20-F 1 k01608e20vf.htm SONY CORPORATION SONY CORPORATION
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 20-F
 
     
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
     
 
or
     
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
     
    For the fiscal year ended March 31, 2008
     
 
or
     
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
     
    For the transition period from/to
     
 
or
     
     
o
  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
     
    Date of event requiring this shell company report:
     
 
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)
 
7-1, KONAN 1-CHOME, MINATO-KU,
TOKYO 108-0075 JAPAN
(Address of principal executive offices)
 
Samuel Levenson, Senior Vice President, Investor Relations
 
Sony Corporation of America
550 Madison Avenue
New York, NY 10022
Telephone: 212-833-6722, Facsimile: 212-833-6938
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
 
Securities registered or to be 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
Common Stock**
  New York 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 New York Stock Exchange.
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
 
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, 2008
  March 28, 2008
Title of Class
 
(Tokyo Time)
 
(New York Time)
Common Stock
  1,003,427,768    
American Depositary Shares
      162,804,647
 
Indicate by check mark if the registrant is a well-seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ      No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o      No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ      No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer” and ‘‘large accelerated filer” in Rule 12b-2 of the Exchange Act.
þ Large accelerated filer o Accelerated filer o Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP þ International Financial Reporting Standards as issued by the International Accounting Standards Board o Other o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o      Item 18 þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No þ
 


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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, as well as achieve sufficient cost reductions for, its products and services, including newly introduced platforms within the Game segment, which are offered in highly competitive markets characterized by continual new product introductions, rapid development in technology and subjective and changing consumer preferences (particularly in the Electronics, Game and Pictures segments, and the music business); (iv) Sony’s ability and timing to recoup large-scale investments required for technology development and increasing production capacity; (v) Sony’s ability to implement successfully business reorganization activities in its Electronics segment; (vi) Sony’s ability to implement successfully its network strategy for its Electronics, Game and Pictures segments, and All Other, including the music business, and to develop and implement successful sales and distribution strategies in its Pictures segment and the music business in light of the Internet and other technological developments; (vii) Sony’s continued ability to devote sufficient resources to research and development and, with respect to capital expenditures, to correctly prioritize investments (particularly in the Electronics segment); (viii) Sony’s ability to maintain product quality (particularly in the Electronics and Game segments); (ix) the success of Sony’s joint ventures and alliances; (x) the outcome of pending legal and/or regulatory proceedings; (xi) shifts in customer demand for financial services such as life insurance and Sony’s ability to conduct successful Asset Liability Management in the Financial Services segment; and (xii) the impact of unfavorable conditions or developments (including market fluctuations or volatility) in the Japanese equity markets on the revenue and operating income of the Financial Services segment. Risks and uncertainties also include the impact of any future events with material adverse 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.”
 
In this document, Sony Corporation and its consolidated subsidiaries are together referred to as “Sony.” In addition, sales and operating revenue are referred to as “sales” in the narrative description except in the consolidated financial statements.
 
As of March 31, 2008, Sony Corporation had 991 consolidated subsidiaries (including variable interest entities). It has applied the equity accounting method with respect to its 63 affiliated companies.


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 EX-1.3 Charter of the Board of Directors, as amended (English Translation)
 EX-12.1 302 Certification
 EX-12.2 302 Certification
 EX-13.1 906 Certification
 EX-15.1(a) Consent of PricewaterhouseCoopers Arata
 EX-15.1(b) Consent of PricewaterhouseCoopers AB


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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
    2004   2005   2006   2007   2008
    (Yen in millions, Yen per share amounts)
 
Income Statement Data:
                                       
Sales and operating revenue
    7,530,635       7,191,325       7,510,597       8,295,695       8,871,414  
Operating income
    133,146       145,628       226,416       71,750       374,482  
Income before income taxes
    144,067       157,207       286,329       102,037       466,317  
Income taxes
    52,774       16,044       176,515       53,888       203,478  
Income before cumulative effect of accounting changes
    90,628       168,551       123,616       126,328       369,435  
Net income
    88,511       163,838       123,616       126,328       369,435  
Data per Share of Common Stock:
                                       
Income before cumulative effect of accounting changes
                                       
— Basic
    98.26       180.96       122.58       126.15       368.33  
— Diluted
    89.03       162.59       116.88       120.29       351.10  
Net income
                                       
— Basic
    95.97       175.90       122.58       126.15       368.33  
— Diluted
    87.00       158.07       116.88       120.29       351.10  
Cash dividends declared
                                       
Interim
    12.50       12.50       12.50       12.50       12.50  
      (11.37 cents )     (12.12 cents )     (10.36 cents )     (10.78 cents )     (11.26 cents )
Fiscal year-end
    12.50       12.50       12.50       12.50       12.50  
      (11.26 cents )     (11.29 cents )     (11.04 cents )     (10.24 cents )     (11.92 cents )
Depreciation and amortization*
    366,269       372,865       381,843       400,009       428,010  
Capital expenditures (additions to fixed assets)
    378,264       356,818       384,347       414,138       335,726  
Research and development costs
    514,483       502,008       531,795       543,937       520,568  
Balance Sheet Data:
                                       
Net working capital
    381,140       746,803       569,296       994,871       986,296  
Long-term debt
    777,649       678,992       764,898       1,001,005       729,059  
Stockholders’ equity
    2,378,002       2,870,338       3,203,852       3,370,704       3,465,089  
Total assets
    9,090,662       9,499,100       10,607,753       11,716,362       12,552,739  
Number of shares issued at fiscal year-end (thousands of shares of common stock)
    926,418       997,211       1,001,680       1,002,897       1,004,443  
Stockholders’ equity per share of common stock
    2,563.67       2,872.21       3,200.85       3,363.77       3,453.25  
 
* Depreciation and amortization includes amortization expenses for intangible assets and 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
                               
2004
    113.07       120.55       104.18       104.18  
2005
    107.49       114.30       102.26       107.22  
2006
    113.15       120.93       104.41       117.78  
2007
    116.92       121.81       110.07       117.56  
2008
    114.31       124.09       96.88       99.85  
2008
                               
January
          109.70       105.42       106.74  
February
          108.15       104.19       104.19  
March
          103.99       96.88       99.85  
April
          104.56       100.87       104.53  
May
          105.52       103.01       105.46  
June (through June 19)
          108.19       104.41       107.95  
 
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 19, 2008 was 107.95 yen = 1 U.S.dollar.
 
* The average yen exchange rates represent average noon buying rates of all the business days during the respective year.
 
Notes to Selected Financial Data:
 
1.  In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletin (“ARB”) No. 51.” FIN No. 46 addresses the 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 2,117 million yen as a cumulative effect of accounting change in the consolidated statement of income, and Sony’s assets and liabilities increased by 95,255 million yen and 97,950 million yen, respectively. These increases were treated as non-cash transactions in the consolidated statement of cash flows. In addition, cash and cash equivalents increased by 1,521 million yen. Sony subsequently early adopted the provisions of FIN No. 46R, which replaced FIN No. 46, upon issuance in December 2003. 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.
 
2.  In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued 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. 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 a charge of 4,713 million yen (net of income taxes of 2,675 million yen) as a cumulative effect of an accounting change.
 
3.  In July 2004, the Emerging Issues Task Force (“EITF”) issued EITF 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

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upon the conversion of Co-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise the stock acquisition rights have been met. Sony adopted EITF 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. Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the fiscal year ended March 31, 2005 decreased by 7.26 yen and 7.06 yen, respectively, as a result of adopting EITF Issue No. 04-8.
 
4.  Effective April 1, 2006, Sony adopted FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123(R)”). This statement requires the use of the fair value based method of accounting for employee stock-based compensation and eliminates the alternative to use the intrinsic value method prescribed by Accounting Principle Board Opinion (“APB”) No. 25. With limited exceptions, FAS No. 123(R) requires that the grant-date fair value of share-based payments to employees be expensed over the period the service is received. Sony had accounted for its employee stock-based compensation in accordance with the provisions prescribed by APB No. 25 and its related interpretations and had disclosed the net effect on net income and EPS allocated to the common stock as if Sony had applied the fair value recognition provisions of FAS No. 123 to stock-based compensation as described in Note 2 to the consolidated financial statements, “Significant accounting policies — Stock-based compensation.” Sony has elected the modified prospective method of transition prescribed in FAS No. 123(R), which requires that compensation expense be recorded for all unvested stock acquisition rights as the requisite service is rendered beginning with the first period of adoption. As a result of the adoption of FAS No. 123(R), Sony’s operating income decreased by 3,670 million yen for the fiscal year ended March 31, 2007.
 
5.  In February 2006, the FASB issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of FAS No. 133 and FAS No. 140. This statement permits an entity to elect fair value remeasurement for any hybrid financial instrument if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under FAS No. 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. The statement is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s fiscal year beginning after September 15, 2006, with earlier adoption permitted as of the beginning of the fiscal year, provided that financial statements for any interim period of that fiscal year have not been issued. Sony early adopted FAS No. 155 on April 1, 2006. As a result of the adoption of FAS No. 155, Sony’s operating income increased by 3,828 million yen for the fiscal year ended March 31, 2007. Additionally, on April 1, 2006, Sony recognized a net charge of 3,785 million yen (net of income taxes of 2,148 million yen) as a cumulative-effect adjustment to beginning retained earnings, which consisted of 1,754 million yen (net of income taxes of 996 million yen) of gross gains and 5,539 million yen (net of income taxes of 3,144 million yen) of gross losses.
 
6.  In September 2006, the FASB issued FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” an amendment to FASB Statements No. 87, 88, 106 and 132(R). FAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit pension and other postretirement benefit plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. FAS No. 158 was adopted by Sony in the financial statements for the year ended March 31, 2007. FAS No. 158 also requires companies to measure the funded status of the plan as of the date of its fiscal year-end, effective for years ending after December 15, 2008. Sony expects to adopt the measurement provisions of FAS No. 158 effective March 31, 2009. The impact of adopting FAS 158 was a 9,508 million yen reduction in accumulated other comprehensive income. Refer to Note 14 to the consolidated financial statements, “Pension and severance plans,” for further details.
 
7.  In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides


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guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Sony adopted FIN No. 48 effective April 1, 2007. As a result of the adoption of FIN No. 48, a charge against beginning retained earnings totaling 4,452 million yen was recorded. As of April 1, 2007, total unrecognized tax benefits were 223,857 million yen, of which 129,632 million yen, if recognized, would affect Sony’s effective tax rate.
 
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 segment produces consumer products that compete against products sold by an increasing number of competitors on the basis of several factors including price. In order to produce products that appeal to changing and increasingly diverse consumer preferences, and to overcome the fact that a relatively high percentage of consumers already possess products similar to those that Sony offers, Sony’s Electronics and Game segments must develop superior technology, anticipate consumer tastes and rapidly develop attractive products. In the Electronics segment, Sony faces increasingly intense pricing pressure and shorter product cycles in a variety of consumer product categories. Sony’s sales and operating income depend on Sony’s ability to continue to develop efficiently and offer Electronics and Game products at competitive prices that meet changing and increasingly diverse consumer preferences. If we are unable to effectively anticipate and counter the price erosion that frequently accompanies our products, or if the average selling prices of our products decrease faster than we are able to reduce our manufacturing costs, our gross margins will decrease and our results of operations and financial condition may be negatively impacted.
 
To remain competitive and stimulate customer demand, Sony must successfully manage frequent product and service introductions and transitions.
 
Due to the highly volatile and competitive nature of the PC, consumer electronics and mobile communication industries, Sony must continually introduce new products, services and technologies, enhance existing products and services, and effectively stimulate customer demand for new and upgraded products and services. The success of new product and service introductions depends on a number of factors, including timely and successful completion of development efforts, market acceptance, Sony’s ability to manage the risks associated with new products and production ramp-up issues, the availability of application software for new products, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and costs to meet anticipated demand, and the risk that new products and services may have quality or other defects in the early stages of introduction. Accordingly, Sony cannot determine in advance the ultimate effect that new product introductions and transitions will have on financial condition and operating results.
 
Sony is subject to competition from firms that may be more specialized or have greater resources.
 
Sony has several business segments in different industries and has many product categories within the Electronics segment, which causes it to face a broad range of competitors ranging from large international companies to highly specialized entities that are focused on only a few businesses. 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


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financial, technical, and marketing resources available to them than the businesses of Sony. Sony’s financial services businesses may not be able to compete effectively, especially against established competitors with greater financial, marketing and other resources.
 
Sony’s investments in research and development may not yield the results expected.
 
Sony’s businesses, particularly the Electronics and Game segments, operate in intensely competitive markets characterized by changing consumer preferences and rapid technological innovation. Due to technological innovation and ease of imitation, new products tend to become standardized rapidly, leading to intense competition and price declines. In order to strengthen the competitiveness of its products in this environment, Sony is continuing to invest heavily in research and development. However, these investments in research and development may not yield the results expected, hindering Sony’s ability to commercialize in a timely manner new and competitive products that meet the needs of the market, which consequently, may negatively impact Sony’s results.
 
Sony may not be able to recoup the large capital expenditures or investments it makes to increase production capacity.
 
Sony continues to invest heavily in production equipment in the Electronics segment. Sony also invests in production-related joint ventures. One recent example is the investment Sony and Samsung Electronics Co., Ltd. (“Samsung”) made in connection with 8th generation production capacity for amorphous thin film transistor (“TFT”) LCD panel production, following investments in 7th generation production capacity, at S-LCD Corporation (“S-LCD”), a joint venture of the two companies. The accumulated total amount of the investment in S-LCD by Sony and Samsung for 7th and 8th generation production capacity is approximately 400 billion yen (approximately 50 percent of which was contributed by Sony). Sony may not be able to recover these capital expenditures or investments, in part or in full, or the recovery of these capital expenditures or investments may take longer than expected. As a result, the carrying value of the related assets may be subject to an impairment charge, which could adversely affect Sony’s mid-term profitability. (Refer to “Electronics” section of “Trend Information” in “Item 5. Operating and Financial Review and Prospects.”)
 
Sony’s utilization of joint ventures and alliances within strategic business areas may not be successful.
 
During the last several years Sony has moved increasingly toward 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.
 
Sony currently has investments in several joint ventures, including Sony Ericsson Mobile Communications, AB, S-LCD and SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”). In February 2008, Sony and Sharp signed a non-binding memorandum of intent to establish a joint venture to manufacture 10th generation amorphous TFT LCD panels and modules. 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 adversely affected temporarily or in the short- and medium-term during the investment period of alliances, joint ventures and strategic investments even if Sony and its partners remain on course to achieve their common objectives.
 
Sony may not adequately manage the growing number of joint ventures and strategic alliances, and, in particular, may not deal effectively with the legal and cultural differences that can arise in such relationships or changes in the relationships with or financial status of partners. In addition, by participating in joint ventures or strategic alliances, Sony may encounter conflicts of interest, may not maintain sufficient control over the joint venture or strategic alliance, including over cash flow, and may be faced with an increased risk of the loss of proprietary technology or know-how. Sony’s reputation could be harmed by the actions or activities of a joint venture that uses the Sony brand.
 
Sony’s business reorganization efforts are costly and may not attain their objectives.
 
Sony implemented restructuring initiatives in relation to its mid-term corporate strategy for the three fiscal years ended March 31, 2008 that focused on the reduction of the number of business categories and product models,


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the rationalization of manufacturing sites, streamlining of administrative and headquarter functions, and the sale of non-core assets. In association with these restructuring initiatives, 138.7 billion yen, 38.8 billion yen and 47.3 billion yen of restructuring charges were recorded for the fiscal years ended March 31, 2006, 2007 and 2008, respectively. Sony anticipates the recording of approximately 20 billion yen of restructuring charges for the fiscal year ending March 31, 2009.
 
Restructuring charges are recorded in cost of sales, selling, general and administrative expenses and loss on sale, disposal or impairment of assets, net and thus decrease Sony’s consolidated operating and net income. Moreover, due to internal or external factors, the improved efficiencies and projected cost savings 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 the worsening of market conditions beyond expectations. Such possible internal factors could include, for example, a decision to implement new restructuring initiatives not already planned or a decision to increase research and development outlays or other expenditures beyond currently projected levels, either of which might increase total costs. Possible external factors could include, for example, increased burdens from regional labor regulations and labor union agreements that could prevent Sony from executing its restructuring initiatives as planned. Therefore, such reorganizations may not result in improved efficiency, increased ability to respond to market changes or the reallocation of resources to more profitable activities. The inability to fully and successfully implement restructuring programs may cause Sony to have insufficient financial resources to carry out its research and development plans and to invest in targeted growth areas for its businesses.
 
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 Sony Corporation’s subsidiaries around the world, which are then translated into yen at the monthly average currency exchange rate. Sony’s consolidated balance sheets are prepared using the local currency-denominated assets and liabilities of Sony Corporation’s subsidiaries around the world, which are translated into yen at the market exchange rate at the end of each financial period. A large proportion of Sony’s consolidated financial results, assets and liabilities is accounted for in currencies other than the Japanese yen. For example, only 23.2 percent of Sony’s sales and operating revenue in the fiscal year ended March 31, 2008 were originally recorded in Japan. Accordingly, Sony’s consolidated financial results and the assets and liabilities in Sony’s businesses that operate internationally, principally in its Electronics, Game and Pictures segments, may be materially affected by changes in the exchange rates of foreign currencies when translating into Japanese yen. Foreign exchange rate fluctuations may have a negative impact on Sony’s results in the future, especially if the yen strengthens significantly against the U.S. dollar, the euro or other foreign currencies.
 
Foreign exchange fluctuations can affect Sony’s results of operations due to sales and expenses in different currencies.
 
Exchange rate fluctuations affect Sony’s operating profitability because many of Sony’s products are sold in countries other than the ones in which they were manufactured. The concentration of research and development, administrative functions and manufacturing activities within the Electronics segment in Japan, makes this segment particularly sensitive to the yen’s appreciation as the ratio of yen-denominated 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 may interfere with Sony’s global allocation of resources and hinder Sony’s ability to engage in research and development, procurement, production, logistics, and sales activities in a manner that is profitable after the effect of such exchange rate changes.
 
Although Sony hedges most of 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.


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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. Sony consumes a tremendous volume of parts and components such as semiconductors and LCD panels for its products. Consequently, market fluctuations may cause a shortage of parts and components, and may affect Sony’s production or the cost of goods sold, as could price fluctuations of the underlying raw or basic materials. In the past, for example, Sony has experienced both a shortage of certain semiconductors, which resulted in Sony’s inability to meet demand for its PCs and audio visual products, as well as a surplus in certain other semiconductors that resulted in the recognition of losses when semiconductor prices fell.
 
Sony’s profitability may also be adversely affected by inventory adjustments that, as a result of efforts to reduce inventory by adjusting production or by reducing the price of finished 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 sales and profitability are sensitive to economic and other trends in Sony’s major markets.
 
A consumer’s decision to purchase products such as those offered by Sony is discretionary to a very significant extent. 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, 2008, 23.2 percent, 25.1 percent and 26.2 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 or natural disasters depress consumer confidence, Sony’s short- to mid-term sales and profitability may be significantly adversely affected. In addition, since Sony’s sales in Other Areas are growing, its sales and profitability may also be affected by future political, economic and military uncertainties surrounding those areas.
 
Sony is subject to the risks of operations in different countries.
 
Most of Sony’s activities are conducted outside of Japan, and international operations bring challenges. For example, in the Electronics and Game segments, production and procurement of products and parts in Asian countries such as China are increasing, and this creates a risk that production and shipping of products and parts could be interrupted by a natural disaster or pandemic in the region, similar to the spread of Severe Acute Respiratory Syndrome (“SARS”). In addition, production of electronics products in China and other Asian countries increases the time necessary to supply products to Europe and the U.S., which can make it more difficult to meet changing customer demand. Further, Sony may encounter difficulty in planning and managing operations due to unfavorable political or economic factors, such as cultural and religious conflicts, non-compliance with expected business conduct, unexpected legal or regulatory changes such as foreign exchange, import or export controls, nationalization of assets or restrictions on the repatriation of returns from foreign investments and the lack of adequate infrastructure. As emerging markets are becoming increasingly important in our operations, the above mentioned risks are also expected to grow and could have an adverse impact on our financial condition and operating results.
 
The large-scale investment required during the development and introductory period of a new gaming platform may not be fully recovered.
 
Within the Game segment, developing and providing products that maintain competitiveness over an extended life-cycle requires large-scale investment relating to research and development, particularly during the development and introductory period of a new platform. In the past, large-scale investment relating to capital expenditures and


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research and development for the manufacture of key components, including semiconductors supplied for PLAYSTATION®3 (“PS3”), was also recorded within the Electronics segment. Moreover, it is particularly important in the Game segment that these products are provided to consumers at competitive prices to ensure the favorable market penetration of the platform. Should the platform fail to achieve such favorable market penetration, there is a risk that this investment, or a part thereof, will not be recouped, resulting in a significant negative impact on Sony’s profitability. In addition, even if Sony is able to sufficiently recoup its investment, significant negative impact on Sony’s operating results could occur during the introductory period of the platform. Further, even if the platform is ultimately successful, it may take longer than expected to recoup the investment, resulting in a negative impact on Sony’s profitability.
 
An example of such a significant negative impact during the introductory period of a platform are PS3-related charges that resulted in losses of 232.3 billion yen and 124.5 billion yen within the Game segment for the fiscal years ended March 31, 2007 and 2008, respectively. These losses arose from the strategic pricing of PS3 hardware at points lower than its production cost. (Refer to “Electronics” section of “Trend Information” and “Game” section of “Operating Performance by Business Segment” at “Operating Results” in “Item 5. Operating and Financial Review and Prospects.”)
 
Sony’s Game and Electronics segments are particularly sensitive to year-end holiday season demand.
 
Since the Game segment offers a relatively small range of hardware products (including PlayStation®2, PSP® (PlayStation®Portable), and PS3) and a significant portion of overall demand is weighted towards the year-end holiday season, 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 both the Game and the Electronics segments. The Electronics segment is also dependent upon year-end holiday season demand and, to a lesser extent than the Game segment, is susceptible to weak sales as well as supply shortages that may prevent it from meeting demand for its products during this season.
 
The sales and profitability of Sony’s Game segment depends on the penetration of its gaming platforms, which is sensitive to software line-ups, including software produced by third parties.
 
In the Game segment, the penetration of gaming platforms is a significant factor driving sales and profitability, which may be affected by the ability to provide customers with sufficient software line-ups, including software produced by third parties. Software line-ups affect not only software sales and profitability, as in many other content businesses, but also affect the penetration of gaming platforms, which can affect hardware sales and profitability.
 
Operating results for Sony’s Pictures segment vary according to the cost of productions, customer acceptance, timing of releases or syndication sales, 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, both of which are difficult to predict, as well as the timing of new motion picture releases and the syndication of television productions. In addition, the commercial success of the Pictures segment’s motion picture and television productions depends upon the public’s acceptance of other competing productions, and the availability of alternative forms of entertainment and leisure activities.
 
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.


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Sony’s Financial Services segment operates in highly regulated industries and new rules, regulations and regulatory initiatives by government authorities could adversely affect the flexibility of its business operation.
 
Sony’s Financial Services segment operates in industries subject to comprehensive regulation and supervision, including the Japanese insurance and banking industries. Future developments or changes in laws, regulations or policies and their effects are unpredictable and could lead to increased compliance expenses or limitations on operations. For example, Japan’s Financial Services Agency (“FSA”) has recently strengthened its regulatory supervision relating to non-payment of insurance claims. The FSA requires all life and non-life insurance companies to perform and report on the results of a systematic review of non-payment of insurance claims. Based on the results of such review, the FSA has issued business improvement orders and other administrative sanctions to non-life insurance companies, and it is considering issuing certain administrative sanctions to life insurance companies. Compliance with multiple regulatory regimes is challenging and, due to our common branding strategy, compliance failures in any of our businesses within our Financial Services segment could have a negative impact on the overall business reputation of the Financial Services segment.
 
Declines in the value of equity securities could have a material adverse impact on the financial results of Sony’s Financial Services segment.
 
In the Financial Services segment, Sony Life Insurance Co., Ltd. (“Sony Life”) holds both convertible bonds and equity securities. The convertible bonds are required to be marked to market at the end of each accounting period on the income statement under U.S. generally accepted accounting principles. Declines in equity prices, such as those due to recent problems in the United States residential mortgage market that have resulted in large fluctuations in global equity prices, may result in valuation losses on the convertible bonds as well as impairment losses on the equity securities held by Sony Life.
 
Changes in interest rates may significantly affect Sony’s Financial Services segment’s financial condition and results.
 
We engage in asset liability management (“ALM”) in an effort to manage the investment assets within the Financial Services segment in a manner appropriate to our liabilities, which arise from both the insurance policies we underwrite in both our life insurance and non-life insurance businesses and the deposits, borrowings and other liabilities in our banking business. ALM considers the long-term balance between assets and liabilities in an effort to ensure stable returns. Any failure to appropriately conduct our ALM activities, or any significant changes in market conditions beyond what our ALM could reasonably address, could have a material adverse effect on the financial condition and results of operations of our Financial Services segment. In particular, because Sony Life’s liabilities to policyholders generally have longer durations than its investment assets, lower interest rates tend to reduce yields on Sony Life’s investment portfolio while premiums remain generally unchanged on outstanding policies. As a result, Sony Life’s profitability and long-term ability to meet policy commitments could be materially and adversely affected.
 
The investment portfolio within Sony’s Financial Services segment exposes Sony to a number of additional risks other than the risks related to declines in the value of equity securities and changes in interest rates.
 
In Sony’s Financial Services segment, generating stable investment income is important to our operations and we invest in a variety of asset classes, including Japanese government and corporate bonds, foreign government and corporate bonds, Japanese stocks, loans and real estate. In addition to risks related to changes in interest rates and the value of equity securities, the Financial Services segment’s investment portfolio exposes Sony to a variety of other risks, including foreign exchange risk, credit risk and real estate investment risk, any or all of which may have an adverse effect on the financial condition and results of operations of our Financial Services segment.


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Differences between actual and assumed policy benefits and claims may require Sony’s Financial Services segment to increase policy reserves in the future.
 
Sony’s life insurance and non-life insurance businesses establish policy reserves for future benefits and claims based on regulatory guidelines and estimates of future payment obligations made by qualified actuaries. These reserves are calculated based on many assumptions and estimates, including the frequency and timing of the event covered by the policy, the amount of benefits or claims to be paid and the investment returns on the assets these businesses purchase with the premiums received. These assumptions and estimates are inherently uncertain, and we cannot determine with precision the ultimate amounts that we will be required to pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow at the level we assume prior to the payment of benefits or claims. The frequency and timing of the event covered by the policy and the amount of benefits or claims to be paid are subject to a number of risks and uncertainties, many of which are outside of our control, including:
 
•   changes in trends underlying our assumptions and estimates, such as mortality and morbidity rates;
 
•   the availability of sufficient reliable data and our ability to correctly analyze the data;
 
•   our selection and application of appropriate pricing and rating techniques; and
 
•   changes in legal standards, claim settlement practices and medical care expenses.
 
