
1.	December 31, 2004. As a result of the adoption of EITF Issue No. 04-8, Sony’s diluted EPS of its income before cumulative effect of an accounting change and its net income for the fiscal year ended March 31, 2004 were restated respectively. Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the fiscal year ended March 31, 2005 were decreased by 7.26 yen and 7.06 yen, respectively, compared to those before the adoption of EITF Issue No. 04-8.

3.	In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ~~ARB~~Accounting Research Bulletins (“ARB”) No. 51”., and the revised FIN No. 46 was issued in December 2003. This interpretation addresses consolidation by a primary beneficiary of a ~~Variable Interest Entity~~variable interest entity (“VIE”). ~~For VIEs created or acquired prior to February 1, 2003,~~ Sony adopted ~~the provisions of~~ FIN No. 46 on July 1, 2003, prior to required compliance. Under FIN No. 46, any difference between the net amount added to the balance sheet and the amount of any previously recognized interest in the VIE shall be recognized as a cumulative effect of accounting change.2003. As a result of ~~adopting~~the adoption of FIN No. 46, Sony recognized a ~~one-time~~2,117 million yen charge ~~with no tax effect of 2.1 billion yen~~ as a cumulative effect of an accounting ~~changes in the consolidated statement of income, and~~change. Additionally, Sony’s assets and liabilities increased by ~~95.3 billion~~96,776 million yen and ~~98.0 billion~~97,950 million yen, ~~respectively. These increases were treated as non-cash transactions in the consolidated statements of cash flows. In addition,~~respectively, including cash and cash equivalents ~~increased by 1.5 billion~~of 1,521 million yen. In December 2003, the FASB issued a revised version of FIN No. 46 (“FIN No. 46R”), which replaced FIN No. 46. Sony adopted the provisions of FIN No. 46R upon its issuance, prior to required compliance. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or in the way Sony had previously accounted for VIEs.

2.	In November 2002, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. Sony adopted EITF Issue No. 00-21 on July 1, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on Sony’s results of operations and financial position as of and for the year ended March 31, 2004.

3.	In May 2003, the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. Sony adopted FAS No. 150 during the first quarter of the year ended March 31, 2004. The adoption of FAS No. 150 did not have an impact on Sony’s results of operations and financial position as of and for the year ended March 31, 2004.

4.	In June 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which nullified EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. Sony adopted FAS No. 146 on January 1, 2003. The adoption of this statement did not have a material effect on Sony’s results of operations and financial position.

5.	On April 1, 2001, Sony adopted FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by FAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities — an Amendment of FASB Statement No. 133”. As a result, Sony’s operating income, income before income taxes and net income for the fiscal year ended March 31, 2002 decreased by ~~3.0 billion~~3,007 million yen, ~~3.4 billion~~3,441 million yen and ~~2.2 billion~~2,167 million yen, respectively. Additionally, Sony recorded a one-time non-cash after-tax unrealized gain of ~~1.1 billion~~1,089 million yen in accumulated other comprehensive income in the consolidated balance sheet, as well as an after-tax gain of ~~6.0 billion~~5,978 million yen in the cumulative effect of accounting changes in the consolidated statement of income. In April 2003, the FASB issued FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging ~~Activities”.~~Activities.” Sony adopted FAS No. 149 on July 1, 2003. The adoption of FAS No. 149 did not have an impact on Sony’s results of operations and financial position.

6.5.	In July 2001, the FASB issued FAS No. 142, “Goodwill and Other Intangible ~~Assets”.~~Assets.” Sony adopted FAS No. 142 retroactive to April 1, 2001. As a result, Sony’s operating income and income before income taxes for the fiscal year ended March 31, 2002 increased by ~~20.1 billion~~20,114 million yen and income before cumulative effect of accounting changes as well as net income for the fiscal year ended March 31, 2002 increased by ~~18.9 billion~~18,932 million yen.

7.	In June 2000, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 00-2, “Accounting by Producers or Distributors of Films”. Sony adopted SOP 00-2 retroactive to April 1, 2000. As a result, Sony’s net


	~~income for the year ended March 31, 2001 included a one-time, non-cash charge with no tax effect of 101.7 billion yen, primarily to reduce the carrying value of its film inventory.~~

8.	In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”. Sony adopted SAB No. 101 in the fourth quarter ended March 31, 2001 retroactive to April 1, 2000. As a result, a one-time non-cash cumulative effect adjustment of 2.8 billion yen was recorded in the income statement directly above the caption of “net income” for a change in accounting principle. In December 2003, SAB No. 101 was amended by SAB No. 104, “Revenue Recognition”. The amendment did not have an impact on Sony’s results of operations and financial position.

