20-F 1 k01348e20vf.htm SONY CORPORATION SONY CORPORATION
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 20-F
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended March 31, 2007
 
Commission file number 1-6439
 
Sony Kabushiki Kaisha
(Exact name of Registrant as specified in its charter)
 
SONY CORPORATION
(Translation of Registrant’s name into English)
 
JAPAN
(Jurisdiction of incorporation or organization)
 
7-1, KONAN 1-CHOME, MINATO-KU,
TOKYO 108-0075, JAPAN
(Address of principal executive offices)
 
Securities registered pursuant to Section 12(b) of the Act.
 
     
Title of each class
 
Name of each exchange on which registered
American Depositary Shares*
  New York Stock Exchange
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
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
 
         
    Outstanding as of
    March 30, 2007
  March 29, 2007
Title of Class
 
(Tokyo Time)
 
(New York Time)
Common Stock
  1,002,062,405    
American Depositary Shares
      176,704,973
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes þ      No o
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o      No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes þ      No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Refer to definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
         
Large Accelerated Filer  þ
  Accelerated Filer  o   Non-Accelerated Filer  o
 
Indicate by check mark which financial statement item the registrant has elected to follow.
 
Item 17 o      Item 18 þ
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o      No þ
 
In this document, Sony Corporation and its consolidated subsidiaries are together referred to as “Sony.” In addition, sales and operating revenue is referred to as “sales” in the narrative description except in the Consolidated Financial Statements.
 
The noon buying rate for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on June 20, 2007 was 123.60 yen = 1 U.S. dollar.
 
As of March 31, 2007, Sony Corporation had 960 consolidated subsidiaries (including variable interest entities). It has applied the equity accounting method with respect to its 62 affiliated companies.
 


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Cautionary Statement
 
Statements made in this annual report with respect to Sony’s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of Sony. Forward-looking statements include, but are not limited to, those statements using words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “forecast,” “estimate,” “project,” “anticipate,” “aim,” “may” or “might” and words of similar meaning in connection with a discussion of future operations, financial performance, events or conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Sony cautions you that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not rely on any obligation of Sony to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Sony disclaims any such obligation. Risks and uncertainties that might affect Sony include, but are not limited to (i) the global economic environment in which Sony operates, as well as the economic conditions in Sony’s markets, particularly levels of consumer spending; (ii) exchange rates, particularly between the yen and the U.S. dollar, the Euro and other currencies in which Sony makes significant sales or in which Sony’s assets and liabilities are denominated; (iii) Sony’s ability to continue to design and develop and win acceptance of, 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 personnel reduction and other 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; and (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. 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.


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 EX-12.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 EX-12.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 EX-13.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 EX-15.1(a) CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 EX-15.1(b) CONSENT OF INDEPENDENT ACCOUNTANTS


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ITEM 1.   Identity of Directors, Senior Management and Advisers
 
Not Applicable
 
ITEM 2.   Offer Statistics and Expected Timetable
 
Not Applicable
 
ITEM 3.   Key Information
 
Selected Financial Data
 
                                         
    Fiscal Year Ended March 31
    2003   2004   2005   2006   2007
    (Yen in millions, Yen per share amounts)
 
Income Statement Data:
                                       
Sales and operating revenue
    7,506,008       7,530,635       7,191,325       7,510,597       8,295,695  
Operating income
    217,815       133,146       145,628       226,416       71,750  
Income before income taxes
    247,621       144,067       157,207       286,329       102,037  
Income taxes
    80,831       52,774       16,044       176,515       53,888  
Income before cumulative effect of accounting changes
    115,519       90,628       168,551       123,616       126,328  
Net income
    115,519       88,511       163,838       123,616       126,328  
Data per Share of Common Stock:
                                       
Income before cumulative effect of accounting changes
                                       
— Basic
    125.74       98.26       180.96       122.58       126.15  
— Diluted
    118.21       89.03       162.59       116.88       120.29  
Net income
                                       
— Basic
    125.74       95.97       175.90       122.58       126.15  
— Diluted
    118.21       87.00       158.07       116.88       120.29  
Cash dividends declared
                                       
Interim
    12.50       12.50       12.50       12.50       12.50  
      (10.50 cents )     (11.37 cents )     (12.12 cents )     (10.36 cents )     (10.78 cents )
Fiscal year-end
    12.50       12.50       12.50       12.50       12.50  
      (10.53 cents )     (11.26 cents )     (11.29 cents )     (11.04 cents )     (10.24 cents )
Depreciation and amortization*
    351,925       366,269       372,865       381,843       400,009  
Capital expenditures (additions to fixed assets)
    261,241       378,264       356,818       384,347       414,138  
Research and development costs
    443,128       514,483       502,008       531,795       543,937  


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

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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 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 net income per share (“EPS”) allocated to the common stock as if Sony had applied the fair value recognition provisions of FAS No. 123 to stock-based compensation as described in Note 2 to the Consolidated Financial Statements, “Significant accounting policies — Stock-based compensation.” Sony has elected the modified prospective method of transition prescribed in FAS No. 123(R), which requires that compensation expense be recorded for all unvested stock acquisition rights as the requisite service is rendered beginning with the first period of adoption. As a result of the adoption of FAS No. 123(R), Sony’s operating income decreased by 3,670 million yen for the fiscal year ended March 31, 2007.
 
5.  In February 2006, the FASB issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of FAS No. 133 and FAS No. 140. This statement permits an entity to elect fair value remeasurement for any hybrid financial instrument if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under FAS No. 133. The election to measure the hybrid instrument at fair value is made on 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.


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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.  Effective April 1, 2006, Sony reclassified royalty income as a component of sales and operating revenue, rather than as a component of other income as previously recorded. In connection with this reclassification, sales and operating revenue, operating income and other income for the fiscal years ended March 31, 2003, 2004, 2005 and 2006 have been reclassified to conform with the presentation of these items for the fiscal year ended March 31, 2007. The amounts of royalty income reclassified from other income to sales and operating revenue for the fiscal years ended March 31, 2003, 2004, 2005 and 2006 were 32,375, 34,244, 31,709, and 35,161 million yen, respectively. In addition to the above, certain reclassifications of the financial statements for the fiscal years ended March 31, 2003, 2004, 2005 and 2006 have been made to conform to the presentation for the fiscal year ended March 31, 2007.
 
Capitalization and Indebtedness
 
Not Applicable
 
Reasons for the Offer and Use of Proceeds
 
Not Applicable
 
Risk Factors
 
This section contains forward-looking statements that are subject to the Cautionary Statement appearing 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 in a variety of consumer product areas. Sony’s sales and operating income depend on Sony’s ability to continue to develop and offer Electronics and Game products at competitive prices that meet changing and increasingly diverse consumer preferences.
 
Sony is subject to competition from firms that may be more specialized or have greater resources.
 
Sony’s businesses, primarily within the Electronics segment, face a broad range of competitors, from large international companies to an increasing number of relatively small, rapidly growing, and highly specialized organizations. Sony has a portfolio of businesses in different industries while many of its competitors specialize in one or more of these business areas. As a result, Sony may not fund or invest in certain of its businesses to the same degree that its competitors do, and these competitors may have greater financial, technical, and marketing resources available to them than the businesses of Sony against which they compete. The Financial Services segment faces


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increasing competition in Japan due to ongoing deregulation that is eliminating barriers among the insurance, banking and securities industries. In addition, Sony’s financial services businesses may not be able to compete effectively, especially against established competitors with greater financial, marketing and other resources.
 
Sony may not be able to recover its increasingly diverse and increasingly expensive investments in technology development and production capacity.
 
Sony’s businesses, particularly the Electronics and Game segments, compete in intensely competitive markets characterized by changing consumer preferences and rapid technological innovation. In order to be profitable in such markets, Sony is continuing to invest heavily in research and development and semiconductor fabrication equipment. Recent examples of such expenditures include research and development investment in 65 nanometer semiconductor process technology and related capital expenditures with IBM Corporation and Toshiba Corporation for production of the Cell Broadband EngineTM (“Cell/B.E.”) within the Electronics segment for sale primarily to the Game segment, and an investment in a joint venture, S-LCD Corporation (“S-LCD”), with Samsung Electronics Co., Ltd. (“Samsung”) to produce 7th generation amorphous thin film transistor (“TFT”) liquid crystal display (“LCD”) panels. In addition, by the end of the fiscal year ending March 31, 2008, Sony and Samsung are scheduled to complete the investment in S-LCD regarding the manufacture of 8th generation TFT LCD panels at S-LCD. The total amount of the investment for the 8th generation panels is expected to be approximately 200 billion yen (approximately 50 percent of which will be contributed by Sony). Sony may not be able to recover these investments, in part or in full, or the recovery of these investments may take longer than expected. As a result, the carrying value of the related assets may be subject to an impairment charge, which could adversely affect Sony’s mid-term profitability. (Refer to “Trend Information” in “Item 5. Operating and Financial Review and Prospects.”)
 
Sony’s business reorganization efforts are costly and may not attain their objectives.
 
Sony has engaged in significant reorganization initiatives in an effort to allocate managerial resources into core areas and improve operating efficiency and profitability. These efforts have included the concentration of resources into profitable, growth businesses by withdrawing from or downsizing selected businesses. Other efforts include the execution of a plan to reduce costs including a reduction in the number of Sony’s employees around the world.
 
On September 22, 2005, Sony announced its mid-term corporate strategy for the three fiscal years ending March 31, 2006 through March 31, 2008. This mid-term corporate strategy includes restructuring initiatives focused on the reduction in the number of business categories and the number of product models, the rationalization of manufacturing sites, the streamlining of administrative and headquarter functions, as well as the sale of non-core assets.
 
In association with these restructuring initiatives, 138.7 billion yen and 38.8 billion yen of restructuring charges were recorded for the fiscal years ended March 31, 2006 and 2007, respectively. Sony anticipates the recording of approximately 35 billion yen in restructuring charges for the fiscal year ending March 31, 2008.
 
Restructuring charges are recorded in cost of sales, selling, general and administrative expenses and loss on sale, disposal or impairment of assets, net and thus decrease Sony’s consolidated operating and net income. Moreover, due to internal or external factors, the improved efficiencies and cost savings projected may not be realized as scheduled and, even if those benefits are realized, Sony may not be able to achieve the level of profitability expected due to a worsening of market conditions beyond expectations. Such possible internal factors could include, for example, a decision to implement new restructuring initiatives not already planned or a decision to increase research and development outlays or other expenditures beyond currently projected levels, either of which might increase total costs. Possible external factors could include, for example, increased burdens from regional labor regulations and labor union agreements that could prevent Sony from executing its restructuring initiatives as planned. Therefore, such reorganizations may not result in improved efficiency, increased ability to respond to market changes or reallocation of resources to more profitable activities. The inability to fully and successfully implement restructuring programs may cause Sony to have insufficient financial resources to carry out its research and development plans and to invest in targeted growth business areas.


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Foreign exchange rate fluctuations can affect financial results because a large portion of Sony’s sales and assets are denominated in currencies other than the yen.
 
Sony’s consolidated statements of income are prepared from the local currency-denominated financial results of each of Sony Corporation’s subsidiaries around the world which are translated into yen at the monthly average currency exchange rate. Sony’s consolidated balance sheets are prepared using local currency-denominated assets and liabilities of each of Sony Corporation’s subsidiaries around the world, which are translated into yen at the market 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 25.6 percent of Sony’s sales and operating revenue in the fiscal year ended March 31, 2007 were originally recorded in Japan. Accordingly, Sony’s consolidated financial results, 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. In the fiscal year ended March 31, 2007, for example, Sony’s operating income prepared on the basis of generally accepted accounting principles in the U.S. (“U.S. GAAP”) in yen decreased from the preceding fiscal year by 68.3 percent to 71.8 billion yen. However, if Sony’s operating income had been prepared on a local currency basis, it would have been an operating loss of 20.3 billion yen. Operating results on a local currency basis described herein reflect sales and operating revenue and operating income obtained by applying the yen’s monthly average exchange rate in the previous fiscal year to local currency-denominated monthly sales, cost of sales, and selling, general and administrative expenses in the current fiscal year. Foreign exchange rate fluctuations may have a negative impact on Sony’s results in the future, especially if the yen strengthens significantly against the U.S. dollar or the Euro.
 
Foreign exchange fluctuations can affect Sony’s results of operations due to sales and expenses in different currencies.
 
Exchange rate fluctuations affect Sony’s operating profitability because many of Sony’s products are sold in countries other than the ones in which they were manufactured. The concentration of research and development, administrative functions and manufacturing activities within the Electronics segment largely in Japan, makes this segment particularly sensitive to the yen’s appreciation as the ratio of yen-denominated 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 execute procurement, production, logistics, and sales activities in a manner that is profitable after the effect of such exchange rate changes.
 
Although Sony hedges the net foreign currency exposure resulting from import and export transactions shortly before they are projected to occur, such hedging activity cannot entirely eliminate the risk of adverse exchange rate fluctuations.
 
Sony must efficiently manage its procurement of parts, the market conditions for which are volatile, and control its inventory of products and parts, the demand for which is volatile.
 
In the Electronics and Game segments, Sony places orders for components, determines production and plans inventory in advance based on its forecast of consumer demand, which is highly volatile and difficult to predict. In the past Sony has experienced both a shortage of semiconductors, which resulted in Sony’s inability to meet demand for its personal computers (“PCs”) and audio visual products, and a surplus in certain semiconductors that resulted in the recognition of losses when semiconductor prices fell. Sony consumes a tremendous volume of parts and components for its products such as semiconductors and LCD panels. Consequently, market fluctuations may cause a shortage of parts and components, and may affect Sony’s production or the cost of goods sold, as could price fluctuations of the underlying raw or basic materials. Sony’s profitability may also be adversely affected by supply or inventory shortages or inventory adjustments that, as a result of efforts to reduce inventory by temporarily halting production or by reducing the price of goods, will lead to an increase in the ratio of cost of sales to sales. Sony writes down the value of its inventory when components or products have become obsolete, when inventory exceeds the amount expected to be used, or when the value of the inventory is otherwise recorded at a higher value than net realizable value. Such inventory adjustments have had and, if Sony is not successful in managing its inventory in the future, will have a material adverse effect on Sony’s operating income and profitability. (For more information on sources of supply refer to “Sources of Supply” in “Item 4. Information on the Company.”)


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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 in its Electronics, Game and Pictures segments, as well as by companies within All Other, is to a very significant extent discretionary. Accordingly, weakening economic conditions or outlook can reduce consumption in any of Sony’s major markets, causing material declines in Sony’s sales and operating income. In the fiscal year ended March 31, 2007, 25.6 percent, 26.9 percent and 24.6 percent of Sony’s sales and operating revenue were attributable to Japan, the U.S. and Europe, respectively. If economic conditions in Japan, the U.S. or Europe deteriorate, or if the effects of international political and military instability depress consumer confidence, Sony’s short- to mid-term sales and profitability may be significantly adversely affected. In addition, since Sony’s sales in Other Areas are growing, its sales and profitability may also be affected by future political, economic and military uncertainties surrounding those areas.
 
Large-scale investment is required within the Game and Electronics segments, particularly during the development and introductory period of a new gaming platform.
 
Within the Game segment, providing and developing products that maintain competitiveness over an extended life-cycle requires large-scale investment relating to research and development, particularly during the development and introductory period of a new platform. In addition, large-scale investment relating to capital expenditures and research and development is also required within the Electronics segment for the fabrication and manufacture of key components, including semiconductors supplied to the Game segment, which are used in products within the Game segment. Moreover, it is particularly important in the Game segment that these products are provided to consumers at competitive prices to ensure the favorable market penetration of the platform. Should the platform fail to achieve such favorable market penetration, there is a risk that this investment, or a part thereof, will not be recouped and the carrying value of the related assets will be subject to an impairment charge, resulting in a significant negative impact on Sony’s mid-term profitability. In addition, even if Sony is able to sufficiently recoup its investment, it is probable
that a significant negative impact on Sony’s operating results could occur during the introductory period of the platform. Further, if the platform is ultimately successful, it may take longer than expected to recoup the investment, resulting in a negative impact on Sony’s profitability.
 
An example of such a significant negative impact during the introductory period of the platform is the PLAYSTATION®3 (“PS3”)-related charges which resulted in a loss of 232.3 billion yen within the Game segment for the fiscal year ended March 31, 2007. This loss reflected a negative margin arising from the sale of the PS3 at strategic price points lower than its production cost during the introductory period. (Refer to “Game” section of “Operating Performance by Business Segment” at “Operating Results” in “Item 5. Operating and Financial Review and Prospects.”)
 
Sony’s Game and Electronics segments are particularly sensitive to year-end holiday season demand.
 
Since the Game segment offers a relatively small range of hardware products (including PlayStation®2, PSPTM (PlayStation®Portable), and the 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. For example, in the fiscal year ended March 31, 2007, the introduction of the PS3 in Europe was delayed from the scheduled date of November 2006 to March 2007 because of a delay in improvements in the mass production yield of the blue-violet laser diode, a key device for the Blu-ray disc drive equipped in the PS3, which was designed, developed and manufactured internally at Sony. Also, a supply shortage of the PS3 arose during the 2006 year-end holiday season in Japan and North America.
 
The Electronics segment is also dependent upon year-end holiday season demand and, to a lesser extent than the Game segment, is susceptible to weak sales and supply shortages that may prevent it from meeting demand for its products during this season.


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The sales and profitability of Sony’s Game segment depends on the penetration of its gaming platforms, which is sensitive to software line-ups, including software published by third parties.
 
In the Game segment, the penetration of gaming platforms is a significant factor for sales and profitability, which may be affected by the ability to provide customers with sufficient software line-ups, including software published 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, and competing products.
 
Operating results for the Pictures segment’s motion picture and television productions can materially fluctuate depending primarily upon the cost of such productions and acceptance of such productions by the public, which are difficult to predict. In addition, the commercial success of the Pictures segment’s motion picture and television productions depend upon the acceptance of other competing productions by the public, 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.
 
Sony’s Financial Services segment operates in a highly regulated environment and new regulations and regulatory initiatives could adversely affect the flexibility of its business operation.
 
Sony’s Financial Services segment operates in industries subject to comprehensive regulation and supervision, including the Japanese insurance and banking industries. Future developments or changes in laws, regulations or policies and their effects are unpredictable and could lead to increased compliance expenses or limitations on operations. For example, Japan’s Financial Services Agency recently required all life and non-life insurance companies to perform and report on systematic reviews of non-payment of insurance claims, the results of which could lead to additional rulemaking.
 
In conducting prudent asset liability management, Sony’s Financial Services segment is subject to risks from market fluctuations in the value of investments, changes in customer demand and potential variability in insurance claims.
 
If Sony’s Financial Services segment fails to conduct effective asset liability management (“ALM”) to balance possible risks and expected returns on investment assets with its financing liabilities and underwriting risks on insurance policy benefits, its ability to provide competitive products and services to customers may deteriorate and its profitability may decline. Sony Life Insurance Co., Ltd. (“Sony Life”), which constitutes the largest portion of this segment, has liabilities to policyholders with a long average duration, making ALM more challenging. This segment also may incur losses from decreases in the value of securities and other financial instruments purchased for investment purposes resulting from fluctuations in interest rates or in equity markets. In addition, Sony’s Financial Services segment faces a risk of changes in customer demand including a change from more profitable protection-orientated products, such as term insurance, to less profitable savings-oriented products, such as individual annuities, as well as a risk of unpredictable increases in insurance claims.
 
Differences between actual and assumed policy benefits and claims may require Sony’s Financial Services segment to increase policy reserves in the future.
 
Sony’s life insurance and non-life insurance businesses establish policy reserves for future benefits and claims based on regulatory guidelines and estimates of future payment obligations made by qualified actuaries. The


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


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SONY BMG is subject to renewed regulatory approval from the European Commission competition authorities.
 
In August 2004, Sony combined its recorded music business outside of Japan with the recorded music business of Bertelsmann AG, forming SONY BMG, after approval from, among others, the European Commission competition authorities. On December 3, 2004, Impala, an international association consisting of 2,500 independent recorded music companies, applied for annulment of the decision to clear the merger. On July 13, 2006, the European Court of First Instance overruled the Commission’s decision to allow the merger to go forward, requiring the Commission to re-examine the merger. The transaction was renotified on January 31, 2007, in accordance with applicable EU merger control rules, and an in-depth investigation was opened on March 1, 2007. While the Commission completes its reexamination, Sony continues to account for the results of Sony BMG under the equity method. If the Commission does not approve the merger and the previously combined company is forced to unwind the merger, Sony may incur significant costs and may not be able to achieve its objectives with respect to its recorded music business.
 
Sony may not be successful in implementing its hardware, software and content integration strategy.
 
Sony believes that 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 mid- to long-term competitiveness.
 
Sony’s utilization of joint ventures and alliances within strategic business areas may not be successful.
 