If the actual experience of our insurance businesses is less favorable than our assumptions or estimates, our policy reserves may be inadequate. In addition, any changes in regulatory guidelines or standards with respect to the required level of policy reserves may require that we establish policy reserves based on more stringent assumptions, estimates or actuarial calculations. Such events could result in a need to increase provisions for policy reserves, which may have a significant adverse effect on the financial condition and results of operations of the Financial Services segment.
 
Sony’s music business, including its investment in SONY BMG, and the Pictures segment are subject to digital piracy, which may become increasingly prevalent with the development of new technologies.
 
The development of digital technology has created new risks with respect to Sony’s ability to protect its copyrights in its music business, including its investment in SONY BMG, as well as in the Pictures segment. Advances in technology that enable the transfer and downloading of digital audio and video 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 video files. These technological advances include new digital devices such as hard disk drive video and audio recorders, CD, DVD, and Blu-ray Disctm recorders and peer-to-peer digital distribution services. Such unauthorized distribution has adversely affected sales and operating income within the music business, and returns from Sony’s investment in SONY BMG, and threatens to adversely affect sales and operating income in the Pictures segment. As a result, Sony has incurred and will continue to incur expenses to develop new services for the authorized digital distribution of music, movies and television programs and to combat unauthorized digital distribution of its copyrighted content. These initiatives will increase Sony’s near-term expenses and may not achieve their intended result.
 
Sony’s music business and Sony’s investment in SONY BMG are dependent on establishing new artists, and together with Sony’s Pictures segment are subject to increases in talent-related costs.
 
The success of Sony’s music business and Sony’s investment in SONY BMG is highly dependent on establishing artists that appeal to customers, and the competition with other entertainment companies for such talent is intense. If the music business and SONY BMG are unable to find and establish new talented artists, sales, operating income and the returns from Sony’s investment in SONY BMG may be adversely affected. In addition, with respect to the music business and the Pictures segment, as well as SONY BMG, Sony has experienced and may continue to experience significant increases in talent-related spending.


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SONY BMG may be subject to renewed judicial review by the European Court.
 
In August 2004, Sony combined its recorded music business outside of Japan with the recorded music business of Bertelsmann AG, forming SONY BMG, after receiving antitrust approval from, among others, the European Commission. On December 3, 2004, Impala, an international association of 2,500 independent recorded music companies, appealed the European Commission’s clearance decision to the EU Court of First Instance (“CFI”). On July 13, 2006, the CFI annulled the Commission’s decision to allow the merger to go forward, requiring the Commission to re-examine the transaction. In October 2006, Sony Corporation of America and Bertelsmann AG filed an appeal of the CFI’s judgment to the Court of Justice of the European Communities (“ECJ”). The ECJ is scheduled to render judgment on that appeal on July 10, 2008. On October 3, 2007, following its re-examination of the merger, the Commission rendered a second clearance decision reaffirming the conclusion reached in 2004 that the transaction raised no competition concerns. That decision may be appealed to the CFI until June 26, 2008 and on June 16, 2008 Impala announced it had filed an appeal. If the ECJ were to affirm the CFI’s judgment annulling the Commission’s original clearance decision and the CFI (and upon a further appeal, the ECJ) were to annul that second clearance decision, then, should the Commission following a further investigation reverse the position it had taken in 2004 and 2007, the previously combined company could be forced to unwind the merger in whole or in part. In such circumstance, Sony might incur significant costs and might not be able to achieve its objectives with respect to its recorded music business.
 
Sony may not be successful in implementing its hardware, software and content integration strategy.
 
Sony believes that utilizing broadband networks to facilitate the integration of hardware, software and content is essential for differentiating itself in the marketplace. Sony also believes that this strategy will eventually lead to consistent revenue streams. However, this strategy depends on the development (both inside and outside of Sony) of certain network technologies, coordination among Sony’s various business units, and the standardization of technological and interface specifications across business units and within industries. If Sony is not successful in implementing this strategy, it could adversely affect Sony’s competitiveness and profitability.
 
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 earthquakes is generally higher than in other parts of the world. In addition, Sony’s offices and facilities, including those used for research and development, material procurement, manufacturing, motion picture and television program production, 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 recording revenue, and result in large expenses to repair or replace these facilities or offices. In addition, as network and information systems have become increasingly important to Sony’s operating activities, network and information system shutdowns caused by unforeseen events such as power outages, disasters, terrorist attacks, hardware or software defects, computer viruses and computer hacking pose increasing risks. Although Sony is developing counter-measures, such events could result in the disruption of Sony’s operations, delay production, shipments and recognition of revenue, and result in large expenditures necessary to repair or replace such network information systems.
 
Sony’s reputation and business could be harmed and Sony could be subject to legal claims if there is loss, disclosure or misappropriation of our customers’ personal information or other breaches of our security.
 
Sony makes extensive use of online services and centralized data processing, including through third-party service providers, particularly in the Financial Services segment. The secure maintenance and transmission of confidential information is a critical element of Sony’s operations. Sony’s customers’ personal information may be lost or disclosed or taken without customer’s consent. In addition, Sony’s information technology and other systems, or those of service providers or strategic business partners, may be compromised. If we lose customers’ personal information or if a malicious third party were to penetrate the network security of Sony, Sony’s business


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partners or service providers to misappropriate or acquire customers’ personal information, or if there were an advertent or inadvertent loss, disclosure or misappropriation of customers’ personal information by Sony employees, Sony’s reputation could be damaged and Sony could be subject to lawsuits or claims.
 
Any loss, disclosure or misappropriation of customers’ personal information or other breach of our security would likely have a serious impact on our reputation and could have a significant adverse effect on our businesses and our results of operations.
 
Sony is subject to financial and reputational risks due to product quality and liability issues.
 
Sony products, such as software 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. If they are not, Sony may incur expenses in connection with, for example, product recalls, after-sales service and lawsuits, and Sony’s brand image and reputation as a producer of high-quality products may suffer. These issues are not only relevant to the final Sony products that are sold directly to customers but also to the final products of other companies that are equipped with Sony’s components, such as the semiconductors mentioned above. An example of these issues is the recording of a 51.2 billion yen provision during the fiscal year ended March 31, 2007 that related to the recalls by Dell Inc., Apple Inc. and Lenovo, Inc. of notebook computer battery packs that use lithium-ion battery cells manufactured by Sony as well as the subsequent global replacement program initiated by Sony for certain notebook computer battery packs used by Sony and several other notebook computer manufacturers that use lithium-ion battery cells manufactured by Sony. (A portion of the provision totaling 15.7 billion yen was reversed in the current fiscal year based on the actual results of recalls and replacements as compared to our original estimates. Refer to “Performance by Product Category” for “Electronics” within “Operating Results for the Fiscal Year Ended March 31, 2008” in “Item 5. Operating and Financial Review and Prospects.”)
 
Sony may be adversely affected by its employee benefit obligations.
 
Sony recognizes the unfunded pension obligation as consisting of the (i) Projected Benefit Obligation (“PBO”) less (ii) the fair value of pension plan assets. Actuarial gains and losses are included in pension expenses in a systematic manner over employees’ average remaining service periods in a manner consistent with FAS No. 87, “Employers’ Accounting for Pensions,” FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” and the related amendments to those standards. Any decrease of the pension asset value due to low returns from investments or increases in the PBO due to a lower discount rate, increases in rates of compensation and certain other actuarial assumptions would increase the unfunded pension obligations, and could, subject to the provisions of FAS No. 87, result in an increase in pension expenses recorded as cost of sales or as a selling, general and administrative expense. (Refer to Note 14 of the notes to the 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 gains or losses 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. Similarly, if Sony is required to make an additional contribution to each foreign plan to meet any funding requirements in accordance with local laws and regulations in each country, Sony’s consolidated cash flow might be adversely affected.


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Changes in Sony’s tax rates or exposure to additional tax liabilities could adversely affect its earnings and financial condition.
 
Sony is subject to income taxes in Japan and numerous other jurisdictions. Significant judgment is required in determining its worldwide provision for income taxes. In the ordinary course of our business, there are many transactions, including intercompany charges, and calculations where the ultimate tax determination is uncertain. Also, Sony’s future effective tax rates could be unfavorably affected by changes in the mix of earnings in countries with differing statutory rates.
 
Further, Sony is subject to continuous examination of its income tax returns by tax authorities. As a result, Sony regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. However, there can be no assurance that the outcomes of these examinations will not have an adverse effect on Sony’s operating results and financial condition.
 
In addition, if Sony is unable to generate sufficient future taxable income in certain jurisdictions, or if there is a significant change in the actual effective tax rates or the time period within which the underlying temporary differences become taxable or deductible, Sony could be required to reduce the amount of its deferred tax assets or increase its valuation allowances against its deferred tax assets, resulting in an increase in its effective tax rate and an adverse impact on future operating results.
 
Sony’s business could suffer as a result of adverse outcomes of current or future litigation and regulatory actions.
 
Sony faces the risk of litigation and regulatory proceedings in connection with its operations. Lawsuits, including regulatory actions, may seek recovery of very large indeterminate amounts or limit Sony’s operations, and the possibility that they may arise and their magnitude may remain unknown for substantial periods of time. A substantial legal liability or adverse regulatory outcome and the substantial cost to defend the litigation or regulatory proceedings could have a material adverse effect on Sony’s business, results of operations, financial condition, cash flows and reputation.
 
Sony may be accused of infringing others’ intellectual property rights and be liable for significant damages.
 
Sony’s products incorporate a wide variety of technologies. Claims have been and could be asserted against Sony that such technology infringes the intellectual property owned by others. Such claims might require us to enter into settlement or license agreements, to pay significant damage awards, and/or to face a temporary or permanent injunction prohibiting Sony from marketing or selling certain of its products, which could have a material adverse effect on Sony’s business, results of operations, financial condition, and reputation.
 
Sony is dependent upon certain intellectual property rights of others, and 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 under the license of patents and other intellectual property rights from third parties who have developed technologies that are protected by such rights. Based upon past experience and industry practice, Sony believes that it will be able to obtain or renew licenses relating to various intellectual properties useful in its business that it needs in the future; however, such licenses may not be available at all or on acceptable terms, and Sony may need to redesign or discontinue marketing or selling such products as a result.
 
Increased reliance on external suppliers may increase financial, reputational and other risks to Sony.
 
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 systems for PCs). Sony has also become more reliant upon the services of third-party original equipment and design manufacturers in the Electronics and Game segments. In addition, Sony consigns to external suppliers extensive activities including procurement, logistics, sales and other services. Reliance on outside sources increases the chance that Sony will be unable to prevent products from incorporating defective or inferior third-party technology or components. Products with such defects


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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 insufficient compliance with applicable regulations or infringement of third-party intellectual property rights by external suppliers as well as certain risks, such as accidents or natural disasters, to which an external supplier might be exposed.
 
Sony is subject to environmental and occupational health and safety regulations that can increase the costs of operations or limit its activities.
 
Sony is subject to a broad range of environmental and occupational health and safety laws and regulations, including laws and regulations relating to air pollution, water pollution, the management, elimination or reduction of the use of hazardous substances, decreases in the level of standby power of certain products, waste management, recycling of products, batteries and packaging materials, site remediation and worker and consumer health and safety. These regulations could become more stringent or additional regulations could be adopted in the future, which could cause us to incur additional compliance costs or limit our activities. Further, a failure to comply with applicable environmental or health and safety laws could result in fines, penalties, legal judgments or other costs or remediation obligations. Such a finding of noncompliance could also injure our brand image. Such events could adversely affect our financial performance.
 
We monitor and evaluate new environmental and health and safety requirements that may affect our operations. Sony sees issues related to climate change as a potential risk if we do not respond or undertake environmental activities appropriately. Sony recognizes that climate change issues could possibly lead to an increase in additional costs due to new regulations including carbon taxes and governmental policies regarding energy efficiency for electronics products. A new regulation regarding logistics has already been introduced in Japan and other countries may introduce similar regulations in the near future. In addition, in the event that we are unable to respond appropriately to consumers’ growing concerns with issues related to climate change, there is a risk that Sony’s reputation could be harmed and that consumers may choose to purchase products from companies other than Sony.
 
The EU’s Registration, Evaluation, Authorisation and Restriction of Chemicals program (“REACH”) came into effect as of June 2007. In general, REACH requires manufacturers, users and importers of a broad range of chemical substances to register for these chemicals and uses of chemicals up and down the supply chain and perform a range of tests and assessments on those substances, making the results available to the public and the EU regulators. For certain types of chemical substances, manufacturers, users and importers of the chemical substance are required to convey the information about the designated substance in its supply chain. Going forward, as registrations and test data are processed and evaluated under the REACH program, actions could be taken that could affect the cost and availability of certain chemicals, and users may have to shift to the use of more expensive and/or less effective substitutes. The various obligations under REACH are to be phased in over a period of time, and we will continue to evaluate the potential impact of these regulations, including whether REACH could directly or indirectly increase our costs or restrict our activities, which could have an adverse impact on our results of operations and financial condition.
 
Sony has established an internal risk management system in response to two directives enacted by the EU: The Restriction of Hazardous Substances Directive (“RoHS”) and the Waste Electrical and Electronic Equipment Directive (“WEEE”). Similar regulations are being formulated in other parts of the world, including China. We may incur substantial costs in complying with other similar programs that might be enacted outside Europe in the future.
 
American Depositary Shareholders 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


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distributions collected from Sony. However, ADS holders will not be able to bring a derivative action, examine Sony’s accounting books and records, or exercise appraisal rights through the depositary.
 
Sony Corporation is incorporated in Japan with limited liability. A majority of our directors and corporate executive officers are non U.S. residents, and a substantial portion of the assets of Sony Corporation and the assets of our directors and corporate executive officers are located outside the U.S. As a result, it may be more difficult for investors to enforce against Sony Corporation or such persons the judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal and state securities laws of the U.S. or judgments obtained in other courts outside Japan. There is doubt as to the enforceability in Japanese courts, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the federal and state securities laws of the U.S.
 
Item 4.  Information on the Company
 
History and Development of the Company
 
Sony Corporation was established in Japan in May 1946 as Tokyo Tsushin Kogyo Kabushiki Kaisha, a joint stock company (Kabushiki Kaisha) under Japanese law. In January 1958, it changed its name to Sony Kabushiki Kaisha (“Sony Corporation” in English).
 
In December 1958, Sony Corporation was listed on the Tokyo Stock Exchange (the “TSE”). In June 1961, Sony Corporation issued American Depositary Receipts (“ADRs”) in the U.S.
 
In March 1968, Sony Corporation established 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, and in April 2004, with the establishment of a financial holding company Sony Financial Holdings Inc. (“SFH”), Sony Life became a wholly-owned subsidiary of SFH.
 
In July 1984, Sony Magnescale Inc., a subsidiary of Sony Corporation and currently Sony Precision Technology Inc., was listed on the Second Section of the TSE. In July 1987, Sony Chemicals Corporation, a subsidiary of Sony Corporation, was listed on the Second Section of the TSE.
 
In January 1988, Sony Corporation acquired CBS Records Inc., a music business division of CBS Inc. in the U.S. In January 1991, CBS Records Inc. changed its name to Sony Music Entertainment Inc. (“SMEI”). In November 1989, Sony Corporation acquired Columbia Pictures Entertainment, Inc. in the U.S. In August 1991, Columbia Pictures Entertainment, Inc. changed its name to Sony Pictures Entertainment Inc. (“SPE”).
 
In November 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 was intended to be linked to the economic value of Sony Communication Network Corporation, which was renamed So-net Entertainment Corporation (“So-net”) in October 2006. All shares of the subsidiary tracking stock were terminated and converted to shares of Sony’s common stock in December 2005. So-net was listed on the Mother’s market of the TSE in December 2005 (and has been traded on the First Section of the TSE since January 2008). Sony Corporation continues to hold a majority of the shares of So-net.


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In October 2001, Sony Ericsson Mobile Communications, AB, a 50:50 joint venture company between Sony Corporation and Telefonaktiebolaget LM Ericsson of Sweden, was established.
 
In October 2002, Aiwa Co., Ltd. (“Aiwa”) became a wholly-owned subsidiary of Sony Corporation. In December 2002, Aiwa was merged into Sony Corporation.
 
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 SFH in Japan. Sony Life, Sony Assurance Inc. (“Sony Assurance”), and Sony Bank Inc. (“Sony Bank”) became subsidiaries of SFH.
 
In April 2004, S-LCD Corporation, a joint venture between Sony Corporation and Samsung Electronics Co., Ltd. of Korea for the manufacture of amorphous thin film transistor (“TFT”) LCD panels, was established in Korea.
 
In August 2004, Sony combined its worldwide recorded music business, excluding its recorded music business in Japan, with the worldwide recorded music business of Bertelsmann AG forming the 50:50 joint venture, SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”).
 
In April 2005, a consortium led by Sony Corporation of America (“SCA”) and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, completed the acquisition of Metro-Goldwyn-Mayer Inc. (“MGM”).
 
In October 2007, SFH was listed on the First Section of the TSE in connection with the global initial public offering of shares of SFH by Sony Corporation and SFH.
 
Sony Corporation’s registered office is located at 7-1, Konan 1-chome, Minato-ku, Tokyo 108-0075, Japan, telephone +81-3-6748-2111.
 
The agent in the U.S. for purposes of this Item 4 is Sony Corporation of America, 550 Madison Avenue, New York, NY 10022 (Attn: Office of the General Counsel).
 
Principal Capital Investments
 
In the fiscal years ended March 31, 2006, 2007 and 2008, Sony’s capital expenditures (additions to fixed assets on the balance sheets) were 384.3 billion yen, 414.1 billion yen and 335.7 billion yen, respectively. Sony’s capital expenditures are expected to be 430 billion yen during the fiscal year ending March 31, 2009. 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 90 billion yen in the semiconductor business during the fiscal year ended March 31, 2008. Sony plans to invest approximately 110 billion yen in the semiconductor business in the fiscal year ending March 31, 2009. The funding requirements of such various capital expenditures are expected to be financed by cash provided by operating and financing activities or cash and cash equivalents. Refer to “Property, Plant and Equipment” below for a geographic distribution of these investments.
 
Business Overview
 
Products and Services
 
Commencing April 1, 2007, Sony has partly realigned its business segment configuration. A contactless integrated circuit card business has been reclassified from All Other to Other in the Electronics segment. Accordingly, results for the previous fiscal years have been reclassified.


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The following table sets forth Sony’s sales and operating revenue by operating segments. Figures in parentheses indicate percentage of sales and operating revenue.
 
                                                 
    Fiscal Year Ended March 31
    2006   2007   2008
    (Yen in millions)
 
Electronics
    4,796,061       (63.9 )     5,443,336       (65.6 )     5,931,708       (67.0 )
Game
    918,252       (12.2 )     974,218       (11.7 )     1,219,004       (13.7 )
Pictures
    745,859       (9.9 )     966,260       (11.7 )     855,482       (9.6 )
Financial Services
    720,566       (9.6 )     624,282       (7.5 )     553,216       (6.2 )
All Other
    329,859       (4.4 )     287,599       (3.5 )     312,004       (3.5 )
             
             
Sales and operating revenue
    7,510,597       (100.0 )     8,295,695       (100.0 )     8,871,414       (100.0 )
             
             
 
Electronics
 
The following table sets forth Sony’s Electronics segment sales and operating revenue by product categories. Figures in parentheses indicate percentage of sales and operating revenue.
 
                                                 
    Fiscal Year Ended March 31
    2006   2007   2008
    (Yen in millions)
 
Audio
    536,187       (11.2 )     522,879       (9.6 )     558,624       (9.4 )
Video
    1,021,325       (21.3 )     1,143,120       (21.0 )     1,279,225       (21.6 )
Televisions
    927,769       (19.3 )     1,226,971       (22.5 )     1,367,078       (23.0 )
Information and Communications
    842,537       (17.6 )     950,461       (17.5 )     1,098,574       (18.5 )
Semiconductors
    172,249       (3.6 )     205,757       (3.8 )     228,711       (3.9 )
Components
    800,716       (16.7 )     852,981       (15.7 )     847,131       (14.3 )
Other
    495,278       (10.3 )     541,167       (9.9 )     552,365       (9.3 )
             
             
Electronics Total
    4,796,061       (100.0 )     5,443,336       (100.0 )     5,931,708       (100.0 )
             
             
 
Note:
Sony manages the Electronics segment as a single operating segment. However, Sony believes that the product category information in the Electronics segment is useful to investors in understanding the sales contributions of the products in this business segment.
 
In the Electronics segment, Sony is engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments and devices for consumer and professional markets. Sony’s principal manufacturing facilities are located in Japan, Malaysia, China, the U.S., 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 personal navigation systems.
 
Video:
 
“Video” includes video cameras, compact digital cameras, digital single-lens reflex (“SLR”) cameras, Blu-ray Disctm players/recorders, and DVD-Video players/recorders.


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Televisions:
 
“Televisions” includes LCD televisions.
 
Information and Communications:
 
“Information and Communications” includes PCs, broadcast- and professional-use audio, video, and monitors, and other professional-use equipment.
 
Semiconductors:
 
“Semiconductors” includes charged coupled devices (“CCDs”), complementary metal-oxide semiconductor (“CMOS”) image sensors and other semiconductors.
 
Components:
 
“Components” includes optical pickups, batteries, audio/video/data recording media, data recording systems and LCDs.
 
Other:
 
“Other” includes sales to outside customers, such as sales of mobile phones produced for wireless customers by Sony EMCS Corporation (“Sony EMCS”), CD, DVD, Blu-ray Disc manufacturing and physical distribution businesses, and products and services that are not included in the above categories.
 
Game
 
SCEI develops, produces, markets and distributes PlayStation®2 (“PS2”), PSP® (PlayStation®Portable) (“PSP”) and PLAYSTATION®3 (“PS3”) hardware and related software. Sony Computer Entertainment America Inc. (“SCEA”) and Sony Computer Entertainment Europe Ltd. (“SCEE”) market and distribute PS2, PSP and PS3 hardware, and develop, produce, market and distribute related software in the U.S. and Europe. SCEI, SCEA and SCEE enter into licenses with third-party software developers.
 
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 content creation and distribution; development of new entertainment products, services and technologies; 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 also holds a 7.5 percent equity interest in Revolution Studios and has the rights to market and distribute its motion picture product throughout most of the world. SPE retains a fee for distributing Revolution Studios’ films and participates in Revolution Studios’ profits and losses as a result of its equity ownership stake. The initial theatrical release of the final Revolution Studios’ film under this arrangement occurred in December 2007.
 
SPE’s Television Group is primarily comprised of Sony Pictures Television and Sony Pictures Television International with various broadcast channel investments. SPE develops and produces network television series, first-run syndication programming, made-for-cable programming, daytime serials, syndicated games shows, animated series, made for television movies, miniseries and other television programming and distributes such programs to the networks, syndication market and cable market.
 
Sony Pictures Digital operates Sony Pictures Imageworks and Sony Pictures Animation. Through March 31, 2008, Sony Pictures Digital also operated Sony Online Entertainment (“SOE”). Effective April 1, 2008, management of SOE was transferred to SCEI and SOE will now be operated as part of the Game segment.


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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 with the lease term expiring on April 30, 2009.
 
Financial Services
 
In the Financial Services segment, on April 1, 2004 Sony established a wholly-owned subsidiary, SFH, a holding company for Sony Life, Sony Assurance and Sony Bank Inc., with the aim of integrating various financial services including insurance, savings and loans, and offering individual customers high value-added products and high-quality services. On October 11, 2007, in conjunction with the global initial public offering of shares of SFH, the shares of SFH were listed for trading on the First Section of the TSE. Following this global offering, SFH remains a consolidated subsidiary with Sony Corporation as the majority shareholder.
 
Sony conducts insurance and banking operations primarily through Sony Life, a Japanese life insurance company, Sony Assurance, a Japanese non-life insurance company, and Sony Bank, a Japanese Internet-based bank, which are all wholly-owned by SFH. Aside from SFH, Sony is also engaged in a leasing and credit financing business in Japan through Sony Finance International Inc. (“Sony Finance”), a wholly-owned subsidiary of Sony Corporation.
 
All Other
 
All Other is mainly comprised of SMEJ, a Japanese domestic recorded music business that produces recorded music and music videos through contracts with many artists in all musical genres; SMEI’s music publishing business, which owns and acquires rights to musical compositions, exploits and markets these compositions and receives royalties or fees for their use; So-net, an Internet-related service business subsidiary operating mainly in Japan; an in-house facilities management business in Japan; and an advertising agency business in Japan.
 
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
    2006   2007   2008
    (Yen in millions)
 
Japan
    2,203,812       (29.3 )     2,127,841       (25.6 )     2,056,374       (23.2 )
United States
    1,957,644       (26.1 )     2,232,453       (26.9 )     2,221,862       (25.1 )
Europe
    1,715,775       (22.8 )     2,037,658       (24.6 )     2,328,233       (26.2 )
Other Areas
    1,633,366       (21.8 )     1,897,743       (22.9 )     2,264,945       (25.5 )
             
             
Sales and operating revenue
    7,510,597       (100.0 )     8,295,695       (100.0 )     8,871,414       (100.0 )
             
             
 
Electronics
 
Sony’s electronics products and services are marketed throughout the world under the trademark “Sony,” which has been registered in 200 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


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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.
 
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 electronics products and services are marketed through sales subsidiaries including Sony United Kingdom Limited, Sony France S.A., Sony Espana S.A., Sony Deutschland G.m.b.H., and Sony Italia S.P.A.
 
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 (China) Limited, Sony Corporation of Hong Kong Limited, Sony Taiwan Limited, Sony Gulf FZE in the United Arab Emirates, and Sony of Canada Limited.
 
Game
 
SCEI, SCEA, SCEE and subsidiaries in Asia market and distribute PS2, PSP and PS3 entertainment hardware and related software.
 
Sales in the Game segment are dependent on the timing of the introduction of attractive software and a significant portion of overall demand is weighted towards the year-end holiday season.
 
Pictures
 
SPE, with global operations in more than 100 countries, generally retains all rights relating to the worldwide distribution of its internally produced motion pictures, including rights for theatrical exhibition, DVD and Blu-ray 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 periods of time. SPE uses its own distribution service business, Sony Pictures Releasing, for the U.S. theatrical release of its films and for the theatrical release of films acquired from and produced by others.
 
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, 2009, 40 films are currently slated for release by SPE, including 13 films under the Columbia banner, eight films under the Screen Gems or TriStar banner and 19 Sony Pictures Classics releases. SPE has a motion picture library of more than 3,500 feature films, including 12 that have won the Best Picture Academy Award®. Currently, SPE is converting this library (including acquired product) to a digital format and approximately 2,400 titles have been converted.
 
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 DVD and Blu-ray formats.


