchanged in Europe and increased by 9 percent in non-Japan Asia and other geographic areas (“Other Areas”).
      In Japan, although there was a significant increase in the sales of LCD televisions, and an increase in the sales of DVD recorders (including PSX), there was a decrease in the sales of PCs, cellular phones, primarily to Sony Ericsson, broadcast- and professional-use equipment and CRT televisions. In the U.S., there was an increase in sales of LCD rear projection televisions and digital still cameras, although sales mainly of CRT televisions, PCs, computer displays and portable audio declined. In Europe, sales increased, primarily of digital still cameras, LCD televisions and plasma televisions. However, there was a decrease in the sales mainly of CRT televisions and portable audio. In Other Areas, sales mainly of digital still cameras, CD-R/ RW and DVD+/-R/ RW drives and PCs increased while sales of primarily portable audio, optical pickups and home audio decreased.
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 24 of Notes to Consolidated Financial Statements.

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      “Audio” sales decreased by 103.6 billion yen, or 15.3 percent, to 571.9 billion yen. Sales of headphone stereos declined as a result of a significant decrease in the unit shipments of both CD format and MD format devices due to a shift in demand towards hard disc- and flash-based memory players. Worldwide shipments of CD format devices decreased by approximately 3.68 million units to approximately 7.28 million units and worldwide shipments of MD format devices decreased by approximately 1.44 million units to 1.92 million units. Sales of home audio declined primarily due to a contraction of the market. On the other hand, overall sales of car audio increased slightly due to strong sales in the European market and Other Areas.
      “Video” sales increased by 85.5 billion yen, or 9.0 percent, to 1,034.7 billion yen. There was a growth in the sales of digital still cameras outside of Japan and DVD recorders (including PSX) recorded a significant increase in sales worldwide. Worldwide shipments of digital still cameras increased by approximately 4.0 million units to approximately 14.0 million units. Worldwide shipments of DVD recorders were approximately 650,000 units in the previous fiscal year but increased to approximately 1.7 million units in the fiscal year ended March 31, 2005. Worldwide shipments of home-use video cameras increased by approximately 750,000 units to approximately 7.35 million units, but overall sales remained almost unchanged, due to increased price competition. DVD-Video player sales decreased due to pricing pressure, although unit shipments increased by approximately 1.0 million units to approximately 9.5 million units.
      “Televisions” sales increased by 31.6 billion yen, or 3.4 percent, to 957.1 billion yen. In addition to a significant increase in worldwide sales of LCD televisions, there was a significant increase in the sales of plasma televisions outside of Japan, particularly in Europe, and of projection televisions in the U.S. Worldwide shipments of LCD televisions increased by approximately 570,000 units, compared to the previous fiscal year, to approximately 1.0 million units; plasma television shipments increased by approximately 90,000 units to approximately 300,000 units; and projection televisions shipments increased by approximately 280,000 units to approximately 1.2 million units. On the other hand, although there was an increase in worldwide shipments of CRT televisions by approximately 100,000 units to approximately 9.5 million units, sales decreased significantly as a result of a fall in unit prices due to the continued shift in demand towards flat panel televisions. In addition, sales of computer displays also decreased worldwide.
      “Information and Communications” sales decreased by 56.4 billion yen, or 6.8 percent, to 778.4 billion yen. Despite an increase in notebook PC sales due to strong sales outside Japan, overall sales decreased due to a decrease in sales of desktop PCs. Worldwide unit shipments of PCs increased approximately 100,000 units to approximately 3.3 million units. Sales of personal digital assistants decreased significantly due to a downsizing of the business. Sales of broadcast- and professional-use products decreased slightly compared to the previous fiscal year, despite recording increased sales outside Japan, as sales in Japan decreased as a result of the recording of higher sales, in the previous fiscal year, from the sale of equipment to two television stations which opened new broadcasting facilities.
      “Semiconductors” sales decreased by 6.9 billion yen, or 2.7 percent, to 246.3 billion yen. The decrease was due to a decrease in sales of CCDs as the result of pricing pressures. Regarding LCDs, sales of low temperature polysilicon LCDs for cellular phones increased significantly.
      “Components” sales decreased by 4.3 billion yen, or 0.7 percent, to 619.5 billion yen. The decrease was primarily due to a decrease in sales of CD-R/ RW drives and optical pickups associated mainly with significant declines in unit prices. Sales of DVD+/-R/ RW drives increased due to a production and sales alliance with a third party. Regarding lithium-ion batteries, sales for use in digital still cameras and cellular phones increased.
      “Other” sales increased by 2.1 billion yen, or 0.4 percent, to 578.3 billion yen. The increase resulted from increased sales at Sony’s non-Japan based disc manufacturing business. However, there was a slight decrease in sales of mobile phone handsets mainly to Sony Ericsson.
      In the Electronics segment, cost of sales for the fiscal year ended March 31, 2005 increased by 129.1 billion yen, or 3.3 percent to 4,079.1 billion yen compared with the previous fiscal year. The cost of sales to sales ratio deteriorated by 2.9 percent to 81.8 percent compared to 78.9 percent in the previous fiscal year. Products that contributed to the deterioration in the cost of sales to sales ratio were CRT televisions and portable audio products, which both experienced a decrease in sales, and DVD recorders (including PSX) and

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video cameras, which were both impacted by falling unit prices. Restructuring charges recorded in cost of sales amounted to 9.6 billion yen, a decrease of 0.5 billion yen compared with the 10.1 billion yen recorded in the previous fiscal year. Research and development costs increased 2.4 billion yen, or 0.5 percent, from 430.5 billion yen in the previous fiscal year to 432.8 billion yen. Although there was an increase in research and development costs within the segment as a result of the transfer of semiconductor manufacturing operations from the Game segment to the Electronics segment in association with the business integration of Sony’s semiconductor manufacturing operations, overall research and development costs within the segment only increased slightly as a result of the carrying out of a stringent process for the selection of research and development activities.
      Selling, general and administrative expenses decreased by 116.3 billion yen, or 10.9 percent to 953.4 billion yen compared with the previous fiscal year. The primary reason for this decrease was a decrease in restructuring charges. Of the restructuring charges recorded in the Electronics segment, the amount recorded in selling, general and administrative expenses decreased by 71.4 billion yen from 124.7 billion yen in the previous fiscal year to 53.3 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 50.3 billion yen, a decrease of 67.7 billion yen compared with the previous fiscal year. On the other hand, royalty expenses increased 17.3 billion yen. The ratio of selling, general and administrative expenses to sales decreased 2.2 percentage points from the 21.2 percent recorded in the previous fiscal year to 19.0 percent.
      Loss on sale, disposal or impairment of assets, net decreased 6.0 billion yen to 23.4 billion yen compared with the previous fiscal year. This amount includes 18.8 billion yen in restructuring charges, which includes 7.5 billion yen related to CRT and CRT televisions manufacturing facilities in Europe. The amount of restructuring charges included in loss on sale, disposal or impairment, net in the previous fiscal year was 10.6 billion yen.
      An increased operating loss was recorded in the Electronics segment for the fiscal year ended March 31, 2005 due to a significant deterioration in the cost of sales ratio, as mentioned above. Regarding profit performance by product, excluding restructuring charges, semiconductors recorded an operating loss for the fiscal year, compared to the operating profit of the previous fiscal year. This loss was due to the recording, within the Electronics segment, of research and development costs related to system large scale integration (“LSI”) manufacturing, in particular the next generation processor chip, as a result of the integration of Sony’s semiconductor manufacturing business operations within the Electronics segment mentioned above. These costs were previously recorded within the Game segment. CRT televisions and portable audio products recorded a loss for the fiscal year compared to the operating income recorded in the previous fiscal year. DVD recorders (including PSX) also experienced an increased operating loss. The operating income for video cameras also decreased.
      On the other hand, results were positively affected by a decreased operating loss from personal digital assistants through the implementation of significant business downsizing, and a significant increase in operating income recorded for PCs and broadcast- and professional-use products.
Manufacturing by Geographic Area
      Approximately 50 percent of the Electronics segment’s total annual production during the fiscal year ended March 31, 2005 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 10 percent of total annual production, approximately 70 percent of which was destined for other regions. Asia, excluding Japan and China, accounted for slightly more than 10 percent of total annual production, with approximately 60 percent destined for Japan, the U.S. and Europe. The Americas and Europe together accounted for the remaining slightly less than 30 percent of total annual production, most of which was destined for local distribution and sale.

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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 exceeded the positive effect of the appreciation of the euro against the yen. Sales for the fiscal year ended March 31, 2005 decreased, on a yen basis, by 0.4 percent, but increased on a local currency basis by approximately 1 percent. In terms of operating performance, there was a deterioration in the operating loss compared to the previous fiscal year, but if calculated on a local currency basis, this operating loss was smaller compared to the actual results on a yen basis.
      Sales to outside customers by geographic area on a yen basis decreased in Japan by 10 percent, and in the U.S. by 4 percent: however, sales in Europe remained relatively unchanged and sales increased in Other Areas by 9 percent. Sales on a local currency basis for regions outside Japan increased in the U.S. by 1 percent and in Other Areas by 13 percent, but decreased in Europe by 2 percent.
Game
      Sales for the fiscal year ended March 31, 2005 decreased by 50.5 billion yen, or 6.5 percent, to 729.8 billion yen compared with the previous fiscal year. Operating income decreased by 24.4 billion yen, or 36.1 percent, to 43.2 billion yen compared with the previous fiscal year, and the operating income margin decreased from 8.7 percent to 5.9 percent.
      Sales in the Game segment on a local currency basis decreased approximately 6 percent. In addition, on a local currency basis, operating income decreased approximately 45 percent compared to the previous fiscal year. By region, although sales increased in Japan, there was a decrease in sales in the U.S. and Europe.
      Hardware sales declined. Although there was an increase in sales in Japan primarily associated with the launch of PlayStation Portable in December 2004, there was a decline in hardware sales in the U.S. and Europe associated with a decline in unit sales, and strategic price reductions, of PS2. On the other hand, both units sales and overall sales of software increased in Japan, the U.S. and Europe.
      Total worldwide production shipments of hardware and software were as follows:
                           
    Fiscal Year Ended    
    March 31    
        Cumulative as of
    2004   2005   March 31, 2005
             
    (Million units)
Total Production Shipments of Hardware*
                       
 
PlayStation + PS one
    3.31       2.77       102.49  
 
PlayStation 2
    20.10       16.17       87.47  
 
PlayStation Portable
            2.97       2.97  
Total Production Shipments of Software*/**
                       
 
PlayStation
    32.00       10.00       959.00  
 
PlayStation 2
    222.00       252.00       824.00  
 
PlayStation Portable
            5.70       5.70  
 
Production shipments of hardware 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 decreased compared with the previous fiscal year. Although there was an increase in software sales, the decrease in operating income was the result of a decrease in hardware sales coupled primarily with start up costs for the PlayStation Portable. The cost of sales to sales ratio deteriorated as a result of costs associated with both the launch of the PlayStation Portable and with the changeover to the new PS2 model. The ratio of selling, general and administrative expenses to sales compared to the previous fiscal year was relatively unchanged.

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Music
      Sales for the fiscal year ended March 31, 2005 decreased by 191.2 billion yen, or 43.4 percent, to 249.1 billion yen compared with the previous fiscal year. Of the Music segment’s sales, 62 percent were generated by SMEJ, a Japan-based subsidiary, and 38 percent were generated by SMEI, a U.S.-based subsidiary. Compared to an operating loss of 6.0 billion yen in the previous fiscal year, operating income of 8.8 billion yen was recorded.
      On a local currency basis, sales in the Music segment decreased by approximately 42 percent, although the Music segment recorded operating income as compared to an operating loss in the previous fiscal year.
      As previously noted, the recorded music business of SMEI merged with the recorded music business of Bertelsmann AG to form SONY BMG. As a result, there were no recorded music sales at SMEI after July 31, 2004. Therefore, SMEI’s results are not comparable with the results of the previous fiscal year.
      Sales at SMEJ increased by 6.9 percent compared with the previous fiscal year mainly due to an increase in album and single sales. Best-selling albums and singles during the fiscal year included musiQ by ORANGE RANGE, SENTIMENTALovers by Ken Hirai and two greatest hits albums by Porno Graffitti. Operating income increased by approximately 250 percent compared to the previous fiscal year due mainly to the higher sales noted above and an improvement in the cost of sales ratio associated with strong sales of greatest hits albums.
Pictures
      Sales for the fiscal year ended March 31, 2005 decreased by 22.7 billion yen, or 3.0 percent, to 733.7 billion yen compared with the previous fiscal year. Operating income increased by 28.7 billion yen, or 81.4 percent, to 63.9 billion yen and the operating income margin increased from 4.7 percent to 8.7 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.S. dollar basis, sales for the fiscal year in the Pictures segment increased approximately 1 percent and operating income increased by approximately 76 percent. Sales increased primarily due to higher worldwide home entertainment, international television syndication and worldwide theatrical revenues on films. Worldwide home entertainment and international television syndication revenues were higher as a result of the performance of films from the prior year release slate including 50 First Dates, Big Fish and Bad Boys 2. For theatrical revenues, the success of the current year film slate, particularly Spider-Man 2, Hitch and The Grudge, more than offset the impact of releasing fewer films this fiscal year. Sales for the fiscal year release slate decreased 70 million U.S. dollars as compared to the previous fiscal year. However, sales in the fiscal year ended March 31, 2005 from the prior year release slate increased 304 million U.S. dollars as compared to sales in the previous fiscal year from the release slate for the fiscal year ended March 31, 2003. While benefiting from higher theatrical revenues, total fiscal year release slate revenues were lower due to the timing of the fiscal year’s film slate’s release in the home entertainment market. The higher sales from films were partially offset by a 248 million U.S. dollar decrease in sales resulting from the absence in the fiscal year ended March 31, 2005 of several transactions in the television business that occurred in the prior fiscal year. These included syndication sales of King of Queens and Seinfeld as well as the extension of a licensing agreement for Wheel of Fortune. Television sales in the fiscal year ended March 31, 2005 benefited from the highly successful DVD release of Seinfeld.
      Operating income for the segment increased significantly, resulting in record operating income for the segment, due to the strong overall performance of the current year film slate and the home entertainment and international television syndication carryover performance of the prior year film slate noted above. Operating loss from the fiscal year release slate decreased 415 million U.S. dollars and operating income for the prior year’s release slate increased 173 million U.S. dollars as compared to the prior year. Spider-Man 2’s worldwide success contributed substantially to this fiscal year’s earnings, offset somewhat by the disappointing theatrical performance of Spanglish. Further improving operating income was a 38 million U.S. dollar decrease in restructuring charges. Partially offsetting these increases in operating income was the impact of the absence of

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the television transactions noted above, which reduced operating income by approximately 150 million U.S. dollars due primarily to the factors noted above for revenue.
      As of March 31, 2005, unrecognized license fee revenue at SPE was approximately 1.3 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. 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 Insurance Co., Ltd. (“Sony Life”), Sony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”) discussed below 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, 2005 decreased by 33.0 billion yen, or 5.6 percent, to 560.6 billion yen compared with the previous fiscal year. Operating income increased by 0.3 billion yen, or 0.6 percent, to 55.5 billion yen and the operating income margin increased to 9.9 percent compared with the 9.3 percent of the previous fiscal year.
      At Sony Life, revenue decreased by 38.7 billion yen, or 7.5 percent, to 474.3 billion yen compared with the previous fiscal year. The main reasons for the decrease in revenue were a change in the method of recognizing insurance premiums received on certain products, as of the third quarter beginning October 1, 2003, from being recorded as revenues to being offset against the related provision for future insurance policy benefits, coupled with a small decrease in valuation gains in the current fiscal year compared to the previous fiscal year in which significant valuation gains were recorded against stock conversion rights from convertible bonds. Although there was a decrease in insurance premium revenue as a result of the above mentioned change in accounting method, there were increases in insurance-in-force at the end of the fiscal year compared to the end of the previous fiscal year. Operating income at Sony Life decreased by 2.2 billion yen or 3.4 percent to 61.0 billion yen, mainly due to a decrease in valuation gains against stock conversion rights from convertible bonds, although this was partially offset by an increase in revenue from insurance premiums excluding the effect of the change in revenue recognition method noted above. In addition, the impact on operating income from the change in revenue recognition method noted above was slight.
      At Sony Assurance, revenue increased due to higher insurance revenue brought about by an expansion in automobile insurance-in-force. Operating income increased due to an increase in insurance revenue, although there was a deterioration in the loss ratio (the ratio of insurance payouts to premiums).
      At Sony Bank, which started operations in June 2001, revenue rose as there was an increase in interest revenue associated with an increase in the balance of funds from investing activities. Although revenue increased, an increase in operating expenses resulted in a relatively unchanged operating loss compared with the previous fiscal year.
      At Sony Finance International, Inc. (“Sony Finance”), a leasing and credit financing business subsidiary in Japan, revenue decreased due to a fall in leasing revenue. In terms of profitability, the operating loss decreased due to the recording of a loss, in the previous fiscal year ended March 31, 2004, from the lease of certain fixed assets to Crosswave Communications Inc (“Crosswave”), which commenced reorganization proceedings under the Corporate Reorganization Law of Japan during the same fiscal year.
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 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
                   
    Fiscal Year Ended
    March 31
     
    2004   2005
         
    (Yen in millions)
Financial Services
               
 
Financial service revenue
     593,544       560,557  
 
Financial service expenses
     538,383       505,067  
             
 
Operating income
    55,161       55,490  
 
Other income (expenses), net
    1,958       10,204  
             
 
Income before income taxes
    57,119       65,694  
 
Income taxes and other
    22,975       25,698  
             
 
Income before cumulative effect of an accounting change
    34,144       39,996  
 
Cumulative effect of an accounting change
          (4,713 )
             
 
Net income
    34,144       35,283  
             
                   
    Fiscal Year Ended
    March 31
     
    2004   2005
         
    (Yen in millions)
Sony without Financial Services
               
 
Net sales and operating revenue
    6,939,964       6,632,728  
 
Costs and expenses
    6,896,377       6,575,354  
             
 
Operating income
    43,587       57,374  
 
Other income (expenses), net
    52,746       40,639  
             
 
Income before income taxes
    96,333       98,013  
 
Income taxes and other
    30,916       (37,043 )
             
 
Income before cumulative effect of an accounting change
    65,417       135,056  
 
Cumulative effect of an accounting change
    (2,117 )      
             
 
Net income
    63,300       135,056  
             

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    Fiscal Year Ended
    March 31
     