Sony’s Electronics and Game segments produce consumer products that compete against products sold by an increasing number of competitors on the basis of factors including price. In order to produce products that appeal to changing and increasingly diverse consumer preferences, and to overcome the fact that a relatively high percentage of consumers already possess products similar to those that Sony offers, Sony’s Electronics and Game segments must develop superior technology, anticipate consumer tastes and rapidly develop attractive products. In the Electronics segment, ~~in the face of~~Sony faces increasingly intense pricing pressure ~~from Korean and Chinese competitors~~ in a

Sony’s consolidated statements of income are prepared from the local currency-denominated financial results of each of Sony Corporation’s subsidiaries around the world which are translated into yen at the average market rate during each financial period. Sony’s consolidated balance sheets are prepared using local currency-denominated assets and liabilities ~~and stockholders’ equity~~ of each of Sony Corporation’s subsidiaries around the world, which are translated into yen at the market rate at the end of each financial period. A large proportion of Sony’s consolidated financial results, assets ~~liabilities~~ and ~~stockholders’ equity~~liabilities is accounted for in currencies other than the Japanese yen. For example, only ~~29.6~~29.3 percent of Sony’s sales and operating revenue in the fiscal year ended March 31, ~~2004~~2005 were originally recorded in Japan. Accordingly, Sony’s consolidated results, assets ~~liabilities~~ and ~~stockholders’ equity~~liabilities in Sony’s businesses that operate internationally, principally in its Electronics, Game, Music and Pictures segments, may be materially affected by changes in the exchange rates of foreign currencies when translating into Japanese yen. In the fiscal ~~years~~year ended March 31, ~~2001 and 2003,~~2005, for example, Sony’s consolidated operating income prepared on the basis of Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”) in yen increased from the preceding fiscal year by ~~1.0 percent and 37.7 percent, respectively;~~15.2 percent; however, if Sony’s consolidated operating income had been prepared on a local currency basis, it would have increased by ~~48 percent and decreased 5 percent~~26 percent. (Refer to “Operating Results” in ~~those two fiscal years, respectively (refer to Operating Results in Item~~“Item 5.Operating and Financial Review and ~~Prospects~~Prospects.”). Operating results on a local currency basis described herein reflect sales and operating revenue and operating income obtained by applying the yen’s monthly average exchange rate in the previous fiscal year to local currency-denominated monthly sales, cost of sales, and selling, general and administrative expenses in the current fiscal year. Foreign exchange fluctuations may have a negative impact on Sony’s results in the future, especially if the yen strengthens significantly against the U.S. dollar or euro.

Sony’s Music segment and Sony’s investment in SONY BMG are dependent on establishing new artists, and Sony’s Music and Pictures segments, as well as Sony’s investment in SONY BMG, are subject to increasing prices for talent.

Sony believes that the utilization of broadband networks to facilitate the integration of hardware and content is essential to differentiating itself in the marketplace. Sony also believes that this strategy will

The composition of Sony ~~increasingly relies on alliances,~~during the last several years has reflected a shift towards the establishment of joint ventures and strategic alliances in order to supplement or replace functions that were previously performed by divisions of Sony Corporation or wholly owned subsidiaries, to mitigate the burden of substantial investments ~~including~~and to achieve operating efficiencies through cooperation with other companies.

Sony products, such as software (including software for mobile phone handsets) and electronic devices including semiconductors, are becoming increasingly sophisticated and complicated as rapid advancements in technologies occur, and as demand increases for digital equipment. At the same time product quality and liability issues present greater risks. In the first half of the fiscal year ended March 31, 2002, Sony recalled products in the mobile phone handset business for quality reasons, which resulted in increased after-sales service expenses of 18.6 billion yen. Sony’s efforts to manage the rapid advancements in technologies and increased demand, as well as to control product quality, may not be successful, and if they are not, Sony may incur expenses ~~such as those~~in connection with, for example, product recalls, service and lawsuits, and Sony’s brand image and reputation ~~for quality~~as a producer of high-quality products may suffer.