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SPE produces local language programming in key markets around the world, some of which are co-produced with local partners and sells SPE-owned formats in approximately 40 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 network GSN (formerly Game Show Network) jointly with Liberty Media Corporation. SPE also has investments in almost 50 international networks, which are available in more than 130 countries worldwide.
 
Financial Services
 
Sony Life conducts its life insurance business primarily in Japan. Sony Life’s core business is providing death protection and other insurance products to individuals, primarily through a consulting-based sales approach utilizing its experienced team of Lifeplanner® sales employees and Partner independent sales agents. Sony Life provides tailor-made life insurance products that are optimized for each customer. As of March 31, 2008, Sony Life employed 3,779 Lifeplanner® sales employees. As of the same date, Sony Life maintained an extensive service network including 83 Lifeplanner retail offices, 25 regional sales offices, and 2,151 sales agents in Japan. In addition, our life insurance business also includes sales in the Philippines through Sony Life’s wholly-owned subsidiary, Sony Life Insurance (Philippines) Corporation. As part of its plan to expand its sales of individual annuity products, Sony Life has entered into an agreement with AEGON N.V. for the establishment of a new Japanese venture company. The new joint venture company is expected to commence operations in 2008, subject to regulatory approval.
 
Sony Assurance has conducted a non-life insurance business in Japan since October 1999. Sony Assurance’s core business is providing automobile insurance products and medical and cancer insurance products to individual customers, primarily through direct marketing via the telephone and the Internet. The direct marketing business model employed by Sony Assurance enables it to improve operating efficiency and lower the costs of marketing and maintaining its insurance policies, creating savings which it passes on to policyholders in the form of competitively-priced premiums.
 
Sony Bank has conducted banking operations in Japan since June 2001. As an Internet bank focusing on the asset management and borrowing needs of individual customers, Sony Bank offers an array of products and services including yen and foreign currency deposits, investment trusts, mortgages and other individual loans. By using Sony Bank’s transaction channel, the “MONEYKit” service website, account holders can invest and manage assets according to their life plans over the Internet. As part of its plan to respond to its customers’ diverse asset management needs, Sony Bank launched online securities brokerage services through its wholly-owned subsidiary, Sony Bank Securities Inc., in October 2007.
 
Sony Finance conducts a leasing business for corporations, and a consumer financing business including “Sony Card,” a credit card for individual customers, through Sony’s electronic retailers and other affiliated partners. Sony Finance also conducts an electronic settlement business through SmartLink Network, Inc., a subsidiary of Sony Finance.
 
All Other
 
SMEJ produces, markets, and distributes CDs, DVDs, 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 through a joint venture with a third party investor in countries other than Japan primarily under the Sony/ATV Music Publishing name.
 
So-net provides Internet broadband network services to subscribers as well as creating and distributing content through its portal service to various platforms including PCs, mobile phones and other home electronics devices including TVs and game consoles.


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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. For example, the market price of copper has the potential to proportionately affect the cost of parts that utilize copper, such as printed circuit boards and power cables. The price of cobalt, which is used in applications involving lithium-ion batteries as well as a range of recording media, has also been rising and has some impact on the cost of those items. In addition, the price of resin has risen resulting in an increase in the cost of plastic parts. With respect to parts and components, LCD panels and memory devices, which are used in multiple applications, can influence Sony’s business performance when the cost of such parts and components fluctuates substantially.
 
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 practices 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 a malfunction 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 in which 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 those for optical disc-related and Digital TV products. With respect to optical disc-related products, Sony products that employ DVD-Video player functions, including PS2 and PS3 hardware, are substantially dependent upon certain patents that relate to technologies specified in the DVD specification and are licensed by MPEG LA LLC, Dolby Laboratories Licensing Corporation and Nissim Corp. Sony products that employ Blu-ray Disc player functions, including PS3 hardware, and that also employ DVD-Video player functions, are substantially dependent upon certain patents that relate to technologies specified in the Blu-ray Disc specification and are licensed by MPEG LA LLC and AT&T, in addition to the patents that relate to technologies specified in the DVD specification, as described above. Sony’s Digital TV products are substantially dependent upon certain patents that relate to technologies specified in the Digital TV specification and are licensed by Thomson Licensing Inc. Sony considers its overall license position beneficial to its operations. While Sony believes that its various proprietary intellectual property rights are important to its success, it believes that neither its business as a whole nor any business segment is materially dependent on any particular patent or license, or any particular group of patents or licenses, except as set forth above.
 
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


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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 SCEI’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 SCEI’s platforms.
 
In the Pictures segment, SPE faces intense competition from other major motion picture studios and, to a lesser extent, from independent production companies. SPE must compete to obtain story rights and talent, including writers, actors, directors and producers, which are essential to the success of SPE’s products. SPE also competes with alternative forms of entertainment to attract the attention of audiences worldwide and to obtain exhibition and distribution outlets and optimal release dates for its products. Competition in television production, distribution, and syndication is also intense because available broadcast time is limited and the audience is increasingly fragmented among broadcast networks, cable, independent television stations and other outlets both in the U.S. and internationally. Furthermore, broadcast networks are increasingly producing their own shows internally. This competitive environment has resulted in fewer opportunities to produce shows for networks and a shorter lifespan for ordered shows that do not immediately achieve favorable ratings.
 
In the Financial Services segment, Sony Life, Sony Assurance and Sony Bank have each developed tailored distribution channels to best meet customers’ needs:
 
  •  Sony Life focuses primarily on the death protection market, which it serves through a unique consulting-based sales approach utilizing its Lifeplanner sales employees as well as its Partner independent sales agents with strong consulting skills in life planning.
 
  •  Sony Assurance offers automobile insurance products and medical and cancer insurance products directly to customers through effective use of telephone and internet channels, in contrast to most other Japanese non-life insurers, which offer their products through agency channels.
 
  •  Sony Bank has made use of the Internet to offer a steadily expanding menu of asset management services and loans to individuals, including mortgage loans, in contrast to traditional full-service banking institutions with their extensive physical infrastructure.
 
Each of Sony Life, Sony Assurance and Sony Bank proactively solicits feedback from its customers and continually strives to improve its level of service. This customer-centric service culture is reflected in high customer satisfaction rankings.
 
In the Financial Services segment, it is important to maintain a strong and healthy financial foundation for the business as well as to meet diversifying customer needs. Sony Life has maintained a high solvency margin ratio, relative to Japanese domestic criteria that require the maintenance of a minimum solvency margin ratio. Sony Assurance also has maintained a high solvency margin ratio relative to the aforementioned Japanese domestic criteria. Sony Bank has maintained an adequate capital adequacy ratio relative to the Japanese domestic criteria concerning this ratio.
 
In addition, Sony Finance faces a challenging environment in the credit financing industry primarily due to regulatory changes. Sony Finance is working to improve profitability by restructuring its credit card business mainly by carefully selecting affiliated credit card programs, expanding outsourcing initiatives and consolidating sales branches.
 
Within All Other, success at SMEJ 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. SMEJ’s future competitive position depends on its continuing ability to attract and develop artists who can achieve a high degree of public acceptance. So-net faces competition in Japan from many existing large companies, as well as from new entrants to the market. Telecommunications 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


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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 So-net.
 
Government Regulations
 
Sony’s business activities are subject to various governmental regulations in the different countries in which it operates, including regulations relating to business/investment approvals, trade affairs including customs, import and export control, competition and antitrust, intellectual property, consumer and business taxation, foreign exchange controls, personal information protection, product safety, labor, occupational health, and environmental and recycling requirements.
 
In Japan, the insurance and banking businesses are subject to approvals and oversight from the Financial Services Agency under the Insurance Business Law and the Banking Law, respectively. In addition, the telecommunication businesses are subject to approvals from the Ministry of Internal Affairs and Communications.
 
Also refer to “Risk Factors” in “Item 3. Key Information.
 
Organizational Structure
 
The following table sets forth the significant subsidiaries owned, directly or indirectly, by Sony Corporation.
 
             
    Country of
  (As of March 31, 2008)
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 Financial Holdings Inc. 
  Japan     60.0  
Sony Life Insurance Co., Ltd. 
  Japan     100.0  
Sony Music Entertainment (Japan) Inc. 
  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  
Sony DADC Austria A.G. 
  Austria     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. 
  Netherlands     100.0  
Sony Europe G.m.b.H
  Germany     100.0  
Sony United Kingdom Ltd. 
  U.K.     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. 
  Netherlands     100.0  
Sony Overseas S.A. 
  Switzerland     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 in, and land on, which they are located are owned by Sony, free from significant encumbrances.


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The following table sets forth information as of March 31, 2008 with respect to plants used for the production of products for the Electronics segment and for the Game segment with floor space of more than 500,000 square feet:
 
             
    Approximate
   
Location
  floor space   Principal products produced
    (square feet)    
 
In Japan:
           
             
Nagasaki
(Sony Semiconductor Kyushu Corporation
— Nagasaki TEC)
    2,232,000     CMOS image sensors and other semiconductors
             
Kumamoto
(Sony Semiconductor Kyushu Corporation
— Kumamoto TEC)
    2,115,000     CCDs, CMOS image sensors, LCDs and other semiconductors
             
Kagoshima
(Sony Semiconductor Kyushu Corporation
— Kagoshima TEC)
    1,787,000     LCDs, CCDs, CMOS image sensors and other semiconductors
             
Higashiura, Aichi
(Sony Mobile Display Corporation)
    1,281,000     LCDs
             
Kohda, Aichi
(Sony EMCS Corporation — Kohda TEC)
    939,000     Video cameras, compact digital cameras and Memory Sticks
             
Inazawa, Aichi
(Sony EMCS Corporation — Inazawa TEC)
    864,000     LCD televisions
             
Ichinomiya, Aichi
(Sony EMCS Corporation — Ichinomiya TEC)
    835,000     Front projectors and professional-use Monitors
             
Kanuma, Tochigi
(Sony Chemicals & Information Device Corporation — Kanuma Plant)
    791,000     Magnetic tapes, adhesives, and electronic components
             
Tochigi, Tochigi
(Sony Energy Devices Corporation
— Tochigi Plant)
    609,000     Magneto-optical disc and batteries
             
Koriyama, Fukushima
(Sony Energy Devices Corporation
— Koriyama Plant)
    585,000     Batteries
             
Kosai, Shizuoka
(Sony EMCS Corporation — Kosai TEC)
    568,000     Broadcast- and professional-use video equipment
             
Minokamo, Gifu
(Sony EMCS Corporation — Minokamo TEC)
    544,000     Compact digital cameras, digital SLR cameras, mobile phones and modules
             
Kisarazu, Chiba
(Sony EMCS Corporation — Kisarazu TEC)
    502,000     Blu-ray Disc players/recorders and audio equipment


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    Approximate
   
Location
  floor space   Principal products produced
    (square feet)    
 
Overseas:
           
             
Pittsburgh, Pennsylvania, U.S.A.
(Sony Technology Center Pittsburgh)
    2,820,000     LCD televisions
             
Huizhou, China
(Sony Precision Devices (Huizhou) Co., Ltd.)
    1,385,000     Optical pickups and LCDs
             
Wuxi, China
(Sony Electronics (Wuxi) Co., Ltd., Sony Digital Products (Wuxi) Co., Ltd. and Sony (China) Ltd.)
    1,352,000     Batteries and compact digital cameras
             
Terre Haute, Indiana, U.S.A.
(Sony DADC US Inc.)
    1,229,000     CDs, CD-ROMs, DVDs, DVD-ROMs, and Blu-ray Discs
             
Penang, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — PG TEC)
    988,000     Audio equipment, optical disc drives and batteries
             
Dothan, Alabama, U.S.A.
(Sony Dothan Alabama)
    809,000     Magnetic tapes
             
Bangi, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — KL TEC)
    797,000     LCD televisions, TV tuners, DVD-players and Blu-ray Disc players
             
Jurong, Singapore
(Energy Technology Singapore)
    776,000     Batteries (to be operated)
             
Tijuana, Mexico
(Sony Baja California — Tijuana Factory)
    712,000     LCD televisions, TV tuners and audio equipment
             
San Diego, California, U.S.A.
(Sony Electronics Inc.)
    688,000     PCs
             
Nitra, Slovakia
(Sony Slovakia s.r.o)
    637,000     LCD televisions
             
Nuevo Laredo, Mexico
(Sony Electronics Inc.)
    587,000     Magnetic tapes, CD-Rs and DVD-Rs
             
Viladecavallas, Spain
(Sony Espana, S.A.)
    578,000     LCD televisions and TV components
             
Bangkadi, Thailand
(Sony Device Technology (Thailand) Co.
— Bangkadi Technology Centre)
    501,000     CCDs and other semiconductors
 
In addition to the above facilities, 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.
 
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

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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 with the lease term expiring on April 30, 2009. 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.
 
Most of SMEJ’s offices, including leased premises, are located in Tokyo, Japan.
 
In December 2001, SCA entered into a lease with a Variable Interest Entity, which is consolidated by Sony, for its corporate headquarters. Sony has the option to purchase the building at any time during the lease term which expires in December 2008. The aggregate floor space of this building is approximately 723,000 square feet.
 
Item 4A.  Unresolved Staff Comments
 
Not applicable.
 
Item 5.  Operating and Financial Review and Prospects
 
OPERATING RESULTS
 
Operating Results for the Fiscal Year Ended March 31, 2008 compared with the Fiscal Year Ended March 31, 2007
 
Overview
 
Sony’s sales and operating revenue (“sales”) for the fiscal year ended March 31, 2008 increased 6.9 percent compared with the previous fiscal year. Sales within the Electronics segment and the Game segment increased while sales for the Pictures segment and revenue for the Financial Services segment decreased. In the Electronics segment, while there was a decline in sales of such products as LCD rear-projection televisions, sales to outside customers increased 9.0 percent compared with the previous fiscal year mainly due to an increase in sales of LCD televisions, PCs and compact digital cameras. Sales within the Game segment increased 26.3 percent compared to the previous fiscal year primarily as a result of a significant increase in sales of PLAYSTATION®3 (“PS3”). In the Pictures segment, sales decreased 11.2 percent compared to the previous fiscal year as motion pictures sales decreased primarily due to fewer films being released during the current fiscal year. Revenues decreased 10.5 percent within the Financial Services segment primarily due to net losses from investments in the separate account and the deterioration in net valuation gains from convertible bonds in the general account reflecting a significant decline in the Japanese stock market partially offset by an increase in insurance premium revenue at Sony Life Insurance Co., Ltd. (“Sony Life”).
 
Operating income increased 421.9 percent compared with the previous fiscal year. Operating income within the Electronics segment increased 121.8 percent mainly as a result of an increase in sales and the positive impact from the depreciation of the yen against the euro. In the previous fiscal year, a 51.2 billion yen provision was recorded for charges related to recalls by certain notebook computer makers and the subsequent global replacement program by Sony and certain notebook computer makers involving battery packs containing Sony-manufactured battery cells. A portion of the provision totaling 15.7 billion yen was reversed in the fiscal year ended March 31, 2008 based on the actual results of recalls and replacements as compared to original estimates. In the Game segment, operating losses decreased by 107.8 billion yen to 124.5 billion yen primarily due to a decrease in the operating losses of the PS3 business as a result of successful PS3 hardware cost reductions and increased sales of PS3 software. In the Pictures segment, operating income increased 26.5 percent compared with the previous fiscal year primarily due to the strong performance of prior year films in the home entertainment and television markets as well as the benefit from the sale of a bankruptcy claim against Kirch Media GmbH & Co. KGaA (“Kirch Media”), a former licensee of film and television product. In the Financial Services segment, operating income decreased 73.1 percent as compared to the previous fiscal year as a result of deterioration in net valuation gains from convertible bonds and an impairment loss on equity securities in the general account of Sony Life reflecting a significant decline in the Japanese stock market.


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Operating income in the fiscal year ended March 31, 2008 included one-time gains primarily from a gain on the sale of a portion of the site of Sony’s former headquarters of 60.7 billion yen which was recorded in “Corporate”, a 15.6 billion yen gain which was recorded in the operating income of the Electronics segment relating to the sale of a portion of Sony’s semiconductor operations in Nagasaki, Japan, including machinery and equipment, and a 10.0 billion yen gain on the sale of “The Sony Center am Potsdamer Platz” in Berlin which was recorded in the operating income of All Other. Operating income in the previous fiscal year included a gain on the sale of a portion of the site of Sony’s former headquarters of 21.7 billion yen, of which 2.6 billion yen was recorded within All Other and the remaining amount was recorded in “Corporate”.
 
Operating income in the fiscal year ended March 31, 2008 included a gain from the reversal of a portion of a legal provision as a result of the resolution of a legal matter, while a comparable gain was recorded in the previous fiscal year attributed to the reversal of a portion of patent-related provisions.
 
Restructuring
 
In the fiscal year ended March 31, 2008, Sony recorded restructuring charges of 47.3 billion yen, an increase from the 38.8 billion yen recorded in the previous fiscal year. The primary restructuring activities were in the Electronics segment. Of the total 47.3 billion yen incurred, Sony recorded 12.6 billion yen in personnel-related costs.
 
Restructuring charges in the Electronics segment amounted to 45.6 billion yen for the fiscal year ended March 31, 2008, compared with 37.4 billion yen in the previous fiscal year.
 
Sony made the decision to exit the LCD rear-projection television business in the fiscal year ended March 31, 2008 due to the shrinking market for these products. In association with this action, Sony recorded 19.7 billion yen of restructuring charges consisting mainly of inventory write downs. Of this amount, 11.9 billion yen was recorded in cost of sales and 6.7 billion yen was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. This phase of the restructuring program was completed in the fiscal year ended March 31, 2008, and the remaining liability balance as of March 31, 2008 was 1.6 billion yen, which is expected to be paid during the fiscal year ending March 31, 2009.
 
In addition to the restructuring efforts described above, Sony has undergone several headcount reduction programs to further reduce operating costs within its Electronics segment. As a result of these programs, Sony recorded restructuring charges totaling 11.0 billion yen for the fiscal year ended March 31, 2008, and these charges were included in selling, general and administrative expenses in the consolidated statements of income. The remaining liability balance as of March 31, 2008 was 9.4 billion yen and will be paid throughout the fiscal year ending March 31, 2009.
 
For more detailed information about restructuring, please refer to Note 17 of the notes to the consolidated financial statements.
 
Operating Performance
 
                         
    Fiscal Year Ended
   
    March 31    
    2007   2008   Percent change
    (Yen in billions)    
 
Sales and operating revenue
    8,295.7       8,871.4       +6.9 %
Operating income
    71.8       374.5       +421.9  
Income before income taxes
    102.0       466.3       +357.0  
Equity in net income of affiliated companies
    78.7       100.8       +28.2  
Net income
    126.3       369.4       +192.4  


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Sales
 
Sales for the fiscal year ended March 31, 2008 increased by 575.7 billion yen, or 6.9 percent, to 8,871.4 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 cost of sales, including research and development costs, and selling, general and administrative expenses to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue, and excludes financial service revenue. This is because financial service expenses are recorded separately from cost of sales and selling, general and administrative expenses. 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, 2008 increased by 400.4 billion yen, or 6.8 percent, to 6,290.0 billion yen compared with the previous fiscal year, and decreased from 76.8 percent to 75.6 percent as a percentage of sales. Year on year, the cost of sales ratio decreased from 78.8 percent to 77.9 percent in the Electronics segment, decreased from 102.8 percent to 93.9 percent in the Game segment, and decreased from 60.3 percent to 58.6 percent in the Pictures segment.
 
In the Electronics segment, there was an improvement in the cost of sales ratio for several products, in particular PCs, compact digital cameras and video cameras. The cost of sales ratio in the Game segment improved primarily as a result of PS3 hardware cost reductions and increased sales of PS3 software. In the Pictures segment, the cost of sales ratio decreased compared to the previous fiscal year mainly due to the higher home entertainment and television revenues from prior year films.
 
Personnel-related costs included in cost of sales were 487.8 billion yen, an increase of 30.5 billion yen, primarily recorded within the Electronics segment.
 
Research and development costs (all research and development costs are included within cost of sales) for the fiscal year ended March 31, 2008 decreased by 23.4 billion yen to 520.6 billion yen compared with the previous fiscal year. The ratio of research and development costs to sales was 6.3 percent compared to 7.1 percent in the previous fiscal year.
 
Selling, general and administrative expenses for the fiscal year ended March 31, 2008 decreased by 74.0 billion yen, or 4.1 percent, to 1,714.4 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales decreased from 23.3 percent in the previous fiscal year to 20.6 percent. Year on year, the ratio of selling, general and administrative expenses to sales decreased from 18.2 percent to 16.2 percent in the Electronics segment. This improvement is due to the recording of the provision for charges related to the notebook computer battery pack recalls and subsequent global replacement program in the previous fiscal year and a reversal of the portion of the provision in the fiscal year ended March 31, 2008 based on the actual results of recalls and replacements as compared to original estimates. The ratio of selling, general and administrative expenses to sales decreased from 20.0 percent to 15.8 percent in the Game segment and from 35.2 percent to 35.1 percent in the Pictures segment.
 
Personnel-related costs in selling, general and administrative expenses increased by 19.8 billion yen compared with the previous fiscal year mainly within the Electronics and the Pictures segment. Advertising and publicity expenses for the fiscal year decreased by 46.2 billion yen compared with the previous fiscal year primarily due to decreased advertising and publicity expenses within the Pictures segment.
 
Gain on sale, disposal or impairment of assets, net was 37.8 billion yen, compared with a 5.8 billion yen loss on sale, disposal or impairment of assets, net recorded in the previous fiscal year. The gain recorded in the fiscal year ended March 31, 2008 is primarily from a gain on the sale of a portion of the site of Sony’s former headquarters of 60.7 billion yen and gain on the sale of “The Sony Center am Potsdamer Platz” in Berlin of 10.0 billion yen. A gain on the sale of a portion of the site of Sony’s former headquarters of 21.7 billion yen was recorded in the previous fiscal year.


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Operating Income
 
Operating income for the fiscal year ended March 31, 2008 increased by 302.7 billion yen, or 421.9 percent, to 374.5 billion yen compared with the previous fiscal year. The operating income margin increased from 0.9 percent to 4.2 percent. In descending order by yen amount, the Electronics segment, the Pictures segment, All Other and the Financial Services segment contributed to operating income. An operating loss was recorded within the Game segment. For a further breakdown of operating income (loss) for each segment, please refer to “Operating Performance by Business Segment” below.
 
Other Income and Expenses
 
For the fiscal year ended March 31, 2008, other income increased by 54.3 billion yen, or 57.0 percent, to 149.4 billion yen, while other expenses decreased by 7.3 billion yen, or 11.2 percent, to 57.6 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 91.8 billion yen, an increase of 61.5 billion yen, compared with the previous fiscal year.
 
The gain on change in interest in subsidiaries and equity investees increased by 50.5 billion yen, or 160.4 percent compared to the previous fiscal year, to 82.1 billion yen. This increase is due to the recording of a gain of 81.0 billion yen for the change in interest in subsidiaries and equity investees as a result of the global initial public offering of shares of Sony Financial Holdings Inc. (“SFH”) in connection with the listing of shares on the First Section of the Tokyo Stock Exchange (“TSE”) in October 2007. During the fiscal year ended March 31, 2007, there was a gain on change in interest in subsidiaries and equity investees recorded on the sale of a portion of the stock held in StylingLife Holdings Inc. (“StylingLife”).
 
Interest and dividends in other income of 34.3 billion yen was recorded in the fiscal year ended March 31, 2008, an increase of 6.0 billion yen, or 21.4 percent, compared with the previous fiscal year. For the fiscal year ended March 31, 2008, interest expense totaling 22.9 billion yen was recorded, a decrease of 4.3 billion yen, or 15.9 percent, compared with the previous fiscal year.
 
In addition, net foreign exchange income of 5.6 billion yen was recorded in the fiscal year ended March 31, 2008, compared to a net foreign exchange loss of 18.8 billion yen in the previous fiscal year. Net foreign exchange income was recorded due to the value of the yen, especially during the second through fourth quarters of the fiscal year ended March 31, 2008, appreciating in value against other currencies from 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.
 
Income before Income Taxes
 
Income before income taxes for the fiscal year ended March 31, 2008 increased 364.3 billion yen, or 357.0 percent, to 466.3 billion yen compared with the previous fiscal year, primarily as a result of the increase in operating income and the gain on the change in interest in subsidiaries and equity investees mentioned above.
 
Income Taxes
 
During the fiscal year ended March 31, 2008, Sony recorded 203.5 billion yen of income taxes resulting in an effective tax rate of 43.6 percent. In the previous fiscal year, the effective tax rate was 52.8 percent and exceeded the Japanese statutory tax rate as a result of losses recorded by certain overseas subsidiaries with tax rates that are lower than the rate in Japan.
 
Results of Affiliated Companies Accounted for under the Equity Method (Refer to Note of “Critical Accounting Policies.”)
 
Equity in net income of affiliated companies during the fiscal year ended March 31, 2008 was 100.8 billion yen, an increase of 22.2 billion yen, or 28.2 percent compared to the previous fiscal year. Equity in net income of affiliated companies reported for Sony Ericsson Mobile Communications AB (“Sony Ericsson”) was 79.5 billion


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yen, a decrease of 5.8 billion yen compared to the previous fiscal year, due to higher research and development expenses as a percentage of sales. Sony recorded equity in net income of 10.0 billion yen for SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), an increase of 5.0 billion yen compared to the previous fiscal year primarily due to a reduction in restructuring costs compared to the previous fiscal year, lower marketing costs, a reduction in overhead costs from continued restructuring, a gain on the sale of an interest in a joint venture of SONY BMG and the favorable impact of currency fluctuations. Sony recorded equity in net income of 7.4 billion yen, a 2.4 billion yen increase compared to the prior fiscal year, for S-LCD Corporation (“S-LCD”), a joint-venture with Samsung Electronics Co., Ltd. (“Samsung”) for the manufacture of amorphous thin film transistor (“TFT”) LCD panels.
 
Sony did not record any equity gain or loss for Metro-Goldwyn-Mayer Inc. (“MGM”) in the current fiscal year compared to equity in net loss of 18.9 billion yen recorded in the prior fiscal year. As of March 31, 2007, Sony no longer had any book basis in MGM and, accordingly, no additional losses were recorded during the fiscal year ended March 31, 2008.
 
Minority Interest in Income (Loss) of Consolidated Subsidiaries
 
In the fiscal year ended March 31, 2008, minority interest in loss of consolidated subsidiaries of 5.8 billion yen was recorded compared to minority interest in income of 0.5 billion yen in the previous fiscal year. Minority interest in loss was recorded mainly due to the loss recorded at SFH subsequent to the change in Sony Corporation’s ownership. Sony Corporation’s ownership percentage in SFH was reduced from 100 percent to 60 percent after the global initial public offering of SFH shares during the fiscal year ended March 31, 2008. The operating results of SFH in the second half of the fiscal year ended March 31, 2008 were negatively impacted mainly by the deterioration in net valuation gains from convertible bonds and an impairment loss on equity securities at Sony Life.
 