    2004   2005
         
    (Yen in millions)
Consolidated
               
 
Financial service revenue
    565,752       537,715  
 
Net sales and operating revenue
    6,930,639       6,621,901  
             
        7,496,391       7,159,616  
 
Costs and expenses
    7,397,489       7,045,697  
             
 
Operating income
    98,902       113,919  
 
Other income (expenses), net
    45,165       43,288  
             
 
Income before income taxes
    144,067       157,207  
 
Income taxes and other
    53,439       (11,344 )
             
 
Income before cumulative effect of an accounting change
    90,628       168,551  
 
Cumulative effect of an accounting change
    (2,117 )     (4,713 )
             
 
Net income
    88,511       163,838  
             
Other
      During the fiscal year ended March 31, 2005, sales within the Other segment were comprised mainly of sales from an advertising agency business in Japan; Sony Communication Network Corporation (“SCN”), an Internet-related service business subsidiary operating mainly in Japan; an imported general merchandise retail business; an in-house oriented facility management business; and from an IC-card business.
      Sales for the fiscal year ended March 31, 2005 decreased by 13.9 billion yen, or 5.2 percent, to 254.4 billion yen, compared with the previous fiscal year. Of total segment sales, 72 percent were sales to outside customers. In terms of profit performance, operating losses for the segment improved for the fiscal year from 12.1 billion yen to 4.1 billion yen.
      During the fiscal year, sales decreased primarily as the result of a decrease in intersegment sales due to contract changes at a Japanese subsidiary involved in the advertising agency business. Regarding profit performance, an operating loss of 4.1 billion yen was recorded, an 8.0 billion yen improvement on the 12.1 billion yen loss recorded in the previous fiscal year. This improvement was mainly due to a reduction of fixed costs, a gain from the sale of a retail and showroom building in Japan and the strong performance of a business engaged in the production and marketing of animation products. Segment losses decreased despite the absence in the fiscal year ended March 31, 2005 of a 7.7 billion yen one-time gain recorded at a business operated by a U.S. subsidiary on the sale of rights related to a portion of the Sony Credit Card portfolio in the previous fiscal year.
Changes in the Classification of Business Segments for the fiscal year ending March 31, 2006
      In association with a significant contraction in the size of the Music segment as a result of the establishment of SONY BMG in August, 2004, Sony will discontinue the separate reporting of the Music segment as of the first quarter of the fiscal year ending March 31, 2006, and will instead consolidate its results within the Other segment. After the establishment of SONY BMG, for the second half of the fiscal year ended March 31, 2005, sales revenue for the Music segment (including intersegment sales) was 2.3 percent of total consolidated sales and operating income was 7.9 percent of the total operating income for all segments recording an operating profit. In addition, total assets for the Music segment, as of March 31, 2005, were 3.5 percent of the total assets for all segments. Furthermore, as of the first quarter of the fiscal year ending March 31, 2006, Sony’s Japan-based disc manufacturing and distribution business, previously classified within the Music segment, is scheduled to be reclassified to the Electronics segment.

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Foreign Exchange Fluctuations and Risk Hedging
      During the fiscal year ended March 31, 2005, the average value of the yen was 106.5 yen against the U.S. dollar, and 133.7 yen against the euro, which was 5.2 percent higher against the U.S. dollar and 1.9 percent lower against the 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, 2005, 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 addition, in the Music segment, results for this fiscal year only include the results of SMEI’s recorded music business for the months of April through July 2004, and the twelve month results for SMEI’s music publishing business and SMEJ. However, results for the previous fiscal year in the Music segment include the consolidated results for SMEI’s recorded music business for all twelve months, as well as the full year’s results for SMEI’s publishing business and SMEJ.
      In the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of SPE (a U.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 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.
      Sony Global Treasury Services Plc (“SGTS”) in London provides 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 general, SGTS hedges the projected exposures on average three months before the actual transactions take place. However, in certain cases SGTS partially hedges the projected exposures one month before the actual transactions take place when business requirements such as shorter production-sales cycle for certain products arise. Sony enters into foreign exchange transactions with financial institutions primarily for hedging purposes. Sony does not use these derivative financial instruments for trading or speculative purposes except for certain derivatives in the Financial Services segment utilized for portfolio investments.
      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.

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      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 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 are marked-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, 2005 were 1,545.8 billion yen, 428.3 billion yen and 146.5 billion yen, respectively.
Operating Results for the Fiscal Year Ended March 31, 2004 compared with the Fiscal Year Ended March 31, 2003
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, 2004 increased 0.3 percent compared with the previous fiscal year. Sales to outside customers in the Electronics segment increased, and revenue in the Financial Services segment increased due to improvements in valuation gains and losses at Sony Life Insurance Co., Ltd. (“Sony Life”), despite a decrease in sales in the Game, Pictures and Music segments.
      Operating income decreased 46.7 percent compared with the previous fiscal year. This decrease was mainly due to the increase in restructuring charges 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 of Spider-Man in the previous fiscal year in the Pictures segment. Partially offsetting the decrease in 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 compared with the previous fiscal year.
Restructuring
      In the fiscal year ended March 31, 2004, Sony recorded restructuring charges of 168.1 billion yen, an increase from the 106.3 billion yen recorded in the previous fiscal year. The primary restructuring activities were in the Electronics, Music and Pictures segments.
      Of the total restructuring costs incurred, Sony recorded 133.4 billion yen of personnel related costs. This expense was incurred because 9,000 people, mainly in Japan, the U.S. and Western Europe, left the company primarily through early retirement programs. Of the 9,000 people, 5,000 were people who left the company in Japan.
      For more detailed information about restructuring, please refer to Note 17 of Notes to the Consolidated Financial Statements.

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Electronics
      Restructuring charges in the Electronics segment for the fiscal year ended March 31, 2004 were 145.4 billion yen, compared to 80.4 billion yen in the previous fiscal year. Of these restructuring charges, 8.0 billion yen and 2.1 billion yen for the fiscal years ended March 31, 2003 and 2004, respectively, were recorded in the non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment but reclassified to the Electronics segment. See Note 24 of Notes to the Consolidated Financial Statements for more information on this reclassification.
      In the fiscal 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 a shift in demand from CRT televisions to 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 fiscal year ended March 31, 2004, the Electronics segment accelerated the implementation of headcount reduction through early retirement programs resulting in personnel related costs of 114.9 billion yen, an increase of 92.6 billion yen compared to the previous fiscal year. Of the 9,000 people who left the company on a consolidated basis, the majority came from the Electronics segment. The headcount of relatively high-paid white collar employees in Japan, the U.S. and Western Europe was reduced through early retirement programs while the headcount increased at manufacturing facilities in East Asia, particularly in China.
Music
      Restructuring charges in the Music segment, including at SMEJ, for the fiscal year ended March 31, 2004 were 9.9 billion yen, compared to 16.0 billion yen in the previous fiscal year.
      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, 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 undergone 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.
      During the fiscal year ended March 31, 2004, Sony broadened the scope of its worldwide restructuring of the Music segment, which resulted in restructuring charges totaling 8.6 billion yen at SMEI, compared to 14.4 billion yen in the fiscal year ended March 31, 2003. These restructuring charges exclude restructuring charges, including costs relating to the shutdown of CD manufacturing activities in the U.S., that were recorded in the non-Japan based disc manufacturing and physical distribution businesses that were formerly included in the Music segment but have now been reclassified to the Electronics segment. Restructuring activities at SMEI included the restructuring of the music label operations and further rationalization of overhead functions through staff reductions. The restructuring charges consisted of personnel related costs of 4.3 billion yen, lease abandonment costs of 1.3 billion yen and other related costs of 3.0 billion yen including non-cash asset impairments and disposals. Most of these charges were recorded in selling, general and administrative expense. Positions 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 disposal of certain

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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 yen was recorded in loss on sale, disposal or impairment of assets, net.
Operating Performance
                         
    Fiscal Year Ended
    March 31
     
    2003   2004   Percent 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  
Equity in net income of affiliated companies
    (44.7 )     1.7        
Net income
    115.5       88.5       -23.4  
Sales
      Sales for the fiscal year ended March 31, 2004 increased by 22.8 billion yen, or 0.3 percent, to 7,496.4 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 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 Service revenue. This is because Financial Service expenses are recorded separately from cost of sales and selling, general and administrative expenses. Furthermore, in the analysis 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 the ratios below that pertain to business segments are calculated with intersegment transactions included.)
Cost of Sales and Selling, General and Administrative Expenses
      Cost of sales for the fiscal year ended March 31, 2004 increased by 78.8 billion yen, or 1.6 percent, to 5,058.2 billion yen compared with the previous fiscal year, and increased from 72.0 percent to 73.5 percent as a percentage of sales. Year on year, the cost of sales ratio was almost unchanged from 78.8 percent to 78.9 percent in the Electronics segment and almost unchanged from 70.2 percent to 70.1 percent in the Game segment. The cost of sales ratio decreased from 58.8 percent to 58.5 percent in the Music segment. However, the cost of sales ratio increased from 58.2 percent to 60.0 percent in the Pictures segment.
      In the Electronics segment, the benefit of restructuring undertaken in previous fiscal years was offset primarily by an increase in research and development costs during the fiscal year. In the Game segment, the effect of increased PS2 software sales was offset by increased research and development costs. The cost of sales ratio in the Music segment decreased due to the benefits from restructuring activities implemented over the past several fiscal years. However, the cost of sales ratio in the Pictures segment increased due to the absence of the higher margins generated by revenues from Spider-Man in the prior fiscal year.
      Personnel related costs included in cost of sales increased only 1.7 billion yen compared with the previous fiscal year.
      Research and development costs (included in cost of sales) for the fiscal year ended March 31, 2004 increased by 71.4 billion yen, or 16.1 percent, to 514.5 billion yen compared with the previous fiscal year, primarily due to increases in the Electronics and Game segments. The ratio of research and development costs to sales increased from 6.4 percent to 7.5 percent.

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      Selling, general and administrative expenses for the fiscal year ended March 31, 2004 increased by 15.9 billion yen, or 0.9 percent, to 1,798.2 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales increased from 25.6 percent in the previous fiscal year to 25.9 percent. Year on year, the ratio of selling, general and administrative expenses to sales increased from 19.8 percent to 21.2 percent in the Electronics segment, from 18.0 percent to 21.1 percent in the Game segment, from 34.4 percent to 35.0 percent in the Pictures segment, and from 41.2 percent to 41.8 percent in the Music segment.
      Of selling, general and administrative expenses, personnel related costs increased by 89.7 billion yen compared with the previous fiscal year mainly due to an increase in severance related expenses in the Electronics segment resulting from the implementation of restructuring initiatives. However, the increase in selling, general and administrative expenses was partially offset by a decrease in royalty expenses, which decreased by 20.5 billion yen compared with the previous fiscal year due to the reversal, in the fiscal year ended March 31, 2004, of royalty expense reserves provided for in the previous fiscal year in the Electronics segment.
      Loss on sale, disposal or impairment of assets, net decreased 4.4 billion yen, or 11.1 percent, compared with the previous fiscal year, to 35.5 billion yen. Losses were recorded on the sale, disposal and impairment of CRT production equipment in the Electronics segment, on the 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, 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 to the sale of rights to a portion of the Sony Card portfolio.
Operating Income
      Operating income for the fiscal year ended March 31, 2004 decreased by 86.5 billion yen, or 46.7 percent, to 98.9 billion yen compared with the previous fiscal year. Operating income margin decreased from 2.5 percent to 1.3 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, in descending order by amount of financial impact, were the Game and Financial Services segments.
Other Income and Expenses
      In the consolidated results for the fiscal year ended March 31, 2004, other income decreased by 35.2 billion yen, or 22.4 percent, to 122.3 billion yen, while other expenses decreased by 18.2 billion yen, or 19.1 percent, to 77.1 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 45.2 billion yen, a decrease of 17.0 billion yen, or 27.4 percent, compared with the previous fiscal year.
      The decrease in other income was primarily due to the recording, in the fiscal year ended March 31, 2003, of a 66.5 billion yen gain on the sale of Sony’s equity interest in 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 16.1 billion yen increase in net foreign exchange gain, from 1.9 billion yen in the previous fiscal year to 18.1 billion yen. The net foreign exchange gain was recorded because the value of the yen, especially during the second half of the fiscal year ended March 31, 2004, was higher 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.

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      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 fiscal 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.
      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 fiscal 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 for the fiscal year ended March 31, 2004 decreased 103.6 billion yen, or 41.8 percent, to 144.1 billion yen compared with the previous fiscal year. As mentioned above, operating income and the net amount of other income and other expenses decreased compared with the previous fiscal year.
Income Taxes
      Income taxes for the fiscal year ended March 31, 2004 decreased by 28.1 billion yen, or 34.7 percent, to 52.8 billion yen, as a result of the decrease 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. The effective tax rate for the fiscal year was 36.6 percent, lower than the 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 utilization 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 in valuation allowances on deferred tax assets by Aiwa Co., Ltd. and its subsidiaries (“Aiwa”).
Results of Affiliated Companies Accounted for under the Equity Method
      Equity in net income of affiliated companies during the fiscal year ended March 31, 2004 was 1.7 billion yen, an improvement over the 44.7 billion yen in losses recorded in the previous fiscal year. Equity in net income of Sony Ericsson, a joint venture focused on mobile phone handsets, was 6.4 billion yen, an improvement from the 20.8 billion yen in losses recorded in the previous fiscal year. This improvement was due 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 losses of some other affiliated companies such as Crosswave, which commenced reorganization proceedings under the Corporate Reorganization Law of Japan during the fiscal year ended March 31, 2004. The equity in net loss related to Crosswave for the fiscal year ended March 31, 2004 was 1.4 billion yen.

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Minority Interest in Income of Consolidated Subsidiaries
      In the fiscal year ended March 31, 2004, minority interest in income of consolidated subsidiaries decreased 4.2 billion yen, or 63.9 percent, to 2.4 billion yen. This decrease is due to the absence of the previous fiscal year increase which resulted from the reversal, in that fiscal 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 losses of Aiwa in that fiscal year, as a result of taking Aiwa private. For the fiscal year ended March 31, 2004, minority interest in income was recorded mainly at certain television and home entertainment subsidiaries in the Pictures segment.
Net Income
      Net income for the fiscal year ended March 31, 2004 decreased by 27.0 billion yen, or 23.4 percent, to 88.5 billion yen compared with the previous fiscal year. As a percentage of sales, net income decreased 0.3 percentage points from 1.5 percent to 1.2 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 5.0 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.)
      Basic net income per share was 95.97 yen compared with 125.74 yen in the previous fiscal year, and diluted net income per share was 87.00 yen compared with 118.21 yen in the previous fiscal year. Refer to Notes 2 and 21 of Notes to Consolidated Financial Statements.
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 24 of Notes to Consolidated Financial Statements.
Business Segment Information
                           
    Fiscal Year Ended    
    March 31    
         
    2003   2004   Percent change
             
    (Yen in billions)    
Sales and operating revenue
                       
 
Electronics
    5,096.0       5,042.3       -1.1 %
 
Game
    955.0       780.2       -18.3  
 
Music
    466.3       440.3       -5.6  
 
Pictures
    802.8       756.4       -5.8  
 
Financial Services
    537.3       593.5       +10.5  
 
Other
    261.1       268.3       +2.7  
 
Elimination
    (644.9 )     (384.7 )      
                         
Consolidated
    7,473.6       7,496.4       +0.3  
                         
                         

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    Fiscal Year Ended    
    March 31    
         
    2003   2004   Percent change
             
    (Yen in billions)    
Operating income (loss)
                       
 
Electronics
    65.9       (6.8 )      
 
Game
    112.7       67.6       -40.0 %
 
Music
    (28.3 )     (6.0 )      
 
Pictures
    59.0       35.2       -40.3  
 
Financial Services
    22.8       55.2       +142.4  
 
Other
    (28.3 )     (12.1 )      
 
Elimination and unallocated corporate expenses
    (18.3 )     (34.2 )      
                         
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 and reclassified as unallocated corporate expenses, because the expected future benefits of this business will be spread across Sony. 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 presentation for the fiscal year ended March 31, 2004.
      In connection with the establishment of the SONY BMG joint venture, Sony’s non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment, have been reclassified to the Electronics segment to reflect the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. Results for the fiscal years ended March 31, 2003 and 2004 in the Electronics and Music segments have been restated to account for this reclassification.
Electronics
      Sales for the fiscal year ended March 31, 2004 decreased by 53.7 billion yen, or 1.1 percent, to 5,042.3 billion yen compared with the previous fiscal year. An operating loss of 6.8 billion yen was recorded compared to operating income of 65.9 billion yen in the previous fiscal year.
      The year-on-year decrease in sales was due to a significant decrease in intersegment sales to the Game segment as a result of the outsourcing of PS2 game console production to third parties in China. Sales to outside customers on a yen basis increased 4.6 percent compared with the previous fiscal year.
      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 non-Japan Asia and other geographic areas (“Other Areas”) by 8 percent. Sales on a yen basis in the U.S. decreased 7 percent.
      In Japan, mainly due to the strong sales of Sony Ericsson, 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, sales of digital still cameras, flat panel televisions, cellular 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,

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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.
Performance by Product Category
      Sales and operating revenue by product category discussed below represent sales to customers, which do not include intersegment transactions. Refer to Note 24 of Notes to Consolidated Financial Statements.
      “Audio” sales decreased by 108.6 billion yen, or 13.9 percent, to 675.5 billion yen. Sales of home audio declined due to a contraction of the market and increased price competition. Regarding headphone stereos, sales declined primarily due to falling prices, but the unit shipments of both MD format and CD format devices slightly exceeded their levels in 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, sales of car audio increased due to strong sales in the European market. Also, sales of Aiwa products decreased in all regions.
      “Video” sales increased by 121.0 billion yen, or 14.6 percent, to 949.3 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 analog and digital devices increased by approximately 850,000 units to approximately 6.6 million units, but overall sales increased only slightly, as sales in Japan 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 56.2 billion yen, or 5.7 percent, to 925.5 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 100,000 units to approximately 3.2 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 year as 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” sales increased by 48.5 billion yen, or 23.7 percent, to 253.2 billion yen. The increase was due to a significant 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 cameras and cellular phones increased significantly.
      “Components” sales increased by 96.0 billion yen, or 18.2 percent, to 623.8 billion yen. The increase was primarily due to significant increases 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 by approximately 12 million units to approximately 31 million units due to the continued, strong demand for digital still cameras. On