The composition of Sony during the last several years has reflected a shift towards the establishment of joint ventures and strategic alliances in order to supplement or replace functions that were previously performed by divisions of Sony Corporation or wholly-owned subsidiaries, to mitigate the burden of substantial investments and to achieve operating efficiencies through cooperation with other companies.
 
Sony currently has investments in several joint ventures, including Sony Ericsson Mobile Communications, AB (“Sony Ericsson”). In April 2004, Sony established S-LCD, a joint venture with Samsung for the production of 7th generation amorphous TFT LCD panels. In August 2004, Sony combined its recorded music business outside of Japan with the recorded music business of Bertelsmann AG, forming the jointly-owned company, SONY BMG. 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 medium-term during the investment period of those alliances, joint ventures and strategic investments even if Sony and its partners remain on course to achieve those common objectives. A recent example of how Sony’s financial performance has been adversely affected in the course of these types of relationships is the equity in net losses recorded for S-LCD during the fiscal year ended March 31, 2006 of 7.2 billion yen. Managing the growing number of joint ventures and strategic alliances, and, in particular, dealing with the legal and cultural differences that can arise in such relationships, represents a risk. In addition, by participating in joint ventures or strategic alliances, Sony may encounter conflicts of interest, may not maintain sufficient control over the 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 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 production, logistics, sales and services are located throughout the world and are subject to possible


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destruction, temporary stoppage or disruption as a result of any number of unexpected events. If any of these facilities or offices were to experience a significant loss as a result of any of the above events, it could disrupt Sony’s operations, delay production, shipments and revenue, and result in large expenses to repair or replace these facilities or offices.
 
In addition, as network and information systems have become 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. Such an event could also result in the disruption of Sony’s operations, delay production, shipments and recognition of revenue, and result in large expenditures necessary to repair or replace such network information systems. Furthermore, Sony’s operating activities could be subject to risks caused by misappropriation, misuse, leakage, falsification, and disappearance of internal information, including that of customers and vendors. Judging from the experience of other similarly situated companies, it is possible that Sony could be exposed to significant monetary liability if such risks were to materialize, and it is also possible that such events could harm Sony’s reputation and credibility. Considering the increasing social awareness concerning the importance of personal information and relevant legislation (Refer to “Government Regulations” in “Item 4. Information on the Company”), such risks are increasing particularly for businesses that handle a large amount of customer and consumer data. Although Sony continues to take precautions against such unforeseen risks, such as by undertaking efforts to educate operators and administrators who have access to databases about appropriate ways to protect such information, these measures may be insufficient, and Sony may be unable to avoid or prevent such situations.
 
Sony is subject to financial and reputational risks due to product quality and liability issues.
 
Sony products, such as software (including software for mobile phone handsets) and electronic devices including semiconductors are becoming increasingly sophisticated and complicated as rapid advancements in technologies occur, and as demand increases for digital equipment. At the same time, product quality and liability issues present greater risks. Sony’s efforts to manage the rapid advancements in technologies and increased demand, as well as to control product quality, may not be successful, and if they are not, Sony may incur expenses in connection with, for example, product recalls, service and lawsuits, and Sony’s brand image and reputation as a producer of high-quality products may suffer. These issues are not only relevant to the final Sony products that are sold directly to customers but also to the final products of other companies that are equipped with Sony’s components, such as the semiconductors mentioned above. An example of these issues is the recording of a 51.2 billion yen provision during the fiscal year ended March 31, 2007 that related to the recalls by Dell Inc., Apple Inc. and Lenovo, Inc. of notebook computer battery packs that use lithium-ion battery cells manufactured by Sony as well as the subsequent global replacement program initiated by Sony for certain notebook computer battery packs used by Sony and several other notebook computer manufacturers that use lithium-ion battery cells manufactured by Sony (refer to “Performance by Product Category” for “Electronics” within “Operating Results for the Fiscal Year Ended March 31, 2007” in “Item 5. Operating and Financial Review and Prospects”).
 
Sony may be adversely affected by its employee benefit obligations.
 
Sony 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 Notes to Consolidated Financial Statements for more information regarding Sony’s pension and severance plans. Also refer to “Critical Accounting Policies” in “Item 5. Operating and Financial Review and Prospects.
 
Most pension assets and liabilities recognized on Sony’s consolidated balance sheets relate to Japanese plans, which are subject to the Japanese Defined Benefit Corporate Pension Plan Act pursuant to which Sony is required to


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meet certain financial criteria including periodic actuarial revaluation and annual settlement of gain or loss of the plan. In the eventuality that the actuarial reserve required by law exceeds the fair value of pension assets, Sony may be required to make an additional contribution to the plan, which would reduce consolidated cash flow.
 
Changes in Sony’s tax rates or exposure to additional tax liabilities could adversely affect its earnings and financial condition.
 
Sony is subject to income taxes in Japan and numerous other jurisdictions. Significant judgment is required in determining its worldwide provision for income taxes. In the ordinary course of our business, there are many transactions, including intercompany charges, and calculations where the ultimate tax determination is uncertain. Also, Sony’s future effective tax rates could be unfavorably affected by changes in the mix of earnings in countries with differing statutory rates.
 
Further, Sony is subject to continuous examination of its income tax returns by tax authorities. As a result, Sony regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. However, there can be no assurance that the outcomes of these examinations will not have an adverse effect on Sony’s operating results and financial condition.
 
In addition, if Sony is unable to generate sufficient future taxable income in certain jurisdictions, or if there is a significant change in the actual effective tax rates or the time period within which the underlying temporary differences become taxable or deductible, Sony could be required to increase its valuation allowances against its deferred tax assets resulting in an increase in its effective tax rate and an adverse impact on future operating results.
 
Sony’s business could suffer as a result of adverse outcomes of current or future litigation and regulatory actions.
 
Sony faces the risk of litigation and regulatory proceedings in connection with its operations. Lawsuits, including regulatory actions, may seek recovery of very large, indeterminate amounts or limit Sony’s operations, and the possibility that they may arise and their magnitude may remain unknown for substantial periods of time. A substantial legal liability or adverse regulatory outcome could have a material adverse effect on Sony’s business, results of operations, financial condition, and reputation.
 
Sony may be accused of infringing others’ intellectual property rights and be liable for significant damages.
 
Sony’s products incorporate a wide variety of technologies. Claims have been and could be asserted against Sony that such technology infringes the intellectual property owned by others. Such claims might require us to enter into settlement or license agreements, to pay significant damage awards, and/or to face a temporary or permanent injunction prohibiting Sony from marketing or selling certain of its products, which could have a material adverse effect on Sony’s business, results of operations, financial condition, and reputation.
 
Sony is dependent upon certain intellectual property rights of others, and 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). In addition, it consigns to external suppliers extensive activities including procurement, manufacturing, logistics, sales and other services. Reliance on outside sources increases the chance that Sony will be unable to prevent products from incorporating defective or


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inferior third-party technology or components. Products with such defects can adversely affect Sony’s consolidated sales and its reputation for quality products. This reliance on external suppliers may also expose Sony to the effects of an external suppliers’ insufficient compliance with applicable regulations or infringement of third-party intellectual property rights.
 
Sony is subject to environmental and occupational health and safety regulations that can increase the costs of operations or limit its activities.
 
Sony is subject to 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. The European Union (the “EU”) has enacted two directives relevant to our business: the Restriction of Hazardous Substances Directive (“RoHS”) and the Waste Electrical and Electronic Equipment Directive (“WEEE”). RoHS restricts the use of certain hazardous substances in electrical and electronic equipment marketed in the EU. WEEE makes producers of electrical and electronic equipment financially responsible for the collection of certain products from end users who wish to dispose of them and for subsequent treatment, recycling and safe disposal of those products. Similar regulations are being formulated in other parts of the world, including in China. We could incur substantial costs to comply with RoHS, WEEE and other similar programs that might be enacted in the future.
 
In addition, the EU’s Registration, Evaluation, Authorisation and Restriction of Chemicals program (“REACH”) came into effect as of June 2007. In general, REACH requires manufacturers, users and importers of a broad range of chemical substances to register for these chemicals and uses of chemicals up and down the supply chain and perform a range of tests and assessments on those substances and make the results available to the public and the EU regulators. Going forward, as registrations and test data are processed and evaluated under the REACH program, actions could be taken that could affect the cost and availability of certain chemicals, and users may have to shift to the use of more expensive and/or less effective substitutes. The various obligations under REACH are to be phased in over a period of time, and we will continue to evaluate the potential impact of these regulations, including whether REACH could directly or indirectly increase our costs or restrict our activities, which could have an adverse impact on our financial performance.
 
Sony is subject to the risks of operations in different countries.
 
Most of Sony’s activities are conducted outside of Japan, including in emerging markets. International operations bring challenges. Production in China and other Asian countries of electronics products increases the time necessary to supply products to Europe and the U.S., which can make it more difficult to meet changing customer demand and preferences. Concentration of the production of PC components in China and Taiwan could lead to production interruptions if a catastrophe or widespread contagion, similar to the spread of Severe Acute Respiratory Syndrome (“SARS”), occurs in the region. Further, Sony may encounter difficulty in planning and managing operations due to unfavorable political or economic factors, such as instability in the Middle East resulting from the Iraq War, cultural and religious conflicts, foreign exchange controls, or unexpected legal or regulatory changes such as import or export controls, nationalization of assets or restrictions on the repatriation of returns from foreign investments.


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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 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, the ultimate parent company of Sony, was established in Japan in May 1946 as Tokyo Tsushin Kogyo Kabushiki Kaisha, a joint stock company (Kabushiki Kaisha) under 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.


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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 (“SCN”), which was renamed So-net Entertainment Corporation (“So-net”) in October 2006. All shares of subsidiary tracking stock were terminated and converted to shares of Sony’s common stock in December 2005. SCN was listed on the Mother’s market of the TSE in December 2005. Sony Corporation continues to hold a majority of the shares of So-net.
 
In October 2001, Sony Ericsson Mobile Communications, AB (“Sony Ericsson”), 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., and Sony Bank Inc. became subsidiaries of SFH.
 
In April 2004, S-LCD Corporation (“S-LCD”), a joint venture between Sony Corporation and Samsung Electronics Co., Ltd. of Korea for the manufacture of amorphous thin film transistor (“TFT”) liquid crystal display (“LCD”) panels, was established in Korea.
 
In August 2004, Sony combined its worldwide recorded music business, excluding its recorded music business in Japan, with the worldwide recorded music business of Bertelsmann AG forming the 50:50 joint venture, SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”).
 
In April 2005, a consortium led by Sony Corporation of America (“SCA”) and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, completed the acquisition of Metro-Goldwyn-Mayer Inc. (“MGM”).
 
Sony Corporation’s registered office is located at 7-1, 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, 2005, 2006 and 2007, Sony’s capital expenditures (additions to fixed assets on the balance sheets) were 356.8 billion yen, 384.3 billion yen and 414.1 billion yen, respectively. Sony’s capital expenditures are expected to be 440 billion yen during the fiscal year ending March 31, 2008. For a breakdown of principal capital expenditures and divestitures (including interests in other companies), refer to “Item 5. Operating and Financial Review and Prospects.” Sony invested approximately 150 billion yen in the semiconductor business during the fiscal year ended March 31, 2007. Sony plans to invest approximately 130 billion yen in the semiconductor business in the fiscal year ending March 31, 2008. Sony issued an 80 billion yen syndicated loan in June 2006, and a 130 billion yen syndicated loan in December 2006 and has raised additional funds generated internally to be used for general corporate purposes, including capital expenditures related to key devices including display devices, and debt redemption. Refer to “Property, Plant and Equipment” below for a geographic distribution of these investments.
 
Business Overview
 
Important Changes during the Fiscal Year
 
Effective April 1, 2006, Sony reclassified royalty income as a component of sales and operating revenue, rather than as a component of other income as previously recorded. As a result, this reclassification has also been made to sales and operating revenue, operating income and other income for the fiscal years ended March 31, 2005 and 2006


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to conform with the presentation of these items for the fiscal year ended March 31, 2007. Royalty income for the fiscal year ended March 31, 2007 was 35.1 billion yen. Royalty income for the fiscal years ended March 31, 2005 and 2006 was 31.7 billion yen and 35.4 billion yen, respectively. These amounts were recorded primarily within the Electronics segment.
 
Effective April 1, 2005, Sony no longer breaks out its music business as a reportable segment as it no longer meets the materiality threshold. Accordingly, the results for Sony’s music business are now included within All Other and the results for the fiscal year ended March 31, 2005 have been reclassified to All Other for comparative purposes. Results for the fiscal years ended March 31, 2006 and 2007 in All Other include the results of SMEI’s music publishing business and SMEJ, excluding Sony’s Japan-based disc manufacturing business which, effective April 1, 2005, has been reclassified to the Electronics segment. However, results for the fiscal year ended March 31, 2005 in All Other include the consolidated results for SMEI’s recorded music business for the period through August 1, 2004, as well as the results for SMEI’s music publishing business and SMEJ excluding Sony’s Japan-based disc manufacturing business.
 
On April 8, 2005, a consortium led by SCA and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, completed the acquisition of MGM for a total purchase price of approximately 5.0 billion U.S. dollars. In conjunction with the acquisition, SPE entered into agreements to co-finance and produce new motion pictures with MGM, and to distribute MGM’s existing film and television content through SPE’s global distribution channels. In June 2006, MGM and SPE modified this arrangement with respect to the co-financing of motion pictures and further to allow MGM to bring its worldwide television distribution business in-house and to consolidate substantially all of its worldwide home entertainment distribution activities with another major studio. MGM continues to operate under the Metro-Goldwyn-Mayer name as a private company headquartered in Los Angeles. As part of the acquisition, SCA invested 257 million U.S. dollars in exchange for 20 percent of the total equity capital. However, based on the percentage of common stock owned, Sony records 45 percent of MGM’s net income (loss) as equity in net income of affiliated companies. With respect to equity in net income of affiliated companies, MGM is expected to have no effect on equity in net income during the fiscal year ending March 31, 2008, due to the fact that Sony no longer has any book basis in MGM as of March 31, 2007.
 
In August 2004, Sony combined its recorded music business outside of Japan with the recorded music business of Bertelsmann AG forming SONY BMG, after approval from, among others, the European Commission competition authorities. On December 3, 2004, Impala, an international association consisting of 2,500 independent recorded music companies, applied for annulment of the decision to clear the merger. On July 13, 2006, the European Court of First Instance overruled the Commission’s decision to allow the merger to go forward, requiring the Commission to re-examine the merger. The transaction was renotified, in accordance with applicable EU merger control rules, on January 31, 2007, and an in-depth investigation was opened on March 1, 2007. While the Commission completes its reexamination, Sony continues to account for the results of Sony BMG under the equity method.
 
Commencing April 1, 2006, Sony has partly realigned its product category configuration in the Electronics segment. Accordingly, results for the previous fiscal year have been reclassified. The primary changes are as shown below:
 
             
Main Product
  Previous Product Category   New Product Category
 
Low-temperature polysilicon thin film transistor LCD
  “Semiconductors”   “Components”
Chemical component
  “Other”   “Components”


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


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Televisions:
 
“Televisions” includes LCD televisions, televisions incorporating cathode ray tubes (“CRTs”), rear-projection televisions, and computer displays.
 
Information and Communications:
 
“Information and Communications” includes PCs, printer systems, broadcast- and professional-use audio, video, and monitors and other professional-use equipment.
 
Semiconductors:
 
“Semiconductors” includes LCDs, charge coupled devices (“CCDs”), CMOS image sensors, and other semiconductors.
 
Components:
 
“Components” includes optical pickups, batteries, audio/video/data recording media, and data recording systems.
 
Other:
 
“Other” includes sales to outside customers, such as sales of mobile phone handsets to Sony Ericsson by Sony EMCS Corporation (“Sony EMCS”), CD, DVD, Blu-ray disc manufacturing and physical distribution businesses, and products and services that are not included in the above categories.
 
Game
 
Sony Computer Entertainment Inc. (“SCEI”) develops, produces, markets and distributes PlayStation®, PS onetm, PlayStation®2 (“PS2”), PSP® (PlayStation®Portable) (“PSP”) and PLAYSTATION®3 (“PS3tm”) hardware and related software. Sony Computer Entertainment America Inc. (“SCEA”) and Sony Computer Entertainment Europe Ltd. (“SCEE”) market and distribute PlayStation, PS one, 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 and services, and operation of a studio facility.
 
SPE’s motion picture arm, the Columbia TriStar Motion Picture Group, includes SPE’s principal motion picture production organizations, Columbia Pictures, TriStar Pictures, Screen Gems and Sony Pictures Classics, as well as 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. Upon delivery of Revolution Studios’ films, SPE advances a portion of the production cost and then incurs distribution and marketing costs in those markets where SPE distributes. SPE retains a fee for its distribution services in addition to its participation in Revolution Studios’ profits and losses as a result of its equity ownership stake. SPE currently expects the initial theatrical release of the final Revolution Studios’ film under this arrangement to be prior to March 31, 2008.
 
In conjunction with the acquisition of MGM in April 2005 by SCA and its equity partners, SPE entered into agreements to co-finance and produce new motion pictures with MGM and to distribute MGM’s existing film and television content through SPE’s global distribution channels. In June 2006, MGM and SPE modified this arrangement with respect to the co-financing of motion pictures and further to allow MGM to bring its worldwide


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television distribution business in-house and to consolidate substantially all of its worldwide home entertainment distribution activities with another major studio.
 
SPE’s Television Group is primarily comprised of Sony Pictures Television and Sony Pictures Television International with various broadcast channel investments. SPE develops and produces network television series, first-run syndication programming, made-for-cable programming, daytime serials, syndicated games shows, animated series, made for television movies, miniseries and other television programming and distributes such programs to the networks, syndication market and cable market.
 
Sony Pictures Digital operates SPE’s digital content creation and distribution businesses including Sony Online Entertainment, as well as operating Sony Pictures Imageworks and Sony Pictures Animation.
 
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, 2008.
 
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 Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”), 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.
 
Sony conducts insurance operations primarily through Sony Life, a Japanese life insurance company, and Sony Assurance, a Japanese non-life insurance company, both wholly-owned by SFH. Sony also operates an Internet-based banking business in Japan through Sony Bank, which is an 88 percent owned subsidiary of 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; a contactless IC card business; 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
    2005   2006   2007
            (Yen in millions)        
 
Japan
    2,132,462       (29.7 )     2,203,812       (29.3 )     2,127,841       (25.6 )
United States
    1,977,310       (27.5 )     1,957,644       (26.1 )     2,232,453       (26.9 )
Europe
    1,612,576       (22.4 )     1,715,775       (22.8 )     2,037,658       (24.6 )
Other Areas
    1,468,977       (20.4 )     1,633,366       (21.8 )     1,897,743       (22.9 )
             
             
Sales and operating revenue
    7,191,325       (100.0 )     7,510,597       (100.0 )     8,295,695       (100.0 )
             
             


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Electronics
 
Sony’s electronics products and services are marketed throughout the world under the trademark “Sony,” which has been registered in 204 countries and territories.
 
In most cases, sales of Sony’s electronics products are made to sales subsidiaries of Sony Corporation located in or responsible for sales in the countries and territories where Sony’s products and services are marketed. These subsidiaries then sell those products to local distributors and dealers. In some regions, sales of certain products and services are made directly to local distributors by Sony Corporation.
 
Sales in the Electronics segment are particularly seasonal and also vary significantly with the timing of new product introductions and economic conditions of each country. Sales for the third quarter ending December 31 of each fiscal year are generally higher than other quarters of the same fiscal year due to demand in the year-end holiday season.
 
Japan:
 
Sony Marketing (Japan) Inc. markets consumer electronics products through retailers and also markets professional electronics products and services. For electronic components, Sony sells products directly to wholesalers and manufacturers.
 
United States:
 
Sony markets its electronics products and services through Sony Electronics Inc. and other wholly owned subsidiaries in the U.S.
 
Europe:
 
In Europe, Sony’s consumer electronics products and services are marketed through several sales subsidiaries including Sony United Kingdom Limited, Sony Deutschland G.m.b.H., and Sony France S.A. Sales of electronics products for professional use, electronic components, and services are made through several divisions, differentiated by product, covering all of Europe.
 
Other Areas:
 
In overseas areas other than the U.S. and Europe, Sony’s electronics products and services are marketed through sales subsidiaries including Sony Corporation of Hong Kong Limited, Sony Gulf FZE in the United Arab Emirates, Sony Electrónicos de México, S.A. de C.V., Sony of Canada Ltd., and Sony Australia Limited.
 
Game
 
SCEI, SCEA, SCEE and subsidiaries in Asia market and distribute PlayStation, PS one, 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 67 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.


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Outside the U.S., SPE generally distributes and markets its films through one of its Sony Pictures Releasing International subsidiaries. In certain countries, however, SPE has joint distribution arrangements with other studios or arrangements with independent local distributors.
 