Net Income
 
Net income for the fiscal year ended March 31, 2008 increased by 243.1 billion yen, or 192.4 percent, to 369.4 billion yen compared with the previous fiscal year. As a percentage of sales, net income increased from 1.5 percent to 4.2 percent. Return on stockholders’ equity increased from 3.8 percent to 10.8 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, 2008.)
 
Basic net income per share was 368.33 yen compared with 126.15 yen in the previous fiscal year, and diluted net income per share was 351.10 yen compared with 120.29 yen in the previous fiscal year. Refer to Notes 2 and 21 of the notes to the 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 the notes to the consolidated financial statements.
 
Business Segment Information
 
                         
    Fiscal Year Ended
   
    March 31    
    2007   2008   Percent change
    (Yen in billions)    
 
Sales and operating revenue
                       
Electronics
    6,072.4       6,613.8       +8.9 %
Game
    1,016.8       1,284.2       +26.3  
Pictures
    966.3       857.9       −11.2  
Financial Services
    649.3       581.1       −10.5  
All Other
    355.1       382.2       +7.6  
Elimination
    (764.2 )     (847.9 )      
                         
Consolidated
    8,295.7       8,871.4       +6.9  
                         


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    Fiscal Year Ended
   
    March 31    
    2007   2008   Percent change
    (Yen in billions)    
 
Operating income (loss)
                       
Electronics
    160.5       356.0       +121.8 %
Game
    (232.3 )     (124.5 )      
Pictures
    42.7       54.0       +26.5  
Financial Services
    84.1       22.6       −73.1  
All Other
    28.9       50.2       +73.9  
                         
Sub-Total
    83.9       358.4       +327.0  
Elimination and unallocated corporate expenses/gains
    (12.2 )     16.1        
                         
Consolidated
    71.8       374.5       +421.9  
                         
 
Electronics
 
Sales and operating revenue for the fiscal year ended March 31, 2008 increased 541.4 billion yen, or 8.9 percent, to 6,613.8 billion yen compared with the previous fiscal year. Operating income increased by 195.5 billion yen, or 121.8 percent, to 356.0 billion yen compared with the previous fiscal year and the operating income to sales ratio increased from 2.6 percent to 5.4 percent. Sales to outside customers on a yen basis increased 9.0 percent compared to the previous fiscal year. Regarding sales to outside customers by geographical area, sales decreased by 2 percent in Japan, but increased by 2 percent in the U.S., by 11 percent in Europe, and by 19 percent in non-Japan Asia and other geographic areas (“Other Areas”).
 
In Japan, sales of products such as charged coupled devices (“CCDs”) and complementary metal-oxide semiconductor (“CMOS”) imaging sensors increased while sales of mobile phones produced for wireless customers decreased. In the U.S., sales of products such as LCD rear-projection and cathode ray tube (“CRT”) televisions decreased while sales of products such as LCD televisions, compact digital cameras and PCs increased. In Europe, sales of products such as LCD televisions and PCs increased while sales of mobile phones produced for wireless customers decreased. In Other Areas, sales of LCD televisions, compact digital cameras and PCs increased while sales of CRT televisions 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 the notes to the consolidated financial statements.
 
“Audio” sales increased by 35.7 billion yen, or 6.8 percent, to 558.6 billion yen. Sales of flash memory digital audio players increased as worldwide unit shipments increased by approximately 1.3 million units to approximately 5.8 million units. Sales of home audio, headphones and personal navigation systems also increased. On the other hand, due to a shift in market demand, sales of CD format headphone stereos decreased.
 
“Video” sales increased by 136.1 billion yen, or 11.9 percent, to 1,279.2 billion yen. Sales of compact digital cameras increased as worldwide unit shipments increased by approximately 6.5 million units to approximately 23.5 million units. Sales of home-use video cameras increased as worldwide unit shipments increased by approximately 250,000 units to approximately 7.7 million units. Sales of Blu-ray Disctm recorders and players also increased. On the other hand, sales of DVD recorders and players decreased, with unit shipments of DVD recorders decreasing by approximately 150,000 units to approximately 1.7 million units and unit shipments of DVD players decreasing by approximately 900,000 units to approximately 7.0 million units.
 
“Televisions” sales increased by 140.1 billion yen, or 11.4 percent, to 1,367.1 billion yen. There was a significant increase in worldwide sales of LCD televisions, as worldwide shipments increased by approximately 4.3 million units, to approximately 10.6 million units. On the other hand, there was a decrease in sales of LCD rear-


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projection and CRT televisions as Sony decided to exit these businesses due to the shrinking market for these products.
 
“Information and Communications” sales increased by 148.1 billion yen, or 15.6 percent, to 1,098.6 billion yen. Sales of PCs increased as worldwide unit shipments increased by approximately 1.2 million units to approximately 5.2 million units. Sales of broadcast- and professional-use products increased as a result of favorable sales of high-definition (“HD”) related products.
 
“Semiconductors” sales increased by 23.0 billion yen, or 11.2 percent, to 228.7 billion yen. The increase was primarily due to an increase in sales of CCDs and CMOS image sensors.
 
“Components” sales decreased by 5.9 billion yen, or 0.7 percent, to 847.1 billion yen. Sales of lithium-ion batteries and low-temperature polysilicon TFT LCD panels for mobile devices increased. On the other hand, sales of DVD+/-R/RW drives decreased due to a decline in unit selling prices, although unit sales increased in association with an expansion of the market.
 
“Other” sales increased by 11.2 billion yen, or 2.1 percent, to 552.4 billion yen. Although sales of mobile phones produced for wireless customers in Japan and Europe decreased, sales of the disc manufacturing business increased.
 
In the Electronics segment, cost of sales for the fiscal year ended March 31, 2008 increased by 372.4 billion yen, or 7.8 percent to 5,154.6 billion yen compared with the previous fiscal year. The cost of sales ratio improved by 0.9 percentage points to 77.9 percent compared to 78.8 percent in the previous fiscal year. While the cost of sales ratio of such products as PCs, compact digital cameras and home-use video cameras improved, the cost of sales ratio of products such as LCD televisions deteriorated. Restructuring charges recorded in cost of sales amounted to 19.5 billion yen, an increase of 7.0 billion yen compared with the 12.6 billion yen recorded in the previous fiscal year. Research and development costs decreased 1.6 billion yen, or 0.4 percent, from 440.4 billion yen in the previous fiscal year to 438.7 billion yen.
 
Selling, general and administrative expenses decreased by 34.0 billion yen, or 3.1 percent to 1,072.2 billion yen compared with the previous fiscal year. Although advertising and marketing expenses and personnel expenses increased for the fiscal year ended March 31, 2008, selling, general and administrative expenses decreased as a provision of 51.2 billion yen was recorded in the previous fiscal year for charges related to the notebook computer battery pack recalls and subsequent global replacement program, while a portion of the provision totaling 15.7 billion yen was reversed in the fiscal year ended March 31, 2008 based on the actual results of recalls and replacements as compared to original estimates. An additional provision was recorded during the fiscal year for free repair expenses relating to Sony products and the products of other companies containing Sony-made CCDs, but this amount was less than in the previous year. Of the restructuring charges recorded in the Electronics segment, the amount recorded in selling, general and administrative expenses decreased by 1.4 billion yen from 14.0 billion yen in the previous fiscal year to 12.6 billion yen. This 12.6 billion yen was for headcount reductions, including reductions through the early retirement program. The ratio of selling, general and administrative expenses to sales decreased 2.0 percentage points from the 18.2 percent recorded in the previous fiscal year to 16.2 percent.
 
Loss on sale, disposal or impairment of assets, net increased 2.6 billion yen to 13.5 billion yen compared with the previous fiscal year. This amount includes a 6.7 billion yen loss on sale, disposal or impairment of assets, net on LCD rear-projection televisions.
 
The amount of operating income recorded in the Electronics segment for the fiscal year ended March 31, 2008 increased significantly due to the impact of the provision recorded in the previous fiscal year for charges related to the notebook computer battery pack recalls and subsequent global replacement program, the reversal of a portion of the provision in the fiscal year ended March 31, 2008, increased sales of the segment, and the positive impact of the depreciation of the yen against the euro. Also contributing to the increase in Electronics segment profit was the recording of a 15.6 billion yen gain relating to the sale of a portion of Sony’s semiconductor operations in Nagasaki, Japan, including machinery and equipment. Regarding profit performance by product, profitability of products such as LCD televisions worsened due to unit selling price declines while profit increased mainly for PCs and compact digital cameras, which experienced higher sales, for system large-scale integration (“LSIs”), which saw an increase


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in sales of semiconductors for the Game segment, and for home-use video cameras, which experienced increased sales of high value-added models.
 
Manufacturing by Geographic Area
 
Approximately 50 percent of the Electronics segment’s total annual production during the fiscal year ended March 31, 2008 took place in Japan, including the production of compact digital cameras, video cameras, LCD 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 15 percent of total annual production, approximately 70 percent of which was destined for other regions. Asia, excluding Japan and China, accounted for approximately 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 balance of approximately 25 percent of total annual production, most of which was destined for local distribution and sale.
 
Game
 
Sales for the fiscal year ended March 31, 2008 increased by 267.5 billion yen, or 26.3 percent, to 1,284.2 billion yen compared with the previous fiscal year. An operating loss of 124.5 billion yen was recorded for the fiscal year ended March 31, 2008, which was a decrease of 107.8 billion yen from the fiscal year ended March 31, 2007.
 
By region, although sales decreased slightly in Japan, there was an increase in sales in North America and Europe.
 
Overall hardware sales increased as a result of a significant increase in sales of PS3, as well as an increase in sales of PSP® (PlayStation®Portable) (“PSP”), for which a new slimmer, lighter model was released. Sales of PlayStation®2 (“PS2”) decreased compared to the previous fiscal year. Overall software sales increased as a result of an increase in PS3 software sales compared to the previous fiscal year.
 
Total worldwide unit sales of hardware and software were as follows:
 
Worldwide hardware unit sales (increase/decrease year-on-year ):*
 
         
  à  PS2:     13.73 million units (a decrease of 0.98 million units)
  à  PSP:     13.89 million units (an increase of 4.36 million units)
  à  PS3:      9.24 million units (an increase of 5.63 million units)
 
Worldwide software unit sales (increase/decrease year-on-year ):*/**
 
         
  à  PS2:     154.0 million units (a decrease of 39.5 million units)
  à  PSP:      55.5 million units (an increase of 0.8 million units)
  à  PS3:      57.9 million units (an increase of 44.6 million units)
 
* For the fiscal year ended March 31, 2008, the method of reporting hardware and software unit sales has been changed from production shipments to recorded sales. In accordance with this change, the numbers for the fiscal year ended March 31, 2007 have been restated.
 
** Including those both from Sony and third parties under Sony licenses.
 
The operating loss decreased significantly compared with the previous fiscal year. Although there was a loss arising from the strategic pricing of PS3 hardware at points lower than its production cost, the operating losses of the PS3 business decreased as a result of successful hardware cost reductions and increased sales of software. The strong performance of the PSP business with the introduction of a new model also contributed to the decrease in the operating loss of the overall Game segment.
 
Due to these reasons, the cost of sales to sales ratio decreased 8.9 percentage points, from 102.8 percent in the previous fiscal year, to 93.9 percent. The ratio of selling, general and administrative expenses to sales decreased 4.2 percentage points from 20.0 percent in the previous fiscal year, to 15.8 percent mainly due to decreased advertising and marketing expenses.


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Pictures
 
Sales for the fiscal year ended March 31, 2008 decreased by 108.3 billion yen, or 11.2 percent, to 857.9 billion yen compared to the previous fiscal year. Operating income increased by 11.3 billion yen, or 26.5 percent, to 54.0 billion yen and the operating margin increased from 4.4 percent to 6.3 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 decreased approximately 9 percent and operating income increased by approximately 40 percent. Sales decreased primarily due to lower worldwide theatrical and home entertainment revenues as fewer films were released in the current fiscal year, as compared to the number of films released in the previous fiscal year. Major films released in the fiscal year that contributed to both theatrical and home entertainment revenues included Spider-Man 3 and Superbad. Sales for the fiscal year release slate decreased approximately 1.2 billion U.S. dollars as compared to the previous fiscal year. The decrease in revenues from current year films was partially offset by an approximately 300 million U.S. dollar increase in home entertainment and television revenues from prior year films (i.e., films that had their initial U.S. theatrical release in the prior fiscal year). Total revenues for the Pictures segment also benefited from the sale of a bankruptcy claim against Kirch Media, a former licensee of film and television product. Television product revenues increased by approximately 29 million U.S. dollars primarily as a result of higher advertising and subscription sales from several international channels.
 
Operating income for the segment increased primarily due to the strong performance of prior year films in the home entertainment and television markets. Operating income from prior year films increased approximately 225 million U.S. dollars, due to the strong performance from a number of films including Ghost Rider, Stomp the Yard and Casino Royale. Operating income also benefited from the sale of the bankruptcy claim and the higher television business revenues referred to above.
 
As of March 31, 2008, 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 products. The license fee revenue will be recognized in the fiscal year in which the product is made available for broadcast.
 
Financial Services
 
Note that the revenue and operating income at Sony Life, Sony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”) discussed below on the basis of generally accepted accounting principles in the U.S. (“U.S. GAAP”) differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
 
Financial Services segment revenue for the fiscal year ended March 31, 2008 decreased by 68.2 billion yen, or 10.5 percent, to 581.1 billion yen compared with the previous fiscal year. Operating income decreased by 61.5 billion yen, or 73.1 percent, to 22.6 billion yen and the operating income margin decreased to 3.9 percent compared with 13.0 percent in the previous fiscal year.
 
At Sony Life, revenue decreased by 81.0 billion yen, or 14.9 percent, to 464.1 billion yen compared with the previous fiscal year. Although revenue from insurance premiums increased due to an increase in insurance-in-force, revenue decreased due to a net loss from investments in the separate account, a deterioration in net valuation gains from convertible bonds and an impairment loss on equity securities in the general account reflecting a significant decline in the Japanese stock market this fiscal year. Operating income at Sony Life decreased by 70.1 billion yen, or 85.9 percent, to 11.5 billion yen. This decrease was mainly due to a deterioration in net valuation gains from convertible bonds and an impairment loss on equity securities in the general account which more than offset the contribution from increased insurance premium revenue.
 
At Sony Assurance, revenue increased due to higher insurance revenue brought about by a steady expansion in the number of automobile policies-in-force. Despite higher insurance revenue, operating income decreased due to a deterioration in the net loss ratio and expense ratio (the ratio of sales, general and administrative expenses and commissions to net premiums written).


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At Sony Bank, revenue increased mainly due to foreign exchange valuation gains from part of Sony Bank’s foreign currency deposits brought about by a significant appreciation of the yen. As a result, operating income significantly increased.
 
At Sony Finance International, Inc. (“Sony Finance”), a leasing and credit financing business subsidiary in Japan, revenue increased overall mainly due to revenue increases from the electronic settlement business and the credit card business. The operating loss at Sony Finance decreased overall primarily due to increased profit at the electronic settlement business and the leasing business, as well as a decrease in losses at the credit card business.
 
Information of Operations Separating Out the Financial Services Segment (Unaudited)
 
The following charts show Sony’s unaudited information of operations for the Financial Services segment alone and for all segments excluding the Financial Services segment. These separate condensed 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 utilizes this information to analyze its results without Financial Services and believes that these presentations 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.
 
                 
    Fiscal Year Ended March 31
  Financial Services   2007   2008
    (Yen in millions)
 
Financial service revenue
    649,341       581,121  
Financial service expenses
    565,199       558,488  
                 
Operating income
    84,142       22,633  
Other income (expenses), net
    9,886       (383 )
                 
Income before income taxes
    94,028       22,250  
Income taxes and other
    33,536       11,908  
                 
Net income
    60,492       10,342  
                 
 
                 
    Fiscal Year Ended March 31
  Sony without Financial Services   2007   2008
    (Yen in millions)
 
Net sales and operating revenue
    7,680,578       8,324,828  
Costs and expenses
    7,694,375       7,974,630  
                 
Operating income (loss)
    (13,797 )     350,198  
Other income (expenses), net
    27,917       100,479  
                 
Income before income taxes
    14,120       450,677  
Income taxes and other
    (57,991 )     93,373  
                 
Net income
    72,111       357,304  
                 
 


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    Fiscal Year Ended March 31
  Consolidated   2007   2008
    (Yen in millions)
 
Financial service revenue
    624,282       553,216  
Net sales and operating revenue
    7,671,413       8,318,198  
                 
      8,295,695       8,871,414  
Costs and expenses
    8,223,945       8,496,932  
                 
Operating income
    71,750       374,482  
Other income (expenses), net
    30,287       91,835  
                 
Income before income taxes
    102,037       466,317  
Income taxes and other
    (24,291 )     96,882  
                 
Net income
    126,328       369,435  
                 
 
All Other
 
During the fiscal year ended March 31, 2008, sales within All Other were comprised mainly of sales from Sony Music Entertainment (Japan) Inc. (“SMEJ”), a Japanese domestic recorded music business; Sony Music Entertainment Inc. (“SMEI”)’s music publishing business; So-net Entertainment Corporation (“So-net”), an Internet-related service business subsidiary operating mainly in Japan; and an advertising agency business in Japan. Trademark royalty income from Sony Ericsson is also included in sales and operating income of All Other.
 
Sales for the fiscal year ended March 31, 2008 increased by 27.1 billion yen, or 7.6 percent, to 382.2 billion yen, compared with the previous fiscal year. Of total sales, 82 percent were sales to outside customers. In terms of profit performance, operating income for All Other increased by 21.3 billion yen, or 73.9 percent from the previous fiscal year, to 50.2 billion yen.
 
The increase in sales is mainly due to the contribution of sales from Famous Music LLC (“Famous Music”), a U.S-based music publishing company that was acquired by Sony’s U.S.-based music publishing subsidiary Sony/ATV Music Publishing LLC (“Sony ATV”) and consolidated in the current fiscal year, the receipt of a settlement payment related to copyright infringement claims and an increase in sales at SMEJ and So-net. An increase in trademark royalty income from Sony Ericsson also contributed to the increase in sales.
 
Sales at SMEJ increased compared with the previous fiscal year mainly due to an increase in music download sales. Best selling albums that contributed to sales during the fiscal year included ORANGE RANGE’s ORANGE and RANGE, Ken Hirai’s FAKIN’ POP and YUI’s CAN’T BUY MY LOVE.
 
Sales at So-net increased compared to previous fiscal year primarily due to higher fee revenue from broadband connections, especially fiber-optic.
 
Operating income for All Other increased compared to the previous fiscal year, primarily due to recording a 10.0 billion yen gain on the sale of “The Sony Center am Potsdamer Platz” in Berlin, the receipt of a settlement payment related to copyright infringement claims, an increase in trademark royalty income from Sony Ericsson and an increase in operating income at So-net.
 
Operating income at SMEJ increased approximately 4 percent, compared with the previous fiscal year, mainly due to an increase in animation DVD sales as well as the above-mentioned increase in music download sales.
 
Part of the gain on the sale of a portion of Sony’s former headquarters site in the amount of 2.6 billion yen was included in operating income within All Other in the previous fiscal year.
 
Foreign Exchange Fluctuations and Risk Hedging
 
During the fiscal year ended March 31, 2008, the average value of the yen was 113.3 yen against the U.S. dollar, and 160.0 yen against the euro, which was 2.4 percent higher against the U.S. dollar and 7.1 percent lower against the euro, respectively, compared with the average of the previous fiscal year.

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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 SPE are specified as being on “a U.S. dollar basis.” 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. Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that results presented on a local currency basis provide additional useful information to investors regarding operating performance.
 
Sony’s consolidated results are subject to foreign currency rate fluctuations largely because 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 most of 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 cycles 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. In the Financial Services segment, Sony uses derivatives for Asset Liability Management (“ALM”) and trading.
 
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 are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. For the fiscal years ended March 31, 2007 and 2008, these cash flow hedges were fully effective. 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, 2008 were 2,019.8 billion yen, 215.7 billion yen and 25.9 billion yen, respectively.
 
Operating Results for the Fiscal Year Ended March 31, 2007 compared with the Fiscal Year Ended March 31, 2006
 
Overview
 
Sony’s sales for the fiscal year ended March 31, 2007 increased 10.5 percent compared with the previous fiscal year. Sales within the Electronics segment, the Game segment and the Pictures segment increased while Financial Services revenue decreased. In the Electronics segment, although there was a decline in sales of such products as CRT televisions, sales to outside customers increased 13.5 percent compared with the previous fiscal year mainly due to an increase in sales of LCD televisions. Sales within the Game segment increased 6.1 percent compared to the previous fiscal year as a result of the launch of PS3 in Japan, North America and Europe. In the Pictures segment, sales increased 29.5 percent compared to the previous fiscal year due to higher worldwide theatrical and home entertainment revenue from films released in the fiscal year ended March 31, 2007 as compared to those released in the previous fiscal year. Revenues decreased 12.6 percent within the Financial Services segment primarily due to


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lower valuation gains in the general account and the separate account at Sony Life, compared to the previous fiscal year, when there was a significant increase in the Japanese stock market.
 
Operating income decreased 68.3 percent compared with the previous fiscal year. Operating income for the previous fiscal year included a one time net gain of 73.5 billion yen resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund, of which 64.5 billion yen was recorded within the Electronics segment. During the fiscal year ended March 31, 2007, Sony recorded a 51.2 billion yen provision related to recalls by Dell Inc., Apple Inc. and Lenovo, Inc. of notebook computer battery packs that used lithium-ion battery cells manufactured by Sony and the subsequent global replacement program initiated by Sony for certain notebook computer battery packs used by Sony and several other notebook computer manufacturers that used lithium-ion battery cells manufactured by Sony. Despite the recording of this provision, operating income within the Electronics segment increased 1,720.1 percent mainly as a result of an increase in sales to outside customers and the positive impact from the depreciation of the yen versus the U.S. dollar and the euro. In the Game segment, an operating loss was recorded in the fiscal year ended March 31, 2007 as a result of the sale of PS3 at strategic price points lower than its production cost during the introductory period. In the Pictures segment, operating income increased 55.7 percent compared with the previous fiscal year due to strong worldwide theatrical and home entertainment revenue on feature films released in the current fiscal year. In the Financial Services segment, operating income decreased 55.3 percent compared with the previous fiscal year as a result of decreased valuation gains from investments in the general account, including valuation gains from convertible bonds at Sony Life.
 
Operating income for the fiscal year ended March 31, 2007 included a gain on the sale of a portion of the site of Sony’s former headquarters in the amount of 21.7 billion yen, of which 2.6 billion yen was recorded within All Other and the remaining amount was recorded in “Corporate.”
 
Operating income for the fiscal year ended March 31, 2007 was negatively affected by the recording of certain provisions for outstanding legal proceedings including the European Commission’s investigation in connection with professional videotape claims, partially offset by the reversal of a portion of provisions related to the resolution of certain patent claims recorded in prior periods.
 
Restructuring
 
In the fiscal year ended March 31, 2007, Sony recorded restructuring charges of 38.8 billion yen, a decrease from the 138.7 billion yen recorded in the previous fiscal year. The primary restructuring activities were in the Electronics segment.
 
Of the total 38.8 billion yen, Sony recorded 10.8 billion yen in personnel-related costs including early retirement programs.
 
Restructuring charges in the Electronics segment for the fiscal year ended March 31, 2007 were 37.4 billion yen, compared to 125.8 billion yen in the previous fiscal year.
 
Due to the worldwide market shrinkage as a result of demand shift from CRT televisions to LCD and plasma televisions, Sony has been implementing a worldwide plan to rationalize CRT and CRT television production facilities and has been downsizing its business over several years. As a part of this restructuring program, in the fiscal year ended March 31, 2007, Sony recorded a non-cash impairment charge of 1.7 billion yen for CRT television manufacturing facilities located in the U.S. The impairment charge was calculated as the difference between the carrying value of the asset 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. While continuing to manufacture and sell CRT televisions in countries and territories where demand remains, Sony is actively shifting its focus in those areas to LCD televisions. As a result, Sony planned to cease manufacturing CRTs by March 2008, after it has stockpiled a sufficient quantity for future use.
 
As a result of the contraction of the European rear-projection television market, Sony decided to discontinue the production of LCD rear-projection televisions in Europe. In association with this action, Sony recorded inventory writedowns and charges for supplier claims of 3.8 billion yen for the fiscal year ended March 31, 2007, with most of these expenses recorded as cost of sales in the consolidated statements of income.


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In addition to the above restructuring efforts, Sony undertook headcount reduction programs to further reduce operating costs in the Electronics segment. As a result of these programs, Sony recorded restructuring charges of 9.7 billion yen for the fiscal year ended March 31, 2007, and these charges were included in selling, general and administrative expenses in the consolidated statements of income. The remaining liability balance as of March 31, 2007 was 7.2 billion yen and was fully paid as of March 31, 2008.
 
For more detailed information about restructuring, please refer to Note 17 of the notes to the consolidated financial statements.
 
Operating Performance
 
                         
    Fiscal Year Ended
   
    March 31    
    2006   2007   Percent change
    (Yen in billions)    
 
Sales and operating revenue
    7,510.6       8,295.7       +10.5 %
Operating income
    226.4       71.8       −68.3  
Income before income taxes
    286.3       102.0       −64.4  
Equity in net income of affiliated companies
    13.2       78.7       +496.9  
Net income
    123.6       126.3       +2.2  
 
Sales
 
Sales for the fiscal year ended March 31, 2007 increased by 785.1 billion yen, or 10.5 percent, to 8,295.7 billion yen compared with the previous fiscal year. A further breakdown of sales figures is presented under “Operating Performance by Business Segment” below.
 
“Sales” in this analysis of the ratio of cost of sales, including research and development costs, and selling, general and administrative expenses to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue, and excludes financial service revenue. This is because financial service expenses are recorded separately from cost of sales and selling, general and administrative expenses. 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, 2007 increased by 738.2 billion yen, or 14.3 percent, to 5,889.6 billion yen compared with the previous fiscal year, and increased from 75.9 percent to 76.8 percent as a percentage of sales. Year on year, the cost of sales ratio decreased from 80.6 percent to 78.8 percent in the Electronics segment, increased from 80.4 percent to 102.8 percent in the Game segment, and increased from 60.2 percent to 60.3 percent in the Pictures segment.
 
In the Electronics segment, there was an improvement in the cost of sales ratio for several products, in particular compact digital cameras, LCD televisions and video cameras. In the Game segment, there was a deterioration in the cost of sales ratio. This deterioration was primarily the result of losses arising from the sale of PS3 at strategic price points lower than its production cost during the introductory period, as well as the recording of other charges in association with the preparation for the launch of the PS3 platform. In the Pictures segment, operating income increased due to substantially higher revenue. However, the cost of sales ratio was flat compared to the previous fiscal year due to the recording of production expenses associated with several new network television shows in the television business during the fiscal year ended March 31, 2007 and the absence of a licensing agreement extension for Wheel of Fortune, which was recognized in the previous fiscal year.
 