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March 31, 2004, Sony’s cumulative shipments of Memory Stick had reached approximately 66 million units. Regarding lithium-ion batteries, sales for use in digital still cameras and PCs increased.
      “Other” sales increased by 115.3 billion yen, or 25.0 percent, to 576.2 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. On the other hand, disc manufacturing sales decreased due to the appreciation of the yen.
      In the Electronics segment, cost of sales for the fiscal year ended March 31, 2004 decreased by 41.1 billion yen, or 1.0 percent to 3,950.0 billion yen compared with the previous fiscal year. The cost of sales to sales ratio increased 0.1 percentage point from 78.8 percent to 78.9 percent. Products that contributed to an increase in the cost of sales to sales ratio was a significant increase in the sales of mobile phone handsets, produced for Sony Ericsson, which have a relatively high cost of sales to sales ratio. Offsetting this increase, however, were PCs, which benefited from an emphasis on profitability and an increase in the proportion of high value added models in the product line-up, and low temperature polysilicon LCDs, which benefited from a significant expansion in sales. Restructuring charges recorded in cost of sales amounted to 10.1 billion yen compared with 22.2 billion yen in the previous fiscal year. Research and development costs increased 49.2 billion yen, or 12.9 percent, from 381.2 billion yen in the previous fiscal year to 430.5 billion yen.
      Selling, general and administrative expenses increased by 59.6 billion yen, or 5.9 percent to 1,069.7 billion yen compared with the previous fiscal year. The primary reason for this increase was an increase in restructuring charges. Of the restructuring charges recorded in the Electronics segment, the amount recorded in selling, general and administrative expenses increased by 80.4 billion yen from 44.4 billion yen in the previous fiscal year to 124.7 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 118.0 billion yen, an increase of 85.6 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 8.6 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales increased 1.4 percentage points from 19.8 percent recorded in the previous fiscal year to 21.2 percent, due to the decrease in sales.
      Loss on sale, disposal or impairment of assets, net increased 0.6 billion yen to 29.5 billion yen compared with the previous fiscal year. This amount includes 10.6 billion yen in restructuring charges, which includes 5.2 billion yen related to the TV display CRT manufacturing facilities in Japan. The amount of restructuring charges included in loss on sale, disposal or impairment, net in the previous fiscal year was 13.9 billion yen.
      Regarding profit performance of the segment, an operating loss was recorded for the fiscal year due to a significant increase in restructuring charges, especially severance-related expenses, as mentioned above. Regarding profit performance by product, excluding restructuring charges, compared with the previous fiscal year, operating income was recorded in PCs compared with an operating loss in the previous fiscal year, and a significant increase in operating income of CCDs was recorded. Losses from Aiwa products decreased while 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 fiscal year.
Manufacturing by Geographic Area
      Approximately 50 percent of the Electronics segment’s total annual production 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 10 percent of total annual production, approximately 70 percent of which was destined for other regions. Asia, excluding Japan and

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China, accounted for approximately 15 percent of total annual production, with approximately 60 percent destined for Japan, the U.S. and Europe. The Americas and Europe together accounted for the remaining 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 PS2 hardware for the Game segment; however, due to the outsourcing of PS2 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, by 1.1 percent, but increased on a local currency basis by approximately 1 percent. In terms of operating performance on a local currency basis, a small operating profit was recorded compared to the operating loss 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 for regions outside Japan increased in every region, with 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 174.8 billion yen, or 18.3 percent, to 780.2 billion yen compared with the previous fiscal year. Operating income decreased by 45.1 billion yen, or 40.0 percent, to 67.6 billion yen 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 on 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 PS2 hardware, despite higher unit sales of PS2 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 PS2 hardware, a strategic price reduction of PS2 hardware and a decrease in software unit sales. In Europe, although hardware unit sales increased as the market penetration of PS2 hardware continued to expand, hardware sales declined due to a strategic price reduction of PS2 hardware. Software unit sales and software sales in Europe both increased.
      Total worldwide production shipments of hardware and software were as follows:
                           
    Fiscal Year Ended    
    March 31    
        Cumulative as of
    2003   2004   March 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  
 
* Production shipments of hardware 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.

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**  Including those both from Sony and third parties under Sony licenses.
      In terms of profitability, operating income decreased compared with the previous fiscal year. This decrease was due to an increase in research and development costs for future businesses and a decrease in hardware sales. Research and development costs increased by 21.9 billion yen to 83.4 billion yen compared with 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 as the cost of producing PS2 hardware decreased in line with the decrease in hardware sales. Selling, general 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 to the previous fiscal year as the ratio of personnel related costs and advertising and promotion expenses to sales rose compared with the previous fiscal year.
Music
      Sales for the fiscal year ended March 31, 2004 decreased by 26.0 billion yen, or 5.6 percent, to 440.3 billion yen compared with the previous fiscal year. The operating loss for the year ended March 31, 2004 decreased by 22.3 billion yen, or 78.8 percent, to 6.0 billion yen compared with the previous fiscal year.
      Sales at 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, operating results improved as the operating loss for SMEI decreased compared to 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 improvement in profitability primarily resulted from the benefits realized from the worldwide restructuring activities implemented over the past two fiscal years to reduce costs in response to the downward trend of the market. These activities included the rationalization of support functions including record label shared services through elimination of redundancy. Operating income also benefited from lower restructuring charges as compared to the prior fiscal year. The total restructuring charges for the fiscal year ended March 31, 2004 was 76 million U.S. dollars or 8.6 billion yen, a decrease of 46 million U.S. dollars from the prior fiscal 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 fiscal year and an improvement in the ratio of selling, general and administrative expenses to sales.
      Regarding the results of SMEJ, sales were flat compared with the previous fiscal year, despite the continued contraction of the music industry. Operating income increased 69 percent compared with the prior fiscal year due to a reduction in selling, general and administrative expenses, primarily advertising and promotion expenses, and strong sales of Japanese artists’ recordings.
      On a yen basis, 67 percent of the Music segment’s sales were generated by SMEI while 33 percent were generated by SMEJ.
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 decreased by 23.7 billion yen, or

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40.3 percent, to 35.2 billion yen and the operating income margin decreased from 7.3 percent to 4.7 percent. The results in the Pictures segment consist of the results of SPE, a U.S. based subsidiary.
      On a U.S. dollar basis, sales for the fiscal year in the Pictures segment increased approximately 2 percent and operating income decreased approximately 30 percent. The increase in sales was primarily due to higher television performance in the fiscal year. Television revenues increased significantly due to initial syndication sales of The King of Queens and third cycle syndication sales of Seinfeld, as well as the extension of a licensing agreement for Wheel of Fortune. This increase in sales was partially offset by lower theatrical and home entertainment revenues from the fiscal year release slate, which included such notable titles as Bad Boys 2, S.W.A.T., Anger Management and Something’s Gotta Give, when compared to the prior fiscal year release slate, which included Spider-Man, the highest grossing film in SPE’s history, Men in Black II, xXx and Mr. Deeds. Sales for the fiscal year release slate decreased 359 million U.S. dollars as compared to the previous fiscal year. Operating income for the segment decreased significantly due to the absence of profits contributed by the record breaking performance of Spider-Man in the previous fiscal year and, to a lesser extent, the aggregate disappointing performance of several films from the fiscal year release slate including Gigli, Hollywood Homicide, The Missing and Charlie’s Angels: Full Throttle, resulting in an increase in operating loss of 412 million U.S. dollars compared to the prior fiscal year release slate. Additionally, operating income was also negatively impacted by a 38 million U.S. dollar increase in restructuring charges recorded in the fiscal year. (Refer to “Restructuring” above for details.) Partially offsetting these decreases in operating income was the contribution from the syndication sales and extension of a licensing agreement noted above, DVD sales of television library product and an additional syndication sale of Dawson’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 fiscal 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.
      As of March 31, 2004, unrecognized license fee revenue at SPE was approximately 1.2 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. The license fee revenue will be recognized in the fiscal year that the product is available for broadcast.
Financial Services
      The revenue and operating income at Sony Life, Sony Assurance and Sony Bank discussed below 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, 2004 increased by 56.3 billion yen, or 10.5 percent, to 593.5 billion yen compared with the previous fiscal year. Operating income increased by 32.4 billion yen, or 142.4 percent, to 55.2 billion yen and the operating income margin increased to 9.3 percent compared with the 4.2 percent of the previous fiscal year.
      At Sony Life, revenue increased by 46.4 billion yen, or 9.9 percent, to 513.0 billion yen and operating income increased by 33.6 billion yen, or 113.3 percent, to 63.2 billion yen compared with the previous fiscal year. Revenue increased due to improvements in valuation gains and losses from investments in the separate account and the general account, reflecting strength in the equity markets. This increase occurred 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 fiscal year, and the amount of insurance-in-force at the end of the fiscal year increased compared with the end of the previous fiscal year. Operating income at Sony Life increased due to improvements 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. Valuation gains and losses from investments in the separate account accrue directly to the account of policyholders and, therefore, do not affect operating income.

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      At Sony Assurance, revenue increased due to higher insurance revenue brought about by an expansion in automobile insurance-in-force. Operating income was recorded during the fiscal year compared 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 operating expenses to premiums) and the loss ratio (the ratio of insurance payouts to premiums).
      Sony Bank, which started business in June 2001, recorded a loss, as was also the case in the previous fiscal year, but the amount of loss decreased.
      At Sony Finance, a leasing and credit financing business subsidiary in Japan, revenue was unchanged compared to the previous fiscal year as credit financing revenue increased slightly and leasing revenue and rent revenue decreased slightly. In terms of profitability, the operating loss increased due to the recording of a loss from the lease of certain fixed assets to Crosswave, which commenced reorganization proceedings under the Corporate Reorganization Law of Japan, and an increase in expenses associated with the start of a credit card business.
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 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.
                                                 
            All other segments        
        excluding    
    Financial Services   Financial Services   Consolidated
             
Fiscal Year Ended March 31   2003   2004   2003   2004   2003   2004
                         
    (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  
                                     
Other
      During the fiscal year ended March 31, 2004, sales of the Other segment were comprised mainly of an advertising agency business in Japan and SCN, an Internet-related service business subsidiary operating mainly in Japan.
      Sales for the fiscal year ended March 31, 2004 increased by 7.2 billion yen, or 2.7 percent, to 268.3 billion yen, compared with the previous fiscal year. Of total segment sales, 64 percent were sales to outside customers.

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In terms of profit performance, operating losses for the segment decreased from 28.3 billion yen to 12.1 billion yen.
      During the fiscal year ended March 31, 2004, sales increased primarily due to an increase in sales at the in-house oriented information system service business, reflecting greater demand for its services by other businesses within Sony. Regarding profit performance, the segment recorded a loss primarily due to the recording of expenses associated with the development of network and content technology and services, intended to facilitate new businesses in the broadband age. Overall segment losses decreased compared to the previous fiscal year primarily because a U.S. subsidiary recorded a one-time gain of 7.7 billion yen on the sale of rights related to a portion of the Sony Card portfolio and because software in a discontinued professional-use video software business had been written off in the previous fiscal year. On the other hand, an operating loss was recorded at SCN compared with operating income in the previous fiscal year, due to increased expenses for subscriber acquisition.
Foreign Exchange Fluctuations and Risk Hedging
      During the fiscal year ended March 31, 2004, the average value of the yen was 112.1 yen against the U.S. dollar, and 131.1 yen against the euro, which was 7.3 percent higher against the U.S. dollar and 9.7 percent lower against the 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 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. 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 local currency basis results provide additional useful information to investors regarding operating performance.
      Sony’s consolidated results are subject to foreign currency 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 providing 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 particular SGTS hedges the majority of the 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 of the projected exposures are hedged one month before the actual transactions take place due to cost effectiveness considerations. Sony enters into

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foreign exchange transactions with financial institutions only for hedging purposes and does not undertake speculative transactions.
      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 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 are marked-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, 2004 were 1,348.2 billion yen, 375.6 billion yen and 124.9 billion yen, respectively.
Assets, Liabilities and Stockholders’ Equity
Assets
      Total assets on March 31, 2005 increased by 408.4 billion yen, or 4.5 percent, to 9,499.1 billion yen, compared with the previous fiscal year-end. Total assets on March 31, 2005 in all segments excluding the Financial Services segment decreased by 32.9 billion yen, or 0.5 percent, to 6,027.9 billion yen and total assets on March 31, 2005 in the Financial Services segment increased by 410.5 billion yen, or 11.8 percent, to 3,885.5 billion yen, compared with the previous fiscal year-end. Total assets on March 31, 2005 in all segments excluding the Financial Services segment would have decreased by approximately 2 percent compared with the previous fiscal year-end if the value of the yen had remained the same on March 31, 2005 as it was on March 31, 2004.
Current Assets
      Current assets on March 31, 2005 increased by 192.8 billion yen, or 5.7 percent, to 3,556.2 billion yen compared with the previous fiscal year-end. Current assets on March 31, 2005 in all segments excluding the Financial Services segment decreased by 99.6 billion yen, or 3.7 percent, to 2,592.8 billion yen.
      Cash and cash equivalents on March 31, 2005 in all segments excluding Financial Services segment decreased 73.2 billion yen, or 12.3 percent, to 519.7 billion yen compared with the previous fiscal year-end. This is primarily a result of 57.3 billion yen repayment of long-term debt relating to a variable interest entity responsible for the operation and development of a real estate complex in Berlin, Germany.
      Notes and accounts receivable, trade (net of allowance for doubtful accounts and sales returns) on March 31, 2005, in all segments excluding Financial Services segment increased 9.1 billion yen, or 1.0 percent, compared with the previous fiscal year-end to 952.7 billion yen.
      Inventories on March 31, 2005 decreased by 35.2 billion yen, or 5.3 percent, to 631.3 billion yen compared with the previous fiscal year-end. The inventory to cost of sales turnover ratio (based on the average of inventories at the end of each fiscal year and previous fiscal year) was 1.56 months compared to 1.53 months at the end of the previous fiscal year. Sony considers this level of inventory to be appropriate in the aggregate.
      Current assets on March 31, 2005 in the Financial Services segment increased by 290.5 billion yen, or 41.5 percent, to 990.2 billion yen, compared with the previous fiscal year-end. The increase was primarily attributable to an increase in marketable securities. (Refer to Note 7 of Notes to Consolidated Financial Statements.)
Investments and Advances
      Investments and advances on March 31, 2005 increased by 232.7 billion yen, or 9.3 percent, to 2,745.7 billion yen, compared with the previous fiscal year-end.

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      Investments and advances on March 31, 2005 in all segments excluding the Financial Services segment increased by 86.8 billion yen, or 24.2 percent, to 445.4 billion yen. This increase was mainly the result of investments associated with the establishment of S-LCD, a joint venture with Samsung Electronics Co., Ltd. for the manufacture of amorphous TFT LCD panels.
      Investments and advances on March 31, 2005 in the Financial Services segment increased by 104.5 billion yen, or 4.6 percent, to 2,379.0 billion yen, compared with the previous fiscal year-end. This increase was primarily due to investments mainly in Japanese fixed income securities resulting from an increase in insurance premiums at Sony Life, and an increase in housing loans due to a campaign carried out at Sony Bank.
      Also see “Investments” below.
Property, Plant and Equipment (after deduction of accumulated depreciation)
      Property, plant and equipment on March 31, 2005 increased by 7.4 billion yen, or 0.5 percent, to 1,372.4 billion yen, compared with the previous fiscal year-end.
      Property, plant and equipment on March 31, 2005 in all segments excluding the Financial Services segment increased by 9.6 billion yen, or 0.7 percent, to 1,333.8 billion yen, compared with the previous fiscal year-end.
      Capital expenditures (part of the increase in property, plant and equipment) for the fiscal year ended March 31, 2005 decreased by 21.4 billion yen, or 5.7 percent, to 356.8 billion yen compared with the previous fiscal year. Capital expenditures in the Electronics segment increased by 59.1 billion yen, or 23.5 percent, to 311.1 billion yen but decreased in the Game segment by 81.5 billion yen, or 81.2 percent, to 18.8 billion yen. Capital expenditures in the semiconductor businesses mainly in the Electronics segment amounted to 150.0 billion yen, of which investments in production equipment for system LSI including next generation broadband microprocessors amounted to 90.0 billion yen. Capital expenditures in the Music segment decreased by 0.8 billion yen, or 20.7 percent, to 2.9 billion yen, and decreased in the Pictures segment by 0.2 billion yen, or 3.4 percent to 5.8 billion yen, and decreased in the Other segment by 4.0 billion yen, or 39.3 percent, to 6.1 billion yen.
      Property, plant and equipment on March 31, 2005 in the Financial Services segment decreased by 2.3 billion yen, or 5.6 percent, to 38.6 billion yen compared with the previous fiscal year-end. Capital expenditures in the Financial Services segment decreased by 0.8 billion yen, or 16.7 percent, to 3.8 billion yen.
Other Assets
      Other assets on March 31, 2005 decreased by 46.7 billion yen, or 2.9 percent, to 1,545.9 billion yen, compared with the previous fiscal year-end.
      Other assets on March 31, 2005 in all segments excluding the Financial Services segment decreased by 62.5 billion yen to 1,189.4 billion yen. This decrease was primarily the result of the fact that, due to the establishment of SONY BMG, artist’s contracts belonging to the joint venture are no longer recorded as intangible assets within Sony’s consolidated balance sheets.
      Deferred tax assets on March 31, 2005 increased by 37.2 billion yen, or 18.3 percent, to 240.4 billion yen compared with the previous fiscal year-end. As a result of the recording of operating losses in the past, certain U.S. subsidiaries of Sony have had valuation allowances against deferred tax assets for U.S. federal taxes and certain state taxes. However, in the fiscal year ended March 31, 2005, based on both improved operating results in recent years and a sound outlook for the future operating performance at Sony’s U.S. subsidiaries, Sony reversed 67.9 billion yen of such valuation allowances. On the other hand, certain of Sony’s subsidiaries recorded new valuation allowances against deferred tax assets during the fiscal year ended March 31, 2005.
      Other assets in the Financial Services segment on March 31, 2005 increased by 17.8 billion yen, or 3.9 percent, to 477.8 billion yen compared with the previous fiscal year-end. This was mainly due to an increase in deferred insurance acquisition costs at Sony Life.