SPE’s theatrical release strategy focuses on offering a diverse slate of films with a mix of genres, talent and budgets. For the fiscal year ending March 31, 2008, 41 films are currently slated for release by SPE, including nine films under the Columbia banner, five films under the Screen Gems or TriStar banner, 20 Sony Pictures Classics releases, six Revolution Studios releases, and one film from Sony Pictures Animation. 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 its library (including acquired product) to a digital format and approximately 2,200 titles have been converted. In addition, SPE and four other motion picture studios are equal investors in Movielink LLC, an online download service offering feature films on an on-demand basis.
 
The worldwide home entertainment distribution of SPE’s motion pictures and television programming (and programming acquired or licensed from others) is handled through Sony Pictures Home Entertainment, except in certain countries where SPE has joint distribution arrangements with other studios or arrangements with independent local distributors. Product is distributed on DVD and Blu-ray formats.
 
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 over 30 countries. This programming, along with SPE’s library of television programming and motion pictures, is licensed to affiliated and independent stations and broadcasters in the U.S., and to affiliated and independent international television stations and other broadcasters throughout the world. In the U.S., SPE owns and operates the cable channel GSN (formerly Game Show Network) jointly with Liberty Media Corporation. SPE also has investments in more than 40 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 Lifeplanner®, its highly trained life insurance professionals, and through independent agencies. Sony Life provides tailor-made life insurance products that are optimized for each customer. As of March 31, 2007, Sony Life employed 3,776 Lifeplanner® life insurance professionals. Sony Life maintains an extensive service network including 84 Lifeplanner branch offices, 25 regional sales offices, and 2,186 independent agencies in Japan. In addition, Sony Life has aimed to apply its insurance expertise in countries other than Japan, operating Sony Life Insurance (Philippines) Corporation in the Philippines since November 1999. As part of its plan to expand its sales of individual annuity products, in January 2007 Sony Life announced its intention to establish a new Japanese joint venture with AEGON N.V. The new joint venture is expected to commence operations in 2008, subject to regulatory approval.
 
Sony Assurance has conducted a non-life insurance business in Japan since October 1999. Sony Assurance’s core business is providing automobile insurance and medical and cancer insurance to individual customers, primarily through direct marketing via the telephone and the Internet. The one-to-one relationships Sony Assurance forms with its customers help to provide Sony Assurance with a clear understanding of its customers’ opinions and needs, which it can reflect in its product and service offerings.
 
Sony Bank has conducted banking operations in Japan since June 2001. As an Internet bank focusing on the asset management needs of individual customers, Sony Bank offers an array of products and services including yen and foreign currency deposits, investment trusts, mortgage and other individual loans, and others. 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.
 
Sony Finance conducts a leasing business for corporations, and a consumer financing business including “Sony Card,” a credit card for individual customers, through Sony’s electronic retailers and other affiliated partners.


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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.
 
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, there is growing concern that the price of resin may rise, which would result 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 that for optical disc related and Digital TV products. With respect to optical disc related products, Sony products that employ DVD-Video player functions, including PS2 and PS3 hardware, are substantially dependent upon certain patents licensed by MPEG LA LLC, Dolby Laboratories Licensing Corporation and Nissim Corp. These patents relate to technologies essential to DVD specification. Sony’s Digital TV products are substantially dependent upon certain patents licensed by Thomson Licensing Inc. Sony considers its overall license position beneficial to its operations. While Sony believes that its various proprietary intellectual property rights are important to its success, it believes that neither its business as a whole nor any business segment is materially dependent on any particular patent or license, or any particular group of patents or licenses, except as set forth above.


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Competition
 
In each of its principal product lines, Sony encounters intense competition throughout the world. Sony believes, however, that in the aggregate it competes successfully and has a major position in all of the principal product lines in which it is engaged, although the strength of its position varies with products and markets. Refer to “Risk Factors” in “Item 3. Key Information.”
 
In the Electronics segment, Sony believes that its product planning and product design expertise, the high quality of its products, its record of innovative product introductions and product improvements, its price competitiveness derived from reductions in manufacturing and indirect costs, and its extensive marketing and servicing efforts are important factors in maintaining its competitive position.
 
The Game segment is in a historically volatile and highly dynamic industry, and 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, and other independent television stations both in the U.S. and internationally. Furthermore, broadcast networks are increasingly producing their own shows internally. This competitive environment has resulted in fewer opportunities to produce shows for networks and a shorter lifespan for ordered shows that do not immediately achieve favorable ratings.
 
In the Financial Services segment, Sony Life, Sony Assurance and Sony Bank have each established highly effective marketing channels. Sony Life differentiates itself through its Lifeplanner® consulting-based sales approach and the training and expertise of this sales force contributes not only to growth in new insurance policies but also to creating long-term customer relationships. Sony Assurance’s direct marketing approach makes efficient use of technology to communicate directly with customers resulting in customer-friendly and cost-effective service offerings and Sony Assurance has maintained a leading position in the direct-marketing segment of Japan’s automobile insurance market. Sony Bank has made use of the Internet to offer a steadily expanding menu of investment products and loans to individuals. Each of Sony Life, Sony Assurance, and Sony Bank proactively solicits feedback from its customers and continually strives to improve its level of service. This customer-centric service culture is reflected in high customer satisfaction rankings.
 
In the Financial Services segment, it is 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 strengthened its financial base and has maintained an adequate capital adequacy ratio relative to the Japanese domestic criteria concerning this ratio.
 
In addition, Sony Finance faces competitive pressure to achieve a leading position in the new arena of secure payment systems on the Internet by utilizing new technology.
 
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 and export control, competition and antitrust, intellectual property, consumer and business taxation, foreign exchange controls, personal information protection, product safety, occupational health, and environmental and recycling requirements.
 
In Japan, the insurance and banking businesses are subject to approvals and oversight from the Financial Services Agency 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, 2007)
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     100.0  
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 US Inc. 
  U.S.A.     100.0  
Sony Computer Entertainment America Inc. 
  U.S.A.     100.0  
Sony Pictures Entertainment Inc. 
  U.S.A.     100.0  
Sony Europe Holding B.V. 
  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, 2007 with respect to plants used for the manufacturing 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 manufactured
    (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)
    2,104,000     LCDs, CCDs, CMOS image sensors and other semiconductors
             
Kagoshima
(Sony Semiconductor Kyushu Corporation
— Kagoshima TEC)
    1,783,000     LCDs, CCDs, CMOS image sensors and other semiconductors
             
Kohda, Aichi
(Sony EMCS Corporation — Kohda TEC)
    963,000     Video cameras, digital cameras, and Memory Sticks
             
Inazawa, Aichi
(Sony EMCS Corporation — Inazawa TEC)
    864,000     LCD televisions
             
Kanuma, Tochigi
(Sony Chemicals & Information Device Corporation)
    791,000     Magnetic tapes, adhesives, and electronic components
             
Tochigi, Tochigi
(Sony Energy Devices Corporation)
    609,000     Magnetic and optical storage media and batteries
             
Koriyama, Fukushima
(Sony Energy Devices Corporation)
    581,000     Batteries
             
Kosai, Shizuoka
(Sony EMCS Corporation — Kosai TEC)
    566,000     Broadcast- and professional-use video equipment
             
Minokamo, Gifu
(Sony EMCS Corporation — Minokamo TEC)
    543,000     Video cameras, digital cameras, mobile phone handsets, and modules
             
Kisarazu, Chiba
(Sony EMCS Corporation — Kisarazu TEC)
    502,000     DVD-Video Recorders
             
Overseas:            
             
Pittsburgh, Pennsylvania, U.S.A.
(Sony Electronics Inc.)
    2,820,000     Rear-projection televisions
             
Huizhou, China
(Sony Precision Devices (Huizhou) Co., Ltd.)
    1,329,000     Optical pickups


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    Approximate
   
Location
  floor space   Principal products manufactured
    (square feet)    
 
Terre Haute, Indiana, U.S.A.
(Sony DADC US Inc.)
    1,255,000     CDs, CD-ROMs, DVDs, DVD-ROMs, and Blu-ray Discs
             
Wuxi, China
(Sony Electronics (Wuxi) Co., Ltd., Sony Digital Products (Wuxi) Co., Ltd. and Sony (China) Ltd.)
    1,202,000     Batteries, LCD televisions, PCs, and digital cameras
             
Penang, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — PG TEC)
    988,000     Audio equipment and data recording systems
             
Tijuana, Mexico
(Sony de Tijuana Este, S.A. de C.V.)
    935,000     LCD televisions, rear projection televisions, TV tuners, and audio equipment
             
Dothan, Alabama, U.S.A.
(Sony Electronics Inc.)
    809,000     Magnetic tape products
             
Bangi, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — KL TEC)
    797,000     CRT televisions, rear projection televisions, TV tuners, and DVD-Video players
             
Jurong, Singapore
(Sony Display Device (Singapore))
    786,000     CRTs
             
San Diego, California, U.S.A.
(Sony Electronics Inc.)
    658,000     PCs
             
Nuevo Laredo, Mexico
(Sony Electronics Inc.)
    587,000     Magnetic storage media and batteries
             
Pitman, New Jersey, U.S.A.
(Sony Music Entertainment Inc.)
    568,000     CDs, CD-ROMs, DVDs, and DVD-ROMs
             
Viladecavallas, Spain
(Sony Espana, S.A.)
    566,000     LCD televisions, TV components, and projectors
 
Sony plans to invest 130 billion yen during the fiscal year ending March 31, 2008, compared to 150 billion yen in the previous fiscal year in semiconductor fabrication facilities and equipment. This investment includes investment in production capacity for CMOS image sensors.
 
In addition to the facilities above, Sony has a number of other plants for electronic products throughout the world. Sony owns research and development facilities, and employee housing and recreation facilities, as well as Sony Corporation’s headquarters buildings in Tokyo, Japan, where administrative functions and product development activities are carried out. SCEI leases its corporate headquarters buildings located in Tokyo, where administrative functions, product development, and software development are carried out. SCEA and SCEE lease their offices in the U.S. and Europe, respectively.
 
SPE’s corporate offices and motion picture and television production facilities are headquartered in Culver City, California, where it owns and operates a studio facility, Sony Pictures Studios. A second studio facility, The Culver Studios, which was owned and operated by SPE was sold by SPE in April 2004. SPE is leasing back a portion

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of this facility with the lease term expiring on April 30, 2008. SPE also leases office space and motion picture and television support facilities from affiliates of Sony Corporation and other third parties 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, 2007 compared with the Fiscal Year Ended March 31, 2006
 
Overview
 
Sony’s sales and operating revenue (“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 cathode ray tube (“CRT”) televisions, sales to outside customers increased 13.4 percent compared with the previous fiscal year mainly due to an increase in sales of liquid crystal display (“LCD”) televisions. Sales within the Game segment increased 6.1 percent compared to the previous fiscal year as a result of the launch of the PLAYSTATION®3 (“PS3”) in Japan, North America and Europe. In the Pictures segment, sales increased 29.5 percent compared to the previous fiscal year due to higher worldwide theatrical and home entertainment revenue from films released in the fiscal year ended March 31, 2007 as compared to those released in the previous fiscal year. Revenues decreased 12.6 percent within the Financial Services segment primarily due to lower valuation gains in the general account and the separate account at Sony Life, compared to the previous fiscal year, when there was a significant increase in the Japanese stock market.
 
Operating income decreased 68.3 percent compared with the previous fiscal year. The operating income for the previous fiscal year included a one time net gain of 73.5 billion yen resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund, of which 64.5 billion yen was recorded within the Electronics segment. During the fiscal year ended March 31, 2007, Sony recorded a 51.2 billion yen provision that relates to the recalls by Dell Inc., Apple Inc. and Lenovo, Inc. of notebook computer battery packs that use lithium-ion battery cells manufactured by Sony and the subsequent global replacement program initiated by Sony for certain notebook computer battery packs used by Sony and several other notebook computer manufacturers that use lithium-ion battery cells manufactured by Sony. Despite the recording of this provision, operating income within the Electronics segment increased 2,167.4 percent mainly as a result of an increase in sales to outside customers and a positive impact from the depreciation of the yen versus the U.S. dollar and the Euro. In the Game segment, an operating loss was recorded in the fiscal year ended March 31, 2007 as a result of the sale of the PS3 at strategic price points lower than its production cost during the introductory period. In the Pictures segment, operating income increased 55.7 percent compared with the previous fiscal year due to strong worldwide theatrical and home entertainment revenue on feature films released in the current fiscal year. In the Financial Services segment, 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 Insurance Co., Ltd. (“Sony Life”).
 
Operating income in 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


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Other and the remaining amount was recorded in “Corporate.” Operating income related to an additional gain on sale for the remaining portion of the site under contract, which is expected to be recognized in the fiscal year ending March 31, 2008 is estimated to be approximately 59.0 billion yen, and this entire amount will be 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.
 
Electronics
 
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 plans 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 has decided to discontinue the production of LCD rear projection televisions in Europe. In association with this action, Sony has recorded inventory writedowns and charges for supplier claims of 3.8 billion yen for the fiscal year ended March 31, 2007, with most of these expenses being recorded as cost of sales in the consolidated statements of income.
 
In addition to the above restructuring efforts, Sony undertook headcount reduction programs to further reduce operating costs in the Electronics segment. As a result of these programs, Sony recorded restructuring charges of 9.7 billion yen for the fiscal year ended March 31, 2007, and these charges were included in selling, general and administrative expenses in the consolidated statements of income. The remaining liability balance as of March 31, 2007 was 7.2 billion yen and will be paid through the fiscal year ending March 31, 2008.
 
For more detailed information about restructuring, please refer to Note 17 of Notes to the Consolidated Financial Statements.


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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 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 the loss arising from the sale of the PS3 at strategic price points lower than its production cost during the introductory period, as well as the recording of other charges in association with preparation for the launch of the PS3 platform. In the Pictures segment, operating income increased due to substantially higher revenue. However, the cost of sales ratio 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 in the current fiscal year and the absence of a licensing agreement extension for Wheel of Fortune, which was recognized in the previous fiscal year.
 
The 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 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.


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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 previous fiscal year. In addition, advertising and publicity expenses for the fiscal year 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 a loss arising from the sale of the PS3 at strategic price points lower than its production cost during the introductory period, as well as the recording of other charges in association with preparation for the launch of the PS3 platform. For a further breakdown of operating income (loss) for each segment, please refer to “Operating Performance by Business Segment” below.
 
Other Income and Expenses
 
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 Holdings Inc. (“StylingLife”). However, the total gain on change in ownership interests declined as Sony recorded a gain on change in interest of 60.8 billion yen in the previous fiscal year resulting from the initial public offering of So-net Entertainment Corporation (“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 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, 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.


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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 the recording of losses 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 the recording of additional valuation allowances 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 Mobile Communications AB (“Sony Ericsson”) was 85.3 billion yen, an increase of 56.3 billion yen compared to the previous fiscal year, due to the increase in sales of hit models such as “Walkman®” and “Cyber-shot” phones. Sony recorded equity in net income of 5.0 billion yen for SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), a 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 Corporation (“S-LCD”), a joint-venture with Samsung Electronics Co., Ltd. (“Samsung”) for the manufacture of amorphous thin film transistor (“TFT”) LCD panels. Sony recorded equity in net loss of 18.9 billion yen for Metro-Goldwyn-Mayer Inc. (“MGM”), an increase in the amount of equity in net loss of 2.0 billion yen compared to the previous fiscal year. The equity in net loss for MGM includes non-cash interest expense of 9.6 billion yen on cumulative preferred stock compared to the 6.0 billion yen of non-cash interest expense on cumulative preferred stock recorded in the previous fiscal year. With respect to equity in net income of affiliated companies, MGM is expected to have no effect on equity in net income or loss during the fiscal year ending March 31, 2008, due to the fact that Sony no longer has any book basis in MGM as of March 31, 2007.
 
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 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 Notes to 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 Notes to Consolidated Financial Statements.
 
Business Segment Information
 
                         
    Fiscal Year Ended
   
    March 31    
    2006   2007   Percent change
    (Yen in billions)    
 
Sales and operating revenue
                       
Electronics
    5,176.4       6,050.5       +16.9 %
Game.
    958.6       1,016.8       +6.1  
Pictures
    745.9       966.3       +29.5  
Financial Services
    743.2       649.3       −12.6  
All Other
    426.0       377.6       −11.4  
Elimination
    (539.5 )     (764.8 )      
                         
Consolidated
    7,510.6       8,295.7       +10.5  
                         
 
                         
    Fiscal Year Ended
   
    March 31    
    2006   2007   Percent change
    (Yen in billions)    
 
Operating income (loss)
                       
Electronics
    6.9       156.7       +2,167.4 %
Game
    8.7       (232.3 )      
Pictures
    27.4       42.7       +55.7  
Financial Services
    188.3       84.1       −55.3  
All Other
    20.5       32.4       +57.9  
                         
Sub-Total
    251.9       83.7       −66.8  
Elimination and unallocated corporate expenses
    (25.5 )     (11.9 )      
                         
Consolidated
    226.4       71.8       −68.3  
                         
 
Electronics
 
Sales and operating revenue for the fiscal year ended March 31, 2007 increased 874.1 billion yen, or 16.9 percent, to 6,050.5 billion yen compared with the previous fiscal year. Operating income increased by 149.8 billion yen, or 2,167.4 percent, to 156.7 billion yen compared with the previous fiscal year and the operating income to sales ratio increased from 0.1 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 non-Japan Asia and other geographic areas (“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, personal computers (“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 digital cameras increased, while sales of mobile phones, primarily to Sony Ericsson, and CRT televisions decreased. The decrease in sales of mobile phones


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was due to the impact of the deconsolidation resulting from the transfer to Sony Ericsson in the previous fiscal year of the stock of a Chinese subsidiary that mainly assembled mobile phones.
 
Performance by Product Category
 
Sales and operating revenue by product category discussed below represent sales to outside customers, which do not include intersegment transactions. Refer to Note 24 of Notes to Consolidated Financial Statements.
 
“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. On the other hand, there was a significant decrease in sales of both CD and MiniDisc (“MD”) format headphone stereos due to a shift in market demand. However, car audio and home audio sales increased.
 
“Video” sales increased by 121.8 billion yen, or 11.9 percent, to 1,143.1 billion yen. Sales of digital cameras increased in Japan, the U.S. and Europe. Worldwide shipments of digital cameras increased by approximately 3.5 million units to approximately 17.0 million units. Sales of DVD recorders decreased as worldwide shipments decreased by approximately 150,000 units to approximately 1.85 million units. Worldwide shipments of home-use video cameras decreased by approximately 150,000 units to approximately 7.45 million units. DVD-Video player unit shipments decreased by approximately 100,000 units to approximately 7.9 million units.
 
“Televisions” sales increased by 299.2 billion yen, or 32.2 percent, to 1,227.0 billion yen. There was a significant increase in worldwide sales of LCD televisions, as worldwide shipments of LCD televisions increased by approximately 3.5 million units, to approximately 6.3 million units. Sales of LCD rear projection televisions decreased significantly as a result of declining sales prices, despite an increase in worldwide shipments of approximately 50,000 units, as compared to the previous fiscal year, to approximately 1.10 million units. There was also a significant decrease in worldwide sales of CRT televisions, primarily as a result of a decrease in worldwide shipments of CRT televisions by approximately 2.1 million units to approximately 4.7 million units.
 
“Information and Communications” sales increased by 107.9 billion yen, or 12.8 percent, to 950.5 billion yen. Sales of PCs increased due to strong sales in Europe and Other Areas, and overall sales of PCs increased. 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 charged coupled devices (“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 37.8 billion yen, or 7.9 percent, to 519.2 billion yen. This increase was the result of an increase in sales of mobile phones, primarily to Sony Ericsson.
 
In the Electronics segment, cost of sales for the fiscal year ended March 31, 2007 increased by 594.4 billion yen, or 14.2 percent to 4,769.0 billion yen compared with the previous fiscal year. The cost of sales ratio improved by 1.8 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 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 170.6 billion yen, or 18.3 percent to 1,101.7 billion yen compared with the previous fiscal year. A provision of 51.2 billion yen was recorded for the fiscal year ended


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March 31, 2007 for recalls by Dell Inc., Apple Inc. and Lenovo, Inc. of notebook computer battery packs that use lithium-ion batteries manufactured by Sony as well as the subsequent global replacement program initiated by Sony for certain notebook computer battery packs used by Sony and several other notebook computer manufacturers that use lithium-ion battery cells manufactured by Sony. Also, an additional provision was recorded due to the expansion of models subject to free repairs and an extension of the repair period for Sony products and the products of other companies that are equipped with Sony CCDs. Results for the Electronics segment were also negatively impacted by an adjustment to reflect a more accurate method of calculating the provision for free repairs of Sony CCDs, which had the effect of further increasing the provision. Although there was a reversal of a portion of provisions related to the resolution of certain patent claims recorded in prior periods, this 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, 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 digital cameras, video cameras, flat panel televisions, PCs, semiconductors and components such as batteries and Memory Sticks. Approximately 60 percent of the annual production in Japan was destined for other regions. China accounted for 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.