Personnel-related costs included in cost of sales were 457.3 billion yen, an increase of 1.0 billion yen, primarily recorded within the Electronics segment.
 
Research and development costs (all research and development costs are included within cost of sales) for the fiscal year ended March 31, 2007 increased by 12.1 billion yen to 543.9 billion yen compared with the previous


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fiscal year. The ratio of research and development costs to sales was 7.1 percent compared to 7.8 percent in the previous fiscal year.
 
Selling, general and administrative expenses for the fiscal year ended March 31, 2007 increased by 261.4 billion yen, or 17.1 percent, to 1,788.4 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales increased from 22.5 percent in the previous fiscal year to 23.3 percent. Year on year, the ratio of selling, general and administrative expenses to sales increased from 18.0 percent to 18.2 percent in the Electronics segment and from 18.7 percent to 20.0 percent in the Game segment. On the other hand, the ratio of selling, general and administrative expenses to sales decreased from 36.0 percent to 35.2 percent in the Pictures segment.
 
Personnel-related costs in selling, general and administrative expenses increased by 54.4 billion yen compared with the previous fiscal year mainly due to the recording of a gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund in the fiscal year ended March 31, 2006. In addition, advertising and publicity expenses for the fiscal year ended March 31, 2007 increased by 86.0 billion yen compared with the previous fiscal year primarily due to increased advertising and publicity expenses within the Pictures segment.
 
Loss on sale, disposal or impairment of assets, net was 5.8 billion yen, compared with 73.9 billion yen in the previous fiscal year. This decrease was mainly due to losses on the sale, disposal and impairment of CRT and CRT television production equipment in the Electronics segment, as well as an asset impairment write-down associated with the sale of the Metreon, a U.S. entertainment complex, in the previous fiscal year.
 
Operating Income
 
Operating income for the fiscal year ended March 31, 2007 decreased by 154.7 billion yen, or 68.3 percent, to 71.8 billion yen compared with the previous fiscal year. The operating income margin decreased from 3.0 percent to 0.9 percent. In descending order by amount of financial impact, the Electronics segment, Financial Services segment, the Pictures segment and All Other contributed to operating income. On the other hand, an operating loss was recorded within the Game segment primarily due to losses arising from the sale of PS3 at strategic price points lower than its production cost during the introductory period, as well as the recording of other charges in association with the preparation for the launch of the PS3 platform. For a further breakdown of operating income (loss) for each segment, please refer to “Operating Performance by Business Segment” below.
 
Other Income and Expenses
 
For the fiscal year ended March 31, 2007, other income decreased by 23.3 billion yen, or 19.6 percent, to 95.2 billion yen, while other expenses increased by 6.4 billion yen, or 10.9 percent, to 64.9 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 30.3 billion yen, a decrease of 29.6 billion yen, compared with the previous fiscal year.
 
The gain on change in interest in subsidiaries and equity investees decreased by 29.3 billion yen, or 48.2 percent compared to the previous fiscal year, to 31.5 billion yen. During the fiscal year ended March 31, 2007, there was a gain recorded on the sale of a portion of the stock held in StylingLife. However, the total gain on change in ownership interests declined as Sony recorded a gain on change in interest of 60.8 billion yen in the previous fiscal year resulting from the initial public offering of So-net, and the sale of a portion of the stock held in both Monex Beans Holdings, Inc., and So-net M3 Inc., a consolidated subsidiary of So-net.
 
Interest and dividends in other income of 28.2 billion yen was recorded in the fiscal year ended March 31, 2007, an increase of 3.3 billion yen, or 13.2 percent, compared with the previous year. For the fiscal year ended March 31, 2007, interest expense totaling 27.3 billion yen was recorded, a decrease of 1.7 billion yen, or 5.9 percent, compared with the previous year.
 
In addition, a net foreign exchange loss of 18.8 billion yen was recorded in the fiscal year ended March 31, 2007, an increase of 15.8 billon yen from the previous fiscal year. The net foreign exchange loss was recorded because the value of the yen, especially during the second through fourth quarters of the fiscal year ended March 31, 2007, was lower than the value of the yen at the time that Sony entered into foreign exchange forward contracts and


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foreign currency option contracts. These contracts were 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.
 
Income before Income Taxes
 
Income before income taxes for the fiscal year ended March 31, 2007 decreased 184.3 billion yen, or 64.4 percent, to 102.0 billion yen compared with the previous fiscal year, as a result of the decrease in operating income and the decrease in the net amount of other income and other expenses mentioned above.
 
Income Taxes
 
During the fiscal year ended March 31, 2007, Sony recorded 53.9 billion yen of income taxes at an effective tax rate of 52.8 percent. This effective tax rate exceeded the Japanese statutory tax rate as a result of losses recorded by certain overseas subsidiaries with tax rates that are lower than the rate in Japan. The effective tax rate was 61.6 percent in the previous fiscal year and exceeded the Japanese statutory tax rate due to additional valuation allowances recorded against deferred tax assets by Sony Corporation and several of Sony’s Japanese and overseas consolidated subsidiaries due to continued losses recorded by these entities and the recording of an additional tax provision for the undistributed earnings of overseas subsidiaries.
 
Results of Affiliated Companies Accounted for under the Equity Method
 
Equity in net income of affiliated companies during the fiscal year ended March 31, 2007 was 78.7 billion yen, an increase of 65.5 billion yen, or 496.9 percent compared to the previous fiscal year. Equity in net income of affiliated companies reported for Sony Ericsson was 85.3 billion yen, an increase of 56.3 billion yen compared to the previous fiscal year, due to the increase in sales of hit models such as “Walkman®” and “Cyber-shot” phones. Sony recorded equity in net income of 5.0 billion yen for SONY BMG, a decrease of 0.8 billion yen compared to the previous fiscal year. Although there was a favorable impact due to an industry-related legal settlement, a year-on-year reduction in restructuring charges, and reductions in overhead costs from continued restructuring, sales declined due to the accelerated decline in the worldwide physical music market. Sony recorded equity in net income of 6.4 billion yen (before the elimination of unrealized intercompany profits of 1.4 billion yen), a 13.6 billion yen improvement compared to the prior fiscal year, for S-LCD, a joint-venture with Samsung for the manufacture of TFT LCD panels. Sony recorded equity in net loss of 18.9 billion yen for MGM, an increase in the amount of equity in net loss of 2.0 billion yen compared to the previous fiscal year. The equity in net loss for MGM included non-cash interest expense of 9.6 billion yen on cumulative preferred stock compared to 6.0 billion yen of non-cash interest expense on cumulative preferred stock recorded in the previous fiscal year.
 
Minority Interest in Income (Loss) of Consolidated Subsidiaries
 
In the fiscal year ended March 31, 2007, minority interest in income of consolidated subsidiaries of 0.5 billion yen was recorded compared to minority interest in loss of 0.6 billion yen in the previous year.
 
Net Income
 
Net income for the fiscal year ended March 31, 2007 increased by 2.7 billion yen, or 2.2 percent, to 126.3 billion yen compared with the previous fiscal year. Despite the decrease in income before income taxes, net income increased mainly due to the decrease of income taxes and an increase in equity in net income of affiliated companies. As a percentage of sales, net income decreased from 1.6 percent to 1.5 percent. Return on stockholders’ equity decreased from 4.1 percent to 3.8 percent. (This ratio is calculated by dividing net income by the simple average of stockholders’ equity at the end of the previous fiscal year and at the end of the fiscal year ended March 31, 2007.)
 
Basic net income per share was 126.15 yen compared with 122.58 yen in the previous fiscal year, and diluted net income per share was 120.29 yen compared with 116.88 yen in the previous fiscal year. Refer to Notes 2 and 21 of the notes to the consolidated financial statements.


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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 the notes to the consolidated financial statements.
 
Business Segment Information
 
                         
    Fiscal Year Ended
   
    March 31    
    2006   2007   Percent change
    (Yen in billions)    
 
Sales and operating revenue
                       
Electronics
    5,190.2       6,072.4       +17.0 %
Game
    958.6       1,016.8       +6.1  
Pictures
    745.9       966.3       +29.5  
Financial Services
    743.2       649.3       −12.6  
All Other
    411.5       355.1       −13.7  
Elimination
    (538.9 )     (764.2 )      
                         
Consolidated
    7,510.6       8,295.7       +10.5  
                         
 
                         
    Fiscal Year Ended
   
    March 31    
    2006   2007   Percent change
    (Yen in billions)    
 
Operating income (loss)
                       
Electronics
    8.8       160.5       +1,720.1 %
Game
    8.7       (232.3 )      
Pictures
    27.4       42.7       +55.7  
Financial Services
    188.3       84.1       −55.3  
All Other
    18.8       28.9       +53.3  
                         
Sub-Total
    252.2       83.9       −66.7  
Elimination and unallocated corporate expenses
    (25.7 )     (12.2 )      
                         
Consolidated
    226.4       71.8       −68.3  
                         
 
Electronics
 
Sales and operating revenue for the fiscal year ended March 31, 2007 increased 882.2 billion yen, or 17.0 percent, to 6,072.4 billion yen compared with the previous fiscal year. Operating income increased by 151.7 billion yen, or 1,720.1 percent, to 160.5 billion yen compared with the previous fiscal year and the operating income to sales ratio increased from 0.2 percent to 2.6 percent. Sales to outside customers on a yen basis increased 13.5 percent compared to the previous fiscal year. Regarding sales to outside customers by geographical area, sales increased by 7 percent in Japan, by 9 percent in the U.S., by 24 percent in Europe, and by 14 percent in Other Areas.
 
In Japan, there was a significant increase in the sales of mobile phones, principally to Sony Ericsson, and LCD televisions, while sales decreased for DVD-Video recorders, PCs and CRT televisions. In the U.S., sales of LCD televisions significantly increased, while sales decreased for rear-projection and CRT televisions. In Europe, sales increased for LCD televisions and PCs, while sales declined for CRT televisions and home-use video cameras. In Other Areas, sales of LCD televisions and compact digital cameras increased, while sales of mobile phones, primarily to Sony Ericsson, and CRT televisions decreased. The decrease in sales of mobile phones was due to the impact of the deconsolidation resulting from the transfer to Sony Ericsson of the stock of a Chinese subsidiary that mainly assembled mobile phones in the previous fiscal year.


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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 the notes to the consolidated financial statements.
 
“Audio” sales decreased by 13.3 billion yen, or 2.5 percent, to 522.9 billion yen. Sales of flash memory and hard drive digital audio players decreased due to a change in model mix, as unit shipments of approximately 4.5 million units were flat compared to the previous fiscal year. In addition, there was a significant decrease in sales of both CD and MiniDisc (“MD”) format headphone stereos due to a shift in market demand. However, car audio and home audio sales increased.
 
“Video” sales increased by 121.8 billion yen, or 11.9 percent, to 1,143.1 billion yen. Sales of compact digital cameras increased in Japan, the U.S. and Europe. Worldwide shipments of compact digital cameras increased by approximately 3.5 million units to approximately 17.0 million units. Sales of DVD recorders decreased as worldwide shipments decreased by approximately 150,000 units to approximately 1.85 million units. Worldwide shipments of home-use video cameras decreased by approximately 150,000 units to approximately 7.45 million units. DVD-Video player unit shipments decreased by approximately 100,000 units to approximately 7.9 million units.
 
“Televisions” sales increased by 299.2 billion yen, or 32.2 percent, to 1,227.0 billion yen. There was a significant increase in worldwide sales of LCD televisions, as worldwide shipments of LCD televisions increased by approximately 3.5 million units, to approximately 6.3 million units. Sales of LCD rear-projection televisions decreased significantly as a result of declining sales prices, despite an increase in worldwide shipments of approximately 50,000 units, as compared to the previous fiscal year, to approximately 1.10 million units. There was also a significant decrease in worldwide sales of CRT televisions, primarily as a result of a decrease in worldwide shipments of CRT televisions by approximately 2.1 million units to approximately 4.7 million units.
 
“Information and Communications” sales increased by 107.9 billion yen, or 12.8 percent, to 950.5 billion yen. Sales of PCs increased due to strong sales in Europe and Other Areas. Worldwide unit shipments of PCs increased approximately 300,000 units to approximately 4.0 million units. Sales of broadcast- and professional-use products increased as a result of favorable sales of high-definition related products.
 
“Semiconductors” sales increased by 33.5 billion yen, or 19.5 percent, to 205.8 billion yen. The increase was due to an increase in sales of CCDs and CMOS image sensors.
 
“Components” sales increased by 52.3 billion yen, or 6.5 percent, to 853.0 billion yen. This increase was primarily due to an increase in sales of lithium-ion batteries, primarily for use in PCs and power tools, and Memory Sticks. On the other hand, sales of CD-R/RW drives and optical pickups declined, primarily as a result of significant unit price declines. Sales of DVD+/-R/RW drives increased, despite a deterioration in unit selling prices, as a result of a significant growth in units sold in association with the expansion of the market.
 
“Other” sales increased by 45.9 billion yen, or 9.3 percent, to 541.2 billion yen. This increase was the result of an increase in sales of mobile phones, primarily to Sony Ericsson.
 
In the Electronics segment, cost of sales for the fiscal year ended March 31, 2007 increased by 597.7 billion yen, or 12.5 percent to 4,782.2 billion yen compared with the previous fiscal year. The cost of sales ratio improved by 1.9 percentage points to 78.8 percent compared to 80.6 percent in the previous fiscal year. There was also an improvement in the cost of sales ratio for such products as compact digital cameras, LCD televisions and home-use video cameras, although the cost of sales ratio deteriorated for products such as LCD rear-projection televisions due to sales price reductions associated with severe sales competition in North America. Restructuring charges recorded in cost of sales amounted to 12.6 billion yen, a decrease of 11.2 billion yen compared with the 23.8 billion yen recorded in the previous fiscal year. Research and development costs increased 22.2 billion yen, or 5.3 percent, from 418.1 billion yen in the previous fiscal year to 440.4 billion yen.
 
Selling, general and administrative expenses increased by 173.1 billion yen, or 15.7 percent to 1,106.2 billion yen compared with the previous fiscal year. A provision of 51.2 billion yen was recorded for the fiscal year ended March 31, 2007 for recalls by Dell Inc., Apple Inc. and Lenovo, Inc. of notebook computer battery packs that used lithium-ion batteries manufactured by Sony as well as the subsequent global replacement program initiated by Sony


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for certain notebook computer battery packs used by Sony and several other notebook computer manufacturers that used lithium-ion battery cells manufactured by Sony. Also, an additional provision was recorded due to the expansion of models subject to free repairs and an extension of the repair period for Sony products and the products of other companies that are equipped with Sony CCDs. Results for the Electronics segment were also negatively impacted by an adjustment to reflect a more accurate method of calculating the provision for free repairs of Sony CCDs, which had the effect of further increasing the provision. Although there was a reversal of a portion of provisions related to the resolution of certain patent claims recorded in prior periods, this reversal was more than offset by the negative impact of the recording of certain provisions for outstanding legal proceedings including the European Commission’s investigation in connection with professional videotape claims. Finally, a 64.5 billion yen gain recorded as a result of the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund was included in the previous fiscal year. Total selling, general and administrative expenses increased because the cumulative impact of the above-mentioned items exceeded the decrease in restructuring charges that were recorded in selling, general and administrative expenses for the fiscal year ended March 31, 2007. Of the restructuring charges recorded in the Electronics segment, the amount recorded in selling, general and administrative expenses decreased by 35.5 billion yen from 49.5 billion yen in the previous fiscal year to 14.0 billion yen. Of the restructuring charges recorded in selling, general and administrative expenses, the amount recorded for headcount reductions, including reductions through the early retirement program, was 9.7 billion yen, a decrease of 35.4 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales increased 0.2 percentage points from the 18.0 percent recorded in the previous fiscal year to 18.2 percent.
 
Loss on sale, disposal or impairment of assets, net decreased 12.3 billion yen to 10.8 billion yen compared with the previous fiscal year. This amount includes 10.8 billion yen of restructuring charges, including 5.2 billion yen of restructuring charges related to the recording of an impairment loss for goodwill for a CRT television glass manufacturing subsidiary in the U.S. The amount of restructuring charges included in loss on sale, disposal or impairment, net in the previous fiscal year was 52.5 billion yen.
 
The amount of operating income recorded in the Electronics segment for the fiscal year ended March 31, 2007, increased significantly due to an increase in sales to outside customers and the positive impact of the depreciation of the yen. This result is in spite of the above-mentioned recording by Sony of a 51.2 billion yen provision that relates to recalls of notebook computer battery packs and the subsequent global replacement program and the recording of an additional provision related to free repairs of Sony CCDs. The operating income from the previous year included a 64.5 billion yen gain that was recorded as a result of the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund. Regarding profit performance by product, excluding restructuring charges and the impact of the net gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund, compact digital cameras and LCD televisions, which experienced favorable sales, and video cameras, which experienced an increase in sales of high value-added models, contributed to the increase in the operating income of the segment.
 
Manufacturing by Geographic Area
 
Slightly more than 50 percent of the Electronics segment’s total annual production during the fiscal year ended March 31, 2007 took place in Japan, including the production of compact digital cameras, video cameras, LCD 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 slightly more than 10 percent of total annual production, approximately 80 percent of which was destined for other regions. Asia, excluding Japan and China, accounted for approximately 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 balance of approximately 25 percent of total annual production, most of which was destined for local distribution and sale.
 
Game
 
Sales for the fiscal year ended March 31, 2007 increased by 58.2 billion yen, or 6.1 percent, to 1,016.8 billion yen compared with the previous fiscal year. An operating loss of 232.3 billion yen was recorded for the fiscal year ended March 31, 2007, which was a deterioration of 241.1 billion yen from the fiscal year ended March 31, 2006.


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By region, although sales decreased slightly in Japan, there was a significant increase in sales in North America and Europe.
 
Overall hardware sales increased as a result of the launch of PS3 in Japan, North America and Europe. However, the sales of PS2 and PSP declined due to lower unit sales compared with the previous fiscal year, and also because of a price reduction of PS2. On the other hand, overall software sales decreased as a result of lower PS2 software sales, despite an increase in PSP software sales, as well as the contribution from PS3 software sales, compared to the previous fiscal year.
 
Total worldwide unit sales of hardware and software were as follows:
 
Worldwide hardware unit sales (decrease compared to the previous fiscal year):*
 
         
  à  PS2:     14.71 million units (a decrease of 1.83 million units)
  à  PSP:      9.53 million units (a decrease of 2.35 million units)
  à  PS3:      3.61 million units
 
Worldwide software unit sales (increase/decrease compared to the previous fiscal year):*/**
 
         
  à  PS2:     193.5 million units (a decrease of 30.8 million units)
  à  PSP:      54.7 million units (an increase of 13.0 million units)
  à  PS3:      13.3 million units
 
* For the fiscal year ended March 31, 2008, the method of reporting hardware and software unit sales has been changed from production shipments to recorded sales. In accordance with this change, the numbers for the fiscal years ended March 31, 2006 and 2007 have been restated.
 
** Including those both from Sony and third parties under Sony licenses.
 
Operating performance deteriorated significantly compared with the previous fiscal year. This deterioration was primarily the result of the loss arising from the sale of PS3 at strategic price points lower than its production cost during the introductory period, as well as the recording of other charges in association with the preparation for the launch of the PS3 platform. Operating income for the PS2 business decreased due to a decrease in software sales while operating income in the PSP business increased primarily due to continued cost reductions in hardware production. A write-down of PS3-related inventory of 81.4 billion yen was recorded in the fiscal year ended March 31, 2007 compared with a write-down of 25.0 billion yen recorded in the previous fiscal year.
 
The cost of sales to sales ratio deteriorated 22.4 percentage points, from 80.4 percent in the previous fiscal year, to 102.8 percent and the ratio of selling, general and administrative expenses to sales increased 1.3 percentage points from 18.7 percent in the previous fiscal year, to 20.0 percent for the reasons mentioned above for the decrease in operating income.
 
Pictures
 
Sales for the fiscal year ended March 31, 2007 increased by 220.4 billion yen, or 29.5 percent, to 966.3 billion yen compared to the previous fiscal year. Operating income increased by 15.3 billion yen, or 55.7 percent , to 42.7 billion yen and the operating margin increased from 3.7 percent to 4.4 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 26 percent and operating income increased by approximately 53 percent. Sales increased significantly due to higher worldwide theatrical and home entertainment revenue from films released in the fiscal year ended March 31, 2007, as compared to those released in the previous fiscal year. Major films released in the fiscal year that contributed to both theatrical and home entertainment revenue included The Da Vinci Code, Casino Royale, Click, Talladega Nights: The Ballad of Ricky Bobby and The Pursuit of Happyness. Sales for the fiscal year release slate increased approximately 1.8 billion U.S. dollars as compared to the previous fiscal year. Television product revenues increased by approximately 160 million U.S. dollars primarily as a result of higher advertising and subscription sales from several international channels.


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Operating income for the segment increased significantly, primarily due to the performance of films released in the fiscal year ended March 31, 2007. Operating loss from the current fiscal year release slate decreased approximately 530 million U.S. dollars as compared to the previous year’s release slate due to the same factors contributing to the increase in film revenue noted above. Partially offsetting this was a decrease in operating income of 98 million U.S. dollars for television product primarily due to the recording of production and marketing expenses in the current fiscal year associated with several new network and made-for-syndication television shows, combined with the absence of a licensing agreement extension for Wheel of Fortune, which was recognized in the previous fiscal year. Results for the Pictures segment were also negatively impacted by an adjustment to increase its reserve for returns of home entertainment catalog product.
 
As of March 31, 2007, unrecognized license fee revenue at SPE was approximately 1.1 billion U.S. dollars. SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television products. The license fee revenue will be recognized in the fiscal year in which the product is made available for broadcast.
 
Financial Services
 
Note that the revenue and operating income at Sony Life, Sony Assurance and Sony Bank discussed below on a U.S. GAAP basis differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
 
Financial Services segment revenue for the fiscal year ended March 31, 2007 decreased by 93.9 billion yen, or 12.6 percent, to 649.3 billion yen compared with the previous fiscal year. Operating income decreased by 104.2 billion yen, or 55.3 percent, to 84.1 billion yen and the operating income margin decreased to 13.0 percent compared with the 25.3 percent of the previous fiscal year.
 
At Sony Life, revenue decreased by 100.0 billion yen, or 15.5 percent, to 545.1 billion yen compared with the previous fiscal year. Although revenue from insurance premiums increased at Sony Life reflecting an increase in insurance-in-force, the main reason for this decrease was lower valuation gains in the general and separate accounts as compared to the previous fiscal year, when there was a significant increase in the Japanese stock market. Operating income at Sony Life decreased by 106.8 billion yen or 56.7 percent to 81.7 billion yen, primarily due to a decrease in valuation gains from investments in the general account, including valuation gains from convertible bonds.
 
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 and an improvement in the expense ratio (the ratio of sales, general and administrative expenses and commissions to net premiums written).
 
At Sony Bank, revenue rose mainly due to a significant decrease of foreign exchange losses from part of Sony Bank’s foreign currency deposits, as compared with the previous fiscal year, and an increase in interest revenue associated with an increase in the balance of assets from investing activities. As a result, Sony Bank recorded operating income in the fiscal year ended March 31, 2007, as compared to an operating loss in the previous fiscal year.
 
At Sony Finance, overall revenue decreased and the operating loss increased primarily due to decreases in revenue and profit at leasing and installment businesses. However, revenue increased in the credit card business, which resulted in a decrease in the operating loss recorded for that business.
 
Information of Operations Separating Out the Financial Services Segment (Unaudited)
 
The following charts show Sony’s unaudited information of operations for all segments excluding the Financial Services segment and for the Financial Services segment alone. These separate condensed 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 utilizes this information to analyze its results without Financial Services and believes that these presentations may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and


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all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
 
                 
    Fiscal Year Ended March 31
  Financial Services   2006   2007
    (Yen in millions)
 
Financial service revenue
    743,215       649,341  
Financial service expenses
    554,892       565,199  
                 
Operating income
    188,323       84,142  
Other income (expenses), net
    24,522       9,886  
                 
Income before income taxes
    212,845       94,028  
Income taxes and other
    78,527       33,536  
                 
Net income
    134,318       60,492  
                 
 
                 
    Fiscal Year Ended March 31
  Sony without Financial Services   2006   2007
    (Yen in millions)
 
Net sales and operating revenue
    6,799,068       7,680,578  
Costs and expenses
    6,762,194       7,694,375  
                 
Operating income (loss)
    36,874       (13,797 )
Other income (expenses), net
    36,610       27,917  
                 
Income before income taxes
    73,484       14,120  
Income taxes and other
    84,186       (57,991 )
                 
Net income (loss)
    (10,702 )     72,111  
                 
 
                 
    Fiscal Year Ended March 31
  Consolidated   2006   2007
    (Yen in millions)
 
Financial service revenue
    720,566       624,282  
Net sales and operating revenue
    6,790,031       7,671,413  
                 
      7,510,597       8,295,695  
Costs and expenses
    7,284,181       8,223,945  
                 
Operating income
    226,416       71,750  
Other income (expenses), net
    59,913       30,287  
                 
Income before income taxes
    286,329       102,037  
Income taxes and other
    162,713       (24,291 )
                 
Net income
    123,616       126,328  
                 
 
All Other
 
During the fiscal year ended March 31, 2007, sales within All Other were comprised mainly of sales from SMEJ, a Japanese domestic recorded music business; SMEI’s music publishing business; So-net, an Internet-related service business subsidiary operating mainly in Japan; and an advertising agency business in Japan. In June 2006, Sony Corporation sold 51 percent of the stock of StylingLife, a holding company comprised of six retail businesses within Sony previously included within All Other, to a wholly-owned subsidiary of Nikko Principal Investments Japan Ltd. Sony Corporation sold additional shares of StylingLife in December 2006, and currently holds approximately 23 percent of the total outstanding stock in StylingLife.


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Sales for the fiscal year ended March 31, 2007 decreased by 56.4 billion yen, or 13.7 percent, to 355.1 billion yen, compared with the previous fiscal year. During the fiscal year, the sales decrease within All Other reflects the deconsolidation of the six retail businesses noted above after the sale of a majority of the stock of StylingLife. Of total segment sales, 81 percent were sales to outside customers. In terms of profit performance, operating income for All Other increased from 18.8 billion yen in the previous fiscal year to 28.9 billion yen.
 
Sales at SMEJ declined mainly due to lower intersegment sales in association with the transfer of business activity relating to Sony’s disc custom press business, which was carried out at SMEJ during the previous fiscal year, to other segments within Sony Group. Best selling albums during the fiscal year included CHEMISTRY’s ALL THE BEST, Yuna Ito’s HEART and Angela Aki’s HOME.
 