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Liabilities
      Total current and long-term liabilities on March 31, 2005 decreased by 84.9 billion yen, or 1.3 percent, to 6,604.9 billion yen compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, 2005 in all segments excluding the Financial Services segment decreased by 489.5 billion yen, or 12.7 percent, to 3,366.4 billion yen. Total current and long-term liabilities in the Financial Services segment on March 31, 2005 increased by 365.5 billion yen, or 11.8 percent, to 3,465.3 billion yen, compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, 2005 in all segments excluding the Financial Services segment would have decreased by approximately 14 percent compared with the previous fiscal year-end if the value of the yen had remained the same on March 31, 2005 as it was on March 31, 2004.
Current Liabilities
      Current liabilities on March 31, 2005 decreased by 172.8 billion yen, or 5.8 percent, to 2,809.4 billion yen compared with the previous fiscal year-end. Current liabilities on March 31, 2005 in all segments excluding the Financial Services segment decreased by 236.1 billion yen, or 9.9 percent, to 2,137.5 billion yen.
      Short-term borrowings and current portion of long-term debt on March 31, 2005 in all segments excluding the Financial Services segment decreased 205.7 billion yen, or 50.2 percent, to 204.0 billion yen compared with the previous fiscal year-end. This decrease was mainly a result of the fact that of 300.0 billion yen of convertible bonds due on March 31, 2005, 5.0 billion yen were redeemed on the maturity date with 282.8 billion yen of the 287.8 billion yen balance outstanding at the start of the fiscal year being converted into common stock, which was partially offset by the reclassification of long term debt to current liabilities mainly consisting of 119.0 billion yen of straight bonds and bonds with warrants redeemable during the fiscal year ending March 31, 2006. (Refer to Note 11 of Notes to Consolidated Financial Statements.)
      Notes and accounts payable, trade on March 31, 2005 in all segments excluding the Financial Services segment increased by 28.0 billion yen, or 3.6 percent, to 801.3 billion yen compared with the previous fiscal year-end, mainly due to an increase within the Game segment.
      Current liabilities on March 31, 2005 in the Financial Services segment increased by 59.8 billion yen, or 9.2 percent, to 708.6 billion yen, mainly due to the increase in deposits from customers in the banking business. Deposits from customers in the banking business increased by 167.9 billion yen, or 44.3 percent, to 546.7 billion yen, due to the expansion of the banking business.
Long-term Liabilities
      Long-term liabilities on March 31, 2005 increased by 88.0 billion yen, or 2.4 percent, to 3,795.5 billion yen compared with the previous fiscal year-end.
      Long-term liabilities on March 31, 2005 in all segments excluding the Financial Services segment decreased by 253.5 billion yen, or 17.1 percent, to 1,228.9 billion yen. Long-term debt on March 31, 2005 in all segments excluding the Financial Services segment decreased 147.9 billion yen, or 19.1 percent, to 627.4 billion yen. This was primarily the result of the reclassification of long-term debt to current liabilities, including 119.0 billion yen of bonds redeemable during the fiscal year ending March 31, 2006 and a decrease in accrued pension and severance costs of 20.2 billion yen, or 5.6 percent, to 338.0 billion yen, primarily due to the reform of Sony’s employee retirement pension plan in Japan.
      Long-term liabilities on March 31, 2005 in the Financial Services segment increased by 305.7 billion yen, or 12.5 percent, to 2,756.7 billion yen. This was due to an increase in insurance-in-force in the life insurance business which resulted in an increase in future insurance policy benefits and other of 285.7 billion yen, or 13.1 percent, to 2,464.3 billion yen.

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Total Interest-bearing Debt
      Total interest-bearing debt on March 31, 2005 decreased by 343.4 billion yen, or 27.4 percent, to 909.3 billion yen, compared with the previous fiscal year-end. Total interest-bearing debt on March 31, 2005 in all segments excluding the Financial Services segment decreased by 353.6 billion yen, or 29.8 percent, to 831.4 billion yen.
Stockholders’ Equity
      Stockholders’ equity on March 31, 2005 increased by 492.3 billion yen, or 20.7 percent, to 2,870.3 billion yen compared with the previous fiscal year-end. As noted above, of 300.0 billion yen of convertible bonds due on March 31, 2005, 5.0 billion yen were redeemed on the maturity date with 282.8 billion yen of the 287.8 billion yen balance outstanding at the start of the fiscal year being converted into common stock, and, therefore, incorporated into stockholders’ equity and additional paid-in capital. Retained earnings increased 139.0 billion yen compared with the previous fiscal year-end, and other comprehensive income (net of tax) was 64.3 billion yen. This was primarily due to comprehensive income of 74.2 billion yen arising from foreign currency translation adjustments in current fiscal year due to the devaluation of the yen, partially offset by the recording of a change in accumulated other comprehensive income of 7.3 billion yen arising from unrealized gains on securities in the current fiscal year. The ratio of stockholders’ equity to total assets increased 4.0 percent from 26.2 percent to 30.2 percent.
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.

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Financial Services
                   
    Fiscal Year Ended
    March 31
     
    2004   2005
         
    (Yen in millions)
ASSETS
Current assets:
               
 
Cash and cash equivalents
    256,316       259,371  
 
Marketable securities
    270,676       456,130  
 
Notes and accounts receivable, trade
    72,273       77,023  
 
Other
    100,433       197,667  
             
      699,698       990,191  
Investments and advances
    2,274,510       2,378,966  
Property, plant and equipment
    40,833       38,551  
Other assets:
               
 
Deferred insurance acquisition costs
    349,194       374,805  
 
Other
    110,804       103,004  
             
      459,998       477,809  
             
      3,475,039       3,885,517  
             
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Short-term borrowings
    86,748       45,358  
 
Notes and accounts payable, trade
    7,847       7,099  
 
Deposits from customers in the banking business
    378,851       546,718  
 
Other
    175,357       109,438  
             
      648,803       708,613  
Long-term liabilities:
               
 
Long-term debt
    135,811       135,750  
 
Accrued pension and severance costs
    10,183       14,362  
 
Future insurance policy benefits and other
    2,178,626       2,464,295  
 
Other
    126,349       142,272  
             
      2,450,969       2,756,679  
Minority interest in consolidated subsidiaries
          5,476  
Stockholders’ equity
    375,267       414,749  
             
      3,475,039       3,885,517  
             

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Sony without Financial Services
                   
    Fiscal Year Ended
    March 31
     
    2004   2005
         
    (Yen in millions,)
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
    592,895       519,732  
 
Marketable securities
    4,072       4,072  
 
Notes and accounts receivable, trade
    943,590       952,692  
 
Other
    1,151,879       1,116,353  
             
      2,692,436       2,592,849  
Film costs
    256,740       278,961  
Investments and advances
    358,629       445,446  
Investments in Financial Services, at cost
    176,905       187,400  
Property, plant and equipment
    1,324,211       1,333,848  
Other assets
    1,251,901       1,189,398  
             
      6,060,822       6,027,902  
             
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Short-term borrowings
    409,766       204,027  
 
Notes and accounts payable, trade
    773,221       801,252  
 
Other
    1,190,563       1,132,201  
             
      2,373,550       2,137,480  
Long-term liabilities:
               
 
Long-term debt
    775,233       627,367  
 
Accrued pension and severance costs
    358,199       338,040  
 
Other
    348,946       263,520  
             
      1,482,378       1,228,927  
Minority interest in consolidated subsidiaries
    17,554       18,471  
Stockholders’ equity
    2,187,340       2,643,024  
             
      6,060,822       6,027,902  
             

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Consolidated
                   
    Fiscal Year Ended
    March 31
     
    2004   2005
         
    (Yen in millions)
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
    849,211       779,103  
 
Marketable securities
    274,748       460,202  
 
Notes and accounts receivable, trade
    1,011,189       1,025,362  
 
Other
    1,228,207       1,291,504  
             
      3,363,355       3,556,171  
Film costs
    256,740       278,961  
Investments and advances
    2,512,950       2,745,689  
Property, plant and equipment
    1,365,044       1,372,399  
Other assets:
               
 
Deferred insurance acquisition costs
    349,194       374,805  
 
Other
    1,243,379       1,171,075  
             
      1,592,573       1,545,880  
             
      9,090,662       9,499,100  
             
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Short-term borrowings
    475,017       230,266  
 
Notes and accounts payable, trade
    778,773       806,044  
 
Deposits from customers in the banking business
    378,851       546,718  
 
Other
    1,349,574       1,226,340  
             
      2,982,215       2,809,368  
Long-term liabilities:
               
 
Long-term debt
    777,649       678,992  
 
Accrued pension and severance costs
    368,382       352,402  
 
Future insurance policy benefits and other
    2,178,626       2,464,295  
 
Other
    382,930       299,858  
             
      3,707,587       3,795,547  
Minority interest in consolidated subsidiaries
    22,858       23,847  
Stockholders’ equity
    2,378,002       2,870,338  
             
      9,090,662       9,499,100  
             
Investments
      Sony regularly evaluates its investment portfolio to identify other-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether an other-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 for available-for-sale securities with readily determinable fair values, management presumes a decline in value to be other-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 an other-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 is other-than-temporary.
      The assessment of whether a decline in the value of an investment is other-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 be other-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 and the effect of world wide 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 sale and held to maturity securities, breaking out the unrealized gains and losses by investment category.
                                         
    Fiscal Year Ended March 31, 2005
     
    Cost   Unrealized gain   Unrealized Loss   Fair Market Value
                 
    (Yen in millions)
Financial Services
                               
 
Available for sale
                               
   
Debt securities
                               
       
Sony Life
    1,769,693       56,988       (2,130 )     1,824,551  
       
Other
    315,101       1,096       (281 )     315,916  
 
Equity securities
                               
       
Sony Life
    42,256       22,735       (278 )     64,713  
       
Other
    9,469       5,172       (12 )     14,629  
 
Held to maturity
                               
   
Debt securities
                               
       
Sony Life
                       
       
Other
    27,414       530       (13 )     27,931  
                         
     
Total Financial Services
    2,163,933       86,521       (2,714 )     2,247,740  
                         
Non-Financial Services:
                               
 
Available for sale securities
    61,212       21,520       (577 )     82,155  
 
Held to maturity securities
    17                   17  
                         
     
Total Non-Financial Services
    61,229       21,520       (577 )     82,172  
                         
Consolidated
    2,225,162       108,041       (3,291 )     2,329,912  
                         
      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 better by Standard & Poor’s, Moody’s or others. As of March 31, 2005, Sony Life had debt and equity securities which had gross unrealized losses of 2.1 billion yen and 0.3 billion yen, respectively. Of the unrealized loss amounts recorded by Sony Life, less than 1 percent relate to securities being in an unrealized loss position of greater than 12 months. These unrealized losses related to numerous investments, with no single investment being in a material unrealized loss position. In addition, there was no individual security with

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unrealized losses that met the test discussed above for impairment 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 noninvestment grade securities held by Sony Life represents approximately 2 percent of Sony Life’s total investment portfolio, while the percentage of unrealized losses that relate to those noninvestment grade securities was approximately 4 percent of Sony Life’s total unrealized losses as of March 31, 2005.
      For fixed maturity securities with unrecognized losses held by Sony Life as of March 31, 2005 (2.1 billion yen), maturity dates vary as follows:
     
• Within 1 year:
  18 percent
• 1 to 5 years:
  55 percent
• 5 to 10 years:
  21 percent
      Sony also maintains long-term investment securities issued by a number of non-public companies. The aggregate carrying amount of these investments in non-public companies at March 31, 2005 was 48.9 billion yen. A non-public equity investment is valued at cost as fair value is not readily determinable. If the value is estimated to have declined and such decline is judged to be other than temporary, impairment of the investment is recognized and the carrying value is reduced to its fair value.
      For the fiscal years ended March 31, 2003, 2004 and 2005, total impairment losses were 25.5 billion yen, 16.7 billion yen and 4.2 billion yen of which 2.3 billion yen, 0.2 billion yen and 0.5 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, 2005 and March 31, 2004). Impairment losses other than at Sony Life in each of the three fiscal 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, 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 as other-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, 2005, March 31, 2004 and March 31, 2003.
      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 84 percent and 14 percent of the investments of the Financial Services segment, respectively.
      Sony Life’s basic investment policy is to take 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. Moreover, Sony Life analyzes the character of future insurance policy benefits by utilizing Asset Liability Management (“ALM”), a method of managing interest rate fluctuation risk through the comprehensive identification of the mismatches of duration and cash flows between assets and liabilities. Government bonds, convertible bonds, and straight corporate bonds constitute a majority of Sony Life’s current portfolio. Sony Life invests in various types of bonds in many countries,

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companies and industries, to diversify associated risks. Stocks accounted for approximately 3 percent of the current portfolio.
      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 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. With respect to loans, Sony Bank mainly offers housing loans to individuals and does not have any corporate loan exposure.
Contractual Obligations, Commitments, and Contingent Liabilities
      The following table summarizes Sony’s contractual obligations and major commitments. Please note that references to Notes below are references to particular notes within the Notes to Consolidated Financial Statements.
                                           
        Payments Due by Period
         
        Less than   1 to   3 to   After
    Total   1 Year   3 Year   5 Year   5 Year
                     
        (Yen in millions)
Contractual Obligations and Major Commitments:*
                                       
Long-term debt (Note 11)
                                       
 
Capital lease obligations (Notes 8 and 11)
    40,301       11,713       17,435       6,655       4,498  
 
Other long-term debt (Note 11)
    805,561       155,157       192,741       278,684       178,979  
Minimum rental payments required under operating leases (Note 8)
    169,951       38,182       53,561       24,556       53,652  
Purchase commitments for property, plant and equipment and other assets (Note 23)
    83,683       67,698       15,973       12        
Expected cost for the production or purchase of films and television programming or certain rights (Note 23)
    82,080       45,651       36,429              
 
* 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, 2005 discussed below as such amount is not currently determinable. Sony expects to contribute approximately 35.0 billion yen to the Japanese pension plans and approximately 6.0 billion yen to the foreign pension plans for the fiscal year ending March 31, 2006 (Note 14).
* The total unused portion of the line of credit extended under loan agreements in the Financial Services segment is not included in the above table or the amount of commitments outstanding at March 31, 2005 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 199.9 billion yen as of March 31, 2005 (Note 23).
* The 5 year Revolving Credit Agreement with Sony BMG, which matures on August 5, 2009 and provides for a base commitment of 32.1 billion yen and additional incremental borrowings of up to 16.1 billion yen, is not included in the above table or the amount of commitments outstanding at March 31, 2005 discussed below as such amount is not currently determinable. Sony’s outstanding commitment under this Credit Agreement as of March 31, 2005 was 24.1 billion yen (Note 23).

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      The total amount of commitments outstanding at March 31, 2005 was 240.7 billion yen (Refer to Note 23 of Notes to Consolidated Financial Statements). 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, 2005, such commitments outstanding were 83.7 billion yen.
      A subsidiary in the Pictures segment has committed to fund a portion of the production cost 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, 2005, 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 82.1 billion yen.
      In order to fulfill its commitments, Sony will use cash generated by its operating activities, intra-group loans and borrowings from subsidiaries with excess funds to subsidiaries that are short of funds through its finance subsidiaries such as SGTS, and raise funds from the global capital markets and from banks when necessary.
      The following table summarizes Sony’s contingent liabilities.
           
    Total Amounts of
    Contingent Liabilities
     
    (Yen in millions)
Contingent Liabilities: (Notes 23)
       
 
Loan guarantees to related parties
    7,642  
 
Other
    18,407  
       
 
Total contingent liabilities
    26,049  
       
Off-Balance Sheet Arrangements
      Sony has several accounts receivable securitization programs to provide liquidity, capital resources and credit risk support.
      In the United States, Sony has set up an accounts receivable securitization program that provides for the accelerated receipt of up to 53.5 billion 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 an undivided interest in that pool of receivables to several multi-seller commercial paper conduits owned and operated by a bank. These securitization transactions are accounted for as a sale in accordance with 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 transactions are excluded from receivables in the accompanying consolidated balance sheet. During the period from April 2004 to January 2005, Sony sold a total of 80.3 billion yen of accounts receivable under this program. There were no outstanding amounts due at March 31, 2005 relating to the existing undivided interests in the pool of receivables that had been sold. Losses from these transactions were insignificant. This program was terminated in May 2005.
      During the fiscal year ended March 31, 2005, Sony entered into new accounts receivable sales programs that provide for the accelerated receipt of up to 47.5 billion yen of eligible trade accounts receivable of Sony Corporation. Through these programs, Sony can sell receivables to special purpose entities owned and operated by banks. These transactions are accounted for as a sale in accordance with FAS No. 140, because Sony has relinquished control of the receivables. Accordingly, accounts receivable sold under these transactions are excluded from receivables in the accompanying consolidated balance sheet. The 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, 2005. Losses from these transactions were insignificant. Although Sony continues servicing the sold

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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.
      Sony has, from time to time, entered into various financing arrangements with Variable Interest Entities (“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 not a significant part of its financing activities, Sony employs these arrangements because they provide a diversification of funding sources. The assets and liabilities associated with these arrangements previously qualified for off-balance sheet treatment. On July 1, 2003, Sony adopted FIN 46 and accordingly, the assets and liabilities associated with these arrangements were consolidated. Refer to Note 22 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 cumulative effect of an accounting change for the year ended March 31, 2004. 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 as of March 31, 2005, also increased by 1.5 billion yen compared with previous fiscal year-end. As of March 31, 2005, Sony is a primary beneficiary for all the VIEs in which Sony holds a significant variable interest, and all these VIEs are consolidated by Sony. Also, in connection with Sony’s utilization of joint venture and alliances to achieve certain strategic objectives, Sony has recently entered into several joint ventures and made certain strategic investments which include SONY BMG, S-LCD and MGM. Sony has reviewed these investments and determined that both SONY BMG and S-LCD are not VIEs while MGM is a VIE. However, MGM will not be consolidated as Sony is not the primary beneficiary of this VIE. Accordingly, Sony has accounted for these investments under the equity method.
Cash Flows
(The fiscal year ended March 31, 2005 compared with the fiscal year ended March 31, 2004)
      Operating Activities: During the fiscal year ended March 31, 2005, Sony generated 647.0 billion yen of net cash from operating activities, a increase of 14.4 billion yen, or 2.3 percent compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment generated 485.4 billion yen of net cash from operating activities, a increase of 84.3 billion yen, or 21.0 percent, compared with the previous fiscal year, and the Financial Services segment generated 168.1 billion yen of net cash from operating activities, a decrease of 73.5 billion yen, or 30.4 percent, compared with the previous fiscal year.
      During the fiscal year, in addition to profit contributions from the Pictures, Financial Services, Game and Music segments and depreciation expenses, operating cash flow benefited from an increase in notes and accounts payable, trade, primarily associated with an increase in sales and procurement related primarily to the PlayStation Portable within the Game segment during the fourth quarter of the fiscal year, a decrease in notes and accounts receivable, trade, associated with a sales decrease in the Pictures segment during the fourth quarter and within the Music segment associated with the decrease in sales after August 2004, and a decrease in inventory mainly within the Game and Electronics segments. Partially offsetting these contributions were factors including an increase in notes and accounts receivable, trade primarily within the Game segment. In addition, in the Financial Services segment, 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 increased, due to a decrease in inventory during the fiscal year compared to an increase in inventory in the previous fiscal year, and there was a smaller increase in notes and accounts receivable, trade, compared with the previous fiscal year associated with the decrease in sales. These factors were partially offset by factors such as a smaller increase in notes and accounts payable, trade.
      Investing Activities: During the fiscal year, Sony used 931.2 billion yen of net cash in investing activities, an increase of 169.4 billion yen, or 22.2 percent, compared with the previous fiscal year. Of this total, all