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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.
 
By region, although sales decreased slightly in Japan, there was a significant increase in sales in North America and Europe.
 
Overall hardware sales increased as a result of the launch of the PS3 in Japan, North America and Europe. However, the sales of the PlayStation®2 (“PS2”) and PSP®(PlayStation®Portable) (“PSP”) declined due to lower unit sales compared with the previous fiscal year, and also because of a price reduction of the 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 production shipments of hardware and software were as follows:
 
Worldwide hardware production shipments (decrease compared to the previous fiscal year):*
 
         
  à  PS2:     14.20 million units (a decrease of 2.02 million units)
  à  PSP:      8.36 million units (a decrease of 5.70 million units)
  à  PS3:      5.50 million units
 
Worldwide software production shipments (increase/decrease compared to the previous fiscal year):*/**
 
         
  à  PS2:     193 million units (a decrease of 30 million units)
  à  PSP:     54.1 million units (an increase of 12.5 million units)
  à  PS3:     13.2 million units
 
* Production shipments of hardware and software are counted upon shipment of the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers.
 
** Including those both from Sony and third parties under Sony licenses.
 
Operating performance deteriorated significantly compared with the previous fiscal year. This deterioration was primarily the result of the loss arising from the sale of the PS3 at strategic price points lower than its production cost during the introductory period, as well as the recording of other charges in association with 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 for the decrease in operating income above.
 
A significant reduction in the operating loss is expected in the fiscal year ending March 31, 2008 due to rapid reductions in hardware production costs and an enhanced line-up of software titles in the PS3 business.
 
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 Sony Pictures Entertainment Inc. (“SPE”), a U.S. based subsidiary.
 
On a U.S. dollar basis, sales for the fiscal year in the Pictures segment increased approximately 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 current fiscal year, as compared to those


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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.
 
Operating income for the segment increased significantly, primarily due to the performance of films released in the current fiscal year. 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 Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”) discussed below on a U.S. GAAP basis differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
 
Financial Services segment revenue for the fiscal year ended March 31, 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 International, Inc. (“Sony Finance”), a leasing and credit financing business subsidiary in Japan, overall revenue decreased and the operating loss increased primarily due to decreases in revenue and profit at leasing and installment businesses. However, revenue increased at the credit card business which resulted in a decrease in the operating loss recorded for that business.


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Condensed Statements of Income Separating Out the Financial Services Segment (Unaudited)
 
The following schedule shows unaudited condensed statements of income for the Financial Services segment and all other segments excluding Financial Services as well as condensed consolidated statements of income. This presentation is not required under generally accepted accounting principles in the U.S. (“U.S. GAAP”), which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements.
 
Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
 
Condensed Statements of Income
 
                 
    Fiscal Year ended March 31
  Financial Services   2006   2007
    (Yen in millions)
 
Financial service revenue
    743,215       649,341  
Financial service expenses
    554,892       565,199  
                 
Operating income
    188,323       84,142  
Other income (expenses), net
    24,522       9,886  
                 
Income before income taxes
    212,845       94,028  
Income taxes and other
    78,527       33,536  
                 
Net income
    134,318       60,492  
                 
 
                 
    Fiscal Year ended March 31
  Sony without Financial Services   2006   2007
    (Yen in millions)
 
Net sales and operating revenue
    6,799,068       7,680,578  
Costs and expenses
    6,762,194       7,694,375  
                 
Operating income
    36,874       (13,797 )
Other income (expenses), net
    36,610       27,917  
                 
Income before income taxes
    73,484       14,120  
Income taxes and other
    84,186       (57,991 )
                 
Net income (loss)
    (10,702 )     72,111  
 
                 
    Fiscal Year ended March 31
  Consolidated   2006   2007
    (Yen in millions)
 
Financial service revenue
    720,566       624,282  
Net sales and operating revenue
    6,790,031       7,671,413  
                 
      7,510,597       8,295,695  
Costs and expenses
    7,284,181       8,223,945  
                 
Operating income
    226,416       71,750  
Other income (expenses), net
    59,913       30,287  
                 
Income before income taxes
    286,329       102,037  
Income taxes and other
    162,713       (24,291 )
                 
Net income
    123,616       126,328  
                 


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All Other
 
During the fiscal year ended March 31, 2007, 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.’s (“SMEI”) music publishing business; So-net, an Internet-related service business subsidiary operating mainly in Japan; a contactless IC card business; and an advertising agency business in Japan. In June 2006, Sony Corporation sold 51 percent of the stock of StylingLife Holdings Inc. (“StylingLife”), a holding company comprised of six retail businesses within Sony previously included within All Other, to a wholly-owned subsidiary of Nikko Principal Investments Japan Ltd. Sony Corporation sold additional shares of StylingLife in December 2006, and currently holds approximately 23 percent of the total outstanding stock in StylingLife.
 
Sales for the fiscal year ended March 31, 2007 decreased by 48.4 billion yen, or 11.4 percent, to 377.6 billion yen, compared with the previous fiscal year. During the fiscal year, the sales decrease within All Other reflects the deconsolidation of the six retail businesses noted above after the sale of a majority of the stock of StylingLife. Of total segment sales, 82 percent were sales to outside customers. In terms of profit performance, operating income for All Other increased from 20.5 billion yen in the previous fiscal year to 32.4 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 the contactless IC card business and So-net, where there was a favorable increase in fiber optic connection service subscribers.
 
Regarding profit performance within All Other, operating income of 32.4 billion yen was recorded, an 11.9 billion yen increase compared to the 20.5 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 is included in operating income within All Other.
 
Foreign Exchange Fluctuations and Risk Hedging
 
During the fiscal year ended March 31, 2007, the average value of the yen was 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


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reduce the risk caused by such fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy. Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies.
 
Sony Global Treasury Services Plc (“SGTS”) in London provides integrated treasury services for Sony Corporation and its subsidiaries. Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should enter into commitments with SGTS for hedging their exposures. Sony Corporation and most of its subsidiaries utilize SGTS for this purpose. The concentration of foreign exchange exposures at SGTS means that, in effect, SGTS hedges the net foreign exchange exposure of Sony Corporation and its subsidiaries. SGTS in turn enters into foreign exchange transactions with creditworthy third-party financial institutions. Most of the transactions are entered into against projected exposures before the actual export and import transactions take place. In general, SGTS hedges the projected exposures on average three months before the actual transactions take place. However, in certain cases SGTS partially hedges the projected exposures one month before the actual transactions take place when business requirements such as shorter production-sales 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 Asset Liability Management (“ALM”).
 
To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.
 
Changes in the fair value of derivatives designated as cash flow hedges, including foreign exchange forward contracts and foreign currency option contracts, are initially recorded in accumulated other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges 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.
 
 
Overview
 
Sony’s sales and operating revenue for the fiscal year ended March 31, 2006 increased 4.4 percent compared with the previous fiscal year. This increase is mainly due to an increase in revenues within the Financial Services segment, as a result of an improvement in gains and losses on investments at Sony Life due to favorable Japanese domestic equity market conditions, and increased sales within the Game segment, due to the contribution from the PSP. In the Electronics segment, although sales benefited from the depreciation of the yen as well as an increase in sales of LCD televisions, sales to outside customers decreased 0.9 percent compared with the previous fiscal year. There was a decline in sales of CRT televisions, due to a continued shift in demand towards flat panel televisions, and in plasma televisions, where new product development has been terminated.
 
Operating income increased 55.5 percent compared with the previous fiscal year. Operating income includes a one-time net gain of 73.5 billion yen, which resulted from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund. Of this amount, a gain of 64.5 billion yen was recorded within the Electronics segment. In the Financial Services segment, operating income increased due to an improvement in gains and losses on investments at Sony Life resulting from the above-mentioned favorable Japanese domestic equity market conditions. In the Electronics segment, although restructuring charges increased compared with the previous fiscal year, the amount of operating loss decreased as a result of a net gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund mentioned above and favorable exchange rates. Operating income within the Game segment declined primarily as a result of an increase in research and development costs associated mainly with the PS3. In the Pictures segment,


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operating income also declined due to lower worldwide theatrical and home entertainment revenues on feature films.
 
Restructuring
 
In the fiscal year ended March 31, 2006, Sony recorded restructuring charges of 138.7 billion yen, an increase from the 90.0 billion yen recorded in the previous fiscal year. The primary restructuring activities were in the Electronics segment and All Other.
 
Of the total 138.7 billion yen, Sony recorded 48.3 billion yen in personnel-related costs. This expense was incurred because 5,700 people, mainly in Japan, the U.S. and Western Europe, left Sony primarily through early retirement programs.
 
For more detailed information about restructuring, please refer to Note 17 of Notes to the Consolidated Financial Statements.
 
Electronics
 
Restructuring charges in the Electronics segment for the fiscal year ended March 31, 2006 were 125.8 billion yen, compared to 83.2 billion yen in the previous fiscal year.
 
Due to the worldwide market shrinkage and demand shift from CRT televisions to plasma and LCD panel 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. In the fiscal year ended March 31, 2006, as part of this restructuring program, Sony recorded a non-cash impairment charge of 25.5 billion yen for CRT TV display manufacturing facilities located in the U.S. The impairment charge was calculated as the difference between the carrying value of the asset group and the present value of estimated future cash flows. The charge was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income.
 
In addition to the above restructuring efforts, Sony undertook several headcount reduction programs to further reduce operating costs in the Electronics segment. As a result of these programs, Sony recorded restructuring charges of 45.1 billion yen for the fiscal year ended March 31, 2006, and these charges were included in selling, general and administrative expenses in the consolidated statements of income. These staff reductions were achieved worldwide mostly through the implementation of early retirement programs. The remaining liability balance as of March 31, 2006 was 19.4 billion yen and will be paid through the fiscal year ending March 31, 2007. Sony will continue to seek the appropriate headcount level to optimize the workforce in the Electronics segment.
 
All Other
 
Restructuring charges within All Other for the fiscal year ended March 31, 2006 were 10.4 billion yen, compared to 5.3 billion yen recorded in the previous fiscal year. The main component of the restructuring charges recorded during the fiscal year ended March 31, 2006 was an 8.5 billion yen asset impairment write-down associated with the sale of the Metreon, a U.S. entertainment complex.
 
Operating Performance
 
                         
    Fiscal Year Ended
   
    March 31    
    2005   2006   Percent change
    (Yen in billions)    
 
Sales and operating revenue
    7,191.3       7,510.6       +4.4 %
Operating income
    145.6       226.4       +55.5  
Income before income taxes
    157.2       286.3       +82.1  
Equity in net income of affiliated companies
    29.0       13.2       −54.6  
Net income
    163.8       123.6       −24.5  


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Sales
 
Sales for the fiscal year ended March 31, 2006 increased by 319.3 billion yen, or 4.4 percent, to 7,510.6 billion yen compared with the previous fiscal year. A further breakdown of sales figures is presented under “Operating Performance by Business Segment” below.
 
“Sales” in this analysis of the ratio of cost of sales, including research and development costs, and selling, general and administrative expenses to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue, and excludes financial 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, 2006 increased by 151.3 billion yen, or 3.0 percent, to 5,151.4 billion yen compared with the previous fiscal year, and increased from 75.1 percent to 75.9 percent as a percentage of sales. Year on year, the cost of sales ratio decreased from 80.7 percent to 80.6 percent in the Electronics segment, increased from 73.0 percent to 80.4 percent in the Game segment, and increased from 58.7 percent to 60.2 percent in the Pictures segment.
 
In the Electronics segment, there was a deterioration in the cost of sales ratio for several products, in particular image sensors and CRT televisions. In the Game segment, there was an increase in the cost of sales ratio as a result of research and development costs associated with the PS3. In the Pictures segment, the cost of sales ratio also increased primarily due to lower worldwide theatrical and home entertainment revenues from feature films.
 
There was a decrease in personnel-related costs included in cost of sales of 9.8 billion yen, primarily within the Electronics segment, compared with the previous fiscal year.
 
Research and development costs (all research and development costs are included within cost of sales) for the fiscal year ended March 31, 2006 increased by 29.8 billion yen to 531.8 billion yen compared with the previous fiscal year. The ratio of research and development costs to sales was 7.8 percent compared to 7.5 percent in the previous fiscal year.
 
Selling, general and administrative expenses for the fiscal year ended March 31, 2006 decreased by 8.0 billion yen, or 0.5 percent, to 1,527.0 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales improved from 23.1 percent in the previous fiscal year to 22.5 percent. Year on year, the ratio of selling, general and administrative expenses to sales improved from 18.8 percent to 18.0 percent in the Electronics segment and from 21.0 percent to 18.7 percent in the Game segment. On the other hand, the ratio of selling, general and administrative expenses to sales increased from 32.5 percent to 36.0 percent in the Pictures segment.
 
Personnel-related costs in selling, general and administrative expenses decreased by 60.4 billion yen compared with the previous fiscal year mainly due to a decrease in severance-related expenses in the Electronics segment resulting from the implementation of restructuring initiatives. In addition, advertising and publicity expenses for the fiscal year increased by 59.8 billion yen compared with the previous fiscal year. This was primarily due to the fact that advertising and publicity expenses increased within the Pictures and Game segments.
 
Loss on sale, disposal or impairment of assets, net was 73.9 billion yen, compared with 28.0 billion in the previous fiscal year. This increase was due to losses recorded on the sale, disposal and impairment of CRT and CRT television production equipment in the Electronics segment, as well as an asset impairment write-down associated with the sale of the Metreon, a U.S. entertainment complex.
 
Operating Income
 
Operating income for the fiscal year ended March 31, 2006 increased by 80.8 billion yen, or 55.5 percent, to 226.4 billion yen compared with the previous fiscal year. The operating income margin increased from 2.0 percent to 3.0 percent. In descending order by the amount of financial impact, the Financial Services segment, the Pictures segment, All Other and the Game segment contributed to operating income. On the other hand, although there was a


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net gain from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund and the depreciation of the yen, the Electronics segment recorded an operating loss mainly due to a decrease in sales to outside customers, an increase in loss on sale, disposal or impairment of assets and a deterioration in the cost of sales ratio associated with a decline in unit selling prices. For a further breakdown of operating income for each segment, please refer to “Operating Performance by Business Segment” below.
 
Other Income and Expenses
 
In the consolidated results for the fiscal year ended March 31, 2006, other income increased by 52.5 billion yen, or 79.7 percent, to 118.4 billion yen, while other expenses increased by 4.2 billion yen, or 7.7 percent, to 58.5 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 59.9 billion yen, an increase of 48.3 billion yen, compared with the previous fiscal year.
 
The gain on change in interest in subsidiaries and equity investees increased by 44.5 billion yen, or 272.7 percent compared to the previous fiscal year to 60.8 billion yen. This was mainly the result of a gain of 21.5 billion yen on the change in interest in subsidiaries and equity investees resulting from the initial public offering of So-net, a gain of 20.6 billion yen on the change in interest resulting from the partial sale of Sony’s investment in Monex Beans Holdings, Inc., and gains of 12.0 billion yen and 6.6 billion yen, respectively, on the change of interest at So-net M3 Inc., a consolidated subsidiary of So-net and at DeNA Co., Ltd., an equity affiliate of So-net accounted for by the equity method.
 
Interest and dividends of 24.9 billion yen were recorded in the fiscal year ended March 31, 2006, an increase of 10.2 billion yen, or 69.5 percent, compared with the previous year. This increase was mainly the result of an increase in interest received resulting from an improvement in the rate of return on overseas investments.
 
For the fiscal year ended March 31, 2006, interest payments totaling 29.0 billion yen were recorded, an increase of 4.4 billion yen, or 18.0 percent, compared with the previous fiscal year.
 
In addition, a net foreign exchange loss of 3.1 billion yen was recorded in the fiscal year ended March 31, 2006, compared to a net foreign exchange loss of 0.5 billion yen recorded in the previous fiscal year. The net foreign exchange loss was recorded because the value of the yen, especially during the first and third quarters of the fiscal year ended March 31, 2006, was lower than the value of the yen at the time that Sony entered into foreign exchange forward contracts and foreign currency option contracts. These contracts 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, 2006 increased 129.1 billion yen, or 82.1 percent compared with the previous fiscal year, to 286.3 billion yen as a result of the increase in operating income and the increase in the net amount of other income and other expenses mentioned above.
 
Income Taxes
 
Income taxes for the fiscal year ended March 31, 2006 increased by 160.5 billion yen to 176.5 billion yen. Compared to an effective tax rate of 10.2 percent in the previous fiscal year, the effective tax rate was 61.6 percent in the current fiscal year. This effective tax rate exceeded the Japanese statutory tax rate primarily due to the recording of additional valuation allowances against deferred tax assets by Sony Corporation and several of Sony’s Japanese domestic and overseas consolidated subsidiaries, mainly within the Electronics segment, due to continued losses recorded at these businesses and the recording of an additional tax provision for the undistributed earnings of certain foreign subsidiaries. The effective tax rate was significantly lower than the Japanese statutory rate in the previous fiscal year as a result of the reversal of valuation allowances at Sony’s U.S. subsidiaries associated with an improvement in operating performance.
 
On June 30, 2006, Sony Corporation and Sony Computer Entertainment Inc. (“SCEI”) each received notification from the Tokyo Regional Taxation Bureau (“TRTB”) of a reassessment of the profits they reported


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from transactions between SCEI and its subsidiary Sony Computer Entertainment America Inc. (“SCEA”), for the fiscal years ended March 31, 2000 through 2005. On the same date, Sony Corporation also received notification of a reassessment of the profits reported from transactions related to CD and DVD disc manufacturing operations with a number of its overseas subsidiaries for the fiscal years ended March 31, 2004 and 2005.
 
Sony Corporation and SCEI believe that their allocation of income for the periods in question was appropriate and that they have paid the proper amount of taxes in each of the jurisdictions. Therefore Sony Corporation and SCEI disagree with the position of the TRTB and have lodged an objection. In addition, Sony Corporation and SCEI plan to formally request bilateral consultations (where available) to obtain relief from double taxation under the applicable tax treaties of various countries and is currently in the process of obtaining an Advanced Price Agreement.
 
Transfer pricing was reassessed in accordance with the notification from the TRTB, resulting in additional Japanese income of 74.4 billion yen, which led to Sony Corporation and SCEI incurring an estimated additional cash tax (including corporate tax and others) of approximately 27.9 billion yen. Sony Corporation and SCEI believe that double taxation will be avoided through the procedure described above, and therefore Sony does not expect any material impact on its consolidated profit and loss as a result of this reassessment.
 
Results of Affiliated Companies Accounted for under the Equity Method
 
Equity in net income of affiliated companies during the fiscal year ended March 31, 2006 was 13.2 billion yen, a decrease of 15.9 billion yen, or 54.6 percent compared to the previous fiscal year. Equity in net income of affiliated companies for the previous fiscal year included the recording of 12.6 billion yen as equity in net income for InterTrust Technologies Corporation (“InterTrust”), which reflected InterTrust’s proceeds from a license agreement arising from the settlement of a patent-related suit. In the current fiscal year, Sony Ericsson, as a result of increased sales of products including camera phone and “Walkman ®” phone models, contributed 29.0 billion yen to equity in net income, an increase of 11.6 billion yen compared to the previous fiscal year. Sony recorded equity income of 5.8 billion yen for SONY BMG during the current fiscal year, compared to an equity loss of 3.4 billion yen in the previous fiscal year as a result of a reduction in restructuring charges and the realization of incremental cost savings. However, Sony recorded an equity in net loss of 7.2 billion yen for S-LCD, a joint-venture with Samsung for the manufacture of amorphous TFT LCD panels and equity in net loss of 16.9 billion yen for MGM. The equity in net loss for MGM includes non-cash interest of 6.0 billion yen on cumulative preferred stock.
 
Minority Interest in Income (Loss) of Consolidated Subsidiaries
 
In the fiscal year ended March 31, 2006, minority interest in loss of consolidated subsidiaries of 0.6 billion yen was recorded compared to minority interest in income of 1.7 billion yen for the previous fiscal year. This loss was primarily due to the recording of loss at ST Mobile Display Corporation, a joint venture with Toyota Industries Corporation for the manufacture of low-temperature polysilicon thin film transistor liquid crystal display panels for mobile products.
 
Net Income
 
Net income for the fiscal year ended March 31, 2006 decreased by 40.2 billion yen, or 24.5 percent, to 123.6 billion yen compared with the previous fiscal year. This decrease was primarily the result of the above-mentioned increase in income taxes and decrease in equity in net income of affiliated companies. As a percentage of sales, net income decreased from 2.3 percent to 1.6 percent. Return on stockholders’ equity decreased from 6.2 percent to 4.1 percent. (This ratio is calculated by dividing net income by the simple average of stockholders’ equity at the end of the previous fiscal year and at the end of the fiscal year ended March 31, 2006.)
 