Excluding sales recorded within Sony’s music business, there was a decrease in sales within All Other. This decrease was mainly due to the above-mentioned deconsolidation of Sony’s retail businesses, partially offset by an increase in sales at So-net, where there was a favorable increase in fiber optic connection service subscribers.
 
Regarding profit performance within All Other, operating income of 28.9 billion yen was recorded, an 10.0 billion yen increase compared to 18.8 billion yen of operating income recorded in the previous fiscal year. Operating income at SMEJ declined approximately 37 percent compared to the previous fiscal year, mainly due to a decrease in album and single sales and the recognition of a gain in the previous fiscal year resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund.
 
Excluding the decrease in operating income in the music business, there was an increase in operating income within All Other, mainly due to an asset impairment write-down associated with the sale of the Metreon, a U.S. entertainment complex, recorded in the previous fiscal year. Operating income at So-net increased mainly due to an increase in profit resulting from greater fee revenue from new subscribers.
 
During the fiscal year ended March 31, 2007, a gain on the sale of a portion of Sony’s former headquarters site in the amount of 2.6 billion yen was included in operating income within All Other.
 
Foreign Exchange Fluctuations and Risk Hedging
 
During the fiscal year ended March 31, 2007, the average value of the yen was 116.0 yen against the U.S. dollar, and 148.6 yen against the euro, which was 3.2 percent lower against the U.S. dollar and 8.2 percent lower against the euro, respectively, compared with the average of the previous fiscal year.
 
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 SPE are specified as being on “a U.S. dollar basis.” Results on a U.S. dollar basis are not on the same basis as Sony’s consolidated financial statements and do not conform with U.S. GAAP. In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that results presented on a local currency basis 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.
 
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


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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 cycles 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 and ALM.
 
To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.
 
Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. For the fiscal years ended March 31, 2006 and 2007, these cash flow hedges were fully effective. 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, 2007 were 1,768.6 billion yen, 287.8 billion yen and 67.2 billion yen, respectively.
 
Assets, Liabilities and Stockholders’ Equity
 
Assets
 
Total assets as of March 31, 2008 increased by 836.4 billion yen, or 7.1 percent, to 12,552.7 billion yen compared with the previous fiscal year-end. Total assets as of March 31, 2008 in all segments excluding the Financial Services segment increased by 86.9 billion yen, or 1.2 percent, to 7,185.0 billion yen compared with the previous fiscal year-end. Total assets as of March 31, 2008 in the Financial Services segment increased by 648.0 billion yen, or 13.0 percent, to 5,625.7 billion yen compared with the previous fiscal year-end.
 
Current Assets
 
Current assets as of March 31, 2008 increased by 462.9 billion yen, or 10.2 percent, to 5,009.7 billion yen compared with the previous fiscal year-end. Current assets as of March 31, 2008 in all segments, excluding the Financial Services segment, increased by 341.7 billion yen, or 9.8 percent, to 3,836.7 billion yen.
 
Cash and cash equivalents as of March 31, 2008 in all segments, excluding the Financial Services segment, increased 425.9 billion yen, or 81.4 percent, to 948.7 billion yen compared with the previous fiscal year-end. This was primarily due to the sale of a portion of the shares Sony Corporation held in SFH pursuant to the global initial public offering of SFH in connection with its listing on the TSE. Refer to “Cash Flows” below.
 
Notes and accounts receivable, trade (net of allowance for doubtful accounts and sales returns) as of March 31, 2008, excluding the Financial Services segment, decreased 259.6 billion yen, or 19.3 percent, compared with the previous fiscal year-end to 1,083.5 billion yen. This was primarily the result of a decrease in sales of PS3 near the end of the fiscal year compared with the previous fiscal year-end when PS3 had just begun shipping in Europe.
 
Inventories as of March 31, 2008 increased by 80.7 billion yen, or 8.6 percent, to 1,021.6 billion yen compared with the previous fiscal year-end. This increase was primarily due to an increase in Electronics segment inventory resulting from a worldwide expansion of the LCD television business. The inventory to cost of sales turnover ratio (based on the average of inventories at the end of each fiscal year and the previous fiscal year) was 1.87 months compared to 1.78 months at the end of the previous fiscal year. Sony considers this level of inventory to be appropriate in the aggregate.
 
Other in current assets as of March 31, 2008 in all segments, excluding the Financial Services segment, increased 175.6 billion yen, or 10.8 percent, to 1,801.5 billion yen compared with the previous fiscal year-end. This was primarily due to the recording of a receivable within the Electronics segment relating to the sale of a portion of Sony’s semiconductor operations in Nagasaki, Japan, including machinery and equipment.


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Current assets as of March 31, 2008 in the Financial Services segment increased by 115.9 billion yen, or 10.6 percent, to 1,205.1 billion yen compared with the previous fiscal year-end. This increase was primarily due to an expansion of banking businesses.
 
Investments and Advances
 
Investments and advances as of March 31, 2008 increased by 446.9 billion yen, or 11.5 percent, to 4,335.6 billion yen compared with the previous fiscal year-end.
 
Investments and advances as of March 31, 2008 in all segments, excluding the Financial Services segment, decreased by 104.8 billion yen, or 16.8 percent, to 518.5 billion yen. This was primarily due to the receipt of a capital redemption payment and dividends from Sony Ericsson.
 
Investments and advances as of March 31, 2008 in the Financial Services segment increased by 532.0 billion yen, or 15.9 percent, to 3,879.9 billion yen compared with the previous fiscal year-end. This increase was primarily due to investments mainly in Japanese fixed income securities by Sony Life, which increased assets as a result of an expansion of its business, and an increase in mortgage loans outstanding at Sony Bank.
 
Also refer to “Investments” below.
 
Property, Plant and Equipment (after deduction of accumulated depreciation)
 
Property, plant and equipment as of March 31, 2008 decreased by 178.2 billion yen, or 12.5 percent, to 1,243.3 billion yen compared with the previous fiscal year-end.
 
Property, plant and equipment as of March 31, 2008 in all segments, excluding the Financial Services segment, decreased by 178.0 billion yen, or 12.9 percent, to 1,204.8 billion yen compared with the previous fiscal year-end.
 
Capital expenditures (additions to property, plant and equipment) for the fiscal year ended March 31, 2008 decreased by 78.4 billion yen, or 18.9 percent, to 335.7 billion yen compared with the previous fiscal year. Capital expenditures in the Electronics segment decreased by 44.8 billion yen, or 12.7 percent, to 306.7 billion yen. Of this amount, approximately 90 billion yen was used for capital expenditures in the semiconductor business, including CCDs and CMOS imaging sensors. Capital expenditures decreased in the Game segment by 11.1 billion yen, or 66.4 percent, to 5.6 billion yen. In the Pictures segment, capital expenditures decreased by 1.0 billion yen, or 9.5 percent to 9.9 billion yen. In All Other, which includes the part of Sony’s music business which is consolidated, 3.0 billion yen of capital expenditures were recorded, a decrease of 2.7 billion yen, or 47.4 percent compared with the previous fiscal year.
 
Other changes resulting in a decrease in property, plant and equipment as of March 31, 2008 compared to March 31, 2007 include the sale of a portion of Sony’s semiconductor operations in Nagasaki, including machinery and equipment, “The Sony Center am Potsdamer Platz” in Berlin and a portion of the site of Sony’s former headquarters.
 
Property, plant and equipment as of March 31, 2008 in the Financial Services segment decreased by 0.2 billion yen, or 0.4 percent, to 38.5 billion yen compared with the previous fiscal year-end. Capital expenditures in the Financial Services segment decreased by 0.5 billion yen, or 6.7 percent, to 6.4 billion yen compared with the previous fiscal year.
 
Consolidated capital expenditures for the fiscal year ending March 31, 2009 are expected to increase 28 percent to 430 billion yen primarily within the Electronics segment. For the Electronics segment, capital expenditures in the semiconductor business during the fiscal year are expected to increase by approximately 20 billion yen to approximately 110 billion yen due to an increase in the amount invested in image sensors.
 
Other Assets
 
Other assets as of March 31, 2008 increased by 109.2 billion yen, or 7.0 percent, to 1,659.8 billion yen compared with the previous fiscal year end. Deferred tax assets as of March 31, 2008 decreased by 18.3 billion yen, or 8.4 percent, to 198.7 billion yen compared with the previous fiscal year end.


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Liabilities
 
Total current and long-term liabilities as of March 31, 2008 increased by 504.1 billion yen, or 6.1 percent, to 8,810.8 billion yen compared with the previous fiscal year-end. Total current and long-term liabilities as of March 31, 2008 in all segments, excluding the Financial Services segment, decreased by 173.4 billion yen, or 4.2 percent, to 3,967.5 billion yen. Total current and long-term liabilities in the Financial Services segment as of March 31, 2008 increased by 646.7 billion yen, or 14.9 percent, to 4,984.4 billion yen compared with the previous fiscal year-end.
 
Current Liabilities
 
Current liabilities as of March 31, 2008 increased by 471.5 billion yen, or 13.3 percent, to 4,023.4 billion yen compared with the previous fiscal year-end. Current liabilities as of March 31, 2008 in all segments excluding the Financial Services segment increased by 57.9 billion yen, or 2.2 percent, to 2,698.5 billion yen.
 
Short-term borrowings and the current portion of long-term debt as of March 31, 2008 in all segments, excluding the Financial Services segment, increased by 258.5 billion yen, or 319.4 percent, to 339.5 billion yen compared with the previous fiscal year-end. This was principally due to the change from long-term to current liabilities of the 250 billion yen tranche of bonds with stock acquisition rights which will come due during the fiscal year ending March 31, 2009.
 
Notes and accounts payable, trade as of March 31, 2008 in all segments, excluding the Financial Services segment, decreased by 261.0 billion yen, or 22.4 percent, to 906.3 billion yen compared with the previous fiscal year-end. This was primarily due to the same reason for the decrease in notes and accounts receivable, trade, discussed above: a decrease in sales of PS3 near the end of the fiscal year compared with the previous fiscal year-end when PS3 had just begun shipping in Europe.
 
Current liabilities as of March 31, 2008 in the Financial Services segment increased by 405.5 billion yen, or 42.4 percent, to 1,363.0 billion yen, mainly due to an increase in deposits from customers at Sony Bank.
 
Long-term Liabilities
 
Long-term liabilities as of March 31, 2008 increased by 32.6 billion yen, or 0.7 percent, to 4,787.4 billion yen compared with the previous fiscal year-end.
 
Long-term liabilities as of March 31, 2008 in all segments, excluding the Financial Services segment, decreased by 231.4 billion yen, or 15.4 percent, to 1,269.0 billion yen. In addition, long-term debt as of March 31, 2008 in all segments, excluding the Financial Services segment, decreased by 274.3 billion yen, or 29.6 percent, to 651.0 billion yen. This was primarily due to the change to current liabilities of the bonds with stock acquisition rights described above.
 
Long-term liabilities as of March 31, 2008 in the Financial Services segment increased by 241.2 billion yen, or 7.1 percent, to 3,621.4 billion yen. This was primarily due to an increase in insurance-in-force at Sony Life.
 
Total Interest-bearing Debt
 
Total interest-bearing debt as of March 31, 2008 decreased by 12.3 billion yen, or 1.1 percent, to 1,084.2 billion yen, compared with the previous fiscal year-end. Total interest-bearing debt as of March 31, 2008 in all segments, excluding the Financial Services segment, decreased by 15.7 billion yen, or 1.6 percent, to 990.5 billion yen.
 
Stockholders’ Equity
 
Stockholders’ equity as of March 31, 2008 increased by 94.4 billion yen, or 2.8 percent, to 3,465.1 billion yen compared with the previous fiscal year-end. Retained earnings increased 339.9 billion yen, or 19.8 percent, to 2,059.4 billion yen compared with the previous fiscal year-end, primarily due to net income of 369.4 billion yen. Unfavorable foreign currency translation adjustments of 212.5 billion yen, dividends declared of 25.1 billion yen and pension liability adjustments of 26.1 billion yen decreased shareholders’ equity by a total of 263.7 billion yen.


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The ratio of stockholders’ equity to total assets decreased 1.2 percentage points compared to the end of the previous fiscal year, from 28.8 percent to 27.6 percent.
 
Information of Financial Position Separating Out the Financial Services Segment (Unaudited)
 
The following charts show Sony’s unaudited information of financial position for all segments excluding the Financial Services segment and for the Financial Services segment alone. These separate condensed 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 utilizes this information to analyze its results without Financial Services and believes that these presentations may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
 
Financial Services
 
                 
    March 31
    2007   2008
    (Yen in millions)
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
    277,048       137,721  
Marketable securities
    490,237       424,709  
Notes and accounts receivable, trade
    29,163       14,143  
Other
    292,806       628,546  
                 
      1,089,254       1,205,119  
Investments and advances
    3,347,897       3,879,877  
Property, plant and equipment
    38,671       38,512  
Other assets:
               
Deferred insurance acquisition costs
    394,117       396,819  
Other
    107,703       105,332  
                 
      501,820       502,151  
                 
      4,977,642       5,625,659  
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:
               
Short-term borrowings
    48,688       44,408  
Notes and accounts payable, trade
    13,159       16,376  
Deposits from customers in the banking business
    752,367       1,144,399  
Other
    143,245       157,773  
                 
      957,459       1,362,956  
Long-term liabilities:
               
Long-term debt
    129,484       111,771  
Accrued pension and severance costs
    8,773       8,034  
Future insurance policy benefits and other
    3,037,666       3,298,506  
Other
    204,317       203,096  
                 
      3,380,240       3,621,407  
Minority interest in consolidated subsidiaries
    5,145       919  
Stockholders’ equity
    634,798       640,377  
                 
      4,977,642       5,625,659  
                 


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Sony without Financial Services
 
                 
    March 31
    2007   2008
    (Yen in millions)
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
    522,851       948,710  
Marketable securities
    3,078       3,000  
Notes and accounts receivable, trade
    1,343,128       1,083,489  
Other
    1,625,914       1,801,468  
                 
      3,494,971       3,836,667  
Film costs
    308,694       304,243  
Investments and advances
    623,342       518,536  
Investments in Financial Services, at cost
    187,400       116,843  
Property, plant and equipment
    1,382,860       1,204,837  
Other assets
    1,100,795       1,203,849  
                 
      7,098,062       7,184,975  
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:
               
Short-term borrowings
    80,944       339,485  
Notes and accounts payable, trade
    1,167,324       906,281  
Other
    1,392,333       1,452,756  
                 
      2,640,601       2,698,522  
Long-term liabilities:
               
Long-term debt
    925,259       650,969  
Accrued pension and severance costs
    164,701       223,203  
Other
    410,354       394,779  
                 
      1,500,314       1,268,951  
Minority interest in consolidated subsidiaries
    32,808       37,509  
Stockholders’ equity
    2,924,339       3,179,993  
                 
      7,098,062       7,184,975  
                 


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Consolidated
 
                 
    March 31
    2007   2008
    (Yen in millions)
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
    799,899       1,086,431  
Marketable securities
    493,315       427,709  
Notes and accounts receivable, trade
    1,369,777       1,090,285  
Other
    1,883,732       2,405,238  
                 
      4,546,723       5,009,663  
Film costs
    308,694       304,243  
Investments and advances
    3,888,736       4,335,648  
Property, plant and equipment
    1,421,531       1,243,349  
Other assets:
               
Deferred insurance acquisition costs
    394,117       396,819  
Other
    1,156,561       1,263,017  
                 
      1,550,678       1,659,836  
                 
      11,716,362       12,552,739  
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:
               
Short-term borrowings
    95,461       355,103  
Notes and accounts payable, trade
    1,179,694       920,920  
Deposits from customers in the banking business
    752,367       1,144,399  
Other
    1,524,330       1,602,945  
                 
      3,551,852       4,023,367  
Long-term liabilities:
               
Long-term debt
    1,001,005       729,059  
Accrued pension and severance costs
    173,474       231,237  
Future insurance policy benefits and other
    3,037,666       3,298,506  
Other
    542,691       528,632  
                 
      4,754,836       4,787,434  
Minority interest in consolidated subsidiaries
    38,970       276,849  
Stockholders’ equity
    3,370,704       3,465,089  
                 
      11,716,362       12,552,739  
                 


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Investments
 
The following table contains available-for-sale and held to maturity securities, breaking out the unrealized gains and losses by investment category.
 
                                 
    March 31, 2008
                Fair
        Unrealized
  Unrealized
  Market
    Cost   Gain   Loss   Value
        (Yen in millions)    
 
Financial Services Business:
                               
Available-for-sale
                               
Debt securities
                               
Sony Life
    2,564,845       77,456       (2,644 )     2,639,657  
Other
    481,159       998       (10,412 )     471,745  
Equity securities
                               
Sony Life
    181,256       47,557       (14,513 )     214,300  
Other
    11,452       1,036       (1,504 )     10,984  
Held to maturity
                               
Debt securities
                               
Sony Life
                       
Other
    56,737       773       (34 )     57,476  
 
 
Total Financial Services
    3,295,449       127,820       (29,107 )     3,394,162  
 
 
Non-Financial Services:
                               
Available-for-sale securities
    52,935       26,992       (3,574 )     76,353  
Held to maturity securities
    1,103                   1,103  
 
 
Total Non-Financial Services
    54,038       26,992       (3,574 )     77,456  
 
 
Consolidated
    3,349,487       154,812       (32,681 )     3,471,618  
 
 
 
The most significant portion of these unrealized losses relate to investments held by Sony Life and Sony Bank.
 
As of March 31, 2008, Sony Life had debt and equity securities which had gross unrealized losses of 2.6 billion yen and 14.5 billion yen, respectively. Of the unrealized loss amounts recorded by Sony Life, approximately 1.5 percent relate to securities being in an unrealized loss position for periods greater than 12 months as of March 31, 2008. Sony Life principally invests in debt securities in various industries. Almost all of these securities were rated “BBB” or higher by Standard & Poor’s, Moody’s or other rating agencies. The percentage of non-investment grade securities held by Sony Life represents approximately 0.2 percent of Sony Life’s total investment portfolio, while the percentage of unrealized losses that relate to those non-investment grade securities was 0.7 percent of Sony Life’s total unrealized losses as of March 31, 2008.
 
As of March 31, 2008, Sony Bank had debt securities which had gross unrealized losses of 10.4 billion yen. Of the unrealized loss amounts recorded by Sony Bank, approximately 60.2 percent relate to securities being in an unrealized loss position for periods greater than 12 months as of March 31, 2008. These unrealized losses related principally to Japanese government bonds. Sony Bank principally invests in Japanese national government bonds, Japanese corporate bonds and foreign bonds. Almost all of these securities were rated “BBB” or higher by Standard & Poor’s, Moody’s or other rating agencies. These unrealized losses related to numerous investments, with no single investment being in a material unrealized loss position for above-mentioned periods. In addition, there was no individual security with unrealized losses that met the test 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.


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For fixed maturity securities with unrecognized losses held by Sony Life as of March 31, 2008 (2.6 billion yen), maturity dates vary as follows:
 
         
• Within 1 year:
    4.8 percent  
• 1 to 5 years:
    3.9 percent  
• 5 to 10 years:
    4.6 percent  
• above 10 years:
    86.7 percent  
 
In the ordinary course of business, Sony maintains long-term investment securities, included in securities investments and other issued by a number of non-public companies. The aggregate carrying amount of the investments in non-public companies at March 31, 2008 was 62.1 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, the impairment of the investment is recognized immediately and the carrying value is reduced to its fair value.
 
For the fiscal years ended March 31, 2006, 2007 and 2008, total impairment losses were 4.0 billion yen, 7.4 billion yen and 37.1 billion yen of which 0.2 billion yen, 6.1 billion yen and 24.0 billion yen, respectively, were recorded by Sony Life in Financial Services revenue. Impairment losses other than at Sony Life in each of the three fiscal years were reflected in non-operating expenses and primarily relate to certain strategic investments in non-financial services businesses. These investments primarily relate to certain strategic investments in Japan and the U.S. with which Sony has strategic relationships for the purposes of developing and marketing new technologies. Impairment losses were recorded for each of the three fiscal years as certain companies failed to successfully develop and market such technology, resulting in the operating performance of these companies being more unfavorable than previously expected. As a result the decline in the fair value of these companies was judged as other-than-temporary. None of these impairment losses were individually material to Sony.
 
Upon determination that the value of an investment is impaired, the value of the investment is written down to its fair value. For publicly traded investments, fair value is determined by the closing stock price as of the date on which the impairment determination is made. For non-public investments, fair value is determined through the use of various methodologies such 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 fundamental policy in managing the investments of its general account assets is to maintain the soundness of its assets and build an investment portfolio capable of ensuring stable mid- to long-term returns, taking into account anticipated risks and returns and responding quickly to changes in financial market conditions and the investment environment. Moreover, Sony Life utilizes basic idea of ALM, a method of managing interest rate fluctuation risk through the comprehensive identification of differences in duration and cash flows between assets and liabilities, and considers the long-term balance between assets and liabilities in an effort to ensure stable and sustainable returns. Sony Life’s investment policy places emphasis on risk management and seeks to achieve the goals of quality, liquidity, stability and profitability. In the fiscal year ended March 31, 2008, considering the investment environment and its liabilities, Sony Life invested mainly in long-term (10 years) and super long-term (more than 10 years) Japanese government bonds. As for its investments in convertible bonds, Sony Life diversified its portfolio by responding to changes in market condition and issue status.
 
Sony Bank seeks to build a portfolio that will maintain the strength and stability of its financial base while ensuring profitability, taking into account appropriate risk management activities in light of the relevant risks associated with its investments. Sony Bank’s securities portfolio consists mainly of Japanese government bonds, Japanese corporate bonds and foreign bonds. In addition, Sony Bank invests in non-yen-denominated foreign bonds as a means of matching its exposure to foreign exchange risk with respect to a portion of the foreign currency deposits of its accountholders. Separately, Sony Bank also holds other non-yen-denominated foreign bonds as a means of diversifying its portfolio, and hedges the majority of those investments against foreign exchange risk by


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using derivative instruments. With respect to loans, Sony Bank mainly offers mortgage 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 as of March 31, 2008. The references to the Notes below refer to the corresponding note within the notes to the consolidated financial statements.
 
                                         
        Payments Due by Period
        Less than
      3 to 5
  After 5
    Total   1 year   1 to 3 year   year   year
 
    (Yen in millions)
 
Contractual Obligations and Major Commitments:*
                                       
Long-term debt (Note 11) 
                                       
Capital lease obligations (Notes 8 and 11)
    51,889       9,328       11,636       6,341       24,584  
Other long-term debt (Note 11)
    969,049       282,551       372,314       148,357       165,827  
Minimum rental payments required under operating leases (Note 8)
    189,313       42,736       57,750       29,095       59,732  
Purchase commitments for property, plant and equipment and other assets (Note 23)
    62,044       61,869       175              
Expected cost for the production or purchase of films and television programming or certain rights (Note 23)
    57,258       44,841       11,928       452       37  
Partnership program contract with Fédération Internationale de Football Association (Note 23)
    22,944       3,306       7,389       8,166       4,083  
Gross unrecognized tax benefits** (Note 20)
    282,098       666                    
 
 
 
*The total amount of expected future pension payments is not included in either the above table or the total amount of commitments outstanding at March 31, 2008 discussed below as such amount is not currently determinable. Sony expects to contribute approximately 34.0 billion yen to Japanese pension plans and approximately 5.0 billion yen to foreign pension plans during the fiscal year ending March 31, 2009 (Note 14).
 
*The total unused portion of the line of credit extended under loan agreements in the Financial Services segment is not included in either the above table or the amount of commitments outstanding at March 31, 2008 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 298.8 billion yen as of March 31, 2008 (Note 23).
 
*The five-year Revolving Credit Agreement with SONY BMG, which matures on August 5, 2009 and initially provided for a base commitment of 300 million U.S. dollars, which was decreased to 200 million U.S. dollars on August 5, 2007, and additional incremental borrowings of up to 150 million U.S. dollars, are not included either in the above table or the amount of commitments outstanding at March 31, 2008 discussed below as such amount is not currently determinable. Sony’s outstanding commitment under this Credit Agreement as of March 31, 2008 was 17.5 billion yen (Note 23).
 
A second Revolving Credit Agreement with SONY BMG, which matures on August 5, 2011 and provides for a base commitment of 138 million U.S. dollars is not included either in the above table or the amount of commitments outstanding at March 31, 2008 discussed below as such amount is not currently determinable. Sony’s outstanding commitment under this Credit Agreement as of March 31, 2008 was 13.8 billion yen (Note 23).


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**The total amounts represent the liability for gross unrecognized tax benefits in accordance with FIN No. 48. Sony estimates 666 million yen of the liability is expected to be settled within one year. The settlement period for the remaining portion of the liability, which totaled 281.4 billion yen, cannot be reasonably estimated due to the uncertainty associated with the timing of settlements with the various taxing authorities.
 
The total amount of commitments outstanding at March 31, 2008 was 261.1 billion yen (Note 23). The commitments include major purchase obligations as shown above.
 
In the ordinary course of business, Sony makes commitments for the purchase of property, plant and equipment. As of March 31, 2008, such commitments outstanding were 62.0 billion yen.
 
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, 2008, 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 57.3 billion yen.
 
Sony Corporation has entered into a partnership program contract with Fédération Internationale de Football Association (“FIFA”). Through this program Sony Corporation will be able to exercise various rights as an official sponsor of FIFA events from 2007 to 2014. As of March 31, 2008, Sony Corporation has committed to make payments under such contract of 22.9 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, and raise funds from the global capital markets and from banks when necessary.
 
The following table summarizes Sony’s contingent liabilities as of March 31, 2008.
 
         
    Total Amounts of
    Contingent Liabilities
 
Contingent Liabilities: (Note 23)
    (Yen in millions )
Loan guarantees to related parties
    9,762  
Other
    40,043  
Total contingent liabilities
    49,805  
 
Off-Balance Sheet Arrangements
 
Sony has certain off-balance sheet arrangements that provide liquidity, capital resources and/or credit risk support.
 
Sony set up several accounts receivable sales programs that provide for the accelerated receipt of up to 50.0 billion yen of eligible trade accounts receivable of Sony Corporation. Through these programs, Sony can sell receivables to qualified special purpose entities owned and operated by banks. These 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 sheets. Total receivables sold for the fiscal years ended March 31, 2006, 2007 and 2008 were 146.2 billion yen, 152.5 billion yen and 181.4 billion yen, respectively. Losses from these transactions were insignificant. Although Sony continues servicing the sold receivables, no servicing liabilities are recorded because costs regarding collection of the sold receivables are insignificant.
 
During the fiscal year ended March 31, 2008, a subsidiary of the Financial Services segment set up several receivable sales programs that provide for the accelerated receipt of up to 18.0 billion yen of eligible receivables. Through these programs, Sony can sell receivables to qualified 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, receivables sold under these transactions are excluded from receivables in the accompanying consolidated balance sheets. Total receivables sold for the fiscal year ended March


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2008 were 113.8 billion yen. Losses from these transactions were insignificant. Although Sony continues servicing the sold receivables, no servicing liabilities are recorded because costs regarding collection of the sold receivables are insignificant.
 