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segments excluding the Financial Services segment used 472.1 billion yen of net cash in investing activities, an increase of 119.6 billion yen, or 33.9 percent, compared with the previous fiscal year, and the Financial Services segment used 421.4 billion yen in net cash, an increase of 19.8 billion yen, or 4.9 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 system LSI including the advanced microprocessor “Cell,” as well as investments associated with the establishment of the amorphous TFT LCD panel manufacturing joint venture S-LCD. Within the Financial Services segment, payments for investments and advances exceeded proceeds from maturities of marketable securities, sales of securities investments and collections of advances primarily as a result of both investments in mainly Japanese fixed income securities resulting from an increase in insurance premiums at Sony Life, and a housing loan campaign carried out at Sony Bank.
      Compared with the previous fiscal year, net cash used in investing activities increased, due primarily to investments associated with S-LCD. In all segments excluding the Financial Services segment, the amount of payments for investments and advances increased by 124.8 billion yen from 33.3 billion yen to 158.2 billion yen due to the abovementioned investments at S-LCD. On the other hand, in the Financial Services segment, net cash used in investing activities increased due to an increase in proceeds from investments and advances year on year.
      In all segments excluding the Financial Services segment, the difference between cash generated from operating activities and cash used in investing activities was 13.3 billion yen for the fiscal year, a decrease of 35.3 billion yen, or 72.6 percent, compared with the previous fiscal year.
      Financing Activities: During the fiscal year ended March 31, 2005, 205.2 billion yen of net cash was provided by financing activities. Of the total, 95.4 billion yen of net cash was used for financing activities in all segments excluding the Financial Services segment as a result of 89.7 billion yen being used for the repayment of long term debt and 23.0 billion yen in cash being used for the payment of dividends.
      In the fiscal year ended March 31, 2005, net cash was used for financing activities compared to 153.8 billion yen of net cash procured in the previous fiscal year. This change was due mainly to the issuance of 250.0 billion yen in euro yen convertible bonds (bonds with stock acquisition rights) within the previous fiscal year.
      In the Financial Services segment, as a result of a 294.4 billion yen increase in customer deposits due to factors such as an increase in insurance-in-force at Sony Life and an increase in deposits from customers in the banking business, 256.4 billion yen was procured by financing activities.
      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 decreased by 70.1 billion yen, or 8.3 percent, to 779.1 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 decreased by 73.2 billion yen, or 12.3 percent, to 519.7 billion yen, and for the Financial Services segment, increased by 3.1 billion, or 1.2 percent, to 259.4 billion yen, compared with the end of the previous fiscal year.
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.

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Condensed Statements of Cash Flows
                   
    Fiscal Year Ended
    March 31
     
    2004   2005
         
    (Yen in millions)
Financial Services
               
 
Net cash provided by operating activities
    241,627       168,078  
 
Net cash used in investing activities
    (401,550 )     (421,384 )
 
Net cash provided by financing activities
    141,696       256,361  
             
 
Net increase (decrease) in cash and cash equivalents
    (18,227 )     3,055  
 
Cash and cash equivalents at beginning of the fiscal year
    274,543       256,316  
             
 
Cash and cash equivalents at end of the fiscal year
    256,316       259,371  
             
                   
    Fiscal Year Ended
    March 31
     
    2004   2005
         
    (Yen in millions)
Sony without Financial Services
               
 
Net cash provided by operating activities
    401,090       485,439  
 
Net cash used in investing activities
    (352,496 )     (472,119 )
 
Net cash provided by (used in) financing activities
    153,759       (95,373 )
             
 
Effect of exchange rate changes on cash and cash equivalents
    (47,973 )     8,890  
             
 
Net increase (decrease) in cash and cash equivalents
    154,380       (73,163 )
 
Cash and cash equivalents at beginning of the fiscal year
    438,515       592,895  
             
 
Cash and cash equivalents at end of the fiscal year
    592,895       519,732  
             
                   
    Fiscal Year Ended
    March 31
     
    2004   2005
         
    (Yen in millions)
Consolidated
               
 
Net cash provided by operating activities
    632,635       646,997  
 
Net cash used in investing activities
    (761,792 )     (931,172 )
 
Net cash provided by financing activities
    313,283       205,177  
 
Effect of exchange rate changes on cash and cash equivalents
    (47,973 )     8,890  
             
 
Net increase (decrease) in cash and cash equivalents
    136,153       (70,108 )
 
Cash and cash equivalents at beginning of the fiscal year
    713,058       849,211  
             
 
Cash and cash equivalents at end of the fiscal year
    849,211       779,103  
             
Cash Flows
(The fiscal year ended March 31, 2004 compared with the fiscal year ended March 31, 2003)
      Operating Activities: During the fiscal year ended March 31, 2004, Sony generated 632.6 billion yen of net cash from operating activities, a decrease of 221.2 billion yen, or 25.9 percent compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment generated 401.1 billion yen of net cash from operating activities, a decrease of 143.0 billion yen, or 26.3 percent, compared with the previous year, and the Financial Services segment generated 241.6 billion yen of net cash from operating activities, a decrease of 73.1 billion yen, or 23.2 percent, compared with the previous fiscal year.

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      During the fiscal year, profits 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 to an increase in the procurement of raw materials and parts reflecting the increase in sales to outside customers in the Electronics segment, contributed to operating cash flow. Partially offsetting these contributions were factors including an increase in inventories in the Electronics segment and an increase in notes and accounts receivable, trade in the Electronics and Pictures 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 to a year on year increase in notes and accounts receivable, trade during the fiscal year ended March 31, 2004, compared with a year on year decrease during the fiscal year ended March 31, 2003. The increase in notes and accounts receivable, trade was primarily due to 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 to 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.
      Investing Activities: During the fiscal year, Sony used 761.8 billion yen of net cash in investing activities, an increase of 55.4 billion yen, or 7.8 percent, compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment used 352.5 billion yen of net cash in investing activities, an increase of 166.6 billion yen, or 89.6 percent, compared with the previous fiscal year, and the Financial Services segment used 401.6 billion yen in net cash, a decrease of 115.1 billion yen, or 22.3 percent.
      During the fiscal year, purchases of fixed assets (capital expenditures) were made, primarily due to proactive capital expenditures in the Electronics and Game segments mainly for next generation broadband microprocessors and CCDs, and payments for investments and advances exceeded proceeds in the Financial Services segment due to an increase in assets under management (Refer to “Financial Services”).
      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. In all segments excluding the Financial Services segment, the amount 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 fiscal year, due to investments associated with the acquisition of companies such as InterTrust Technologies Corporation and an increase in the capital stock of Sony Ericsson in the fiscal year ended March 31, 2003. On the other hand, the amount of proceeds from sales and maturities of investments and collections of advances in the segments other than Financial Services segment decreased 113.5 billion yen, or 76.2 percent to 35.5 billion yen compared with the previous fiscal year, due to the sale of Sony’s equity interest in Telemundo in 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 48.6 billion yen for the fiscal year, a decrease of 309.6 billion yen, or 86.4 percent, compared with the previous fiscal year.
      Financing Activities: During the fiscal year ended March 31, 2004, 313.3 billion yen of net cash was provided by financing activities (in the previous fiscal year, 93.1 billion yen of net cash was
procured through financing activities in all segments excluding the Financial Services segment. Although 23.1 billion yen in cash was used for 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. In

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the Financial Services segment, due to factors such as a 129.9 billion yen increase in deposits from customers in the banking business, net cash provided by financing activities was 141.7 billion yen.
      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 136.2 billion yen, or 19.1 percent, to 849.2 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 154.4 billion yen, or 35.2 percent, to 592.9 billion yen and for the Financial Services segment decreased 18.2 billion, or 6.6 percent, to 256.3 billion yen, compared with the previous fiscal year.
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.
                                                 
            All other segments        
        excluding    
    Financial Services   Financial Services   Consolidated
             
Fiscal Year Ended March 31   2003   2004   2003   2004   2003   2004
                         
    (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  
                                     
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 intends to continue both structural reform and investment for future growth in several segments. Sony believes that it can maintain sufficient liquidity and financial flexibility to satisfy its various capital needs, including the funding requirements that arise from this business strategy, working capital needs, repayment of existing debt, payment of dividend and all its other capital needs, through operating cash flows and cash and cash equivalents, its ability to procure necessary funds from the financial and capital markets, its commitment lines with banks, and other means.

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Market Access
      Sony Corporation and SGTS, a finance subsidiary in the U.K., 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 and did not issue any stock or bonds during the fiscal year. Sony has a shelf registration of 300 billion yen in the Japanese domestic bond market, of which no bonds were issued as of March 31, 2005.
      In order to meet the working capital requirements of Sony, SGTS maintains commercial paper (“CP”) programs and a medium-term note (“MTN”) program. SGTS maintains CP programs for the U.S., Euro and Japanese CP markets. As of March 31, 2005, the total amount of these CP programs was 1,251.5 billion yen. During the fiscal year ended March 31, 2005, the largest month-end outstanding balance of CP at SGTS was 122.5 billion yen in November 2004. There was no outstanding balance of CP as of March 31, 2005.
      SGTS maintains a Euro MTN program of whose total program amount as of March 31, 2005 was 536.8 billion yen. There was no outstanding balance as of March 31, 2005. Sony Capital Corporation (“SCC”), a Sony finance subsidiary in the U.S., had an outstanding MTN balance of approximately 58.8 billion yen as of March 31, 2005. However, Sony does not intend to utilize SCC’s program for future financing requirements as SCC’s financing function was integrated into that of SGTS.
Liquidity Management
      Sony defines its liquidity sources as the amount of cash, cash equivalents (“cash balance”), and committed lines of credit contracted with financial institutions. Working capital needs of Sony shows general seasonality to grow significantly in the third quarter (from October to December). In Sony’s liquidity management, it is basic policy to secure sufficient liquidity throughout the relevant fiscal year, covering such factors as short-term cash flow volatility mentioned above, repayments for debts whose due date come within the fiscal year, and possible downward earnings risk due to business environment change.
      Sony has a policy to keep more than a certain level of cash balance to absorb any working capital needs daily and monthly. The cash balance on March 31, 2005, was 523.8 billion yen. A short-term shortage in the cash balance is financed by the issuance of CP. However, Sony controls the outstanding CP amount through internal limits as part of its short-term debt risk management strategy. In the fiscal year ended March 31, 2005, there was no outstanding CP amount.
      As part of its additional liquidity sources, Sony has a total of 868.7 billion yen in committed lines of credit, of which the unused amount was approximately 863.9 billion yen as of March 31, 2005. Major committed lines of credit include 574.3 billion yen of the Global Commitment Facilities contracted with a syndicate of global banks, and 250 billion yen of committed lines of credit contracted with a syndicate of Japanese banks. There has been no major change since the last fiscal year in terms of the total amount and composition of the committed lines of credit. Sony uses these lines for general corporate purposes, including the support of commercial paper programs and for emergency purposes. There are no financial covenants in any of Sony’s material financial agreements that would cause an acceleration of the obligation in the event of a downgrade in Sony’s credit ratings. However, a downgrade in Sony’s credit ratings could increase the cost of borrowings. There are no restrictions on how Sony’s borrowings can be used except that some borrowings may not be used to acquire securities listed on a U.S. exchange or traded over-the-counter in U.S., and use of such borrowings must comply with the rules and regulations issued by authorities such as the Board of Governors of the Federal Reserve Board.
Ratings
      Sony considers it to be one of management’s top priorities to maintain a stable and appropriate 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.

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      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 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 from each agency are noted below:
             
    Moody’s   S&P   R&I
             
Long-term debt
  A1 (Outlook: Negative)   A (Outlook: Negative)   AA
Short-term debt
  P-1   A-1   a-1+
      On November 22, 2004, S&P downgraded Sony’s long-term debt rating from A+ to A (outlook: negative). This action reflected the concerns of S&P that it is uncertain if Sony will strengthen and stabilize its profitability particularly in the electronics business, under the severe competition and deflationary pressures. Sony’s short-term debt rating from S&P has been unaffected. Despite the downgrading of Sony’s long-term debt rating by S&P, Sony believes its access to the global capital markets and ability to issue CP for its working capital needs has not been limited.
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 Sony’s subsidiaries is invested or funded by SGTS after having been netted out, although Sony recognizes that fund transfers are limited in certain countries and 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 the Financial Services segment which secure liquidity on their own.
Financial Services segment
      In the Financial Services segment, the management of SFH, Sony Life, Sony Assurance and Sony Bank recognize the importance of securing sufficient liquidity to cover the payment obligations that they take on as a result of their ordinary course of business, 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, Sony Life’s cash inflows come mainly from policyholders’ insurance premiums and Sony Life keeps 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 housing 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 four rating agencies: A+ by S&P both for long-term local currency issuer ratings and insurance and finance capability ratings, A+ by AM Best Corporation for insurance and finance capability ratings, and AA by R&I and the Japan Credit Rating Agency Ltd for insurance claim payment capabilities ratings. Sony Bank obtained an A-/ A-2 rating from S&P for its long-term/short-term local/foreign currency issuer ratings.
RESEARCH AND DEVELOPMENT
      Recognizing that research and development are indispensable for business growth, Sony has established semiconductors, displays, and optical technologies, and related devices, as focus areas for research and development and is devoting its energies to the development of a variety of strategic devices and innovative new products as part of research and development activities within the Network Companies and business

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groups. Moreover, a Technology Round Table has been set up to facilitate the selection, consolidation and convergence of themes for research and development, for the sharing and validation of research and development roadmaps and to frame research and development strategy. In addition, while continually endeavoring to improve product quality, Sony is also striving to develop products that are even more environmentally-friendly. During the fiscal year ended March 31, 2005, Sony received a special commendation and award from the Ministry of Agriculture, Forestry and Fisheries of Japan for excellence in the utilization of biomass as a result of Sony’s “technological development and proactive implementation of vegetable-based plastics in home electronic appliances.” Sony continues to strengthen the basic research and development structure at two of its corporate laboratories, the Material Laboratories and the Information Technology Laboratories. These laboratories closely collaborate with the research and development activities carried out by the network companies, with the aim of forging new future markets. In addition, Sony operates three independent research laboratories; Sony Computer Science Laboratories, Inc. (focusing on fundamental research and user interface research); Sony-Kihara Research Center, Inc. (focusing on three-dimensional computer graphics and image processing technologies); and Sony Intelligence Dynamics Laboratories, Inc.
      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 ratio of research and development costs to sales (excluding the Financial Services segment) increased from 7.5 percent to 7.6 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 0.5 percent, to 432.8 billion yen, and expenses in the Game segment decreased 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 process 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 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 PlayStation Portable and PLAYSTATION 3.
      Research and development costs for the fiscal year ended March 31, 2004 increased 71.4 billion yen, or 16 percent, to 514.5 billion yen, compared with the previous fiscal year. The ratio of research and development costs to sales (excluding the Financial Services segment) increased from 6.4 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 49.2 billion yen, or 12.9 percent, to 430.5 billion yen, and expenses in the Game segment increased 21.9 billion yen, or 35.7 percent, to 83.4 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. Research and development costs in the Game segment increased primarily in the semiconductor and hardware fields, with network technology accounting for part of the increase in the hardware area.
      Research and development costs for the fiscal year ended March 31, 2003 were 443.1 billion yen. The bulk of research and development costs were incurred in the Electronics and Game segments; expenses in the Electronics segment were 381.2 billion yen, and expenses in the Game segment increased 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 new technologies in such areas as semiconductors, communications, and displays.
TREND INFORMATION
      This section, including the Forecast 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.