Basic net income per share was 122.58 yen compared with 175.90 yen in the previous fiscal year, and diluted net income per share was 116.88 yen compared with 158.07 yen in the previous fiscal year. Refer to Notes 2 and 21 of Notes to 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 Notes to Consolidated Financial Statements.
 
Business Segment Information
 
                         
    Fiscal Year Ended
   
    March 31    
    2005   2006   Percent change
    (Yen in billions)    
 
Sales and operating revenue
                       
Electronics
    5,094.5       5,176.4       +1.6 %
Game
    729.8       958.6       +31.4  
Pictures
    733.7       745.9       +1.7  
Financial Services
    560.6       743.2       +32.6  
All Other
    470.9       426.0       −9.5  
Elimination
    (398.1 )     (539.5 )      
                         
Consolidated
    7,191.3       7,510.6       +4.4  
                         
 
                         
    Fiscal Year Ended
   
    March 31    
    2005   2006   Percent change
    (Yen in billions)    
 
Operating income (loss)
                       
Electronics
    2.9       6.9       +140.0 %
Game
    43.2       8.7       −79.7  
Pictures
    63.9       27.4       −57.1  
Financial Services
    55.5       188.3       +239.4  
All Other
    5.1       20.5       +305.4  
                         
Sub-Total
    170.5       251.9       +47.8  
Elimination and unallocated corporate expenses
    (24.9 )     (25.5 )      
                         
Consolidated
    145.6       226.4       +55.5  
                         
 
As of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses in a joint venture. The newly formed company, SONY BMG, is 50 percent owned by each parent company. Under U.S. GAAP, SONY BMG is accounted for by Sony using the equity method and, since August 1, 2004, 50 percent of net profits or losses of this business have been included under “Equity in net income (loss) of affiliated companies.”
 
In connection with the establishment of this joint venture, Sony’s non-Japan-based disc manufacturing and physical distribution businesses, formerly included within the Music segment, a separate reporting segment until the end of the previous fiscal year, have been reclassified to the Electronics segment to recognize the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. Effective April 1, 2005, a similar change was made with respect to Sony’s Japan-based disc manufacturing business. Results for the fiscal year ended March 31, 2005 in the Electronics segment have been restated to account for these reclassifications.
 
Effective April 1, 2005, Sony no longer breaks out its music business as a reportable segment as it no longer meets the materiality threshold. Accordingly, the results for Sony’s music business are now included within All Other, and the results for the fiscal year ended March 31, 2005 have been reclassified to All Other for comparative purposes. Results for the fiscal year ended March 31, 2006 in All Other include the results of SMEI music publishing business and SMEJ, excluding Sony’s Japan-based disc manufacturing business which, as noted above,


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has been reclassified to the Electronics segment. However, results for the previous fiscal year in All Other include the consolidated results for SMEI’s recorded music business for the period through August 1, 2004, as well as the results for SMEI’s music publishing business and SMEJ excluding Sony’s Japan-based disc manufacturing business.
 
Electronics
 
Sales and operating revenue for the fiscal year ended March 31, 2006 increased 81.8 billion yen, or 1.6 percent, to 5,176.4 billion yen compared with the previous fiscal year. Operating profit of 6.9 billion in the Electronics segment was recorded compared to operating profit of 2.9 billion yen in the previous fiscal year. Despite the increase in sales, sales to outside customers, on a yen basis, decreased 1.0 percent compared to the previous fiscal year. With respect to sales to outside customers by geographical area, sales decreased by 12 percent in Japan, by 3 percent in the U.S., by 4 percent in Europe and increased by 12 percent in Other Areas.
 
In Japan, although there was a significant increase in the sales of LCD televisions, as well as increased sales for flash memory and hard drive digital audio players, sales decreased for such products as mobile phones, principally to Sony Ericsson, CRT televisions and plasma televisions. In the U.S., although there was an increase in sales of LCD and rear projection televisions, sales decreased for such products as CRT and plasma televisions. In Europe, although sales increased for such products as LCD televisions, there was a decline in sales of such products as CRT and plasma televisions, and mobile phones, primarily to Sony Ericsson. In Other Areas, sales of such products as LCD televisions and PCs increased, while sales of such products as CD-R/RW drives and 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 Notes to Consolidated Financial Statements.
 
“Audio” sales decreased by 35.7 billion yen, or 6.2 percent, to 536.2 billion yen. Sales of flash memory and hard drive digital audio players increased significantly, in conjunction with an increase in shipments to approximately 4.5 million units, compared to approximately 850,000 unit shipments recorded in the previous fiscal year. On the other hand, there was a significant decrease in the unit shipments of both CD and MD format headphone stereos due to a shift in market demand. In addition, car audio experienced a decrease in sales, and there was a slight decrease in home audio sales.
 
“Video” sales decreased by 15.0 billion yen, or 1.4 percent, to 1,021.3 billion yen. In addition to a decrease in sales of digital cameras in Japan, the U.S. and Europe, there was a decrease in sales of VHS video recorders. Sales of digital cameras decreased, coupled with a decrease in worldwide shipments by approximately 0.5 million units to approximately 13.5 million units. Worldwide shipments of DVD recorders increased by approximately 300,000 units to approximately 2.0 million units, while sales increased slightly. Worldwide shipments of home-use video cameras increased by approximately 250,000 units to approximately 7.6 million units. DVD-Video player unit shipments decreased by approximately 1.5 million units to approximately 8.0 million units.
 
“Televisions” sales increased by 6.6 billion yen, or 0.7 percent, to 927.8 billion yen. There was a significant increase in worldwide sales of LCD televisions, as worldwide shipments of LCD televisions increased by approximately 1.8 million units, to approximately 2.8 million units. Sales of rear projection televisions increased as the sales percentage of higher priced units increased, although worldwide shipments remained largely unchanged at approximately 1.2 million units. On the other hand, there was a significant decrease in worldwide sales of CRT televisions, primarily as a result of both a decrease in worldwide shipments of CRT televisions, by approximately 2.7 million units to approximately 6.8 million units and a fall in unit prices due to the continued shift in demand towards flat panel televisions. In addition, sales of plasma televisions, where new product development has been terminated, also decreased worldwide.
 
“Information and Communications” sales increased by 26.4 billion yen, or 3.2 percent, to 842.5 billion yen. Although sales of desktop PCs decreased, overall sales increased as a result of favorable worldwide sales of notebook PCs. Worldwide unit shipments of PCs increased approximately 400,000 units to approximately


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3.7 million units. Sales of broadcast- and professional-use products increased as a result of favorable sales of high-definition related products.
 
“Semiconductors” sales decreased by 12.0 billion yen, or 6.5 percent, to 172.2 billion yen. The decrease was due to a decrease in sales of CCDs as the result of pricing pressures.
 
“Components” sales increased by 49.6 billion yen, or 6.6 percent, to 800.7 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 decreased by 65.4 billion yen, or 12.0 percent, to 481.4 billion yen. This decrease was the result of a decrease in sales of mobile phones, primarily to Sony Ericsson.
 
In the Electronics segment, cost of sales for the fiscal year ended March 31, 2006 increased by 63.3 billion yen, or 1.5 percent to 4,174.6 billion yen compared with the previous fiscal year. The cost of sales ratio decreased by 0.1 percent to 80.6 percent compared to 80.7 percent in the previous fiscal year. Although there was an improvement in the cost of sales ratio for such products as video cameras and PCs, products that contributed to the deterioration in the cost of sales ratio included image sensors and CRT televisions, which experienced decreased sales. Restructuring charges recorded in cost of sales amounted to 23.8 billion yen, an increase of 14.2 billion yen compared with the 9.6 billion yen recorded in the previous fiscal year. Research and development costs decreased 15.2 billion yen, or 3.5 percent, from 433.3 billion yen in the previous fiscal year to 418.1 billion yen.
 
Selling, general and administrative expenses decreased by 25.4 billion yen, or 2.7 percent to 931.1 billion yen compared with the previous fiscal year. The primary reason for this decrease was the recording of a 64.5 billion yen net gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund. Of the restructuring charges recorded in the Electronics segment, the amount recorded in selling, general and administrative expenses decreased by 4.1 billion yen from 53.6 billion yen in the previous fiscal year to 49.5 billion yen. Of the restructuring charges recorded in selling, general and administrative expenses, the amount recorded for headcount reductions, including reductions through the early retirement program, was 45.1 billion yen, a decrease of 5.8 billion yen compared with the previous fiscal year. On the other hand, royalty expenses decreased 17.2 billion yen. The ratio of selling, general and administrative expenses to sales decreased 0.8 percentage points from the 18.8 percent recorded in the previous fiscal year to 18.0 percent.
 
Loss on sale, disposal or impairment of assets, net increased 40.0 billion yen to 63.9 billion yen compared with the previous fiscal year. This amount includes 52.5 billion yen in restructuring charges, which includes 25.5 billion yen of restructuring charges related to CRT and CRT television manufacturing facilities in the U.S. The amount of restructuring charges included in loss on sale, disposal or impairment, net in the previous fiscal year was 19.2 billion yen.
 
The amount of operating profit recorded in the Electronics segment for the fiscal year ended March 31, 2006 increased as a result of the net gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund, despite the recording of increased restructuring charges. Excluding the impact of restructuring charges and the net gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund, profit performance by product reflected an increase in operating losses recorded by CRT televisions and LCD televisions and a decrease in operating income recorded by image sensors. On the other hand, there was a decrease in the operating loss recorded by DVD recorders (including PSXTM) as well as an increase in operating income for video cameras and PCs.
 
Manufacturing by Geographic Area
 
Slightly more than 50 percent of the Electronics segment’s total annual production during the fiscal year ended March 31, 2006 took place in Japan, including the production of digital cameras, video cameras, flat panel televisions, PCs, semiconductors and components such as batteries and Memory Sticks. Approximately 65 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 70 percent of which was destined for other regions. Asia, excluding Japan


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and China, accounted for slightly more than 10 percent of total annual production, with approximately 60 percent destined for Japan, the U.S. and Europe. The Americas and Europe together accounted for the remaining balance of slightly less than 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, 2006 increased by 228.9 billion yen, or 31.4 percent compared with the previous fiscal year, to 958.6 billion yen. Operating income decreased by 34.4 billion yen, or 79.7 percent, to 8.7 billion yen compared with the previous fiscal year, and the operating income margin decreased from 5.9 percent to 0.9 percent.
 
By region, although sales decreased slightly in Japan, there was an increase in sales in the U.S. and Europe.
 
There was a significant increase in hardware sales compared to the previous fiscal year. Sales increased significantly, mainly in the U.S and Europe, and sales in Japan remained relatively unchanged compared to the previous fiscal year, primarily due to a significant contribution to sales from the PSP, which experienced favorable growth in all geographic areas and the fact that PlayStation®2 (“PS2”) sales were on a par with those in the previous fiscal year. In addition, although PS2 software sales decreased, as a result of the contribution to sales from PSP software, software sales in Japan, the U.S. and Europe were relatively unchanged compared to the previous fiscal year.
 
Total worldwide production shipments of hardware and software were as follows:
 
Worldwide hardware production shipments (increase compared to the previous fiscal year):*
 
         
  à  PS2:     16.22 million units (an increase of 0.05 million units)
  à  PSP:     14.06 million units (an increase of 11.09 million units)
 
Worldwide software production shipments (increase/decrease compared to the previous fiscal year):*/**
 
         
  à  PS2:     223 million units (a decrease of 29 million units)
  à  PSP:     41.6 million units (an increase of 35.9 million units)
 
* Production shipments of hardware and software are counted upon shipment of the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers.
 
** Including those both from Sony and third parties under Sony licenses.
 
Operating income decreased significantly compared with the previous fiscal year. Although profits from the PS2 and PSP businesses exceeded those in the previous fiscal year, the decrease in operating income was mainly the result of continued high research and development costs associated with the PS3, as well as the recording of charges associated with preparation for the launch of the PS3 platform including a write-down of approximately 25.0 billion yen for semiconductor components used in the PS3.
 
The cost of sales to sales ratio deteriorated by 7.4 percent, from 73.0 percent in the previous fiscal year, to 80.4 percent for the reasons mentioned above for operating income. The ratio of selling, general and administrative expenses to sales decreased by 2.3 percent, compared to 21.0 percent in the previous fiscal year, to 18.7 percent as a result of the sales increase.
 
Pictures
 
Sales for the fiscal year ended March 31, 2006 increased by 12.2 billion yen, or 1.7 percent, to 745.9 billion yen compared with the previous fiscal year. Operating income decreased by 36.5 billion yen, or 57.1 percent, to 27.4 billion yen and the operating income margin decreased from 8.7 percent to 3.7 percent. The results in the Pictures segment consist of the results of SPE, a U.S.-based subsidiary.
 
On a U.S. dollar basis, sales for the fiscal year in the Pictures segment decreased approximately 4 percent and operating income decreased by approximately 61 percent. Sales decreased primarily due to lower worldwide theatrical and home entertainment revenues on feature films, partially offset by an increase in television product revenues. The lower theatrical and home entertainment revenues primarily resulted from the strong performance of


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Spider-Man 2 in the prior fiscal year coupled with the disappointing performance of certain films in the current fiscal year film slate, particularly Stealth, Zathura and the Legend of Zorro. Sales for the fiscal year release slate decreased 967 million U.S. dollars as compared to the previous fiscal year. Television product revenues increased by approximately 220 million U.S. dollars primarily due to higher advertising and subscription sales from several of SPE’s international channels, higher sales of television library product and the extension of a licensing agreement for Wheel of Fortune.
 
Operating income for the segment decreased significantly, primarily due to the disappointing overall performance of the current fiscal year’s film slate in both the theatrical and home entertainment markets. Operating loss from the current fiscal year release slate increased 623 million U.S. dollars as compared to the prior fiscal year’s release slate due to the same factors contributing to the decrease in film revenue noted above. Partially offsetting this was an increase in operating income of 83 million U.S. dollars for television product due to the same factors noted above for revenue.
 
As of March 31, 2006, unrecognized license fee revenue at SPE was approximately 1.2 billion U.S. dollars. SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television products. The license fee revenue will be recognized in the fiscal year that the product is available for broadcast.
 
Financial Services
 
Please note that the revenue and operating income at Sony Life, Sony Assurance and Sony Bank discussed below on a U.S. GAAP basis differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
 
Financial Services revenue for the fiscal year ended March 31, 2006 increased by 182.7 billion yen, or 32.6 percent, to 743.2 billion yen compared with the previous fiscal year. Operating income increased by 132.8 billion yen, or 239.4 percent, to 188.3 billion yen and the operating income margin increased to 25.3 percent compared with the 9.9 percent of the previous fiscal year.
 
At Sony Life, revenue increased by 170.8 billion yen, or 36.0 percent, to 645.0 billion yen compared with the previous fiscal year. The main reasons for this increase were an improvement in gains and losses from investments at Sony Life, primarily within the general account, as well as an increase in revenue from insurance premiums reflecting an increase of insurance-in-force. The improvement in gains and losses from investments in the general account was principally a result of an improvement in valuation gains from stock conversion rights in convertible bonds resulting from the aforementioned favorable Japanese domestic stock market conditions. Operating income at Sony Life increased by 127.4 billion yen or 208.8 percent to 188.4 billion yen, mainly as a result of a significant improvement in gains and losses on investments in the general account mentioned above.
 
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 to premiums).
 
At Sony Bank, which started operations in June 2001, although foreign exchange losses were recorded as a result of the depreciation of the yen on part of Sony Bank’s foreign currency deposits, revenue rose as there was an increase in interest revenue associated with an increase in the balance of assets from investing activities, in addition to revenues from other investing activities. The amount of the operating loss decreased compared with the previous fiscal year, as a result of the increase in revenue.
 
At Sony Finance, a leasing and credit financing business subsidiary in Japan, revenue increased due to an increase in leasing and credit card revenue. In terms of profitability, a reduced operating loss was recorded compared to the previous fiscal year, as a result of improved profitability at a credit card business at Sony Finance.


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


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    Fiscal Year ended March 31
  Consolidated   2005   2006
    (Yen in millions)
 
                 
Financial service revenue
    537,715       720,566  
Net sales and operating revenue
    6,653,610       6,790,031  
                 
      7,191,325       7,510,597  
Costs and expenses
    7,045,697       7,284,181  
                 
Operating income
    145,628       226,416  
Other income (expenses), net
    11,579       59,913  
                 
Income before income taxes
    157,207       286,329  
Income taxes and other
    (11,344 )     162,713  
                 
Income before cumulative effect of an accounting change
    168,551       123,616  
Cumulative effect of an accounting change
    (4,713 )      —  
                 
Net income
    163,838       123,616  
                 
 
All Other
 
During the fiscal year ended March 31, 2006, 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; a retailer of imported general merchandise in Japan; an in-house facilities management business in Japan; and an advertising agency business in Japan. Results for the first four months of the previous fiscal year in All Other incorporated the results for SMEI’s recorded music business, which, as noted above, was combined with Bertelsmann AG’s recorded music business to form the SONY BMG joint venture which is accounted for by the equity method.
 
Sales for the fiscal year ended March 31, 2006 decreased by 44.9 billion yen, or 9.5 percent, to 426.0 billion yen, compared with the previous fiscal year. Of total segment sales, 81 percent were sales to outside customers. In terms of profit performance, operating income for All Other increased for the fiscal year from 5.1 billion yen to 20.5 billion yen.
 
During the fiscal year, the sales decrease within All Other reflects the fact that, as noted above, the results for the first four months of the previous fiscal year in All Other incorporated the results for SMEI’s recorded music business.
 
Sales at SMEJ were relatively unchanged compared with the previous fiscal year. Best selling albums during the fiscal year included Ken Hirai 10th Anniversary Complete Single Collection ’95-’05 “Uta Baka” by Ken Hirai, NATURAL by ORANGE RANGE and BEST by Mika Nakashima.
 
Excluding sales recorded within Sony’s music business, there was an increase in sales within All Other. This increase was mainly due to strong sales at a business engaged in the production and marketing of animation products, favorable sales both at So-net and its subsidiaries, as well as an increase in sales recorded at an imported general merchandise retail business.
 
Regarding profit performance within All Other, operating income of 20.5 billion yen was recorded, a 15.5 billion yen increase compared to the 5.1 billion yen of operating income recorded in the previous fiscal year. This increase was mainly the result of the fact that the results for SMEI’s recorded music business, which recorded an operating loss in the previous fiscal year, are now recorded as part of the results of the SONY BMG joint venture, and the continued strong performance at SMEJ, where operating income increased approximately 40 percent compared to the previous fiscal year mainly due to an improvement in the cost of sales ratio and the recording of a net gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund.

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Excluding the operating income recorded in the music business, a loss was recorded within All Other mainly as the result of an asset impairment write-down associated with the sale of the Metreon, a U.S. entertainment complex. This was offset to some extent by cost reductions at network related businesses within Sony Corporation.
 
Foreign Exchange Fluctuations and Risk Hedging
 
During the fiscal year ended March 31, 2006, the average value of the yen was 112.3 yen against the U.S. dollar, and 136.3 yen against the Euro, which was 5.1 percent lower against the U.S. dollar and 2.0 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 before the actual export and import transactions take place. In general, SGTS hedges the projected exposures on average three months before the actual transactions take place. However, in certain cases SGTS partially hedges the projected exposures one month before the actual transactions take place when business requirements such as shorter production-sales cycle for certain products arise. Sony enters into foreign exchange transactions with financial institutions primarily for hedging purposes. Sony does not use these derivative financial instruments for trading or speculative purposes except for certain derivatives in the Financial Services segment utilized for portfolio investments and ALM.
 
To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.
 
Changes in the fair value of derivatives designated as cash flow hedges, including foreign exchange forward contracts and foreign currency option contracts, are initially recorded in accumulated other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges 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, 2006 were 1,489.2 billion yen, 457.4 billion yen and 163.7 billion yen, respectively.


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Assets, Liabilities and Stockholders’ Equity
 
Assets
 
Total assets on March 31, 2007 increased by 1,108.6 billion yen, or 10.5 percent, to 11,716.4 billion yen, compared with the previous fiscal year-end. Total assets on March 31, 2007 in all segments excluding the Financial Services segment increased by 711.3 billion yen, or 11.1 percent, to 7,098.1 billion yen and total assets on March 31, 2007 in the Financial Services segment increased by 409.5 billion yen, or 9.0 percent, to 4,977.6 billion yen, compared with the previous fiscal year-end.
 
Current Assets
 
Current assets on March 31, 2007 increased by 777.2 billion yen, or 20.6 percent, to 4,546.7 billion yen compared with the previous fiscal year-end. Current assets on March 31, 2007 in all segments, excluding the Financial Services segment, increased by 538.4 billion yen, or 18.2 percent, to 3,495.0 billion yen.
 