Sony has, from time to time, entered into various arrangements with Variable Interest Entities (“VIEs”). In several of the arrangements in which Sony holds a significant variable interest, Sony is the primary beneficiary and therefore consolidates these VIEs. These arrangements include facilities which provide for the leasing of certain property, the financing of film production and the U.S.-based music publishing business. In addition, Sony holds a significant variable interest in VIEs in which Sony is not the primary beneficiary and therefore does not consolidate. These VIEs include the film production/co-financing arrangements noted as follows.
 
On December 30, 2005, a subsidiary in the Pictures segment entered into a production/co-financing agreement with a VIE to co-finance 11 films that were released over the 15 months ended March 31, 2007. The subsidiary received 376 million U.S. dollars over the term of the agreement to fund the production or acquisition cost of films (including fees and expenses). The subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE. On April 28, 2006, the subsidiary entered into a second production/co-financing agreement with a VIE to co-finance additional films. Eight films are anticipated to be released under this financing arrangement. The subsidiary will receive approximately 190 million U.S. dollars over the term of the agreement to fund the production or acquisition cost of films (including fees and expenses). Similar to the first agreement, the subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. As of March 31, 2008, seven co-financed films have been released by the subsidiary and 110 million U.S. dollars has been received from the VIE under this agreement. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE. On January 19, 2007, the subsidiary entered into a third production/co-financing agreement with a VIE to co-finance a majority of the films to be submitted through March 2012. The subsidiary has received a commitment from the VIE that the VIE will fund up to 525 million U.S. dollars on a revolving basis to fund the production or acquisition cost of films (including fees and expenses). As of March 31, 2008, no films of the subsidiary have been funded by this VIE. Similar to the first two agreements, the subsidiary is responsible for marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE.
 
Refer to Note 22 of the notes to the consolidated financial statements for more information on VIEs.
 
Cash Flows
(The fiscal year ended March 31, 2008 compared with the fiscal year ended March 31, 2007)
 
Operating Activities: During the fiscal year ended March 31, 2008, Sony generated 757.7 billion yen of net cash from operating activities, an increase of 196.7 billion yen, or 35.1 percent compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment generated 519.1 billion yen of net cash from operating activities, an increase of 213.5 billion yen, or 69.9 percent, compared with the previous fiscal year, and the Financial Services segment generated 242.6 billion yen of net cash from operating activities, a decrease of 13.9 billion yen, or 5.4 percent, compared with the previous fiscal year.
 
During the fiscal year, a variety of factors had a positive impact on operating cash flow, including the contribution of net income from the Electronics segment, after taking into account depreciation and amortization, and an increase in insurance premium revenue reflecting a steady increase in insurance-in-force at Sony Life. Partially offsetting these contributions was an increase in inventory, primarily within the Electronics segment.
 
Compared with the previous fiscal year, net cash provided by operating activities increased during the fiscal year mainly as a result of the increase in net income after taking into account depreciation and amortization.


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Investing Activities: During the fiscal year, Sony used 910.4 billion yen of net cash in investing activities, an increase of 195.0 billion yen, or 27.3 percent, compared with the previous fiscal year. Of this total, all segments, excluding the Financial Services segment, used 14.9 billion yen of net cash in investing activities, a decrease of 416.2 billion yen, or 96.5 percent, compared with the previous fiscal year. The Financial Services segment used 873.6 billion yen in net cash, an increase of 596.9 billion yen, or 215.7 percent compared with the previous fiscal year.
 
During the fiscal year, semiconductor fabrication equipment was purchased and Sony ATV acquired Famous Music, a U.S.-based music publishing company. Partially offsetting these uses of net cash were proceeds from the sale of a portion of SFH shares, the sale of “The Sony Center am Potsdamer Platz” in Berlin and the sale of a portion of the site of Sony’s former headquarters. Within the Financial Services segment, payments for investments and advances, carried out primarily at Sony Life, and at Sony Bank where operations are expanding, exceeded proceeds from the maturities of marketable securities, sales of securities investments and collections of advances.
 
Compared with the previous fiscal year, net cash used in investing activities decreased significantly within all segments excluding the Financial Services segment, primarily due to the sale of a portion of SFH shares. On the other hand, net cash used in investing activities within the Financial Services segment increased significantly compared to the previous fiscal year primarily because the increase in payments for investments and advances, carried out primarily at Sony Life and Sony Bank, exceeded the increase in proceeds from the maturities of marketable securities, sales of securities investments and collections of advances compared with the previous fiscal year.
 
In all segments excluding the Financial Services segment, net cash provided by operating and investing activities combined was 504.2 billion yen, an increase of 629.7 billion yen as compared to net cash used of 125.5 billion yen in the previous fiscal year.
 
Financing Activities: During the fiscal year ended March 31, 2008, 505.5 billion yen of net cash was provided by financing activities. Of the total, 12.1 billion yen of net cash was used in financing activities within all segments excluding the Financial Services segment, a decrease of 71.7 billion yen compared to the 59.6 billion yen in net cash generated by financing activities in the previous fiscal year. This was primarily due to the fact that straight bonds were redeemed during the fiscal year.
 
In the Financial Services segment, as a result of an increase in policyholder accounts at Sony Life and an increase in deposits from customers in the banking business, financing activities generated 491.7 billion yen of net cash.
 
Accounting for all these factors and the effect of exchange rate changes, the total outstanding balance of cash and cash equivalents at the end of the fiscal year increased by 286.5 billion yen, or 35.8 percent, to 1,086.4 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 by 425.9 billion yen, or 81.4 percent, to 948.7 billion yen, and for the Financial Services segment, decreased by 139.3 billion yen, or 50.3 percent, to 137.7 billion yen, compared with the end of the previous fiscal year.


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Information of Cash Flows Separating Out the Financial Services Segment (Unaudited)
 
The following charts show Sony’s unaudited cash flow information for all segments excluding the Financial Services segment and for the Financial Services segment alone. These separate condensed 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 utilizes this information to analyze its results without Financial Services and believes that these presentations 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.
 
                 
    Fiscal Year Ended March 31
  Financial Services   2007   2008
    (Yen in millions)
 
Net cash provided by operating activities
    256,540       242,610  
Net cash used in investing activities
    (276,749 )     (873,646 )
Net cash provided by financing activities
    179,627       491,709  
                 
Net increase (decrease) in cash and cash equivalents
    159,418       (139,327 )
Cash and cash equivalents at beginning of the fiscal year
    117,630       277,048  
                 
Cash and cash equivalents at end of the fiscal year
    277,048       137,721  
                 
 
                 
    Fiscal Year Ended March 31
  Sony without Financial Services   2007   2008
    (Yen in millions)
 
Net cash provided by operating activities
    305,571       519,112  
Net cash used in investing activities
    (431,086 )     (14,925 )
Net cash provided by (used in) financing activities
    59,598       (12,100 )
Effect of exchange rate changes on cash and cash equivalents
    3,300       (66,228 )
                 
Net increase (decrease) in cash and cash equivalents
    (62,617 )     425,859  
Cash and cash equivalents at beginning of the fiscal year
    585,468       522,851  
                 
Cash and cash equivalents at end of the fiscal year
    522,851       948,710  
                 
 
                 
    Fiscal Year Ended March 31
  Consolidated   2007   2008
    (Yen in millions)
 
Net cash provided by operating activities
    561,028       757,684  
Net cash used in investing activities
    (715,430 )     (910,442 )
Net cash provided by financing activities
    247,903       505,518  
Effect of exchange rate changes on cash and cash equivalents
    3,300       (66,228 )
                 
Net increase in cash and cash equivalents
    96,801       286,532  
Cash and cash equivalents at beginning of the fiscal year
    703,098       799,899  
                 
Cash and cash equivalents at end of the fiscal year
    799,899       1,086,431  
                 
 
Cash Flows
(The fiscal year ended March 31, 2007 compared with the fiscal year ended March 31, 2006)
 
Operating Activities: During the fiscal year ended March 31, 2007, Sony generated 561.0 billion yen of net cash from operating activities, an increase of 161.2 billion yen, or 40.3 percent compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment generated 305.6 billion yen of net cash from operating activities, an increase of 53.6 billion yen, or 21.3 percent, compared with the previous fiscal year, and the


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Financial Services segment generated 256.5 billion yen of net cash from operating activities, an increase of 109.4 billion yen, or 74.3 percent, compared with the previous fiscal year.
 
During the fiscal year, there was a positive impact on operating cash flow from an increase in notes and accounts payable, trade, and an increase in future insurance policy benefits and other as well as the contribution of net income after taking into account depreciation and amortization. However, primarily offsetting these contributions was an increase in notes and accounts receivable, trade, and inventory, particularly within the Electronics and Game segments.
 
Compared with the previous fiscal year, net cash provided by operating activities increased mainly as a result of an increase in net income after taking into account depreciation and amortization recorded during the fiscal year as compared to the previous fiscal year, as well as the effect of the gain on the transfer to the Japanese government of the substitutional portion of the employee pension fund in the previous fiscal year, and the effect of an increase in revenue from insurance premiums, primarily reflecting an increase in insurance-in-force at Sony Life.
 
Investing Activities: During the fiscal year, Sony used 715.4 billion yen of net cash in investing activities, a decrease of 155.8 billion yen, or 17.9 percent, compared with the previous fiscal year. Of this total, all segments, excluding the Financial Services segment, used 431.1 billion yen of net cash in investing activities, an increase of 134.7 billion yen, or 45.5 percent, compared with the previous fiscal year, and the Financial Services segment used 276.7 billion yen in net cash, a decrease of 287.0 billion yen, or 50.9 percent compared with the previous fiscal year.
 
During the fiscal year, purchases of fixed assets (capital expenditures) in the Electronics segment were made primarily for semiconductor manufacturing facilities. Part of an investment in S-LCD was also made for manufacturing facilities for 8th generation TFT LCD panels.
 
Within the Financial Services segment, payments for investments and advances, such as investments mainly in Japanese fixed income securities at Sony Life and an increase in the outstanding balance of mortgage loans at Sony Bank, exceeded proceeds from the maturities of marketable securities, sales of securities investments and collections of advances.
 
Compared with the previous fiscal year, net cash used in investing activities increased within all segments excluding the Financial Services segment, reflecting the additional investment in S-LCD and the purchases of fixed assets noted above. On the other hand, net cash used in the Financial Services segment for investing activities decreased compared to the previous fiscal year due to the fact that there was an increase in the collections of investments and advances as compared to the previous fiscal year.
 
In all segments excluding the Financial Services segment, the difference between cash generated from operating activities and cash used in investing activities was a net use of cash of 125.5 billion yen, an increase of 81.1 billion yen, or 182.7 percent, as compared to a net use of cash of 44.4 billion yen in the previous fiscal year.
 
Financing Activities: During the fiscal year ended March 31, 2007, 247.9 billion yen of net cash was provided by financing activities. Of the total, 59.6 billion yen of net cash was generated from financing activities in all segments excluding the Financial Services segment, a decrease of 15.0 billion yen or 20.1 percent, compared to net cash generated in the previous fiscal year of 74.6 billion yen. This was a result, as noted above, of financing carried out through yen-denominated syndicated loans during the current fiscal year.
 
In the Financial Services segment, as a result of an increase in policyholder accounts at Sony Life and an increase in deposits from customers at the banking business, financing activities generated 179.6 billion yen of net cash.
 
Accounting for all these factors and the effect of exchange rate changes, the total outstanding balance of cash and cash equivalents at the end of the fiscal year increased by 96.8 billion yen, or 13.8 percent, to 799.9 billion yen, compared with the end of the previous fiscal year. The total outstanding balance of cash and cash equivalents of all segments, excluding the Financial Services segment, decreased by 62.6 billion yen, or 10.7 percent, to 522.9 billion yen, and for the Financial Services segment, increased by 159.4 billion, or 135.5 percent, to 277.0 billion yen, compared with the end of the previous fiscal year.


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Information of Cash Flows Separating Out the Financial Services Segment (Unaudited)
 
The following charts show Sony’s unaudited cash flow information for all segments excluding the Financial Services segment and for the Financial Services segment alone. These separate condensed 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 utilizes this information to analyze its results without Financial Services and believes that these presentations 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.
 
                 
    Fiscal Year Ended March 31
  Financial Services   2006   2007
    (Yen in millions)
 
Net cash provided by operating activities
    147,149       256,540  
Net cash used in investing activities
    (563,753 )     (276,749 )
Net cash provided by financing activities
    274,863       179,627  
                 
Net increase (decrease) in cash and cash equivalents
    (141,741 )     159,418  
Cash and cash equivalents at beginning of the fiscal year
    259,371       117,630  
                 
Cash and cash equivalents at end of the fiscal year
    117,630       277,048  
                 
 
                 
    Fiscal Year Ended March 31
  Sony without Financial Services   2006   2007
    (Yen in millions)
 
Net cash provided by operating activities
    251,975       305,571  
Net cash used in investing activities
    (296,376 )     (431,086 )
Net cash provided by (used in) financing activities
    74,600       59,598  
Effect of exchange rate changes on cash and cash equivalents
    35,537       3,300  
                 
Net increase (decrease) in cash and cash equivalents
    65,736       (62,617 )
Cash and cash equivalents at beginning of the fiscal year
    519,732       585,468  
                 
Cash and cash equivalents at end of the fiscal year
    585,468       522,851  
                 
 
                 
    Fiscal Year Ended March 31
  Consolidated   2006   2007
    (Yen in millions)
 
Net cash provided by operating activities
    399,858       561,028  
Net cash used in investing activities
    (871,264 )     (715,430 )
Net cash provided by financing activities
    359,864       247,903  
Effect of exchange rate changes on cash and cash equivalents
    35,537       3,300  
                 
Net increase (decrease) in cash and cash equivalents
    (76,005 )     96,801  
Cash and cash equivalents at beginning of the fiscal year
    779,103       703,098  
                 
Cash and cash equivalents at end of the fiscal year
    703,098       799,899  
                 
 
LIQUIDITY AND CAPITAL RESOURCES
 
(The description below covers financial basic policy and figures for Sony’s consolidated operations except for the Financial Services segment and So-net, which secure liquidity on their own. Furthermore, the Financial Services segment is described separately at the end of this section.)
 
An important financial objective of Sony is to maintain the strength of its balance sheet, while securing adequate liquidity for business activities.


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Sony intends to continue various investments for future growth. Funding requirements that arise from its business strategy are principally covered by free cash flow generated from business operations and by cash and cash equivalents (“cash balance”); however, as needed, Sony has demonstrated the ability to procure funds from the financial and capital markets. In addition, to sustain sufficient liquidity, Sony has committed lines of credit with financial institutions, together with its cash balances.
 
Liquidity Management and Market Access
 
Sony defines its liquidity sources as the amount of cash balance (excluding restrictions on capital transfers due mainly to country regulations) and the unused amount of committed lines of credit. Sony’s basic liquidity management policy is to secure sufficient liquidity throughout the relevant fiscal year, covering such factors as 50 percent of monthly consolidated sales and repayments on debt which comes due within six months.
 
Sony has a total, translated into yen, of 597.2 billion yen in committed lines of credit, of which the unused amount was 597.1 billion yen as of March 31, 2008. Major committed lines of credit include a total, translated into yen, of 428.8 billion yen of Global Commitment Facilities contracted with a syndicate of global banks effective until March 2009, and a 150 billion yen committed line of credit contracted with Japanese financial institutions, effective until July 2009 where Sony Corporation and SGTS are defined as the borrowers.
 
Sony’s working capital needs grow significantly in the third quarter (from October to December) as a result of the general seasonality of Sony’s business. In order to meet such short-term capital requirements, SGTS maintains commercial paper (“CP”) programs for the U.S., Europe and Japan CP markets. As of March 31, 2008, the total amount to be issued under these CP programs, translated into yen, was 1,201.3 billion yen. During the fiscal year ended March 31, 2008, the largest month-end outstanding balance of CP was 200.0 billion yen in September 2007. There was no outstanding balance of CP as of March 31, 2008. Sony controls the outstanding CP amount, as part of its debt risk management, so that it does not exceed the unused amount of committed lines of credit. In addition, SGTS maintains a euro medium-term note (“MTN”) program with a program limit amount that translates into 501.0 billion yen. There was no outstanding balance as of March 31, 2008.
 
In the event of a downgrade in Sony’s credit ratings, even though the cost of borrowing could increase, there are no financial covenants in any of Sony’s material financial agreements that would cause an acceleration of the obligation. Furthermore, there are no restrictions on the uses of most proceeds except that some borrowings may not be used to acquire securities listed on a U.S. exchange or traded over-the-counter in the U.S., and the 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.
 
For more detailed information about short-term borrowings and long-term debt, please refer to Note 11 of the notes to the consolidated financial statements.
 
Ratings
 
Sony considers one of management’s top priorities to be the maintenance of stable and appropriate credit ratings in order to ensure financial flexibility for liquidity and capital management and continued adequate access to sufficient funding resources in the financial and capital markets.
 
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 as of June 2, 2008 are noted below:
 
                   
      Moody’s     S&P     R&I
Long-term debt
    A2 (Outlook: Positive)     A- (Outlook: Stable)     AA- (Outlook: Stable) 
Short-term debt
    P-1     A-2     a-1+
                   


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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 on a net basis, 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 and in the event of surplus capital generation among Sony’s subsidiaries, uneven cash distribution is managed directly or indirectly through SGTS so that Sony can reduce unnecessary cash and cash equivalents and borrowings.
 
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 of obligations that they incur in the 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, cash inflows for Sony Life and Sony Assurance come mainly from policyholders’ insurance premiums and Sony Life and Sony Assurance keep sufficient liquidity in the form of investments primarily in various securities. Sony Bank, on the other hand, uses its cash inflows, which come mainly from customers’ deposits in local or foreign currencies, in order to offer mortgage loans to individuals or to make bond investments, and establish a necessary level of liquidity for the smooth settlement of transactions.
 
Sony Life currently obtains ratings from five rating agencies: A+ by S&P for insurer financial strength rating, Aa3 by Moody’s for insurance financial strength rating, A+ by AM Best Company Inc. for financial strength rating, AA by R&I for insurance claims paying ability and AA by the Japan Credit Rating Agency Ltd. for ability to pay insurance claims. Sony Bank obtained an A- rating from S&P for its long-term local/foreign currency issuer ratings and an A-2 rating from S&P for its short-term local/foreign currency issuer rating.
 
RESEARCH AND DEVELOPMENT
 
It is necessary for Sony to continue technological innovation in order to maintain group-wide growth. Sony believes that technology made possible by our research and development activities is key to the differentiation of products in existing businesses and the source of creating value in new businesses.
 
Research and development is focused in four key domains: a common development platform technology for home and mobile electronics, and semiconductor, device, and software technologies which are essential for product differentiation and for creating value-added products.
 
Research and development costs for the fiscal year ended March 31, 2008 decreased 23.4 billion yen, or 4.3 percent, to 520.6 billion yen, compared with the previous fiscal year. The ratio of research and development costs to sales (which excludes Financial Services segment revenue) decreased from 7.1 percent to 6.3 percent. The bulk of research and development costs were incurred in the Electronics and Game segments. Expenses in the Electronics segment decreased 1.6 billion yen, or 0.4 percent, to 438.7 billion yen and expenses in the Game segment decreased 20.8 billion yen, or 21.2 percent, to 77.1 billion yen. In the Electronics segment, approximately 65 percent of expenses were for the development of new product prototypes while the remaining 35 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications and displays. In the Game segment, research and development costs decreased mainly due to the decline in costs related to PS3. Consolidated research and development costs for the fiscal year ending March 31, 2009 are expected to increase by 4 percent to 540 billion yen.
 
Research and development costs for the fiscal year ended March 31, 2007 increased 12.1 billion yen, or 2.3 percent, to 543.9 billion yen, compared with the previous fiscal year. The ratio of research and development costs to sales (which excludes Financial Services segment revenue) decreased from 7.8 percent to 7.1 percent. The bulk of research and development costs were incurred in the Electronics and Game segments. Expenses in the Electronics segment increased 22.2 billion yen, or 5.3 percent, to 440.4 billion yen, whereas expenses in the Game segment decreased 10.8 billion yen, or 9.9 percent, to 97.9 billion yen. In the Electronics segment, approximately


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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 and displays. In the Game segment, research and development costs decreased mainly due to the completion of most of PS3’s research and development phase.
 
Research and development costs for the fiscal year ended March 31, 2006 increased 29.8 billion yen, or 5.9 percent, to 531.8 billion yen, compared with the previous fiscal year. The ratio of research and development costs to sales (which excludes financial service revenue) increased from 7.5 percent to 7.8 percent. The bulk of research and development costs were incurred in the Electronics and Game segments. Expenses in the Electronics segment decreased 15.2 billion yen, or 3.5 percent, to 418.1 billion yen, whereas expenses in the Game segment increased 40.2 billion yen, or 58.7 percent, to 108.7 billion yen. In the Electronics segment, approximately 64 percent of expenses were for the development of new product prototypes while the remaining 36 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications, displays and next generation optical discs. In addition, within the Game segment, there was an increase primarily of hardware-related research and development costs associated with PS3.
 
TREND INFORMATION
 
This section 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 applies to this entire document.
 
Issues Facing Sony and Management’s Response to those Issues
 
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 in semiconductors and other key digital devices. Since these semiconductors and key devices can 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 consumer audio visual products market. Also, Sony is exposed to the pressure of declines in selling prices as a result of a concentration of market share among a limited number of dealers and retailers. 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 uses that appeal to the consumer. In addition, it is taking steps to increase its competitive edge by developing high value-added semiconductors and other key digital devices in-house.
 
Sony considers improving the profitability of the television business, which recorded a loss in the fiscal year ended March 31, 2008, as the most pressing issue facing the Electronics segment. As such during the fiscal year ended March 31, 2008, Sony decided to exit the CRT television and LCD rear-projection television businesses due to the shrinking market for these products, and concentrate management resources on the LCD television business. In order to improve profitability in the LCD television business, Sony will continue cost reduction plans through the standardization of panels and chassis and the reduction in the number of components used in production. In addition, Sony is targeting unit sales growth exceeding that of the market by continuing to focus on large-size and high value-added models, while at the same time expanding the line-up of lower priced models and actively developing emerging markets.


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In anticipation of an increase in unit sales of LCD televisions, Sony recognizes the importance of a stable supply of LCD panels. S-LCD, Sony’s joint venture with Samsung, which is based in South Korea, started its 7th generation amorphous TFT LCD panel production line operation in April 2005 and has a current production capacity of 120,000 substrates of mother glass per month. S-LCD also started its 8th generation amorphous TFT LCD panel production line operation in August 2007 and has a current production capacity of 50,000 substrates per month. Furthermore, S-LCD plans to construct a new 8th generation LCD panel production line and start production during the second quarter of calendar year 2009 with an initial production capacity of 60,000 substrates per month. Also, Sony, together with Sharp Corporation (“Sharp”), signed a non-binding memorandum of intent in February 2008 to establish a joint venture to manufacture amorphous TFT LCD panels and modules on a 10th generation production line. Sony and Sharp aim to enter into legally binding joint venture documentation by September 30, 2008. Production capacity is planned to be 72,000 substrates per month. Sony plans to receive a supply of 50 percent of the LCD panels produced by S-LCD and 34 percent of the LCD panels produced by the joint venture with Sharp.
 
Sony has reviewed its investment policy in the semiconductor business. In the future, Sony will carefully select investments and adopt a strategy to more clearly focus on the CCDs and CMOS image sensors and television- and video-related businesses. As part of this strategy, in March 2008, Sony sold to Toshiba Corporation (“Toshiba”) production equipment for high-performance semiconductors such as the “Cell Broadband Enginetm” processor and the “RSX” graphics engine for PS3, installed in the Nagasaki Technology Center of Sony Semiconductor Kyushu Corporation. Nagasaki Semiconductor Manufacturing Corporation was established by Toshiba, Sony and Sony Computer Entertainment and commenced operations on April 1, 2008 to produce such high-performance semiconductors with the above-mentioned production equipment made available to the joint venture by Toshiba. In addition, on March 31, 2008, upon the expiration of their contract, Sony and Toshiba terminated Oita TS Semiconductor Corporation, a manufacturing joint venture located within Toshiba’s Oita Operations. Following the termination of the joint venture, Sony sold the related manufacturing equipment to Toshiba on April 1, 2008.
 
Game
 
In the Game segment, Sony will continue to strive to significantly improve the profitability of the PS3 business through an enhanced line-up of software, expansion of the platform and hardware cost reductions. At the same time, in order to expand the business domain of PS3, Sony will actively engage in the upgrade and expansion of networked service and content. As for PS2, which is in its ninth year since release, Sony expects a decrease in unit sales volume, including hardware and software, in comparison to the previous fiscal year. However, on the back of worldwide hardware expansion, there are plans for a diversified portfolio of software titles to be released, and, thus, Sony will strive to maintain the scale of this business. In addition, Sony will promote the further expansion of the PSP platform, for which hardware unit sales increased significantly compared to the previous fiscal year, by improving the breadth of software titles, functionality and services in the fiscal year ending March 31, 2009.
 
Pictures
 
In the Pictures segment, Sony faces intense competition, rising expenses, including advertising and promotion expenses, and a growing trend toward digital piracy. In addition, the DVD format is 11 years old and is showing signs of maturation. To meet these challenges, Sony is working to produce and acquire a diversified portfolio of motion pictures with broad worldwide appeal for distribution including those existing and new home entertainment formats, such as Blu-ray, and other emerging platforms, including digital download.
 
Financial Services
 
In the Financial Services segment, the value of assets accumulated by businesses has grown continuously over the past several years, resulting in a large portion (approximately 45 percent as of March 31, 2008) of Sony’s total assets being accounted for by the Financial Services segment. To strengthen asset management and risk management in parallel with this growing asset value, enhance disclosure of business details, and offer customers integrated financial services tailored to their individual needs, Sony established SFH in April 2004. SFH functions as a holding company overseeing Sony Life, Sony Assurance and Sony Bank, with the aim of increasing the synergies among these businesses.


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Sony is confronted by changes in the financial services industry as a result of the deregulation and liberalization of additional insurance premiums, postal privatization, the complete lifting of the ban on the sale of insurance products by banks, and the lifting of the ban on the securities intermediary services by banks and others. Sony also faces macroeconomic challenges including Japan’s declining population, low birthrate and growing proportion of elderly citizens. In response to this changing environment, each of Sony’s financial services businesses, which are latecomers to the life insurance, non-life insurance and banking industries, make use of distinctive, individual industry-specific business models and plan to achieve further business expansion and even higher levels of customer satisfaction.
 