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Issues Facing Sony and Management’s Response to those Issues
      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 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, over the three fiscal years ending March 31, 2006, Sony is implementing Transformation 60, a series of fundamental reforms aimed at improving operational profitability and competitiveness in anticipation of future growth. Through greater focus of management resources on strategic businesses, accelerated reform of its manufacturing platform, headcount reductions in administrative (including corporate) and sales functions and reductions in the cost of non-production materials, Sony intends to reduce fixed costs. (See “Restructuring” in “Item 5. Operating and Financial Review and Prospects” for more detailed information about restructuring). Sony also aims to lay the seeds for future growth through strategic investments in research and development, as well as aggressive capital expenditures in the area of semiconductors.
      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
      Although the Electronics segment continues to hold a very strong position in the worldwide consumer audio visual products market, that position has become increasingly threatened as a result of the entrance of new manufacturers and distributors. These new entrants are threatening Sony’s position due to the industry 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 audio 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 communicated to the consumer. In addition, it is taking steps to increase its competitive edge by developing high value-added semiconductors and other digital key devices in-house. By increasing the ratio of key devices produced in-house, Sony aims to capture the value that has become increasingly concentrated in those devices.
      In the area of semiconductors, in the fiscal years ended March 31, 2004 and 2005, Sony carried out 175 billion yen and 150 billion yen, respectively, of capital expenditure mainly on system large scale integrations (“LSI”) and CCDs. Of this, Sony invested 69 billion yen in the fiscal year ended March 31, 2004 and invested 90 billion yen in the fiscal year ended March 31, 2005 on semiconductor fabrication equipment built at the 65 nanometer level of process technology. Chips that will be manufactured using this equipment will be some of the most highly advanced on the market, and will include the new microprocessor for the broadband era, Cell, as well as other system LSI for use in the next generation computer entertainment system, PLAYSTATION 3 and a variety of future consumer electronics products. Sony began developing Cell together with IBM Corporation and Toshiba Corporation in the spring of 2001. In July 2004, in order to establish a more efficient and coordinated semiconductor supply structure, Sony has integrated its semiconductor manufacturing business by transferring Sony Computer Entertainment’s semiconductor manufacturing operation from the Game segment to the semiconductor category within the Electronics segment.
      In the area of other key devices, Sony invested in 7th generation amorphous TFT LCD panel production equipment, through a one billion U.S. dollar investment in S-LCD, a joint venture with Samsung Electronics Co., Ltd. based in South Korea. This investment reflects Sony’s belief that demand for LCD televisions will

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continue to increase rapidly. 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 while the CFO comes from Sony. Production of LCD panels began in April 2005. Expected production capacity is 60,000 sheets per month at the 7th generation (1,870 mm x 2,200 mm) level of technology.
Game
      In the Game segment, PS2 has a high share of the global game console market, and the PS2 business, particularly the PS2 software business, remains in its harvest stage. However, production shipment units of PS2 hardware are expected to decrease in the fiscal year ending March 31, 2006. 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, PLAYSTATION 3. Furthermore, Sony is working to develop a new market through its introduction of PlayStation Portable, a new handheld video game system on which a variety of content can be enjoyed. PlayStation Portable was introduced in Japan and U.S. in December 2004 and March 2005, respectively and will be introduced in Europe in September 2005.
Music
      Within the music industry, album sales over the past several years have decreased due to piracy and competition from other entertainment sectors. One way Sony is working to combat digital piracy and generate profits is through the digital distribution of content, is through its launch of the Connect music store, a digital downloading service, which is now classified as part of the Other segment. As part of an effort to achieve significant operational efficiencies, Sony merged its recorded music business, excluding its recorded music business in Japan, with the recorded music business of Bertelsmann AG in August 2004, forming the joint venture SONY BMG. The newly formed company is 50 percent owned by each parent company and is accounted for by Sony under the equity method.
Pictures
      In the Pictures segment, Sony faces intense competition, rising advertising and promotion expenses and a growing trend toward digital piracy. To meet these challenges, Sony is working to distribute a diversified portfolio of motion pictures and capitalize on the expanding DVD home entertainment market, which is becoming a more significant source of revenues and profits. One of the ways that Sony is working to distribute a diversified portfolio of motion pictures and capitalize on the expanding DVD home entertainment market is through its participation in the acquisition of MGM. In conjunction with the transaction, SPE entered into agreements to co-finance and produce new motion pictures with MGM and to distribute MGM’s existing film and television content in, among other markets, the DVD home entertainment market.
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 40 percent) 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, in April 2004 Sony established Sony Financial Holdings Inc., a holding company comprised of Sony Life, Sony Assurance and Sony Bank, with the aim of both increasing the synergies between these businesses and targeting an initial public offering during the fiscal year ending March 31, 2007.
Forecast of Consolidated Results
      Factors which may affect Sony’s financial performance include the following: market conditions, including general economic conditions, in major areas where Sony conducts its businesses, levels of consumer

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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 reductions 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”.
      Regarding the forecast of consolidated results for the fiscal year ending March 31, 2006, sales and operating revenue, operating income, and income before income taxes are expected to increase compared with the fiscal year ended March 31, 2005. Net income is expected to decrease. This forecast assumes that the yen for the fiscal year ending March 31, 2006 will strengthen against the U.S. dollar and the euro compared with the fiscal year ended March 31, 2005.
      During the fiscal year ending March 31, 2006, restructuring charges, primarily in the Electronics segment, of approximately 72 billion yen are expected to be incurred across Sony as a whole. 90 billion yen of restructuring charges were recorded in the fiscal year ended March 31, 2005.
      The forecast for operating income and income before income taxes reflects an estimated gain of approximately 60 billion yen related to the transfer to the Japanese Government of the substitutional portion, the benefit obligation related to past employee service, of Sony’s Employee Pension Fund. Furthermore, 35 billion yen of this estimated gain is reflected in the forecast for net income after deductions for the effect of income taxes.
      In June 6, 2005, SCN sold 17,935 shares of So-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 records approximately 11.9 billion yen gain on the sale of its stock for the year ending March 31, 2006, and Sony’s ownership interest has been reduced from 74.8 percent to 60.8 percent.
      As of March 31, 2005, Sony had deferred tax assets on tax loss carry forwards in relation to Japanese local income taxes totaling 77.5 billion yen. However, there is a possibility that, depending on future operating performance, Sony may establish a valuation allowance against part or all of its deferred tax assets that would be charged to income as an increase in tax expense. However, the forecast above does not include this possibility.
      The forecast for each business segment (excluding the anticipated gain from the transfer of the substitutional portion of Sony’s Employee Pension Fund) is as follows:
Electronics
      Sales are expected to increase primarily due to an increase in the sales of products such as flat panel televisions and LCD rear projection televisions. With regard to operating performance, although an improvement is expected due to the increase in sales and a reduction in fixed costs relating to restructuring implemented during the previous fiscal year, a decline in unit prices, appreciation of the yen against the U.S. dollar and euro and increase in both depreciation and amortization and research and development costs are also anticipated. An improvement in operating performance is expected, reflecting the abovementioned factors, as well as an anticipated reduction in restructuring charges.
Game
      Sales are expected to increase due to the contribution from both PlayStation Portable hardware and software. Although PS2 and PlayStation Portable are expected to contribute to operating income, increased research and development costs primarily for PLAYSTATION 3 are expected to leave operating income relatively unchanged.

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Music
      Due to the establishment of SONY BMG (Refer to “Business Segment Information” in “Operating Results” above) sales are expected to decrease. A small increase in operating income is anticipated.
Pictures
      Although sales are expected to increase due to the impact of SPE’s agreements with MGM, operating income is expected to decrease compared to the fiscal year ended March 31, 2005, in which Spider-Man 2 was a substantial contributor.
Financial Services
      Although revenue is expected to continue to grow mainly due to an increase in revenue from insurance premiums at Sony Life, a small decrease is expected in operating income due to the conservative estimation of insurance claim payments.
Capital Expenditures
      In the fiscal year ending March 31, 2006, capital expenditures (additions to fixed assets) are expected to be 410 billion yen, an increase of 15 percent compared with the fiscal year ended March 31, 2005. Approximately 90 percent of the amount is expected to be spent in the Electronics segment. Of this amount, capital expenditures on semiconductors during the fiscal year are expected to amount to 160 billion yen (actual amount in the fiscal year ended March 31, 2005 was 150 billion yen). For an explanation regarding fund procurement, refer to “Liquidity and Capital Resources” above.
Depreciation and Amortization
      In the fiscal year ending March 31, 2006, expenses for depreciation and amortization, which includes the amortization of intangible assets and the amortization of deferred insurance acquisition costs, are expected to be 390 billion yen, an increase of 5 percent compared with the fiscal year ended March 31, 2005. Both expenses for the amortization of deferred insurance acquisition costs in the Financial Services segment and expenses for depreciation and amortization in the Electronics segment 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, 2006 to be 520 billion yen, a 4 percent increase compared with the fiscal year ended March 31, 2005. Research and development costs for both the Electronics and Game segments 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.

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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 an other-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 identify other-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether an other-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 for available-for-sale securities whose fair values are readily determinable, management presumes a decline in value to be other-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). This criteria is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-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% 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 is other-than-temporary.
      The assessment of whether a decline in the value of an investment is other-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 be other-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
      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. TV display CRTs) or entity (e.g. semiconductor manufacturing division 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, Sony recorded impairment charges for long-lived assets totaling 12.4 billion yen. This included 8.1 billion yen for the impairment of semiconductor and computer display CRT manufacturing equipment to be abandoned or to be sold 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 fair value of which was estimated by using methods such as a survey of the local real estate market.

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      In the fiscal year ended March 31, 2004, Sony recorded impairment charges for long-lived assets totaling 16.1 billion yen. This included 5.3 billion yen for the impairment of long-lived assets such as semiconductor and TV display CRT manufacturing equipment to be abandoned or sold in connection with certain restructuring activities in the Electronics segment. It also included 3.0 billion yen for the impairment of long-lived assets in the Music segment such as a certain CD manufacturing facility to be abandoned or sold and a recording studio and equipment to be held and used in Japan. Fair value of these assets was determined using estimated future discounted cash flows based on the best information available.
      In the fiscal year ended March 31, 2005, Sony recorded impairment charges for long-lived assets totaling 19.2 billion yen. This included 7.5 billion yen for the impairment of long-lived assets of CRT TV display manufacturing facilities to be held and used in Europe in connection with certain restructuring activities in the Electronics segment. Fair value of these assets was determined using estimated future discounted cash flows based on the best information available.
Goodwill and Other Intangible Assets
      Goodwill and other intangible assets that are determined to have an indefinite life are not amortized, but are tested for impairment in accordance with FAS No. 142 on an annual basis and between annual 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. 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 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 (generally, Sony’s 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.
      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 fourth quarter of the fiscal year ended March 31, 2005, Sony performed the annual impairment analysis and no impairment loss has been recognized.
      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

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assumptions could negatively affect the valuations, which may result in Sony recognizing impairment charges for goodwill and other intangible assets in the future. In order to evaluate the sensitivity of the fair value calculations on the impairment analysis, Sony applied a hypothetical 10% decrease to the fair value of each reporting unit. As of March 31, 2005, a 10% hypothetical decrease to the fair value of each reporting units would not have resulted in a material impairment loss.
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, or at the time when events occur or circumstances change and these events or changes could have a significant effect on these critical assumptions. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods. Therefore, actual results generally affect recognized expenses 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 expenses.
      Sony’s principal pension plans are its Japanese pension plans. Foreign pension plans are not significant individually with total assets and pension obligations amounting to less than 10% of those of the aggregate of the Japanese pension plans.
      To determine the benefit obligation of the Japanese pension plans, Sony used a discount rate of 2.3% for its Japanese pension plans as of March 31, 2005. The discount rate was determined by using 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. The 2.3% discount rate represents a 10 basis point decrease from the 2.4% discount rate used for fiscal year ended March 31, 2004 and reflects current market interest rate conditions. For Japanese pension plans, a 10 basis point decrease in the discount rate would increase pension costs by approximately 1.2 billion yen for the fiscal year ending March 31, 2006.
      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% and 3.2% as of March 31, 2004 and 2005 respectively. The actual loss on pension plan assets for the fiscal year ended March 31, 2005 was 0.1%. Actual results that differ from the expected return on plan assets are accumulated and amortized as a component of pension costs over the average future service period, thereby reducing the year-to-year volatility in pension costs. As of March 31, 2004 and 2005, Sony had unrecognized actuarial losses of 328.5 billion yen and 322.2 billion yen, respectively, including losses related to plan assets. The unrecognized actuarial losses reflect the overall unfavorable performance of equity markets over the past several years and will result in an increase in pension costs as they are recognized.
      Sony recorded a liability for the unfunded accumulated benefit obligation for Japanese pension plans of 149.4 billion yen and 128.6 billion yen as of March 31, 2004 and 2005, respectively. This liability represents the excess of the accumulated benefit obligation under Sony’s qualified defined benefit pension plans over the fair value of the plans’ assets. This liability was established by a charge to stockholders’ equity, resulting in no impact to the accompanying consolidated statements of income.

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      The following table illustrates the sensitivity to a change 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, 2005:
                 
    Pre-Tax   Pension   Equity
Change in Assumption   PBO   Expense   (Net of Tax)
             
    (Yen in billions)
25 basis point increase/decrease in discount rate
  -/+45.0   -/+3.0     +/-1.8  
25 basis point increase/decrease in expected return on assets
    -/+1.3     +/-0.8  
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, because realization of deferred tax assets is dependent on whether each tax-filing unit generates sufficient taxable income. The estimates and assumptions used in determining 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 to file its corporate income tax return under the consolidated tax filing system in Japan beginning with the fiscal year ended March 31, 2004. Under the consolidated tax filing system, the tax-filing unit consists of Sony Corporation, the ultimate parent company of the Sony Group, and its wholly owned Japanese subsidiaries. The eventual ability to realize the tax benefit of its deferred tax assets is dependent on whether the tax-filing unit as a whole will be able to generate sufficient taxable income in the future. In addition, Sony is subject to local income taxes in Japan. For purposes of local income taxes, each entity is taxed as a stand alone tax filing unit. The eventual ability to realize the tax benefit of deferred tax assets for local income taxes is dependent on whether Sony Corporation and each subsidiary will be able to generate sufficient taxable income in the future. As of March 31, 2005, Sony Corporation had deferred tax assets for local income taxes totaling 77.5 billion yen. The eventual ability to realize the tax benefit of its deferred tax assets is dependent on whether Sony Corporation will be able to generate 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 negative evidence to support the future determination that it is more likely than not that Sony Corporation will not realize the tax benefit of all these 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. Such valuation allowances would be charged to income as an increase in tax expense.
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.

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      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 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 entertainment 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
      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, morbidity, mortality, withdrawals and other factors. Future policy benefits are computed using interest rates ranging from approximately 1.30% to 5.20%. 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.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts
      In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued the Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance 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 annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP 03-1, Sony’s operating income decreased by 5.2 billion yen for the fiscal year ended March 31, 2005. Additionally, on April 1, 2004, Sony recorded a 4.7 billion yen charge (net of income taxes of 2.7 billion yen) as a cumulative effect of an accounting change. In addition, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” in the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets.
The Effect of Contingently Convertible Instruments on Diluted Earnings per Share
      In July 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 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 Issue No. 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. EITF Issue No. 04-8 is effective for reporting periods ending after December 15, 2004. Sony adopted EITF Issue No. 04-8 during the quarter ended December 31, 2004. As a result of the adoption of EITF Issue No. 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 respectively. Sony’s diluted EPS of income before

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cumulative effect of an accounting change and net income for the fiscal year ended March 31, 2005 were decreased by 7.26 yen and 7.06 yen, respectively, compared to those before adopting EITF Issue No. 04-8.
Employers’ Disclosures about Pensions and Other Postretirement Benefits
      In December 2003, the Financial Accounting Standards Board (“FASB”) issued FAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“FAS No. 132(R)”), which revised FAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, an amendment of 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”. FAS No. 132(R) 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 requirements of FAS No. 132, FAS No. 132(R) requires additional disclosures about assets, obligations and cash flows. The provisions of FAS No. 132(R) were generally effective for financial statements with fiscal years ending after December 15, 2003, excluding the disclosure of certain information about foreign plans. The information about foreign plans is effective for fiscal years ending after June 15, 2004. In accordance with FAS No. 132(R), Consolidated Financial Statements Note 14, Pension and severance plans, has been expanded to include the new disclosures.
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 beneficiary of a variable interest entity (“VIE”). Sony early adopted the provisions of FIN No. 46 on July 1, 2003. As a result of adopting the original 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 statement of cash flows. In addition, cash and cash equivalents increased by 1.5 billion yen. See Note 22 of Notes to Consolidated Financial Statements 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 replaced FIN No. 46. 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.
RECENT PRONOUNCEMENTS
Accounting for Stock-Based Compensation
      In December 2004, the FASB issued 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 use of the intrinsic value method prescribed by Accounting Principle Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” 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 has accounted for its employee stock-based compensation in accordance with the provisions prescribed by APB No. 25 and its related interpretations and has disclosed the net effect on net income and net income per share allocated to the common stock if Sony had applied the fair value recognition provisions of FAS No. 123 to stock-based compensation as described in Consolidated Financial Statements Note 2(2) Significant accounting policies — Stock-based compensation. This statement shall be effective for fiscal years beginning after June 15, 2005, with early adoption encouraged during the fiscal years beginning after the date this statement is issued. The options for transition methods prescribed in FAS No. 123(R) include either the modified prospective or the modified retrospective methods. Sony intends to adopt the modified prospective method of transition, which

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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. Sony is currently evaluating the impact of adopting this new pronouncement. However, Sony expects that the total expenses to be recorded in the future periods will be consistent with the pro forma information in Consolidated Financial Statements Note 2(2) Significant accounting policies — Stock-based compensation.
Inventory Costs
      In November 2004, the FASB issued FAS No. 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 inventory be based on the normal capacity of the production facilities. This statement shall be effective for fiscal years beginning after June 15, 2005, with early adoption encouraged during the fiscal years beginning after the date this statement is issued. The adoption of FAS No. 151 is not expected to have a material impact on Sony’s results of operations and financial position.
Exchanges of Nonmonetary Assets
      In December 2004, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” This statement requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. This statement shall be effective for nonmonetary asset exchanges occurring in the fiscal periods beginning after June 15, 2005, with early adoption during the fiscal periods beginning after the date this statement is issued encouraged. Sony is currently evaluating the impact of adopting this new pronouncement.
Item 6. Directors, Senior Management and Employees
Directors and Senior Management
      Set forth below are the current Sony Corporation Board of Directors and Corporate Executive Officers, their date of birth, the year in which they were first elected, their current position at Sony, prior positions, and other principal business activities outside Sony as of June 21, 2005.
Board of Directors
       
Nobuyuki Idei
Date of Birth: November 22, 1937
Director (Member of the Board) Since: 1989
Corporate Executive Officer Since: 2003
Current Positions: Chairman and Group Chief Executive Officer, Representative Corporate Executive Officer
Prior Positions:
 
2000
  Chairman and Chief Executive Officer, Representative Director, Sony Corporation
 
1999
  President and Representative Director, Chief Executive Officer, Sony Corporation
 
1995
  President and Representative Director, Chief Operating Officer, Sony Corporation
 
1990
  Senior General Manager, Advertising & Marketing Communication Strategy Group, Sony Corporation
 
1989
  Director, Sony Corporation
 
1988
  Senior General Manager, Home Video Group, Sony Corporation
 
1960
  Entered 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)
Corporate Executive Officer Since: 2003
Current Positions:
  President and Global Hub President, Representative Corporate Executive Officer,
Officer in charge of Personal Solutions Business Group
       
Prior Positions:
 
2003
  President and Group Chief Operating Officer, Representative Corporate Executive Officer, Sony Corporation
 
2000
  President and Chief Operating Officer, Representative Director, Sony Corporation
 
1999
  President and Chief Operating Officer, Personal IT Network Company, Sony Corporation
 
1998
  Corporate Senior Vice President, Sony Corporation
 
1997
  Corporate Vice President (resigns as Director), Sony Corporation
 
1994
  Director, Sony Corporation
 
1990
  President and Chief Operating Officer, Sony Engineering and Manufacturing of America
 
1985
  Deputy President, Sony Prudential Life Insurance Co., Ltd.
 
1969
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
 
Teruo Masaki
Date of Birth: August 7, 1943
Director (Member of the Board) Since: 1999
Corporate Executive Officer Since: 2003
Current Positions: Executive Deputy President and Group General Counsel
Prior Positions:
 
2000
  Corporate Senior Executive Vice President, Director, Sony Corporation
 
1999
  Senior Managing Director, Sony Corporation
 
1997
  Executive Vice President, Sony Corporation of America
 
1991
  Deputy Senior General Manager, Legal and Intellectual Property Group, Sony Corporation
 
1971
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
     
 
Sir Howard Stringer
Date of Birth: February 19, 1942
Director (Member of the Board) Since: 1999
Corporate Executive Officer Since: 2003
Current Positions:
  Vice Chairman and Sony Group Americas Representative, Chief Operating Officer in
charge of Game Business Group and Entertainment Business Group, Officer in
charge of Connect Company, Sony Corporation Chairman and Chief Executive
Officer, Sony Corporation of America
Chairman, Sony Electronics Inc. (a U.S. subsidiary of Sony Corporation)
       
Prior Positions:
 
1999
  Director, 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

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Ken Kutaragi
Date of Birth: August 2, 1950
Director (Member of the Board) Since: 2000
Current Positions:
  Group Executive Officer, Sony Corporation President and Group Chief Executive
Officer, Sony Computer Entertainment Inc.
       