Cash and cash equivalents on March 31, 2007 in all segments, excluding the Financial Services segment, decreased 62.6 billion yen, or 10.7 percent, to 522.9 billion yen compared with the previous fiscal year-end.
 
Notes and accounts receivable, trade (net of allowance for doubtful accounts and sales returns) on March 31, 2007, excluding the Financial Services segment, increased 369.5 billion yen, or 37.9 percent, compared with the previous fiscal year-end to 1,343.1 billion yen. This was primarily the result of an increase in sales of the PS3.
 
Inventories on March 31, 2007 increased by 136.2 billion yen, or 16.9 percent, to 940.9 billion yen compared with the previous fiscal year-end. This increase was primarily a result of both increased semiconductor inventory, primarily for use in the PS3, and LCD television inventory in the Electronics segment and increased inventory in the Game segment resulting from the world-wide introduction of the PS3 platform. The inventory to cost of sales turnover ratio (based on the average of inventories at the end of each fiscal year and the previous fiscal year) was 1.78 months compared to 1.67 months at the end of the previous fiscal year. Sony considers this level of inventory to be appropriate in the aggregate.
 
Current assets on March 31, 2007 in the Financial Services segment increased by 237.8 billion yen, or 27.9 percent, to 1,089.3 billion yen, compared with the previous fiscal year-end. This increase was primarily due to an expansion of the life insurance and banking businesses.
 
Investments and Advances
 
Investments and advances on March 31, 2007 increased by 368.8 billion yen, or 10.5 percent, to 3,888.7 billion yen, compared with the previous fiscal year-end.
 
Investments and advances on March 31, 2007 in all segments, excluding the Financial Services segment, increased by 148.8 billion yen, or 31.3 percent, to 623.3 billion yen. This was primarily a result of an increase in investments and advances towards affiliated companies such as Sony Ericsson and S-LCD.
 
Investments and advances on March 31, 2007 in the Financial Services segment increased by 216.6 billion yen, or 6.9 percent, to 3,347.9 billion yen, compared with the previous fiscal year-end. 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 business, and an increase in mortgage loans at Sony Bank.
 
Also refer to “Investments” below.
 
Property, Plant and Equipment (after deduction of accumulated depreciation)
 
Property, plant and equipment on March 31, 2007 increased by 33.0 billion yen, or 2.4 percent, to 1,421.5 billion yen, compared with the previous fiscal year-end.
 
Property, plant and equipment on March 31, 2007 in all segments, excluding the Financial Services segment, increased by 31.7 billion yen, or 2.3 percent, to 1,382.9 billion yen, compared with the previous fiscal year-end.


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Capital expenditures (part of the increase in property, plant and equipment) for the fiscal year ended March 31, 2007 increased by 29.8 billion yen, or 7.8 percent, to 414.1 billion yen compared with the previous fiscal year. Capital expenditures in the Electronics segment increased by 22.9 billion yen, or 7.0 percent, to 351.5 billion yen. Capital expenditures in the semiconductor business within the Electronics segment, including capital expenditures related to the Cell Broadband Enginetm (“Cell/B.E.”), totaled approximately 150.0 billion yen. Capital expenditures increased in the Game segment by 8.4 billion yen, or 99.5 percent, to 16.8 billion yen. In the Pictures segment, capital expenditures increased by 0.9 billion yen, or 8.6 percent to 11.0 billion yen. In All Other, which includes Sony’s consolidated music business, 5.6 billion yen of capital expenditures were recorded, compared to the 4.2 billion yen of capital expenditures recorded in the previous fiscal year.
 
Property, plant and equipment on March 31, 2007 in the Financial Services segment increased by 1.2 billion yen, or 3.3 percent, to 38.7 billion yen compared with the previous fiscal year-end. Capital expenditures in the Financial Services segment increased by 2.4 billion yen, or 53.4 percent, to 6.8 billion yen.
 
Other Assets
 
Other assets on March 31, 2007 decreased by 18.7 billion yen, or 1.2 percent, to 1,550.7 billion yen, compared with the previous fiscal year end.
 
Other assets on March 31, 2007 in all segments, excluding the Financial Services segment, increased by 44.1 billion yen to 1,100.8 billion yen compared with the previous fiscal year-end.
 
Deferred tax assets on March 31, 2007 increased by 38.2 billion yen, or 21.4 percent, to 217.0 billion yen compared with the previous fiscal year end. The increase is due primarily to an increase of deferred tax assets recorded in connection with tax loss carryforwards of foreign subsidiaries in the Game segment.
 
Other assets in the Financial Services segment on March 31, 2007 decreased by 46.2 billion yen, or 8.4 percent, to 501.8 billion yen compared with the previous fiscal year-end.
 
Liabilities
 
Total current and long-term liabilities on March 31, 2007 increased by 939.9 billion yen, or 12.8 percent, to 8,306.7 billion yen compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, 2007 in all segments, excluding the Financial Services segment, increased by 589.0 billion yen, or 16.6 percent, to 4,140.9 billion yen. Total current and long-term liabilities in the Financial Services segment on March 31, 2007 increased by 363.2 billion yen, or 9.1 percent, to 4,337.7 billion yen, compared with the previous fiscal year-end.
 
Current Liabilities
 
Current liabilities on March 31, 2007 increased by 351.6 billion yen, or 11.0 percent, to 3,551.9 billion yen compared with the previous fiscal year-end. Current liabilities on March 31, 2007 in all segments excluding the Financial Services segment increased by 311.3 billion yen, or 13.4 percent, to 2,640.6 billion yen.
 
Short-term borrowings and the current portion of long-term debt on March 31, 2007 in all segments, excluding the Financial Services segment, decreased 144.1 billion yen, or 64.0 percent, to 80.9 billion yen compared with the previous fiscal year-end. This was principally as a result of a decrease in the current portion of long-term debt, due to the redemption of straight bonds and medium-term notes.
 
Notes and accounts payable, trade on March 31, 2007 in all segments, excluding the Financial Services segment, increased by 362.9 billion yen, or 45.1 percent, to 1,167.3 billion yen compared with the previous fiscal year-end.
 
Current liabilities on March 31, 2007 in the Financial Services segment increased by 39.1 billion yen, or 4.3 percent, to 957.5 billion yen, mainly due to an increase in deposits from customers at Sony Bank.


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Long-term Liabilities
 
Long-term liabilities on March 31, 2007 increased by 588.3 billion yen, or 14.1 percent, to 4,754.8 billion yen compared with the previous fiscal year-end.
 
Long-term liabilities on March 31, 2007 in all segments, excluding the Financial Services segment, increased by 277.7 billion yen, or 22.7 percent, to 1,500.3 billion yen. In addition, long-term debt on March 31, 2007 in all segments, excluding the Financial Services segment, increased by 223.9 billion yen, or 31.9 percent, to 925.3 billion yen.
 
Long-term debt increased primarily due to the execution of yen-denominated syndicated loans for the purpose of allocating funds for general corporate purposes, including capital expenditures, and for debt redemption.
 
Long-term liabilities on March 31, 2007 in the Financial Services segment increased by 324.0 billion yen, or 10.6 percent, to 3,380.2 billion yen. This was due to an increase in insurance-in-force in the life insurance business which resulted in an increase in future insurance policy benefits and other of 293.3 billion yen, or 10.7 percent, to 3,037.7 billion yen.
 
Total Interest-bearing Debt
 
Total interest-bearing debt on March 31, 2007 decreased by 4.8 billion yen, or 0.4 percent, to 1,096.5 billion yen, compared with the previous fiscal year-end. Total interest-bearing debt on March 31, 2007 in all segments, excluding the Financial Services segment, increased by 79.7 billion yen, or 8.6 percent, to 1,006.2 billion yen.
 
Stockholders’ Equity
 
Stockholders’ equity on March 31, 2007 increased by 166.9 billion yen, or 5.2 percent, to 3,370.7 billion yen compared with the previous fiscal year-end. Retained earnings increased 116.9 billion yen compared with the previous fiscal year-end, and accumulated other comprehensive income (net of tax) was 115.5 billion yen. This was primarily due to accumulated other comprehensive income of 86.3 billion yen arising from foreign currency translation adjustments in the current fiscal year due to the depreciation of the yen, partially offset by a decrease in unrealized gains on securities in accumulated other comprehensive income of 14.7 billion yen in the current fiscal year. The ratio of stockholders’ equity to total assets decreased 1.4 percentage points compared to the end of the previous fiscal year, from 30.2 percent to 28.8 percent.


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Condensed Balance Sheets Separating Out the Financial Services Segment (Unaudited)
 
The following schedule shows an unaudited condensed balance sheet for the Financial Services segment and all other segments excluding Financial Services as well as the condensed consolidated balance sheet. This presentation is not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
 
Financial Services
 
                 
    March 31
    2006   2007
    (Yen in millions)
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
    117,630       277,048  
Marketable securities
    532,895       490,237  
Other
    200,929       321,969  
                 
      851,454       1,089,254  
Investments and advances
    3,131,269       3,347,897  
Property, plant and equipment
    37,422       38,671  
Other assets:
               
Deferred insurance acquisition costs
    383,156       394,117  
Other
    164,827       107,703  
                 
      547,983       501,820  
                 
      4,568,128       4,977,642  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Short-term borrowings
    136,723       48,688  
Notes and accounts payable, trade
    11,707       13,159  
Deposits from customers in the banking business
    599,952       752,367  
Other
    169,956       143,245  
                 
      918,338       957,459  
Long-term liabilities:
               
Long-term debt
    128,097       129,484  
Accrued pension and severance costs
    13,479       8,773  
Future insurance policy benefits and other
    2,744,321       3,037,666  
Other
    170,294       204,317  
                 
      3,056,191       3,380,240  
Minority interest in consolidated subsidiaries
    4,089       5,145  
Stockholders’ equity
    589,510       634,798  
                 
      4,568,128       4,977,642  
                 


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Sony without Financial Services
 
                 
    March 31
    2006   2007
    (Yen in millions)
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
    585,468       522,851  
Marketable securities
    4,073       3,078  
Notes and accounts receivable, trade
    973,675       1,343,128  
Other
    1,393,306       1,625,914  
                 
      2,956,522       3,494,971  
Film costs
    360,372       308,694  
Investments and advances
    474,568       623,342  
Investments in Financial Services, at cost
    187,400       187,400  
Property, plant and equipment
    1,351,125       1,382,860  
Other assets
    1,056,726       1,100,795  
                 
      6,386,713       7,098,062  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Short-term borrowings
    225,082       80,944  
Notes and accounts payable, trade
    804,394       1,167,324  
Other
    1,299,809       1,392,333  
                 
      2,329,285       2,640,601  
Long-term liabilities:
               
Long-term debt
    701,372       925,259  
Accrued pension and severance costs
    168,768       164,701  
Other
    352,457       410,354  
                 
      1,222,597       1,500,314  
Minority interest in consolidated subsidiaries
    32,623       32,808  
Stockholders’ equity
    2,802,208       2,924,339  
                 
      6,386,713       7,098,062  
                 


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


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In evaluating the factors for available-for-sale securities with readily determinable fair values, management presumes a decline in value to be other-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally a period of up to six months). The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support the conclusion that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value is other-than-temporary.
 
The assessment of whether a decline in the value of an investment is other-than-temporary is often judgmental in nature and involves certain assumptions and estimates concerning the expected operating results, business plans and future cash flows of the issuer of the security. Accordingly, it is possible that investments in Sony’s portfolio that have had a decline in value that Sony currently believes to be temporary may be determined to be other-than-temporary in the future based on Sony’s evaluation of additional information such as continued poor operating results, future broad declines in value of worldwide equity markets and the effect of worldwide interest rate fluctuations. As a result, unrealized losses recorded for investments may be recognized into income in future periods.
 
The following table contains available-for-sale and held to maturity securities, breaking out the unrealized gains and losses by investment category.
 
                                 
    March 31, 2007
        Unrealized
  Unrealized
  Fair Market
    Cost   Gain   Loss   Value
    (Yen in millions)
 
Financial Services Business:
                               
Available-for-sale
                               
Debt securities
                               
Sony Life
    2,129,352       17,679       (3,052 )     2,143,979  
Other
    381,663       5,983       (5,794 )     381,852  
Equity securities
                               
Sony Life
    210,009       105,376       (3,579 )     311,806  
Other
    7,341       1,657       (40 )     8,958  
Held to maturity
                               
Debt securities
                               
Sony Life
                       
Other
    34,931       165       (127 )     34,969  
 
 
Total Financial Services
    2,763,296       130,860       (12,592 )     2,881,564  
 
 
Non-Financial Services:
                               
Available-for-sale securities
    70,496       21,909       (3,770 )     88,635  
Held to maturity securities
    1,104                   1,104  
 
 
Total Non-Financial Services
    71,600       21,909       (3,770 )     89,739  
 
 
Consolidated
    2,834,896       152,769       (16,362 )     2,971,303  
 
 
 
The most significant portion of these unrealized losses relate to investments held by Sony Life. Sony Life principally invests in debt securities in various industries. Almost all of these securities were rated “BBB” or higher by Standard & Poor’s, Moody’s or other rating agencies. As of March 31, 2007, Sony Life had debt and equity securities which had gross unrealized losses of 3.1 billion yen and 3.6 billion yen, respectively. Of the unrealized loss amounts recorded by Sony Life, approximately 46 percent relate to securities being in an unrealized loss position for periods greater than 12 months as of March 31, 2007. These unrealized losses related to numerous investments, with no single investment being in a material unrealized loss position for the above-mentioned periods. In addition, there was no individual security with unrealized losses that met the test discussed above for impairment


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as the declines in value were observed to be small both in amounts and percentage, and therefore, the decline in value for those investments was still determined to be temporary in nature. The percentage of non-investment grade securities held by Sony Life represents approximately 0.1 percent of Sony Life’s total investment portfolio, while the percentage of unrealized losses that relate to those non-investment grade securities was approximately 1 percent of Sony Life’s total unrealized losses as of March 31, 2007.
 
For fixed maturity securities with unrecognized losses held by Sony Life as of March 31, 2007 (3.1 billion yen), maturity dates vary as follows:
 
         
• Within 1 year:
    0.4 percent  
• 1 to 5 years:
    96.0 percent  
• 5 to 10 years:
    3.4 percent  
• Above 10 years:
    0.2 percent  
 
Sony also maintains long-term investment securities issued by a number of non-public companies. The aggregate carrying amount of the investments in non-public companies at March 31, 2007 was 64.9 billion yen. A non-public equity investment is valued at cost as fair value is not readily determinable. If the value is estimated to have declined and such decline is judged to be other-than-temporary, the impairment of the investment is recognized and the carrying value is reduced to its fair value.
 
For the fiscal years ended March 31, 2005, 2006 and 2007, total impairment losses were 4.2 billion yen, 4.0 billion yen and 7.4 billion yen, of which 0.5 billion yen, 0.2 billion yen and 6.1 billion yen, respectively, were recorded by Sony Life in Financial Services revenue. Impairment losses other than at Sony Life in each of the three years were reflected in non-operating expenses and primarily relate to certain strategic investments in non-financial services businesses. These investments primarily relate to the certain strategic investments in Japan and the U.S. with which Sony has strategic relationships for the purposes of developing and marketing new technologies. The impairment losses were recorded for each of the three fiscal years as these companies failed to successfully develop and market such technology, the operating performance of the companies was more unfavorable than previously expected and the decline in fair value of these companies was judged as other-than-temporary. None of these impairment losses was individually material to Sony.
 
Upon determination that the value of an investment is impaired, the value of the investment is written down to its fair value. For publicly traded investments, fair value is determined by the closing stock price as of the date on which the impairment determination is made. For non-public investments, fair value is determined through the use of such methodologies as discounted cash flows, valuation of recent financings and comparable valuations of similar companies. The impairment losses that were recorded in each of the three fiscal years related to the unique facts and circumstances of each individual investment and did not significantly impact other investments.
 
Sony Life and Sony Bank’s investments constitute the majority of the investments in the Financial Services segment. Sony Life and Sony Bank account for approximately 85 percent and 13 percent of the investments of the Financial Services segment, respectively.
 
Sony Life’s fundamental investment policy is to build an investment portfolio capable of ensuring stable mid- to long-term returns through the efficient investment of funds, taking into account both expected returns and investment risks and responding flexibly to changes in financial conditions and the investment environment, while maintaining a sound asset base. Moreover, as its fundamental stance towards ALM, a method of managing interest rate fluctuation risk through the comprehensive identification of differences in duration and cash flows between assets and liabilities, Sony Life takes the distinct characteristics of liability into account in order to control price fluctuation risks and establish a portfolio that ensures a certain level of returns. Sony Life adjusts its investing style depending on changes in the investment environment. In the first half of the fiscal year ended March 31, 2007, when interest rates in Japan were increasing, Sony Life invested mainly in long-term Japanese government bonds. Sony Life concentrated its investments in convertible bonds whose prices had declined due to the issuer’s falling stock price.
 
Sony Bank operates using a similar basic investment policy as Sony Life, taking expected returns and investment risks into account in order to disperse associated risks, and structuring its asset portfolio to ensure steady returns from investments. In addition, Sony Bank is careful to match the duration of its asset portfolio with the


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duration of liabilities resulting from customer deposits, in order to ensure that significant discrepancies do not occur. Government bonds and corporate bonds in yen or other currencies constitute a majority of Sony Bank’s current portfolio. To safeguard its assets Sony Bank does not invest in equity securities but invests in various types of government and corporate bonds in many countries, companies and industries, to diversify associated risks. With respect to loans, Sony Bank mainly offers housing loans to individuals and does not have any corporate loan exposure.
 
Contractual obligations, commitments, and contingent liabilities
 
The following table summarizes Sony’s contractual obligations and major commitments as of March 31, 2007. The references to the Notes below refer to a corresponding note within the Notes to Consolidated Financial Statements.
 
                                         
        Payments Due by Period
        Less than
      3 to 5
  After 5
    Total   1 year   1 to 3 year   year   year
 
 
    (Yen in millions)
Contractual Obligations and Major
Commitments:*
                                       
Long-term debt (Note 11)
                                       
Capital lease obligations (Notes 8 and 11)
    49,403       12,559       13,674       6,052       17,118  
Other long-term debt (Note 11)
    994,772       30,611       448,404       272,798       242,959  
Minimum rental payments required under operating leases (Note 8)
    202,723       46,154       64,811       31,129       60,629  
Purchase commitments for property, plant and equipment and other assets (Note 23)
    43,329       43,083       213       33        
Expected cost for the production or purchase of films and television programming or certain rights (Note 23)
    67,717       54,940       12,033       585       159  
Partnership program contract with Fédération Internationale de Football Association (Note 23)
    30,939       3,897       7,794       9,624       9,624  
8th generation amorphous TFT-LCD panel manufacturing line at joint venture, S-LCD Corporation (Note 23)
    50,200       50,200                    
 
 
 
*The total amount of expected future pension payments is not included in either the above table or the total amount of commitments outstanding at March 31, 2007 discussed below as such amount is not currently determinable. Sony expects to contribute approximately 37.0 billion yen to the Japanese pension plans and approximately 5.0 billion yen to the foreign pension plans during the fiscal year ending March 31, 2008 (Note 14).
 
*The total unused portion of the line of credit extended under loan agreements in the Financial Services segment is not included in either the above table or the amount of commitments outstanding at March 31, 2007 discussed below as it is not foreseeable how many loans will be executed. The total unused portion of the line of credit extended under these contracts was 348.4 billion yen as of March 31, 2007 (Note 23).
 
*The 5 year Revolving Credit Agreement with Sony BMG, which matures on August 5, 2009 and provides for a base commitment of 300 million U.S. dollars and additional incremental borrowings of up to 150 million U.S. dollars, is not included in either the above table or the amount of commitments outstanding at March 31, 2007 discussed below as such amount is not currently determinable. Sony’s outstanding commitment under this Credit Agreement as of March 31, 2007 was 26.6 billion yen (Note 23).


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The total amount of commitments outstanding at March 31, 2007 was 296.1 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, 2007, such commitments outstanding were 43.3 billion yen.
 
A subsidiary in the Pictures segment has committed to fund a portion of the production costs of completed films and is responsible for all distribution and marketing expenses relating to these films under a distribution agreement with a third party. Further, certain subsidiaries in the Pictures segment have entered into agreements with creative talent for the development and production of films and television programming as well as agreements with third parties to acquire completed films, or certain rights therein. As of March 31, 2007, the total amount of the expected cost for the production or purchase of films and television programming or certain rights under the above commitments was 67.7 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, 2007, Sony Corporation was committed to make payments of 30.9 billion yen under such contract.
 