On October 11, 2007, in conjunction with the global initial public offering of shares of SFH, the shares of SFH were listed for trading on the First Section of the Tokyo Stock Exchange. This offering aimed to achieve the efficient redistribution of management resources within Sony Group as a whole, and establish SFH’s self financing, which is necessary for the further expansion of its financial businesses and independent growth. Following this global offering, SFH remains a consolidated subsidiary with Sony Corporation as the majority shareholder, holding 60 percent of shares issued by SFH.
 
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 judgment and estimates on the part of management in its application. Sony believes that the following represent its critical accounting policies.
 
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 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.
 
In evaluating the factors for available-for-sale securities whose fair values are readily determinable, Sony 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 for a period of up to six months). This criterion is employed as a threshold to identify securities that 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 positive factors that 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 less than 20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors that 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 subjective in nature and involves certain assumptions and estimates concerning the expected operating results, business plans and


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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 worldwide interest rate fluctuations. As a result, unrealized losses recorded for investments may be recognized and reduce income in future periods.
 
Valuation of inventory
 
Sony values its inventory based on the lower of cost or market. Sony writes down inventory in an amount equal to the difference between the cost of the inventory and the net realizable value — i.e., less reasonably predictable costs of completion and disposal. However, if actual market conditions are less favorable than projected and further price decreases are needed, additional inventory write-downs may be required. Additionally, as Sony evaluates its manufacturing cost in yen while it sets its sales prices in euros and U.S. dollars for some products, Sony’s results may be negatively impacted by future exchange rate fluctuations.
 
Impairment of long-lived assets
 
Sony reviews the recoverability of the carrying value of its long-lived assets held and used and long-lived assets to be disposed of whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. This review is performed using estimates of future cash flows by product category (e.g. CRT TV display) or entity (e.g. entertainment complex in the U.S.). If the carrying value of the asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset exceeds its fair value. Fair value is determined using the present value of estimated net cash flows or comparable market values.
 
Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business assumptions could negatively affect the valuations of those long-lived assets.
 
During the fiscal year ended March 31, 2006, Sony recorded impairment charges for long-lived assets totaling 59,762 million yen, which included 25,506 million yen for the impairment of long-lived assets of CRT TV display manufacturing facilities to be held and used in the U.S. in connection with certain restructuring activities in the Electronics segment. Fair value of these assets was determined using estimated future discounted cash flows which were based on the best information available. The impairment charge also included 8,522 million yen for the impairment of long-lived assets of Sony’s entertainment complex to be held for sale in the U.S. in connection with restructuring activities of non-core businesses in All Other. The impairment charge was based on the negotiated sales price of the complex.
 
During the fiscal year ended March 31, 2007, Sony recorded impairment charges for long-lived assets totaling 16,762 million yen, which included 3,572 million yen for the impairment of long-lived assets of CRT TV display manufacturing facilities to be held and used in the U.S., East Asia and Southeast Asia in connection with certain restructuring activities in the Electronics segment. Fair value of these assets was determined using estimated future discounted cash flows which were based on the best information available.
 
During the fiscal year ended March 31, 2008, Sony recorded impairment charges for long-lived assets totaling 19,413 million yen, which included 6,457 million for impairment of long-lived assets of LCD rear-projection television manufacturing facilities to be held and used worldwide in connection with certain restructuring activities in the Electronics segment. Fair value of these assets was determined using estimated future discounted cash flows which were based on the best information available.
 
Goodwill and other intangible assets
 
Goodwill and certain other intangible assets that are determined to have an indefinite life are not amortized and are tested annually for impairment during the fourth quarter of each fiscal year, and the assets are also tested between the 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 amount. Such an event would include unfavorable variances from


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established business plans, significant changes in forecasted results or volatility inherent to external markets and industries, which are periodically reviewed by Sony’s management. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit (Sony’s operating segments or one level below the operating segments) with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized immediately 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.
 
Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business assumptions could negatively affect the valuations, which may result in Sony recognizing impairment charges for goodwill and other intangible assets in the future. In order to evaluate the sensitivity of the fair value calculations on the impairment analysis, Sony applied a hypothetical 10 percent decrease to the fair value of each reporting unit. As of March 31, 2008, a hypothetical 10 percent decrease to the fair value of each reporting unit would not have resulted in a material impact on the statement of income.
 
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 costs 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 costs.
 
Sony’s principal pension plans are its Japanese pension plans. Foreign pension plans are not significant individually, to total plan assets and pension obligations.


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To determine the benefit obligation of the Japanese pension plans, Sony used a discount rate of 2.3 percent for its Japanese pension plans as of March 31, 2008. The discount rate was determined by using currently available information about rates of return on high-quality fixed-income investments available and expected to be available during the period to maturity of the pension benefit obligation in consideration of amounts and timing of cash outflows for expected benefit payments. Such available information about rates of returns is collected from Bloomberg and credit rating agencies. The 2.3 percent discount rate remains unchanged from fiscal year ended March 31, 2007 and reflects current market interest rate conditions.
 
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 3.7 percent and 4.0 percent as of March 31, 2007 and 2008 respectively. The actual loss on pension plan assets for the fiscal year ended March 31, 2008 was 8.5 percent. 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, 2007 and 2008, Sony had net actuarial losses of 200.6 billion yen and 242.1 billion yen, respectively, including losses related to plan assets. For the fiscal year ended March 31, 2008, the net actuarial loss increased due to the difference between the actual rate of return on pension plan assets and the expected long-term rate of return on pension plan assets. The net actuarial loss reflects the overall unfavorable return on investment over the past several years and will result in an increase in pension costs as they are recognized.
 
Sony adopted FAS No. 158 in the financial statements for the year ended March 31, 2007. As a result, Sony recorded a pension liability adjustment for the prior service cost, net actuarial loss and obligation existing at transition totaling 9.5 billion yen as of March 31, 2007. This adjustment was established by a charge to stockholders’ equity, resulting in no impact to the accompanying consolidated statements of income. Refer to Note 14 of the notes to the consolidated financial statements for more information regarding Sony’s pension and severance plans.
 
The following table illustrates the effect of changes in the discount rate and the expected return on pension plan assets, while holding all other assumptions constant, for Japanese pension plans as of March 31, 2008.
 
                         
    Pre-Tax
  Pension
  Equity
Change in Assumption   PBO   Costs   (Net of Tax)
    (Yen in billions)
 
25 basis point increase / decrease in discount rate
    −/+25.4       −/+2.0       +/−1.2  
25 basis point increase / decrease in expected return on assets
          −/+1.2       +/−0.7  
 
Stock-based compensation
 
Sony accounts for stock-based compensation using the fair value based method. Fair value is measured on the date of grant using the Black-Scholes option-pricing model. Sony estimates the forfeiture rate based on its historical experience for the stock acquisition rights plans, and recognizes this compensation expense, net of an estimated forfeiture rate, only for the stock acquisition rights expected to vest over the requisite service period. The expense is primarily included in selling, general and administrative expenses.
 
The Black-Scholes option-pricing model requires various highly judgmental assumptions including expected stock price volatility and the expected life of each award. In addition, judgment is also required to estimate the expected forfeiture rate and recognize expense only for those rights expected to vest.
 
Management believes that these estimates are reasonable; however, if actual results differ significantly from these estimates, stock-based compensation expense may differ materially in the future from that recorded in the current period.


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Deferred tax asset valuation
 
Sony records valuation allowances to reduce deferred tax assets to the amount that management believes is more likely than not to be realized. In assessing the likelihood of realization, Sony considers all currently available evidence for future years, both positive and negative, supplemented by information of historical results and future earning plans along with tax planning strategies and future reversals of existing taxable temporary differences for each tax jurisdiction. Sony also considers its ability to utilize operating loss carryforwards and tax credit carryforwards prior to expiration in each tax jurisdiction. The estimates and assumptions used in determining future taxable income are consistent with those used in Sony’s approved forecasts of future operations. However, if Sony is unable to generate sufficient future taxable income in certain jurisdictions, or if there is a significant change in the actual effective tax rates or the time period within which the underlying temporary differences become taxable or deductible, Sony could be required to reduce the amount of its deferred tax assets or increase its valuation allowances against its deferred tax assets, resulting in an increase in its effective tax rate and an adverse impact on future operating results. 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.
 
Although Sony Computer Entertainment Inc. (“SCEI”), Sony Computer Entertainment America Inc. (“SCEA”) and Sony Computer Entertainment Europe Limited (“SCEE”) have recorded cumulative losses in recent years, Sony concluded that it is more-likely-than-not that SCEI’s, SCEA’s and SCEE’s deferred tax assets will be fully realized based on the consideration of both positive and negative evidence, including the Game segment’s projected income from operating activities and the existence of qualifying tax-planning strategies.
 
Film accounting
 
An aspect of film accounting that requires the exercise of judgment relates to the process of estimating the total revenues to be received throughout a film’s life cycle. Such estimate of a film’s ultimate revenue is important for two reasons. First, while a film is being produced and the related costs are being capitalized, it is necessary for management to estimate the ultimate revenue, less additional costs to be incurred, including exploitation costs which are expensed as incurred, in order to determine whether the value of a film has been impaired and thus requires an immediate write off of unrecoverable film costs. Second, the amount of film costs recognized as cost of sales for a given film as it is exhibited in various markets throughout its life cycle is based upon the proportion that current period actual revenues bear to the estimated ultimate total revenues.
 
Management bases its estimates of ultimate revenue for each film on several factors including the historical performance of similar genre films, the star power of the lead actors and actresses, the expected number of theaters at which the film will be released, anticipated performance in the home entertainment, television and other ancillary markets, and agreements for future sales. Management updates such estimates based on the actual results to date for 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.
 
Future insurance policy benefits
 
Liabilities for future insurance policy benefits are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities are computed by the net level premium method based upon estimates as to future investment yield, mortality, morbidity, withdrawals and other factors. Future policy benefits are computed using interest rates ranging from 1.00 percent to 4.90 percent. Mortality, morbidity and withdrawal assumptions for all policies are based on either the 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.
 
Equity in net income of affiliated companies
 
Sony periodically reviews the presentation of its financial information to ensure that it is consistent with the way management views the consolidated operations. Since Sony considers its equity investments to be integral to its


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operations, effective for the fiscal year ending March 31, 2009, Sony will report equity in earnings of affiliated companies as a component of operating income.
 
RECENTLY ADOPTED ACCOUNTING STANDARDS
 
Accounting by insurance enterprises for deferred acquisition costs in connection with modifications or exchanges of insurance contracts
 
In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued the Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.” SOP 05-1 provides guidance on accounting for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in FAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sales of Investments.” Sony adopted SOP 05-1 on April 1, 2007. The adoption of SOP 05-1 did not have a material impact on Sony’s results of operations and financial position.
 
Accounting for servicing of financial assets
 
In March 2006, the Financial Accounting Standards Board (“FASB”) issued FAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140.” This statement amends FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” with respect to the accounting for separately recognized servicing assets and servicing liabilities. Sony adopted FAS No. 156 on April 1, 2007. The adoption of FAS No. 156 did not have a material impact on Sony’s results of operations and financial position.
 
Accounting for uncertainty in income taxes
 
In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Effective April 1, 2007, Sony adopted the provision of FIN No. 48. As a result of the adoption, a charge against beginning retained earnings totaling 4,452 million yen was recorded. As of April 1, 2007, the total unrecognized tax benefits were 223,857 million yen, of which 129,632 million yen, if recognized, would affect Sony’s effective tax rate.
 
How taxes collected from customers and remitted to governmental authorities should be presented in the income statement
 
In June 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement.” EITF Issue No. 06-3 requires disclosure of the accounting policy for any tax assessed by a governmental authority that is imposed concurrently on a specific revenue-producing transaction between a seller and a customer. Sony adopted EITF Issue No. 06-3 on April 1, 2007. The adoption of EITF Issue No. 06-3 did not have a material impact on Sony’s results of operations.
 
RECENT PRONOUNCEMENTS
 
Fair value measurements
 
In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements.” FAS No. 157 establishes a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures about the use of fair value measurements. FAS No. 157 applies under other accounting pronouncements that require or permit fair


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value measurements and does not require any new fair value measurements. FAS No. 157 will be effective for Sony beginning April 1, 2008. In February 2008, the FASB issued FASB Staff Positions (“FSP”) FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP FAS 157-1 removes certain leasing transactions from the scope of FAS No. 157. FSP FAS 157-2 partially delays the effective date of FAS No. 157 for one year for certain nonfinancial assets and liabilities. The adoption of FAS No. 157 as it relates to financial assets and liabilities is not expected to have a material impact on Sony’s consolidated results of operations and financial position. Sony is currently evaluating the impact for nonfinancial assets and liabilities.
 
Fair value option for financial assets and financial liabilities
 
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. FAS No. 159 permits companies to choose to measure, on an instrument-by-instrument basis, financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. FAS No. 159 is required to be adopted by Sony in the first quarter beginning April 1, 2008. The adoption of FAS No. 159 is not expected to have a material impact on Sony’s consolidated results of operations and financial position. However, its effects on future periods will depend on the nature of instruments held by Sony and its elections under the provisions of FAS No. 159.
 
Business combinations
 
In December 2007, the FASB issued FAS No. 141(R), “Business Combinations,” which applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first fiscal year beginning on or after December 15, 2008. FAS No. 141(R) requires that the acquisition method of accounting be applied to a broader range of business combinations, amends the definition of a business combination, provides a definition of a business, requires an acquirer to recognize an acquired business at its fair value at the acquisition date and requires the assets and liabilities assumed in a business combination to be measured and recognized at their fair values as of the acquisition date, with limited exceptions. Sony will adopt FAS No. 141(R) as of April 1, 2009, and its effects on future periods will depend on the nature and significance of any acquisitions subject to FAS No. 141(R).
 
Noncontrolling interests in consolidated financial statements
 
In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in consolidated financial statements — an amendment of ARB No. 51.” FAS No. 160 requires that the noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interest and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between the interests of the controlling and noncontrolling owners. Pursuant to the transition provisions of FAS No. 160, Sony will adopt the statement as of April 1, 2009, via retrospective application of the presentation and disclosure requirements. Sony is currently evaluating the impact of adopting FAS No. 160.
 
Disclosures about derivative instruments and hedging activities
 
In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” FAS No. 161 amends and expands the disclosures required by FAS No. 133 to provide more information about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS No. 133 and its interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Sony is currently evaluating the additional disclosures required by FAS No. 161.


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The hierarchy of generally accepted accounting principles
 
In May 2008, the FASB issued FAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” FAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. FAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411. Sony is currently evaluating the impact of adopting FAS No. 162.
 
Financial guarantee insurance contracts
 
In May 2008, the FASB issued FAS No. 163, “Accounting for Financial Guarantee Insurance Contracts.” FAS No. 163 clarifies how FAS No. 60, “Accounting and Reporting by Insurance Enterprises”, applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts. FAS No. 163 will be effective for Sony as of April 1, 2009, except for disclosures about the insurance enterprise’s risk-management activities. Disclosures about the insurance enterprise’s risk-management activities will be effective the first period beginning after issuance of FAS No. 163. Sony is currently evaluating the impact of adopting FAS No. 163.
 
Item 6.  Directors, Senior Management and Employees
 
Directors and Senior Management
 
Set forth below are the current members of the Board of Directors and Corporate Executive Officers of Sony Corporation, their date of birth, the year in which they were first elected, their current position at Sony, prior positions, and other principal business activities outside Sony as of June 20, 2008.
 
Board of Directors
 
     
Sir Howard Stringer
   
Date of Birth: February 19, 1942
Director (Member of the Board) Since: 1999
Corporate Executive Officer Since: 2003
Current Positions within Sony:
  Chairman and Chief Executive Officer, Representative Corporate Executive Officer
Chairman and Chief Executive Officer, Sony Corporation of America
Member of the Nominating Committee
     
Prior Positions:
2003
  Vice Chairman, Chief Operating Officer in charge of Entertainment Business Group, Sony Corporation
1997
  President, Sony Corporation of America
1995
  Chairman and Chief Executive Officer, TELE-TV
1988
  President, CBS Broadcast Group, CBS Inc.
1986
  President, CBS News
Principal Business Activities Outside Sony: None
 


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Ryoji Chubachi
   
Date of Birth: September 4, 1947
Director (Member of the Board) Since: 2005
Corporate Executive Officer Since: 2004
Current Positions within Sony:
  President, Representative Corporate Executive Officer, Electronics Chief Executive Officer
Member of the Nominating Committee
     
Prior Positions:
2004
  Executive Deputy President, Sony Corporation
2003
  Executive Vice President, Executive Officer, Sony Corporation
2002
  Corporate Senior Vice President, Sony Corporation
1999
  Corporate Vice President, Sony Corporation
1977
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
 
     
Katsumi Ihara
   
Date of Birth: September 24, 1950
Director (Member of the Board) Since: 2005
Corporate Executive Officer Since: 2004
Current Positions within Sony:
  Executive Deputy President, Representative Corporate Executive Officer
Officer in charge of Consumer Products Group
     
Prior Positions:
2004
  Group Chief Strategy Officer & Group Chief Financial Officer, Sony Corporation
2001
  Group Executive Officer, Sony Corporation
    President, Sony Ericsson Mobile Communications AB
2000
  Corporate Executive Vice President, Sony Corporation
1997
  Corporate Vice President, Sony Corporation
1981
  Entered Sony Corporation
1973
  Entered Mitsui Knowledge Industry Co., Ltd.
Principal Business Activities Outside Sony: None
 
     
Yotaro Kobayashi
   
Date of Birth: April 25, 1933
Outside Director (Member of the Board) Since: 2003
Current Position within Sony: Chairman of the Board and Chair of the Nominating Committee
     
Principal Business Activities Outside Sony:
    Chief Corporate Advisor, Fuji Xerox Co., Ltd.
    Director, Nippon Telegraph and Telephone Corporation
    Director, Callaway Golf Company
Prior Positions:
1999
  Chairman of the Board, Fuji Xerox Co., Ltd.
1992
  Chairman and Chief Executive Officer, Fuji Xerox Co., Ltd.
1987
  Director, Xerox Corporation
1978
  President and Chief Executive Officer, Fuji Xerox Co., Ltd.
 

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Sakie T. Fukushima
   
Date of Birth: September 10, 1949
Outside Director (Member of the Board) Since: 2003
Current Position within Sony: Chair of the Compensation Committee
     
Principal Business Activities Outside Sony:
    Representative Director & Regional Managing Director, Korn/Ferry International-Japan
    Director, Benesse Corporation
Prior Position:
2000
  Managing Director, Korn/Ferry International-Japan
 
     
Yoshihiko Miyauchi
   
Date of Birth: September 13, 1935
Outside Director (Member of the Board) Since: 2003
Current Position within Sony: Vice Chairman of the Board and Member of the Nominating Committee
     
Principal Business Activities Outside Sony:
    Director, Representative Executive Officer, Chairman and Chief Executive Officer, ORIX Corporation
    Director, Showa Shell Sekiyu K.K.
    Director, Access Co., Ltd.
    Director, Sojitz Corporation
Prior Positions:
2000
  Representative Director, Chairman and Chief Executive Officer, ORIX Corporation
1980
  Representative Director, President, ORIX Corporation
 
     
Yoshiaki Yamauchi
   
Date of Birth: June 30, 1937
Outside Director (Member of the Board) Since: 2003
Current Position within Sony: Chair of the Audit Committee
     
Principal Business Activities Outside Sony:
    Director, Sumitomo Mitsui Financial Group, Inc.
    Director, Sumitomo Mitsui Banking Corporation
    Director, Amana Inc.
    Statutory Auditor, Stanley Electric Co., Ltd.
    Executive Officer, ARI Research Institute
Prior Positions:
1999
  Director, Sumitomo Banking Corporation
1993
  Executive Director, Asahi & Co.
1991
  President, Inoue Saito Eiwa Audit Corporation
1986
  President, Eiwa Audit Corporation
Country Managing Partner — Japan, Arthur Andersen & Co.
 
     
Sir Peter Bonfield
   
Date of Birth: June 3, 1944
Outside Director (Member of the Board) Since: 2005
Current Position within Sony: Member of the Nominating Committee

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Principal Business Activities Outside Sony:
    Director, Telefonaktiebolaget LM Ericsson, Sweden
    Director, Mentor Graphics, Inc.
    Director, Taiwan Semiconductor Manufacturing Company Ltd.
Prior Positions:
1996
  Chief Executive Officer, British Telecom plc
1986
  Chairman, ICL plc, U.K.
1984
  Managing Director, ICL plc, U.K.
 
     
Fueo Sumita
   
Date of Birth: May 24, 1938
Outside Director (Member of the Board) Since: 2005
Current Position within Sony: Member of the Audit Committee
     
Principal Business Activities Outside Sony:
    Chief of Sumita Accounting Office
Prior Positions:
2002
  Executive Vice President, Kawada Corporation
2001
  Vice Chairman, Ernst & Young ShinNihon
2000
  Deputy Director, Ohta-Showa Century Audit Corporation
1999
  Chairman, Century Audit Corporation
1985
  Deputy General Manager, Corporate Accounting Dept., Hitachi, Ltd.
 
     
Fujio Cho
   
Date of Birth: February 2, 1937
Outside Director (Member of the Board) Since: 2006
Current Position within Sony: Member of the Nominating Committee
     
Principal Business Activities Outside Sony:
    Representative Director, Chairman, Toyota Motor Corporation
    Director, Central Japan Railway Company
    Statutory Auditor, Denso Corporation
Prior Positions:
2005
  Vice Chairman, Toyota Motor Corporation
1999
  President, Toyota Motor Corporation
 
     
Ryuji Yasuda
   
Date of Birth: April 28, 1946
Outside Director (Member of the Board) Since: 2007
Current Position within Sony: Member of the Audit Committee
     
Principal Business Activities Outside Sony:
    Professor, Graduate School of International Corporate Strategy, Hitotsubashi University
    Director, Shoei Co., Ltd.
    Director, Daiwa Securities Group Inc.
    Director, Fukuoka Financial Group, Inc.
    Director, Fuji Fire and Marine Insurance Co., Ltd.
    Director, VANTEC GROUP HOLDINGS CORPORATION

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Prior Positions:
2003
  Chairman, J-Will Partners Co., Ltd.
1996
  Managing Director and Chairman, A.T. Kearney, Asia
1991
  Director, McKinsey & Company
1986
  Principal Partner, McKinsey & Company
 
     
Yukako Uchinaga:
   
Date of Birth: July 5, 1946
Outside Director (Member of the Board) Since: 2008
Current Position within Sony: Member of the Nominating Committee
     
Principal Business Activities Outside Sony:
    Vice Chairman, Benesse Corporation
    Chairman and Chief Executive Officer, Berlitz International, Inc.
    Director, PARCO Co., Ltd.
    Chairman, Japan Women’s Innovative Network
Prior Positions:
2007
  Technical Advisor, IBM Japan, Ltd.
2004
  Senior Managing Director, IBM Japan, Ltd.
 
     
Mitsuaki Yahagi
   
Date of Birth: March 3, 1948
Outside Director (Member of the Board) Since: 2008
Current Position within Sony: Member of the Compensation Committee
     
Principal Business Activities Outside Sony:
    Chairman of the Board, The Japan Research Institute, Limited
    Corporate Auditor, Toray Industries, Inc.
Prior Positions:
2005
  Deputy President , Sumitomo Mitsui Banking Corporation
2003
  Director, Sumitomo Mitsui Financial Group, Inc.
1998
  Director, The Sakura Bank, Ltd.
 
     
Tsun-Yan Hsieh
   
Date of Birth: December 29, 1952
Outside Director (Member of the Board) Since: 2008
Current Position within Sony: Member of the Compensation Committee
     
Principal Business Activities Outside Sony: Special Consultant, McKinsey & Company
Prior Positions:
2000
  Managing Director, Southeast Asia, McKinsey & Company
1997
  Managing Director, Canada, McKinsey & Company
1990
  Senior Partner, McKinsey & Company
 
     
Roland A. Hernandez
   
Date of Birth: September 29, 1957
Outside Director (Member of the Board) Since: 2008
Current Position within Sony: Member of the Nominating Committee

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Principal Business Activities Outside Sony:
    Director, The Ryland Group, Inc.
    Director, MGM Mirage, Inc.
    Director, Vail Resorts, Inc.
    Director, Lehman Brothers Holdings Inc.
Prior Positions:
1998
  Chairman & Chief Executive Officer, Telemundo Group, Inc.
1995
  President & Chief Executive Officer, Telemundo Group, Inc.
1986
  Founder & President, Interspan Communications
 
Corporate Executive Officers
 
In addition to Messrs. Stringer, Chubachi and Ihara, the four individuals set forth below are the current Corporate Executive Officers of Sony Corporation as of June 20, 2008. Refer to “Board Practices” below.
 
     
Yutaka Nakagawa
   
Date of Birth: December 4, 1945
Corporate Executive Officer Since: 2005
Current Positions within Sony:
  Executive Deputy President, Officer in charge of Semiconductor & Component Group, Production Strategy, Procurement and Supply Chain
     
Prior Positions:
1999
  Corporate Senior Vice President, Sony Corporation
1997
  Corporate Vice President, Sony Corporation
1968
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
 
     
Nobuyuki Oneda
   
Date of Birth: May 6, 1945
Corporate Executive Officer Since: 2004
Current Positions within Sony: Executive Vice President and Chief Financial Officer
     
Prior Positions:
2003
  Senior Vice President, Executive Officer, Sony Corporation
2002
  Corporate Senior Vice President, Sony Corporation
2000
  Deputy President and Chief Financial Officer, Sony Electronics Inc. (a U.S. subsidiary of Sony Corporation)
    Group Executive Officer, Sony Corporation
1969
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
 
     
Keiji Kimura
   
Date of Birth: April 4, 1952
Corporate Executive Officer Since: 2004
Current Positions within Sony:
  Executive Vice President, Officer in charge of Technology Strategies, Intellectual Property, Electronics Business Strategies and Information Systems

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Prior Positions:
2004
  Senior Executive Vice President, Sony Corporation
2003
  Senior Vice President, Executive Officer, Sony Corporation
2002
  Corporate Senior Vice President, Sony Corporation
2000
  Corporate Vice President, Sony Corporation
1977
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
 
     
Nicole Seligman
   
Date of Birth: October 25, 1956
Corporate Executive Officer Since: 2003
Current Positions within Sony:
  Executive Vice President and General Counsel
    Executive Vice President and General Counsel, Sony Corporation of America
     
Prior Positions:
2003
  Group Deputy General Counsel, Sony Corporation
2000
  Entered Sony Corporation of America as Executive Vice President and General Counsel
1992
  Partner, Williams & Connolly LLP
1985
  Entered Williams & Connolly LLP
1978
  Associate Editorial Page Editor for The Asian Wall Street Journal, Hong Kong
Principal Business Activities Outside Sony: None
 
Howard Stringer, Ryoji Chubachi, Katsumi Ihara, Yutaka Nakagawa, Nobuyuki Oneda, Keiji Kimura and Nicole Seligman are 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.