Prior Positions:
 
2004
  Chief Operating Officer in charge of Game Business Group and Home Electronics Network Company
 
2003
  Executive Deputy President, Corporate Executive Officer and Chief Operating Officer in charge of Home Network Company, Game Business Group, Broadband Network Company, NC President, Semiconductor Solutions Network Company, Sony Corporation
 
2000
  Director, Sony Corporation
 
1999
  Executive President, Sony Computer Entertainment Inc.
 
1991
  Manager, PS Project, Video Disc Player Group, Sony Corporation
 
1975
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
     
Teruhisa Tokunaka
Date of Birth: August 9, 1945
Director (Member of the Board) Since: 1999
Current Positions:
  Group Executive Officer, Sony Corporation President, Representative Director,
Sony Financial Holdings Inc.
       
Prior Positions:
 
2003
  Group Chief Strategy Officer, Representative Corporate Executive Officer, Officer in charge of Network Application & Content Service Sector, Personal Solutions Business Group, Sony Corporation
 
2000
  Executive Deputy President and Chief Financial Officer, Representative Director,
Sony Corporation
 
1999
  Senior Managing Director and Chief Financial Officer, Sony Corporation
 
1995
  President, Sony Computer Entertainment Inc.
 
1989
  Deputy Senior General Manager, Corporate Strategy Group, Sony Corporation
 
1969
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
 
Göran Lindahl
Date of Birth: April 28, 1945
Director (Member of the Board) Since: 2001
Prior Positions:
 
2003
  Corporate Executive Officer, Sony Group Europe Representative, Chairman of Sony Group in Europe
 
2001
  Director, Sony Corporation
 
1999
  Director, Telefonaktiebolaget LM Ericsson, Sweden
 
1997
  President and Chief Executive Officer, Asea Brown Boveri Ltd., Switzerland
 
1985
  President, ASEA Transmission AB, Sweden
 
1983
  President, 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:
 
1993
  Standing Statutory Auditor, Sony Corporation
 
1989
  Senior General Manager, Corporate Planning Group, Sony Corporation (concurrent with prior position)
 
1989
  Director, Sony Corporation
 
1988
  General Manager, Accounting Division, Sony Corporation
 
1977
  Managing Director, Hispano Sony S.A.
 
1961
  Entered 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:
 
1999
  Professor, School of Management and Information Sciences, Tama University
 
1991
  Professor, Faculty of Commerce, Hitotsubashi University
 
1984
  Professor, Faculty of Economics, Osaka University
 
1973
  Lecturer 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: Chairman of the Compensation Committee
Prior Positions:
 
1997
  President, The Sakura Bank, Ltd.
 
1996
  Senior Managing Director, The Sakura Bank, Ltd.
 
1995
  Managing Director, The Sakura Bank, Ltd.
 
1991
  Director, The Mitsui Taiyo Kobe Bank, Ltd.
Principal Business Activities Outside Sony:
    Chairman of the Board (Representative Director), Sumitomo Mitsui Financial Group, Inc. Chairman of the Board (Representative Director), Sumitomo Mitsui Banking Corporation

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Hirobumi Kawano
Date of Birth: January 1, 1946
Outside Director (Member of the Board) Since: 2003
Current Position: Vice Chairman of the Board
Prior Positions:
 
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))
 
1998
  Director-General, Basic Industries Bureau, MITI
 
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
 
1993
  Director, General Coordination Division, Minister’s Secretariat, MITI
 
1992
  Director, General Industrial Machinery Division, Machinery and Information Industries Bureau, MITI
 
1989
  Director, Americas-Oceania Division, International Trade Policy Bureau, MITI
 
1969
  Entered MITI
Principal Business Activities Outside Sony: Senior Vice President, JFE Steel Corporation
 
Yotaro Kobayashi
Date of Birth: April 25, 1933
Outside Director (Member of the Board) Since: 2003
Current Position: Chairman of the Nominating Committee
Prior Positions:
 
1996
  Director, ABB Ltd., Switzerland
 
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:
 
1990
  Chairman, President and Chief Executive Officer, Michelin North America Inc.
 
1985
  Chief Operating Officer, Michelin — Brazil
Principal Business Activities Outside Sony:
    President and Chief Executive Officer, Nissan Motor Co., Ltd.
    Director, Alcoa Inc., U.S.A.
    President and Chief Executive Officer, Renault S.A., France

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Sakie T. Fukushima
Date of Birth: September 10, 1949
Outside Director (Member of the Board) Since: 2003
Prior Position:
 
2000
  Managing Director, Korn/Ferry International — Japan
Principal Business Activities Outside Sony:
    Member, Board of Directors, Korn/ Ferry International, U.S.A.
    Director, Kao Corporation
    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:
 
2000
  Representative Director, Chairman and Chief Executive Officer, ORIX Corporation
 
1980
  Representative Director, President, ORIX Corporation
Principal Business Activities Outside Sony:
    Director, Representative Executive Officer, Chairman and
    Group Chief Executive Officer, ORIX Corporation
    Director, Aozora Bank Ltd.
    Director, Fuji Xerox Co., Ltd.
    Director, Showa Shell Sekiyu K.K.
    Director, Daikyo Incorporated
 
Yoshiaki Yamauchi
Date of Birth: June 30, 1937
Outside Director (Member of the Board) Since: 2003
Current Position: Chairman of the Audit Committee
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.
Principal Business Activities Outside Sony:
    Deputy President, ARI Research Institute
    Statutory Auditor, Stanley Electric Co., Ltd.
    Director, Amana Corporation
    Statutory Auditor, Seiko Watch Corporation
    Director, Sumitomo Mitsui Financial Group, Inc.

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      As of the conclusion of the Ordinary General Meeting of Shareholders to be held on June 22, 2005, Messrs. Idei, Ando, Masaki, Kutaragi, Tokunaka, Ohnishi, Nakatani and Ghosn are scheduled to resign from the position of Director (Member of the Board). In addition, at its Board of Directors meeting held on April 26, 2005, Sony Corporation nominated the following candidates for the positions of Director (note that these nominations are subject to the approval of the Ordinary General Meeting of Shareholders mentioned above).
Candidates for Member of the Board of Directors as of June 22, 2005
      In addition to Messrs. Stringer, Okada, Kawano, Kobayashi, Miyauchi, Yamauchi and Lindahl, and Ms. Fukushima, the following are candidates for the position of Director (Member of the Board) subject to the approval of the Ordinary General Meeting of Shareholders to be held on June 22, 2005:
       
Ryoji Chubachi
   Date of Birth: September 4, 1947
   Corporate Executive Officer Since: 2004
   Current Positions: Executive Deputy President, Electronics Chief Executive Officer
   Prior Positions:
 
     2004
  Chief Operating Officer in charge of Micro Systems Network Company (MSNC) and Engineering, Manufacturing and Customer Services (“EMCS”), President, Production Strategy Group, Sony Corporation
 
     2003
  Executive Vice President, Executive Officer, NC President, MSNC, Sony Corporation
 
     2002
  NC President, Core Technology & Network Company (“CNC”), Sony Corporation
 
     2002
  Corporate Senior Vice President, Sony Corporation
 
     1999
  Corporate Vice President, President, Recording Media Company, CNC, Senior Vice President, CNC, Sony Corporation
 
     1977
  Entered 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 Group Chief Financial
Officer, NC President, Home Electronics Network Company
       
   Prior Positions:
 
     2001
  Group Executive Officer, Sony Corporation
President, Sony Ericsson Mobile Communications AB
 
     2000
  Corporate Senior Vice President, NC President, Personal IT Network Company,
Sony Corporation
 
     1997
  Corporate Vice President, Sony Corporation
 
     1996
  President, Home A&V Products Company, Sony Corporation
 
     1981
  Entered Sony Corporation
 
     1973
  Entered Mitsui Knowledge Industry Co., Ltd.
   Principal Business Activities Outside Sony: None

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Sir Peter Bonfield
   Date of Birth: June 3, 1946
   Current Position: Member of the Advisory Board
   Prior Positions:
 
     1996
  Chief Executive Officer, British Telecom plc
 
     1986
  Chairman, ICL plc
 
     1984
  Managing Director, ICL plc
   Principal Business Activities Outside Sony:
    Member of the Board, AstraZeneca plc
    Member of Audit Committee of the Board, Telefonaktiebolaget LM Ericsson
    Member of the Board, Mentor Graphics Inc.
    Member of the Board and Chairman of Audit Committee, Taiwan Semiconductor Manufacturing Company Ltd.
 
Fueo Sumita
   Date of Birth: May 24, 1938
   Prior Positions:
 
     2002
  Executive Vice President, Kawada Corp.
 
     2001
  Vice Chairman, Ernst & Young ShinNihon
 
     2000
  Deputy Director, Ohta-Showa Century Audit Corp.
 
     1999
  Chairman, Century Audit Corp.
 
     1985
  Deputy General Manager, Corporate Accounting Dept., Hitachi, Ltd.
   Principal Business Activities Outside Sony:
    Chief of Sumita Accounting Office
Corporate Executive Officers
      In addition to Messrs. Idei, Ando, Masaki, Stringer, Chubachi and Ihara, the seven individuals set forth below are the current Corporate Executive Officers of Sony Corporation as of June 21, 2005. Refer to “Board Practices” below.

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Shizuo Takashino
Date of Birth: September 2, 1943
Corporate Executive Officer Since: 2003
Current Positions:
  Executive Deputy President & Sony Group China Representative, President, China
Design & Engineering Group, Sony China Limited, Chief Operating Officer in
charge of Information Technology & Communications Network Company, Personal
Audio Visual Network Company, Professional Solutions Network Company
       
Prior Positions:
 
2000
  NC President, Broadband Solutions Network Company, Sony Corporation
 
1999
  Senior Executive Vice President, Corporate Executive Officer, Chief Operating Officer,
NC President, Home Network Company, Sony Corporation
 
1997
  Corporate Senior Vice President, (resigned as Director), Sony Corporation
 
1996
  President, Personal A&V Products Company, Sony Corporation
 
1995
  Executive Vice President, Consumer A&V Products Company, Sony Corporation
 
1995
  Director, Sony Corporation
 
1990
  Senior General Manager, General Audio Group, Sony Corporation
 
1962
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
     
Keiji Kimura
Date of Birth: April 4, 1952
Corporate Executive Officer Since: 2004
Current Positions:
  Senior Executive Vice President, NC President, Information Technology &
Communications Network Company, Officer in charge of Connect Company
       
Prior Positions:
 
2003
  Senior Vice President, Executive Officer, Sony Corporation
 
2002
  Corporate Senior Vice President, Sony Corporation
 
2001
  NC President, Mobile Network Company, Sony Corporation
 
2000
  Corporate Vice President, Sony Corporation NC President, Information Technology Company, Personal Network Company, Sony Corporation
 
1977
  Entered Sony Corporation
Principal Business Activities Outside Sony: None

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Fujio Nishida
Date of Birth: November 26, 1948
Corporate Executive Officer Since: 2004
Current Positions:
  Executive Vice President, President, Global Marketing Group, Deputy President,
Information Technology & Communications Network Company, Deputy President,
Personal Audio Visual Network Company, Officer in charge of Marketing and
Corporate Communications
       
Prior Positions:
 
2003
  Senior Vice President and Electronics Chief Marketing Officer, Executive Officer,
Sony Corporation
 
2000
  Group Executive Officer, Sony Corporation President and Chief Operating Officer,
Sony Electronics Inc.
 
2000
  President, Consumer Electronics Group, Sony Electronics Inc.
 
1998
  President, Consumer Products Marketing Group, Sony Electronics Inc.
 
1996
  Senior Vice President, Home A/ V Division, Consumer AV Group, Sony Electronics Inc. (a U.S. subsidiary of Sony Corporation)
 
1972
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
 
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:
 
2003
  Group Chief Financial Officer, Sony Corporation
 
2001
  Senior General Manager, Corporate Planning & Control, Global Hub, Sony Corporation
 
1999
  Senior Vice President, Corporate Planning & Control, Group HQ, Sony Corporation
 
1996
  Vice President, Display Company, General Manager, Planning & Control Department, Display Company, Sony Corporation
 
1995
  General Manager, Planning & Control Department, Display Device Division, Component Company, Sony Corporation
 
1971
  Entered Sony Corporation
 
1969
  Entered Nippon Chemical Industrial Co., Ltd.
Principal Business Activities Outside Sony: None

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Nobuyuki Oneda
Date of Birth: May 6, 1945
Corporate Executive Officer Since: 2004
Current Positions:   Senior Vice President, Officer in charge of Transformation 60, Corporate Planning &
Control, Accounting and Information Systems
       
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 Kirihara
Date of Birth: November 20, 1946
Corporate Executive Officer Since: 2004
Current Positions: Senior Vice President, Officer in charge of Corporate Human Resources
Prior Positions:
 
2003
  Vice President, Executive Officer, Sony Corporation
 
1998
  Representative Director and President, Sony Service Corporation
 
1997
  Senior Vice President, Recording Media & Energy Company, Sony Corporation
 
1989
  General Manager, Human Resources, Human Resources Development, Sony Corporation
 
1970
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
     
Nicole Seligman
Date of Birth: October 25, 1956
Corporate Executive Officer Since: 2003
Current Positions:
  Group Deputy General Counsel, Sony Corporation
Executive Vice President and General Counsel, Sony Corporation of America
       
Prior Positions:
 
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
Candidates for Corporate Executive Officer as of June 22, 2005
      As of June 22, 2005, Messrs. Idei, Ando, Takashino, Masaki, Nishida, Yuhara and Kirihara are scheduled to resign from the position of Corporate Executive Officer. In addition to Messrs. Stringer, Chubachi, Ihara, Oneda and Kimura, and Ms. Seligman, the following candidate has been selected for the position of Corporate Executive Officer. These appointments are subject to approval by the Board of Directors at the Board of Directors meeting to be held on June 22, 2005.

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Yutaka Nakagawa
Date of Birth: December 4, 1945
Current Positions:
  Executive Vice President, Executive Officer, NC President, Personal Audio Visual
Network Company, President, Personal Audio Business Group
       
Prior Positions:
 
2003
  Deputy President, Micro Systems Network Company, President, Energy Company, MSNC, Sony Corporation
 
1999
  Corporate Senior Vice President, Sony Corporation
 
1998
  President, Personal and Mobile Communication Company, Sony Corporation
 
1997
  Corporate Vice President, Sony Corporation
 
1992
  General Manager, Camcorder Products Division, Personal Video Group, Sony Corporation
 
1968
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
      All of the aforementioned persons, with the exception of Messrs. Nakatani, Okada, Kawano, Kobayashi, Ghosn, Miyauchi, Yamauchi, Bonfield and Sumita, and Ms. Fukushima, are, or will be, engaged on a full-time basis by 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, 2005 to all Directors and Corporate Executive Officers (refer to “Board Practices” below) of Sony Corporation who served during the fiscal year ended March 31, 2005, as a group (28 people), totaled 2,748 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, 2005. 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, Group Executive Officers, 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, 2005 to the Directors, and Corporate Executive Officers as of May 31, 2005 confers rights to purchase a total number of 712,000 shares of Sony Corporation’s Common Stock. The exercise price for these stock acquisition rights issued as of November 18, 2004 was 3,782 yen per share, and the exercise price for these stock acquisition rights issued as of March 31, 2005 was 40.34 U.S. dollars.
      Regarding the above compensation plans, refer to Note 16 of Notes to Consolidated Financial Statements.
      The aggregate amount accrued for lump-sum severance indemnities by Sony during the fiscal year ended March 31, 2005 for all Directors, and Corporate Executive Officers of Sony Corporation as of May 31, 2005, as a group (26 people), totaled 320 million yen.
Board Practices
      Sony has adopted a corporate governance system called the “Company with Committees” system under the Japanese Commercial Code (Shoho) and related legislation (including the Law for Special Exceptions to the Commercial Code concerning Audit, etc. of Kabushiki Kaisha, collectively the “Commercial Code”). Under this system, Sony Corporation has three committees: the Nominating Committee, the Audit Committee and the Compensation Committee. Under the Commercial Code, 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 must elect Corporate Executive Officers (Shikko-

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yaku), who are responsible for 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 management of Sony and oversees the performance of the duties of Directors and Corporate Executive Officers. Under the Commercial Code, all Directors must be elected at the General Meeting of Shareholders from the candidates determined by the Nominating Committee. Under the Commercial Code, the terms of office of Directors expire at the conclusion of the General Meeting of Shareholders held with respect to the last closing of accounts within one year after their assumption of office. Directors may serve any number of consecutive terms; although, under the Regulations 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 Regulations of the Board of Directors of Sony Corporation consists of five or more Directors, determines the content of proposals to be submitted at the General Meeting of Shareholders regarding the appointment and dismissal of Directors. As stated above, under the Commercial Code, 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, a Director must be a person who is not engaged in the business of Sony Corporation and has never been a director, a corporate executive officer, a general manager or an 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. Under the Regulations of the Board of Directors of Sony Corporation, two or more members of the Nominating Committee must concurrently be Corporate Executive Officers. The Nominating Committee is composed of the following members as of June 21, 2005: Yotaro Kobayashi, who is the Chairman of the Nominating Committee and an outside Director; Hirobumi Kawano and Carlos Ghosn, who are outside Directors; and Nobuyuki Idei and Kunitake Ando, who are Corporate Executive Officers. During the fiscal year ended March 31, 2005, the Nominating Committee held seven meetings.
      Under the Regulations 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, a member of the Audit Committee may not concurrently be 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 business of any of such subsidiaries. Each member of the Audit Committee has the statutory duty to examine the consolidated and non-consolidated financial statements and business (annual) reports to be submitted by the Board of Directors at the General Meeting of Shareholders. The Audit Committee operates under regulations adopted by the Board of Directors. The Audit Committee’s primary responsibility is to audit the execution of duties by Directors and Corporate Executive Officers with regard to financial statements, disclosure controls and procedures, internal controls, compliance structure, risk management structure, internal audit structure, whistleblower protections and other matters; to propose appointment/dismissal of, approve the compensation of, oversee and evaluate Sony’s independent auditors. Under the Commercial Code, the Audit Committee has a statutory duty to prepare and submit its audit report to the Board of Directors each year. 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.
      The Audit Committee discusses with Sony Corporation’s independent auditor, ChuoAoyama PricewaterhouseCoopers, the scope and results of their audits 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 ensures the independence of ChuoAoyama PricewaterhouseCoopers by overseeing their activities through regular communications and discussions with ChuoAoyama PricewaterhouseCoopers as well as making pre-approval of audit and non-audit services provided. The Audit Committee is composed of the following members as of June 21, 2005: Yoshiaki Yamauchi, who is the Chairman of the Audit Committee and an outside Director; Sakie T. Fukushima, who is an outside Director; and Akihisa Ohnishi, who is a Director and full-time member of the Audit Committee. Both Yoshiaki Yamauchi and Akihisa Ohnishi are “audit committee financial experts” within the meaning of Item 16A of this report. The Audit Committee held 15 meetings in the fiscal year ended March 31, 2005.