In July 2006, Sony Corporation and Samsung signed the final contract with respect to the construction of an 8th generation amorphous TFT-LCD panel manufacturing line at their joint venture, S-LCD. As of March 31, 2007, Sony Corporation was committed to make payments of 50.2 billion yen under such contract.
 
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, when necessary, raise funds from the global capital markets and banks.
 
The following table summarizes Sony’s contingent liabilities as of March 31, 2007.
 
         
    Total Amounts of
    Contingent Liabilities
 
Contingent Liabilities: (Note 23)
    (Yen in millions )
Loan guarantees to related parties
    11,100  
Other
    10,581  
Total contingent liabilities
    21,681  
 
Off-Balance Sheet Arrangements
 
Sony has several off-balance sheet arrangements to provide liquidity, capital resources and/or credit risk support.
 
During the fiscal year ended March 31, 2005, Sony entered into accounts receivable sales programs that provide for the accelerated receipt of up to 47.5 billion yen of eligible trade accounts receivable of Sony Corporation. Through these programs, Sony can sell receivables to special purpose entities owned and operated by banks. These transactions are accounted for as a sale in accordance with Financial Accounting Standards (“FAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, because Sony has relinquished control of the receivables. Accordingly, accounts receivable sold under these transactions are excluded from receivables in the accompanying consolidated balance sheet. The initial sale of these receivables was in March 2005, and Sony sold a total of 10.0 billion yen for the fiscal year ended March 31, 2005. Total receivables sold for the fiscal years ended March 2006 and 2007 were 146.2 billion yen and 152.5 billion yen, respectively. Losses from these transactions were insignificant. Although Sony continues servicing the sold receivables, no servicing liabilities are recorded because costs regarding collection of the sold receivables are insignificant.
 
Refer to Note 6 of Notes to Consolidated Financial Statements for more information on the accounts receivable securitization.


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Sony has, from time to time, entered into various 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 373 million U.S. dollars over the term of the agreement to fund the production or acquisition cost of films (including fees and expenses). The subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE. On April 28, 2006, the subsidiary entered into a second production/co-financing agreement with a VIE to co-finance additional films. Nine films are anticipated to be released under this financing arrangement. The subsidiary will receive approximately 240 million U.S. dollars over the term of the agreement to fund the production or acquisition cost of the films (including fees and expenses). Similar to the first agreement, the subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. As of March 31, 2007, three co-financed films have been released by the subsidiary and 37 million U.S. dollars has been received from the VIE under this agreement. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE. On January 19, 2007, the subsidiary entered into a third production/co-financing agreement with a VIE to co-finance a majority of the films to be submitted through March 2012. The subsidiary has received a commitment from the VIE that the VIE will fund up to 525 million U.S. dollars on a revolving basis to fund the production or acquisition cost of films (including fees and expenses). As of March 31, 2007, no films of the subsidiary have been funded by this VIE. Similar to the first two agreements, the subsidiary is responsible for marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits, as defined, of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs, each as defined. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE.
 
Refer to Note 22 of Notes to Consolidated Financial Statements for more information on variable interest entities.
 
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 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


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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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Condensed Statements of Cash Flows Separating Out the Financial Services Segment (Unaudited)
 
The following schedule shows unaudited condensed statements of cash flow for the Financial Services segment and all other segments excluding the Financial Services segment as well as condensed consolidated statements of cash flow. These presentations are not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
 
Condensed Statements of Cash Flows
 
                 
    Fiscal Year ended March 31
  Financial Services   2006   2007
    (Yen in millions)
 
Net cash provided by operating activities
    147,149       256,540  
Net cash used in investing activities
    (563,753 )     (276,749 )
Net cash provided by financing activities
    274,863       179,627  
                 
Net increase (decrease) in cash and cash equivalents
    (141,741 )     159,418  
Cash and cash equivalents at beginning of the fiscal year
    259,371       117,630  
                 
Cash and cash equivalents at end of the fiscal year
    117,630       277,048  
                 
 
                 
    Fiscal Year ended March 31
  Sony without Financial Services   2006   2007
    (Yen in millions)
 
Net cash provided by operating activities
    251,975       305,571  
Net cash used in investing activities
    (296,376 )     (431,086 )
Net cash provided by (used in) financing activities
    74,600       59,598  
Effect of exchange rate changes on cash and cash equivalents
    35,537       3,300  
                 
Net increase (decrease) in cash and cash equivalents
    65,736       (62,617 )
Cash and cash equivalents at beginning of the fiscal year
    519,732       585,468  
                 
Cash and cash equivalents at end of the fiscal year
    585,468       522,851  
                 
 
                 
    Fiscal Year ended March 31
  Consolidated   2006   2007
    (Yen in millions)
 
Net cash provided by operating activities
    399,858       561,028  
Net cash used in investing activities
    (871,264 )     (715,430 )
Net cash provided by financing activities
    359,864       247,903  
Effect of exchange rate changes on cash and cash equivalents
    35,537       3,300  
                 
Net increase (decrease) in cash and cash equivalents
    (76,005 )     96,801  
Cash and cash equivalents at beginning of the fiscal year
    779,103       703,098  
                 
Cash and cash equivalents at end of the fiscal year
    703,098       799,899  
                 
 
Cash Flows
(The fiscal year ended March 31, 2006 compared with the fiscal year ended March 31, 2005)
 
Operating Activities: During the fiscal year ended March 31, 2006, Sony generated 399.9 billion yen of net cash from operating activities, a decrease of 247.1 billion yen, or 38.2 percent compared with the previous fiscal year. Of this total, all segments, excluding the Financial Services segment, generated 252.0 billion yen of net cash from


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operating activities, a decrease of 233.5 billion yen, or 48.1 percent, compared with the previous fiscal year, and the Financial Services segment generated 147.1 billion yen of net cash from operating activities, a decrease of 20.9 billion yen, or 12.5 percent, compared with the previous fiscal year.
 
During the fiscal year, there was a positive impact on operating cash flow mainly from the effect of the profit contribution from the Financial Services segment, and after taking into account depreciation and amortization, as well as the effect of the loss on sale, disposal or impairment of assets, net. However, primarily offsetting these contributions was an increase in inventory, particularly within the Electronics and Game segments, the effect of the non-cash net gain on the transfer to the Japanese Government of the substitutional portion of the employee pension fund, an increase in deferred acquisition costs within the Financial Services segment and effect of the gain on change in interest in subsidiaries and equity investees.
 
Compared with the previous fiscal year, net cash provided by operating activities decreased mainly as a result of lower net income recorded during the fiscal year as compared to the previous fiscal year, and, as noted above, the increase in inventory during the fiscal year compared with the previous fiscal year, the effect of the gain on the transfer to the Japanese Government of the substitutional portion of the employee pension fund, and of the gain on change in interest in subsidiaries and equity investees.
 
Investing Activities: During the fiscal year, Sony used 871.3 billion yen of net cash in investing activities, a decrease of 59.9 billion yen, or 6.4 percent, compared with the previous fiscal year. Of this total, all segments, excluding the Financial Services segment, used 296.4 billion yen of net cash in investing activities, a decrease of 175.7 billion yen, or 37.2 percent, compared with the previous fiscal year, and the Financial Services segment used 563.8 billion yen in net cash, an increase of 142.4 billion yen, or 33.8 percent. During the fiscal year, purchases of fixed assets (capital expenditures) were made, primarily due to proactive capital expenditures in semiconductors mainly within the Electronics segment, mostly associated with image sensors.
 
Within the Financial Services segment, payments for investments and advances exceeded proceeds from maturities of marketable securities, sales of securities investments and collections of advances, primarily as a result of investments, mainly in Japanese fixed income securities, resulting from an increase in insurance premiums at Sony Life, and an increase in the outstanding balance of mortgage loans at Sony Bank.
 
Compared with the previous fiscal year, net cash used in investing activities decreased, primarily due to the fact that in the previous fiscal year, investments were carried out principally in relation to S-LCD and in semiconductor fabrication equipment, particularly investments associated with the Cell/B.E. On the other hand, within the Financial Services segment, net cash used in investing activities increased due to an increase in investments and advances 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 use of cash of 44.4 billion yen, as compared to the 13.3 billion yen of cash generated in the previous fiscal year.
 
Financing Activities: During the fiscal year ended March 31, 2006, 359.9 billion yen of net cash was provided by financing activities. Of the total, 74.6 billion yen of net cash was generated from financing activities in all segments, excluding the Financial Services segment, compared to a use of net cash in the previous fiscal year of 95.4 billion yen. This was a result of straight bonds issued in order to redeem bonds maturing during the fiscal years ended March 31, 2006 and March 31, 2007.
 
In the Financial Services segment, as a result of an increase in policyholder accounts at Sony Life, and an increase in deposits from customers, as well as call loan borrowings carried out at Sony Bank, financing activities generated 274.9 billion yen of net cash.
 
Accounting for all these factors and the effect of exchange rate changes, the total outstanding balance of cash and cash equivalents at the end of the fiscal year decreased by 76.0 billion yen, or 9.8 percent, to 703.1 billion yen, compared with the end of the previous fiscal year. The total outstanding balance of cash and cash equivalents of all segments excluding the Financial Services segment, increased by 65.7 billion yen, or 12.6 percent, to 585.5 billion yen, and for the Financial Services segment, decreased by 141.7 billion, or 54.6 percent, to 117.6 billion yen, compared with the end of the previous fiscal year.


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Condensed Statements of Cash Flows Separating Out the Financial Services Segment (Unaudited)
 
The following schedule shows unaudited condensed statements of cash flow for the Financial Services segment and all other segments excluding the Financial Services segment as well as condensed consolidated statements of cash flow. These presentations are not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
 
Condensed Statements of Cash Flows
 
                 
    Fiscal Year ended March 31
  Financial Services   2005   2006
    (Yen in millions)
 
Net cash provided by operating activities
    168,078       147,149  
Net cash used in investing activities
    (421,384 )     (563,753 )
Net cash provided by financing activities
    256,361       274,863  
                 
Net increase (decrease) in cash and cash equivalents
    3,055       (141,741 )
Cash and cash equivalents at beginning of the fiscal year
    256,316       259,371  
                 
Cash and cash equivalents at end of the fiscal year
    259,371       117,630  
                 
 
                 
    Fiscal Year ended March 31
  Sony without Financial Services   2005   2006
    (Yen in millions)
 
Net cash provided by operating activities
    485,439       251,975  
Net cash used in investing activities
    (472,119 )     (296,376 )
Net cash provided by (used in) financing activities
    (95,373 )     74,600  
Effect of exchange rate changes on cash and cash equivalents
    8,890       35,537  
                 
Net increase (decrease) in cash and cash equivalents
    (73,163 )     65,736  
Cash and cash equivalents at beginning of the fiscal year
    592,895       519,732  
                 
Cash and cash equivalents at end of the fiscal year
    519,732       585,468  
                 
 
                 
    Fiscal Year ended March 31
  Consolidated   2005   2006
    (Yen in millions)
 
                 
Net cash provided by operating activities
    646,997       399,858  
Net cash used in investing activities
    (931,172 )     (871,264 )
Net cash provided by financing activities
    205,177       359,864  
Effect of exchange rate changes on cash and cash equivalents
    8,890       35,537  
                 
Net increase (decrease) in cash and cash equivalents
    (70,108 )     (76,005 )
Cash and cash equivalents at beginning of the fiscal year
    849,211       779,103  
                 
Cash and cash equivalents at end of the fiscal year
    779,103       703,098  
                 
 
LIQUIDITY AND CAPITAL RESOURCES
 
Sony’s financial policy is to maintain the strength of its balance sheet, while securing adequate liquidity for business expenses.
 
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 will procure funds from the financial and capital markets.


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For these financing activities, Sony has sufficient access to financial and capital markets as described below. In addition, to sustain sufficient liquidity, Sony has committed lines of credit with financial institutions, together with cash balances.
 
The description below covers liquidity and capital resources for consolidated Sony and excludes the Financial Services segment, which secures liquidity on its own.
 
Market Access
 
Sony Corporation and SGTS, a finance subsidiary in the U.K., procure funds from the financial and capital markets.
 
In order to meet long-term funding requirements, Sony Corporation utilizes its access to global equity and bond markets and borrowings from financial institutions. During the fiscal year ended March 31, 2007, Sony issued an 80 billion yen syndicated loan in June 2006 (3 years maturity), and a 130 billion yen syndicated loan in December 2006 (4 years and 7 years maturity), for general corporate purposes including capital expenditures, and debt redemption. Sony maintains a bond shelf registration of 300 billion yen filed in Japan, effective until April 2008; however Sony has not issued a bond using this shelf registration during the fiscal year ended March 31, 2007.
 
In order to meet the working capital requirements of Sony, SGTS maintains commercial paper (“CP”) programs and a medium-term note (“MTN”) program. SGTS maintains CP programs for the U.S., Euro and Japanese CP markets. As of March 31, 2007, the total maximum amount to be issued under these CP programs, translated into yen, was 1,326.6 billion yen. During the fiscal year ended March 31, 2007, the largest month-end outstanding balance of CP was 348.2 billion yen in November 2006. There was no outstanding balance of CP as of March 31, 2007.
 
SGTS maintains a Euro MTN program with a program limit amount, translated into yen as of March 31, 2007, of 590.5 billion yen. There was no outstanding balance as of that date.
 
Liquidity Management
 
Sony’s working capital needs grow significantly in the third quarter (from October to December) as a result of the general seasonality of Sony’s business. Sony’s basic liquidity management policy is to secure sufficient liquidity throughout the relevant fiscal year, covering such factors as short-term cash flow volatility mentioned above, repayments for debts whose due date fall within a year, and possible downward earnings risk due to changes in the business environment.
 
Sony defines its liquidity sources as the amount of cash balance, and committed lines of credit contracted with financial institutions. Regarding its cash balance, Sony’s policy is to maintain more than a certain level of cash balance to absorb any daily and monthly working capital needs. The balance of cash and marketable securities on March 31, 2007 was 525.9 billion yen. A short-term shortage in the cash balance is financed by the issuance of CP. However, Sony controls the outstanding CP amount through internal limits as part of its short-term debt risk management strategy.
 
For general corporate purposes, including the support of CP programs and for emergency purposes, Sony has a total, translated into yen, of 689.3 billion yen in committed lines of credit with various financial institutions, of which the unused amount was 684.9 billion yen as of March 31, 2007. Major committed lines of credit include a total, translated into yen, of 505.4 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. During the fiscal year ended March 31, 2007, the contract period of the committed line of credit with Japanese financial institutions was extended for one year, from the previous contract which was effective until July 2008. In the event of a downgrade in Sony’s credit ratings, even though the cost of borrowing could increase, there are no financial covenants in any of Sony’s material financial agreements that would cause an acceleration of the obligation. In general, there are no restrictions on the uses of 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.


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Ratings
 
Sony considers one of management’s top priorities to be the maintenance of a 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 are noted below:
 
                   
      Moody’s     S&P     R&I
Long-term debt
    A2 (Outlook: Stable)     A- (Outlook: Negative)     AA- (Outlook: Stable) 
Short-term debt
    P-1     A-2     a-1+
                   
 
In October 2006, S&P changed its outlook of Sony’s long-term debt rating from stable to negative. This change was made based upon their view of increased uncertainty for Sony’s business recovery in fiscal year 2007 onwards. Despite this change in outlook, Sony believes its access to the global capital markets and its ability to issue CP for its working capital needs have not been restricted.
 
Cash Management
 
Sony is centralizing and working to make more efficient its global cash management activities through SGTS. The excess or shortage of cash at most of Sony’s subsidiaries is invested or funded by SGTS after having been netted out, although Sony recognizes that fund transfers are limited in certain countries and geographical areas due to restrictions on capital transactions. In order to pursue more efficient cash management, Sony manages uneven cash distribution among its subsidiaries directly or indirectly through SGTS so that Sony can reduce unnecessary cash and cash equivalents as well as borrowings as much as possible.
 
Financial Services segment
 
In the Financial Services segment, the management of Sony Financial Holdings Inc. (“SFH”), Sony Life, Sony Assurance and Sony Bank recognize the importance of securing sufficient liquidity to cover the payment of obligations that they 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
 
In its mid-term corporate strategy announced on September 22, 2005, Sony stressed that the most pressing issue confronting Sony today is the revitalization of its electronics business. The strengthening of the competitiveness of Sony’s technologies and its products is an important element of both the revitalization of the Electronics business and Sony’s growth strategy, and Sony expects that research and development activities that support this competitiveness will remain pivotal to its mid- to long term strategy.


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Research and development is focused in four key domains: a common development platform technology for home and mobile electronics and the technologies essential for product differentiation and for creating value-added products, semiconductor, device, and software technologies.
 
Reflecting Sony’s mid-term corporate strategy, in October 2005, Sony established the Display Device Development Group, to accelerate the development of organic light-emitting diode (“OLED”) displays, and the Technology Development Group, to strengthen software development. In April 2007, Sony expressed its intention to begin selling 11- inch OLED flat panel televisions during 2007.
 
Research and development costs for the fiscal year ended March 31, 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 net sales (which excludes financial service 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 22.3 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 62 percent of expenses were for the development of new product prototypes while the remaining approximately 38 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications and displays. In the Game segment, research and development costs decreased mainly due to the completion of most of the 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 net 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 the PS3.
 
Research and development costs for the fiscal year ended March 31, 2005 decreased 12.5 billion yen, or 2.4 percent, to 502.0 billion yen, compared with the previous fiscal year. The ratio of research and development costs to net sales (which excludes financial service revenue) increased from 7.4 percent to 7.5 percent. The bulk of research and development costs were incurred in the Electronics and Game segments. Expenses in the Electronics segment increased 2.4 billion yen, or 0.6 percent, to 433.3 billion yen, and expenses in the Game segment decreased 14.9 billion yen, or 17.9 percent, to 68.5 billion yen. In the Electronics segment, approximately 62 percent of expenses were for the development of new product prototypes while the remaining 38 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications, displays and next generation optical discs. There was an increase in research and development costs related to semiconductor process technology associated with the transfer of Sony Computer Entertainment’s semiconductor manufacturing operations from the Game segment to the Electronics segment. However, the stringent selection of research and development activities resulted in a small increase in research and development expenses within the Electronics segment. Research and development expenses in the Game segment remained high due to the research and development associated with the PSP and the 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
 
Competition in many of Sony’s business segments continues to intensify and price erosion, especially in the Electronics segment, remains persistent. Competition has intensified due to the penetration of broadband, which has


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led to an augmentation of network infrastructure, making it easier for companies in other sectors to enter the markets in which Sony competes.
 
In response to these challenges, Sony has been undertaking initiatives to improve its competitiveness and strengthen the quality of its management, such as a reduction in the number of business categories and the number of models, a rationalization of manufacturing sites and the creation of a more efficient administrative structure, as well as the sale of non-core assets (refer to “Restructuring” in “Item 5. Operating and Financial Review and Prospects” for more detailed information about restructuring). This plan, developed in consultation with Sony’s stakeholders both inside and outside the company, moved to strengthen Sony’s competitiveness in three core sectors — Electronics, Game and Entertainment — through a balanced mix of restructuring and growth initiatives combined with a new organizational structure. In particular, it is the revitalization of Electronics that management regards as the most pressing issue confronting Sony today. As well as reorganizing its Electronics business to place centralized decision-making authority over key areas under the Electronics CEO, Sony is implementing reorganization initiatives to strengthen horizontal coordination in the key areas of product planning, technology, procurement, manufacturing, and sales and marketing. For Sony’s growth strategy in Electronics, resources will be focused on the development and commercialization of high-definition products, mobile products and advanced semiconductors and other key devices that can further differentiate these products, targeting enhanced competitiveness and improved profitability. In the Game segment, Sony intends to expand the PS3 platform while developing its PS2 and PSP businesses.
 
In addition to this cost-cutting and investment for growth, each of Sony’s business segments grappled with issues specific to that segment. Below is a description of the issues management believes each segment continues to face and an explanation as to how each segment is approaching those issues.
 
Electronics
 
Although the Electronics segment continues to hold a very strong position in the worldwide consumer audio visual products market, that position has become increasingly threatened as a result of the entrance of new manufacturers and distributors. These new entrants are threatening Sony’s position due to the industry shift from analog to digital technology. In the analog era, complicated functionality of electronics products was made possible through the combination of several complex parts, and Sony held a competitive advantage in the design and manufacture of those parts as a result of its accumulated expertise. In the digital era, however, complicated functionality has become concentrated on semiconductors and other key digital devices. Since these semiconductors and key devices are able to be mass produced, they have become readily available to new market entrants, and the functionality that once commanded a high premium has become more affordable. This has led to intense price erosion in the consumer audio visual products market. To respond to these challenges, Sony is striving to keep pace with price erosion by reducing its manufacturing and other costs. It is seeking to maintain the premium pricing it enjoys on many of its end-user products by adding functionality to those products and developing new applications and ways of use that appeal to the consumer. In addition, it is taking steps to increase its competitive edge by developing high value-added semiconductors and other digital key devices in-house. By enhancing the in-house production of key devices, Sony aims to incorporate added-value into these key devices.
 