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      As required by the Commercial Code, the Compensation Committee determines the compensation (including equity-related rights or options given for the purpose of stock incentive options) to be received by each Director and Corporate Executive Officer. In addition to such statutory duties, the Compensation Committee determines the compensation to be received by each Executive Officer and Group Executive Officer, and also proposes to the Board of Directors stock option plans (involving the issuance of share acquisition rights and other forms of stock price based compensation) to be granted to Directors, officers and employees of Sony. Under the Regulations of the Board of Directors, the Compensation Committee shall consist of three or more Directors and one or more members must concurrently serve as Corporate Executive Officers. As stated above, a majority of the members of the Compensation Committee must be outside Directors. The Compensation Committee is composed of the following members as of June 21, 2005: Akishige Okada, who is the Chairman of the Compensation Committee and an outside Director; Yoshihiko Miyauchi, who is an outside Director; and Teruo Masaki, who is a Corporate Executive Officer. During the fiscal year ended March 31, 2005, the Compensation Committee held seven meetings.
      No Directors have service contracts with Sony providing for benefits upon termination of service as a Director.
      Under the Commercial Code 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 perform their duties. In addition, Sony Corporation has entered into a liability limitation agreement with each outside Director which limits the maximum amount of their liabilities owed to Sony Corporation arising in connection with their failure to perform 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 Paragraph 19 of Article 266 of the Commercial Code (or, when the New Company Law becomes effective, the larger of the amount determined by Sony Corporation or the minimum responsibility amount as set forth by the New 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 Sony within the scope of authority delegated by the Board of Directors. As of June 21, 2005, there are 13 Corporate Executive Officers, some of whom are also Directors. Significant decision-making authority has been delegated to the Group CEO and also to each Corporate Executive Officer with regard to investments, strategic alliances and other actions related to the execution of business operations. Sony Corporation believes that this significant delegation enables Sony to be managed in a more dynamic and responsive manner than in the past. 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 accounts within one year after their assumption of office. From among the Corporate Executive Officers who are also Directors, the Board of Directors must elect one or more Representative Corporate Executive Officers. Each Representative Corporate Executive Officer has the statutory authority to represent Sony Corporation in the conduct of its affairs.
Employees
      As of March 31, 2005, Sony had approximately 151,400 employees. Although employees increased at manufacturing facilities in Asia, particularly in China, the total number of employees declined due to the reductions associated with the implementation of restructuring activities in Japan, the U.S., Europe and South-East Asia, and a decrease in the number of employees as a result of Sony combining its recorded music business outside Japan with the recorded music business of Bertelsmann AG forming the jointly-owned company SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”). The fiscal year-end totals include approximately 2,000 employees in Japan who left Sony mainly through the early retirement program on March 31, 2005 and 3,600 employees in Japan who left Sony mainly through the program on March 31, 2004. As of March 31, 2005, approximately 62,300 employees were located in Japan and approximately 89,100 outside Japan, and approximately 16 percent were members of labor unions.

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      As of March 31, 2004, Sony had approximately 162,000 employees, an increase of approximately 900 from March 31, 2003. As of March 31, 2004, approximately 65,600 employees were located in Japan and approximately 96,400 outside Japan, and approximately 13 percent were members of labor unions. The following table shows the number of employees by segment as of March 31, 2003, 2004 and 2005.
Number of Employees by Segment
                           
    March 31
     
    2003   2004   2005
             
Electronics
    128,000       127,100       123,600  
Game
    4,400       4,800       4,300  
Music
    8,400       6,600       2,100  
Pictures
    5,700       6,200       5,900  
Financial Services
    6,600       6,700       6,800  
Other
    7,300       8,300       6,800  
Unallocated — Corporate employees
    700       2,300       1,900  
                   
 
Total
    161,100       162,000       151,400  
                   
      In addition, the average number of employees for the fiscal years ended March 31, 2003, 2004 and 2005, calculated by averaging the total number of employees at the end of each quarter, was 165,300, 165,300 and 154,200 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. 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, as a result of the establishment of SONY BMG, 6,000 non-unionized employees of Sony Music’s disc manufacturing and distribution operations have now been reclassified to the Electronics segment and 3,600 employees of Sony Music Entertainment Inc. (“SMEI”)’s recorded music business, a certain number of whom were represented by labor unions, are now no longer employees of Sony’s consolidated subsidiaries. As the approximately 300 remaining employees of SMEI’s music publishing business still classified within the Music segment are non-unionized, there are no labor unions within the Music segment with union contracts.
      In the Pictures segment, Sony also generally considers its labor relations to be good. A number of Pictures’ subsidiaries are signatories to union contracts. During the fiscal year ended March 31, 2005, renegotiations for new three-year agreements were successfully concluded with the Directors Guild of America (“DGA”), Screen Actors Guild (“SAG”), American Federation of Television and Radio Artists (“AFTRA”), Writers Guild of America (“WGA”), International Brotherhood of Teamsters (“IBT”), International Brotherhood of Electrical Workers (“IBEW”), Basic Craft Unions (“Basic Crafts”), and Office and Professional Employees International Union Local #174 (“Local #174”). On June 10, 2005, renegotiations for a new three and one-half year agreement were concluded with the American Federation of Musicians (“AFM”). The tentative agreement is subject to ratification by the AFM membership.

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      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, 2005 (25 people). Refer to “Board Practices” above.
             
        Number of shares   Percentage
Title of class   Identity of person or group   beneficially owned   of class
             
        (In thousands)    
Common Stock
  Directors and Executive Officers   1,161   0.1
      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. During the fiscal year ended March 31, 2005, Sony granted stock acquisition rights, which represent rights to subscribe for shares of common stock of Sony Corporation, to Directors, Corporate Executive Officers, Executive Officers, Group Executive Officers, 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, 2005 and which were outstanding as of the same date.
         
    Total number of    
Year granted   shares subject to stock    
(Fiscal Year Ended March 31)   acquisition rights   Exercise price per share
         
    (In thousands)    
2005
  230      40.34 U.S. dollars
2005
  482      3,782 yen
2004
  225      40.90 U.S. dollars
2004
  444      4,101 yen
2003
  200      36.57 U.S. dollars
2003
  345      5,396 yen
      Prior to the introduction of stock acquisition rights, Sony had granted warrants, which represent rights to subscribe to 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 Directors, and Corporate Executive Officers as of May 31, 2005 and which were outstanding as of the same date. The exercise price per share has been adjusted for the two-for-one stock split effective on May 19, 2000 and is subject to anti-dilution adjustment.
         
Year granted   Total number of shares    
(Fiscal Year ended March 31)   subject to warrants   Exercise price per share
         
    (In thousands)   (Yen)
2000
  153     7,167
2001
  245   12,457
2002
  275     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 principal 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

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following table shows the portion of those CBs which were held by Directors and Corporate Executive Officers as of May 31, 2005 and which were outstanding as of the same date.
         
Year issued   Total number of shares    
(Fiscal Year Ended March 31)   subject to CBs   Exercise price per share
         
    (In thousands)   (U.S. dollars)
2001
    60   122.98
2002
  106     71.28
2003
  115     52.29
      Furthermore, Sony has granted stock appreciation rights (“SARs”) in Japan, Europe, and the U.S. to selected employees. Under the terms of these 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 six 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, 2005 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 granted   Total number of shares    
(Fiscal Year Ended March 31)   subject to SARs   Exercise price per share
         
    (In thousands)   (Yen for the Japanese plan,
        U.S. dollars for the U.S. plan)
The Japanese plan
       
2000
  10   7,445
The U.S. plan
       
2002
  10   44.00
      Regarding the above compensation plans, refer to Note 16 of Notes to Consolidated Financial Statements.
Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
      Dodge & Cox, an institutional investor based in San Francisco, California, filed a Schedule 13-G with the SEC on February 10, 2005. According to this filing, Dodge & Cox beneficially owned 49,551,146 shares, of outstanding Sony Corporation Common Stock, representing 5.4 percent of the total. To the knowledge of Sony Corporation, 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, 2005, there were 997,211,213 shares of Common Stock outstanding, of which 136,342,744 shares were in the form of ADRs and 84,481,532 shares were held of record in the form of Common Stock by residents in the U.S. The number of registered ADR holders was 7,209, and the number of registered holders of shares of Common Stock in the U.S. was 238.
      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.
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, 2005, Sony entered into the following sales/purchase

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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 168.3 billion yen; sales to Kyoshin Technosonic Co., Ltd. (“Kyoshin”), a joint venture focused on marketing semiconductors and other electronic components, totaling 63.6 billion yen; sales to SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), a joint venture focused on recorded music business, totaling 19.1 billion yen; purchases from S.T. Liquid Crystal Display Corp., a liquid crystal display (“LCD”) joint venture in Japan, totaling 66.8 billion yen; and purchases from Oita TS Semiconductor Corporation, a semiconductor manufacturing joint venture in Japan, totaling 25.4 billion yen. As of March 31, 2005, Sony held notes and accounts receivable, trade due from Sony Ericsson, SONY BMG, and Kyoshin worth 25.9 billion yen, 11.3 billion yen, and 10.6 billion yen, respectively. Sony held advances to SONY BMG worth 16.0 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.
      Sumitomo Mitsui Financial Group, Inc. and Sumitomo Mitsui Banking Corporation have performed and continue to perform commercial banking services for Sony. Akishige Okada, elected as a Sony Corporation Director effective as of June 20, 2002, is a Representative Director of Sumitomo Mitsui Financial Group, Inc. and Sumitomo Mitsui Banking Corporation. Yoshiaki Yamauchi, elected as a Sony Corporation Director effective as of June 20, 2003, is a Director of Sumitomo Mitsui Financial Group, Inc.
      As of April 1, 2004, Sony Computer Entertainment Inc. (“SCE”) became a wholly-owned subsidiary of Sony Corporation 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 of Sony Corporation. 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 shares of its common stock to an Executive Deputy President who was also a Corporate Executive Officer of Sony Corporation and who owned 100 shares of SCE’s common stock. This transaction did not have a material impact on Sony’s results of operations and financial position for the fiscal year ending March 31, 2005.
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
      Sony Corporation and certain of its subsidiaries are defendants in several pending legal proceedings. However, based upon the information currently available to Sony, management of Sony believes that damages from such legal 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 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 May 16, 2005 and was paid on June 1, 2005. Sony Corporation has

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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 2005, 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
      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 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 the Osaka Securities Exchange in Japan. In addition, Sony Corporation’s Common Stock is listed on the following stock exchanges outside Japan: Pacific, Chicago, Toronto, London, Paris, Frankfurt, Düsseldorf, Brussels, Vienna, and Swiss.
      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.
      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, a directly and indirectly wholly-owned 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.

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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   New York Stock
    Exchange Price   Exchange Price
    Per Share of   Per Share of
    Common Stock   ADS
         
    High   Low   High   Low
                 
    (Yen)   (U.S. dollars)
Annual highs and lows*
                               
 
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  
 
The fiscal year ended March 31, 2003
    7,460       4,070       59.95       34.85  
Quarterly highs and lows*
                               
 
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  
 
The fiscal year ended March 31, 2005
                               
   
1st quarter
    4,710       3,880       43.67       33.95  
   
2nd quarter
    4,200       3,550       38.50       32.35  
   
3rd quarter
    3,990       3,620       39.20       33.77  
   
4th quarter
    4,420       3,750       41.81       36.26  
Monthly highs and lows*
                               
 
2004
                               
   
December
    3,990       3,670       38.76       35.75  
 
2005
                               
   
January
    4,090       3,750       39.53       36.26  
   
February
    4,010       3,770       38.31       36.46  
   
March
    4,420       3,960       41.81       37.85  
   
April
    4,410       3,830       40.79       35.77  
   
May
    4,140       3,850       38.45       36.30  
   
June (through June 20)
    4,080       3,860       37.63       35.10  
Stock price data are based on prices throughout the sessions for each corresponding period at each stock exchange.
      On June 20, 2005, the closing sales price per share of Sony Corporation’s Common Stock on the TSE was 3,860 yen. On June 20, 2005, the closing sales price per share of Sony Corporation’s ADS on the NYSE was 35.39 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
Memorandum and Articles of Association
Organization
      Sony Corporation is a joint stock corporation (Kabushiki Kaisha)incorporated in Japan under the Commercial Code (Shoho) of Japan. It is registered in the Commercial Register (Shogyo Tokibo) maintained by the Shinagawa Branch Office of the Tokyo Bureau of Legal Affairs.
Objects and purposes
      Article 3 of the Articles of Incorporation of Sony Corporation provides 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
      Under the Commercial Code (including the Law for Special Exceptions to the Commercial Code concerning Audit, etc. of Kabushiki-Kaisha, collectively the “Commercial Code”), Directors have no power to execute the business of Sony Corporation except in limited circumstances 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, 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 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 the Commercial Code nor Sony Corporation’s Articles of Incorporation make a special provision as to the borrowing powers exercisable by Directors, 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 and regulations thereunder require a 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 to both the shares of Common Stock and the shares of subsidiary tracking stock.
(General)
      Except as otherwise stated, 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 Code and related legislation.
      A bill to modernize and make overall amendments to the Commercial Code by replacing the current provisions with regard to corporations with a new company law (the “New Company Law”) was submitted to the Diet on March 22, 2005. The proposed New Company Law is to be enacted during the first half of 2005 and will come into effect within one year and half after its promulgation, and currently, it is expected that it will take effect in April 2006. The proposed legislation is subject to discussion at, and approval by, the Diet.
      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.
      UFJ Trust Bank Limited 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, Marunouchi 1-chome, Chiyoda-ku, Tokyo, and records transfers of shares upon presentation of the certificates representing the transferred shares.

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      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. 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.
      A new 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 and the companies are not required to withdraw those share certificates from shareholders. The transfer of such shares will be effected through entry in the books maintained under the new central clearing system.
(Authorized capital)
      Article 5 of the Articles of Incorporation of Sony Corporation provides that Sony Corporation may 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 of Sony Corporation’s Articles of Incorporation provides 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 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)
Dividends — General
      The Articles of Incorporation of Sony Corporation provide that the accounts shall be closed on March 31 of each year. Year-end cash dividends, if any, shall be paid to shareholders, beneficial shareholders and pledgees of record as of the end of such day. After the close of the fiscal period, a Corporate Executive Officer designated by the Board of Directors prepares, among other things, a proposed allocation of profits for dividends and other purposes; this proposal is submitted to the Audit Committee and to independent certified public accountants and then submitted for approval to the Board of Directors. If 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 allocation 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

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inappropriate, such proposal shall be deemed to be approved by the shareholders when approved by the Board of Directors.
      Under the New Company Law, subject to certain limitations on the distributable surplus as described below, dividends, if any, may be paid to shareholders, beneficial shareholders, and pledgees of record as of a record date as set forth by the Articles of Incorporation of Sony Corporation or as determined by the Board of Directors from time to time. Dividends shall be paid by way of distribution of surplus. Dividends may be distributed in cash or in kind. In distributing dividends, Sony Corporation may determine the kind of assets to be distributed, the book value of such assets, matters regarding allocation of such assets, and the effective date of such dividends, by a resolution of a general meeting of shareholders. However, Sony Corporation may generally determine such matters by a resolution of the Board of Directors if (a) the Articles of Incorporation of Sony Corporation so provide, (b) the term of its Directors is set to be until the conclusion of the ordinary general meeting of shareholders held with respect to the last closing of accounts within one year after such Director’s assumption of office, and (c) certain requirements regarding the financial statements and certain documents of Sony Corporation as set forth in an ordinance of the Ministry of Justice are met; provided, however, that when Sony Corporation is to pay dividends in-kind without giving shareholders the right to request payment of cash dividends in lieu of in-kind dividends, it shall determine such matters by a special shareholders resolution (as defined in “(Voting Rights)”). When Sony Corporation makes payment of dividends, it shall allocate such dividends in proportion to the number of shares of any specific class held by each shareholder.
Dividends — Interim cash dividends
      In addition to fiscal year-end cash dividends, the Board of Directors may by its resolution declare a cash distribution pursuant to Article 293-5 of the Commercial Code (an “interim dividend”) payable 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.
      Under the New Company Law, Sony Corporation is allowed to make payment of interim dividends during a fiscal year by way of distribution of surplus by resolution of the Board of Directors; provided, however, that such payment of interim dividends shall be limited to cash dividends and also limited to once per any fiscal year.
Dividends — Legal reserve
      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.
      The New Company Law provides that when a stock company like Sony Corporation makes distribution of surplus, it shall set aside in its legal reserve an amount equal to 10 percent of the amount of the surplus to be decreased as a result of such distribution of surplus in accordance with the provisions set forth in an ordinance of the Ministry of Justice.
Dividends — Distributable amount
      Under the Commercial Code, Sony Corporation is permitted to distribute profits by way of fiscal 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;