In the area of semiconductors, in the fiscal years ended March 31, 2006 and 2007, Sony carried out 140 billion yen and 150 billion yen, respectively, of capital expenditures mainly on system large scale integrations (“LSI”) and CCDs. These totals also include Sony’s investment in semiconductor fabrication equipment built at the 65 nanometer process technology level. Chips that will be manufactured using this equipment will be some of the most highly advanced on the market, and will include system LSI, in particular the Cell/B.E. microprocessor for the broadband era, which is already used in the computer entertainment system, PS3, and is anticipated for use in digital consumer electronics products. Over the last five years, Sony Corporation, Sony Computer Entertainment, IBM Corporation (“IBM”) and Toshiba Corporation (“Toshiba”) have carried out joint development focused on 90 and 65 nanometer process technology for utilization in the design and manufacturing of the Cell/B.E. Moreover, in 2006 Sony Corporation, IBM, and Toshiba concluded a new joint development agreement and an alliance for the research and development of advanced semiconductor technology has begun.


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Sony has reconsidered 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 CCD and CMOS image sensor, television- and video-related, and Game-related businesses.
 
In the area of other key devices, S-LCD, Sony’s joint venture with Samsung, which is based in South Korea, started production of 7th generation amorphous TFT LCD panel (glass panel size: 1,870mm x 2,200mm) in April 2005 and since October 2005 has been producing 60,000 sheets a month. In July 2006, S-LCD increased its production capacity to 75,000 sheets a month and further increased its production capacity to 90,000 sheets in January 2007.
 
In July 2006, Sony and Samsung signed the final contract regarding the manufacturing of 8th generation TFT LCD panels (glass panel size: 2,200mm x 2,500mm) at the S-LCD joint venture. The total amount of the investment is expected to be approximately 200 billion yen (approximately 50 percent of which will be borne by Sony), the major part of which has already been completed. The start of mass production is targeted for summer 2007 with production capacity expected to be 50,000 sheets a month.
 
Game
 
In the Game segment, for the PS2, which is in its eighth year since release, Sony estimated a decrease in production shipment volume, including hardware and software, for the fiscal year ended March 31, 2007. However, as the PS2 platform is still recording favorable sales around the world, Sony will continue to try to maintain the scale of this business. Sony is strongly promoting the PSP platform by offering new ways to enjoy it, such as by increasing interconnectivity with the PS3, along with expanding the line-up of software unique to the PSP. Sony expects a significant reduction in the operating loss of the PS3 business with the rollout of an exciting software lineup, in addition to seeking rapid cost reductions, mainly by shrinking the size of semiconductor chips and reducing the number of parts in the console.
 
Pictures
 
In the Pictures segment, Sony faces intense competition, rising expenses, including advertising and promotion expenses, and a growing trend toward digital piracy. In addition, the DVD format is ten years old and is showing signs of maturation. To meet these challenges, Sony is working to distribute a diversified portfolio of motion pictures with broad worldwide appeal on existing and new home entertainment formats, including Blu-ray, and on other emerging platforms, including digital download.
 
Financial Services
 
In the Financial Services segment, the value of assets accumulated by the businesses in the segment has grown continuously over the past several years, resulting in a large portion (approximately 42 percent as of March 31, 2007) of Sony’s total assets being accounted for by the Financial Services segment. To strengthen asset management and risk management in parallel with this growing asset value, enhance disclosure of business details, and offer customers integrated financial services tailored to their individual needs, Sony established 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.
 
With respect to the environment in the financial services industry, Sony expects increasingly intense competition as it confronts changes in its business environment. In particular, Sony expects competition to result from the deregulation and liberalization of additional insurance premiums, postal privatization and the complete lifting of the ban on the sale of insurance products at banks, as well as changes in the macroeconomic environment brought about by Japan’s declining population, low birthrate and growing proportion of elderly citizens. In response to this changing environment, each of Sony’s financial services businesses, which are latecomers to the life insurance, property and casualty insurance and banking industries, make use of distinctive, individual industry-specific business models and plan to achieve further business expansion and even higher levels of customer satisfaction.


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CRITICAL ACCOUNTING POLICIES
 
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, Sony evaluates its estimates which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of these evaluations form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. Sony considers an accounting policy to be critical if it is important to its financial condition and results, and requires significant judgments and estimates on the part of management in its application. Sony believes that the following represent the critical accounting policies of the company.
 
Investments
 
Sony’s investments are comprised of debt and equity securities accounted for under both the cost and equity method of accounting. If it has been determined that an investment has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings. Sony regularly evaluates its investment portfolio to identify other-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether an other-than-temporary decline in value has occurred include: the length of time and extent to which the market value of the security has been less than its original cost, the financial condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors affecting the market value, deterioration of credit condition of the issuers, sovereign risk, and ability to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value.
In evaluating the factors for available-for-sale securities whose fair values are readily determinable, management presumes a decline in value to be other-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally a period of up to six months). This criteria is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value is other-than-temporary.
The assessment of whether a decline in the value of an investment is other-than-temporary often requires management judgment based on evaluation of relevant factors. Those factors include business plans and future cash flows of the issuer of the security, the regulatory, economic or technological environment of the investee, and the general market condition of either the geographic area or the industry in which the investee operates. Accordingly, it is possible that investments in Sony’s portfolio that have had a decline in value that are currently believed to be temporary may determine to be other-than-temporary in the future based on Sony’s evaluation of additional information such as continued poor operating results, future broad declines in value of worldwide equity markets or circumstances in market interest rate fluctuations. As a result, unrealized losses recorded for investments may be recognized into income in future periods.
 
Valuation of inventory
 
Sony values its inventory based on the lower of cost or market. Sony writes down inventory to an amount equal to the difference between the cost of the inventory and the net realizable value — i.e., less reasonably predictable costs of completion and disposal. However, if actual market conditions are less favorable than projected and further price decreases are needed, additional inventory write-downs may be required. Additionally, as Sony evaluates its manufacturing cost in yen while it sets its sales prices in euros and U.S. dollars for some products, Sony’s results may be negatively impacted by future exchange rate fluctuations.


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Impairment of long-lived assets
 
Sony reviews the carrying value of its long-lived assets held and used and long-lived assets to be disposed of whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. This review is performed using estimates of future cash flows by product category (e.g. CRT TV display) or entity (e.g. an 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.
In the fiscal year ended March 31, 2005, Sony recorded impairment charges for long-lived assets totaling 19.2 billion yen, which included 7.5 billion yen for the impairment of long-lived assets of CRT TV display manufacturing facilities to be held and used in Europe in connection with certain restructuring activities in the Electronics segment. Fair value of these assets was determined using estimated future discounted cash flows which were based on the best information available.
In the fiscal year ended March 31, 2006, Sony recorded impairment charges for long-lived assets totaling 59.8 billion yen, which included 25.5 billion 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 8.5 billion 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.
In the fiscal year ended March 31, 2007, Sony recorded impairment charges for long-lived assets totaling 16.8 billion yen, which included 3.6 billion yen for the impairment of long-lived assets of CRT TV display manufacturing facilities to be held and used in 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.
 
Goodwill and other intangible assets
 
Goodwill and other intangible assets that are determined to have an indefinite life are not amortized, but are tested annually for impairment in accordance with FAS No. 142 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 established business plans, significant changes in forecasted results or volatility inherent to external markets and industries, which are periodically reviewed by Sony’s management. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit (Sony’s operating segments or one level below the operating segments) with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Other intangible assets are tested for impairment by comparing the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.


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Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. These estimates and assumptions could significantly impact whether or not an impairment charge is recognized as well as the magnitude of any such charge. In its impairment review, Sony performs internal valuation analyses or utilizes third-party valuations when management believes it to be appropriate, and considers other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flow analysis. This approach uses significant estimates and assumptions including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. During the fiscal year ended March 31, 2007, Sony recorded impairment losses of 5,620 million yen in reporting units in the Electronics segment, of which 5,320 million yen was related to the CRT TV business which was downsized in the U.S., and an impairment loss of 237 million yen in a reporting unit included in All Other. These impairment charges reflected the overall decline in the fair value of the subsidiaries. The fair value of the subsidiaries was estimated principally using the expected present value of future cash flows.
Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business assumptions could negatively affect the valuations, which may result in Sony recognizing impairment charges for goodwill and other intangible assets in the future. 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, 2007, a hypothetical 10 percent decrease to the fair value of each reporting unit would not have resulted in a material impairment loss.
 
Pension benefits costs
 
Employee pension benefit costs and obligations are dependent on certain assumptions including discount rates, retirement rates and mortality rates, which are based upon current statistical data, as well as expected long-term rates of return on plan assets and other factors. Specifically, the discount rate and expected long-term rate of return on assets are two critical assumptions in the determination of periodic pension costs and pension liabilities. Assumptions are evaluated at least annually, or at the time when events occur or circumstances change and these events or changes could have a significant effect on these critical assumptions. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods. Therefore, actual results generally affect recognized 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.
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, 2007. 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 represents a 10 basis point increase from the 2.2 percent discount rate used for fiscal year ended March 31, 2006 and reflects current market interest rate conditions. For Japanese pension plans, a 10 basis point increase in the discount rate would decrease pension costs by approximately 0.8 billion yen for the fiscal year ending March 31, 2008.
To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as historical and expected long-term rates of return on various categories of plan assets. For Japanese pension plans, the expected long-term rate of return on pension plan assets was 3.5 percent and 3.7 percent as of March 31, 2006 and 2007 respectively. The actual gain on pension plan assets for the fiscal year ended March 31, 2007 was 0.8 percent. Actual results that differ from the expected return on plan assets are


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accumulated and amortized as a component of pension costs over the average future service period, thereby reducing the year-to-year volatility in pension costs. As of March 31, 2006 Sony had unrecognized actuarial losses of 169.9 billion yen and as of March 31, 2007 Sony had a net actuarial loss of 200.6 billion yen, including losses related to plan assets. For the fiscal year ended March 31, 2007, 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 recorded a minimum pension liability adjustment for the unfunded accumulated benefit obligation for Japanese pension plans of 35.8 billion yen as of March 31, 2006. FAS No. 158 was adopted by Sony in the financial statements for the year ended March 31, 2007. As a result, Sony recorded a pension liability adjustment for the prior service cost, net actuarial loss and obligation existing at transition for Japanese pension plans of 73.5 billion yen as of March 31, 2007. Both adjustments were established by a charge to stockholders’ equity, resulting in no impact to the accompanying consolidated statements of income. Refer to Note 14 of Notes to Consolidated Financial Statements for more information regarding Sony’s pension and severance plans.
The following table illustrates the 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, 2007.
 
                         
    Pre-Tax
  Pension
  Equity
Change in Assumption   PBO   Costs   (Net of Tax)
    (Yen in billions)
 
25 basis point increase/decrease in discount rate
    −/+24.9       −/+2.0       +/−1.2  
25 basis point increase/decrease in expected return on assets
          −/+1.3       +/−0.8  
 
Stock-based compensation
 
Sony accounts for stock-based compensation using the fair value based method. The fair value is measured on the date of grant using the Black-Scholes option-pricing model. Sony estimates the forfeiture rate based on its historical experience for the stock acquisition rights plans, and recognizes this compensation expense, net of an estimated forfeiture rate, only for the stock acquisition rights expected to vest over the requisite service period. The expense is mainly included in selling, general and administrative expenses.
The Black-Scholes option-pricing model requires various highly judgmental assumptions including expected stock price volatility and the expected life of each award. In addition, judgment is also required to estimate the expected forfeiture rate and recognize expense only for those rights expected to vest.
Management believes that these estimates are reasonable; however, if actual results differ significantly from these estimates, stock-based compensation expense may differ materially in the future from that recorded in the current period.
 
Deferred tax asset valuation
 
Sony records a valuation allowance to reduce the deferred tax assets to an amount that management believes is more likely than not to be realized. In establishing the appropriate valuation allowance for deferred tax assets (including deferred tax assets on tax loss carry-forwards), all available evidence, both positive and negative, is considered. Information on historical results is supplemented by all currently available information on future years, because realization of deferred tax assets is dependent on whether each tax-filing unit generates sufficient taxable income. The estimates and assumptions used in determining future taxable income are consistent with those used in Sony’s approved forecasts of future operations. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, less valuation allowance, will be realized.
SCEI and SCEA have recorded cumulative losses in recent years primarily due to the sale of the PS3 at a price lower than production cost during the introductory period, the recording of other charges in association with the preparation for the launch of the PS3 platform and a write-down for semiconductor components used in the PS3. However, Sony expects to establish the same successful business model with the PS3 that it achieved with the PS2,


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which has sold over 100 million units. Taxable income is expected to increase during the tax carryforward period due to the rapid reduction in hardware production costs and an enhanced line-up of software titles in the PS3 business. Accordingly, both companies expect to recover these losses within the next five years.
Given sufficiently strong evidence to support the conclusion that a valuation allowance is not necessary, Sony has decided not to record a valuation allowance for SCEI and SCEA’s deferred tax assets.
 
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 of each film. For example, a film that has resulted in lower than expected theatrical revenues in its initial weeks of release would generally have its theatrical, home entertainment and television distribution ultimate revenues adjusted downward; a failure to do so would result in the understatement of amortized film costs for the period.
 
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 0.90 percent to 5.00 percent. Mortality, morbidity and withdrawal assumptions for all policies are based on either the life insurance subsidiary’s own experience or various actuarial tables. Generally these assumptions are “locked-in” upon the issuance of new insurance. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect Sony’s future insurance policy benefits.
 
RECENTLY ADOPTED ACCOUNTING STANDARDS
 
Inventory Costs -
 
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of FAS No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4.” This statement requires certain abnormal expenditures to be recognized as expenses in the current period. It also requires that the amount of fixed production overhead allocated to the inventory be based on the normal capacity of the production facilities. Sony adopted FAS No. 151 on April 1, 2006. The adoption of FAS No. 151 did not have a material impact on Sony’s results of operations and financial position.
 
Accounting for Stock-Based Compensation -
 
Effective April 1, 2006, Sony adopted FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123(R)”). This statement requires the use of the fair value based method of accounting for employee stock-based compensation and eliminates the alternative to use the intrinsic value method prescribed by Accounting Principle Board Opinion (“APB”) No. 25. With limited exceptions, FAS No. 123(R) requires that the grant-date fair value of share-based payments to employees be expensed over the period the service is received. Sony had accounted for its employee stock-based compensation in accordance with the provisions prescribed by APB No. 25 and its related interpretations and had disclosed the net effect on net income and net income per share (“EPS”)


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allocated to the common stock as if Sony had applied the fair value recognition provisions of FAS No. 123 to stock-based compensation as described in Note 2 to the Consolidated Financial Statements, Significant accounting policies — Stock-based compensation. Sony has elected the modified prospective method of transition prescribed in FAS No. 123(R), which requires that compensation expense be recorded for all unvested stock acquisition rights as the requisite service is rendered beginning with the first period of adoption. As a result of the adoption of FAS No. 123(R), Sony’s operating income decreased by 3,670 million yen for the fiscal year ended March 31, 2007.
 
Derivative Instruments and Hedging Activities -
 
In February 2006, the FASB issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of FAS No. 133 and FAS No. 140. This statement permits an entity to elect fair value remeasurement for any hybrid financial instrument if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under FAS No. 133. The election to measure the hybrid instrument at fair value is made on 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.
 
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans -
 
In September 2006, the FASB issued FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” an amendment to FASB Statements No. 87, 88, 106 and 132(R). FAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit pension and other postretirement benefit plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. FAS No. 158 was adopted by Sony in the financial statements for the year ending 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. Refer to Note 14, “Pension and severance plans”, for further details.
 
Quantifying Effects of Prior Year Misstatements in Current Year Financial Statements -
 
In September 2006, the U.S. Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effect of Prior Year Misstatement when Quantifying Misstatements in Current Year Financial Statements”. SAB No. 108 requires that registrants quantify errors using both a balance sheet approach, generally referred to as the “Iron Curtain” method, and a statement of operations approach, generally referred to as the “Rollover” method, and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 became effective for Sony as of April 1, 2006. Prior to the application of SAB No. 108, Sony used a statement of operations approach to quantify errors. The application of SAB No. 108 did not have a material impact on Sony’s consolidated financial statements.
 
RECENT PRONOUNCEMENTS
 
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 (“AcSEC”) issued the Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance


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


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Item 6.  Directors, Senior Management and Employees
 
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 21, 2007.
 
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
 
     
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
  Chief Operating Officer in charge of Micro Systems Network Company (“MSNC”) and Engineering, Manufacturing and Customer Services (“EMCS”), President, Production Strategy Group, Sony Corporation
Executive Deputy President, Corporate Executive Officer, Sony Corporation
2003
  Executive Vice President, Executive Officer, NC President, MSNC, Sony Corporation
2002
  NC President, Core Technology & Network Company (“CNC”), Sony Corporation
2002
  Corporate Senior Vice President, Sony Corporation
1999
  Corporate Vice President, President, Recording Media Company, CNC, Senior Vice President, CNC, Sony Corporation
1977
  Entered Sony Corporation
Principal Business Activities Outside Sony: None
 


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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:
2005
  Officer in charge of Procurement Strategies and TV & Video Business
NC President of Home Electronics Network Company, Sony Corporation
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 Senior Vice President, NC President, Personal IT Network Company, Sony Corporation
1997
  Corporate Vice President, Sony Corporation
1996
  President, Home A&V Products Company, Sony Corporation
1981
  Entered Sony Corporation
1973
  Entered Mitsui Knowledge Industry Co., Ltd.
Principal Business Activities Outside Sony: None
 
     
Akishige Okada
Date of Birth: April 9, 1938
Outside Director (Member of the Board) Since: 2002
Current Position within Sony: Chairman of the Compensation Committee
Principal Business Activities Outside Sony:
    Advisor, Sumitomo Mitsui Banking Corporation
    Director, Daicel Chemical Industries, Ltd.
    Director, Mitsui & Co., Ltd.
    Statutory Auditor, Toyota Motor Corporation
    Statutory Auditor, Hotel Okura Co., Ltd.
    Statutory Auditor, Mitsui Fudosan Co., Ltd.
Prior Positions:
2002
  Chairman of the Board (Representative Director), Sumitomo Mitsui Financial Group, Inc.
2001
  Chairman of the Board (Representative Director), Sumitomo Mitsui Banking Corporation
 
     
Hirobumi Kawano
Date of Birth: January 1, 1946
Outside Director (Member of the Board) Since: 2003
Current Position within Sony:
  Vice Chairman of the Board
Member of the Nominating Committee
Principal Business Activities Outside Sony: Senior Vice President, JFE Steel Corporation
     
Prior Positions:
2002
  Executive Adviser, The Tokio Marine and Fire Insurance Co., Ltd.
1999
  Director-General, Agency for Natural Resources and Energy, Ministry of International Trade and Industry (“MITI”) (later renamed the Ministry of Economy, Trade and Industry)
1998
  Director-General, Basic Industries Bureau, MITI

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1996
  Director-General, Machinery and Information Industries Policy, Machinery and Information Industries Bureau, MITI
1995
  Director-General, Petroleum Department, Agency of Natural Resources and Energy, MITI
 
     
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 Chairman of the Nominating Committee
Principal Business Activities Outside Sony:
    Chief Corporate Advisor, Fuji Xerox Co., Ltd.
    Director, Nippon Telegraph and Telephone Corporation
    Director, Callaway Golf Company
Prior Positions:
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.
 
     
Sakie T. Fukushima
Date of Birth: September 10, 1949
Outside Director (Member of the Board) Since: 2003
Current Position within Sony: Member of the Compensation Committee
Principal Business Activities Outside Sony:
    Representative Director & Regional Managing Director — Japan, Korn/Ferry International
    Director, Korn/Ferry International, U.S.A.
    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: Member of the Compensation Committee
Principal Business Activities Outside Sony:
    Director, Representative Executive Officer, Chairman and Chief Executive Officer, ORIX Corporation
    Director, Aozora Bank, Ltd.
    Director, Showa Shell Sekiyu K.K.
    Director, Daikyo Incorporated
    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
 

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Yoshiaki Yamauchi
Date of Birth: June 30, 1937
Outside Director (Member of the Board) Since: 2003
Current Position within Sony: Chairman of the Audit Committee
Principal Business Activities Outside Sony:
    Director, Sumitomo Mitsui Financial Group, Inc.
    Director, Sumitomo Mitsui Banking Corporation
    Director, amana Inc.
    Statutory Auditor, Stanley Electric Co., Ltd.
    Statutory Auditor, Sumitomo Wiring System, Ltd.
    Executive Officer, ARI Research Institute
Prior Positions:
1999
  Director, Sumitomo Banking Corporation
1993
  Executive Director, Asahi & Co.