Sony recognizes an unfunded pension obligation (in an amount equal to (i) its Projected Benefit Obligation (“PBO”) less (ii) the fair value of plan assets and accrued pension and severance costs) as a pension cost in a systematic and gradual manner over employees’ average remaining service periods as required under FAS No. 87, “Employers’ Accounting for Pensions”. Any decrease of pension asset value due to low ~~return~~returns from investments or ~~increase of~~increases in PBO due to a lower discount rate may increase unfunded pension obligations, resulting in an increase in pension expenses recorded as cost of sales or as a selling, general and administrative expense. Refer to Note 1314 of Notes to Consolidated Financial Statements for more information regarding Sony’s pension and severance plans. Also refer to “Critical Accounting Policies” in “Item 5.Operating and Financial Review and Prospects”.

Sony is subject to environmental and occupational health and safety regulations relating to matters such as reductions or prohibitions in the use of harmful substances, comprehensive compliance and risk management practices in manufacturing activities and products, decreases in the level of standby power of certain products, protection of natural resources and remediation as a result of certain manufacturing operations and the recycling of products, batteries and packaging materials. The European Parliament and the Council of the European Union have published directives on waste electrical and electronic equipment and on the restriction of the use of certain hazardous substances in electrical and electronic equipment. These directives will require electronics producers after August 2005 to bear the cost of collection, treatment, recovery and safe disposal of future products from end-users and to ensure after June 2006 that new electrical and electronic equipment does not contain specified hazardous substances. While the cost of these directives to Sony cannot be determined before regulations are adopted in individual member states, it may be substantial. In the event it is determined that Sony has not complied in a material way with certain environmental laws and regulations, Sony may incur remediation ~~cost~~costs or sustain injury to its brand image. Sony’s activities also may be limited if Sony is unable to comply with such regulations, which could adversely affect Sony’s results.

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

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


*	~~On April 1, 2004, Sony Computer Entertainment Inc., Sony Computer Entertainment America Inc. and Sony Computer Entertainment Europe Ltd. became wholly owned subsidiaries of Sony Corporation.~~

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

~~The~~In the Financial Services segment, ~~includes~~on April 1, 2004 Sony established a wholly-owned subsidiary, SFH, a holding company composed of Sony Life, ~~which underwrites~~Sony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”) with the aim of integrating various financial services including savings and loans, and offering individual customers high value-added products and high-quality services.


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

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

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

Income before income taxes for the fiscal year ended March 31, 2004 decreased 103.6 billion yen, or 41.8 percent, to 144.1 billion yen compared with the previous fiscal year. As mentioned above, operating income and the net amount of other income and other expenses decreased compared with the previous fiscal year.

Income taxes for the fiscal year ended March 31, 2004 decreased by 28.1 billion yen, or 34.7 percent, to 52.8 billion yen, as a result of the decrease in income before income taxes. Income taxes decreased 91.6 billion yen, or 51.2 percent, to 87.2 billion yen, while deferred income tax expense decreased by 63.6 billion yen, or 64.9 percent, to 34.4 billion yen. The effective tax rate for the fiscal year was 36.6 percent, lower than the statutory rate in Japan due to a decrease in deferred tax liabilities on undistributed earnings of foreign subsidiaries and because U.S. income was taxed at a lower rate due to utilization of tax loss and foreign tax credit carryforwards. However, this rate was higher than the effective tax rate of 32.6 percent in the prior fiscal year, which benefited from a reversal in valuation allowances on deferred tax assets by Aiwa Co., Ltd. and its subsidiaries (“Aiwa”).

Equity in net income of affiliated companies during the fiscal year ended March 31, 2004 was 1.7 billion yen, an improvement over the 44.7 billion yen in losses recorded in the previous fiscal year. Equity in net income of Sony Ericsson, ~~Mobile Communications (“Sony Ericsson”),~~ a joint venture focused on mobile phone handsets, was 6.4 billion yen, an improvement from the 20.8 billion yen in losses recorded in the previous fiscal year. This improvement was due to strong demand for Sony Ericsson’s products, particularly in the Global System for Mobile Communications (“GSM”) and Japanese markets, and due to improvements in operating efficiencies at the company. Moreover, S.T. Liquid Crystal Display Corporation (“ST-LCD”), an LCD joint venture in Japan, recorded a profit compared with a loss in the previous fiscal year. Partially offsetting these improvements were equity in net losses of some other affiliated companies such as Crosswave, which commenced reorganization proceedings under the Corporate Reorganization Law of ~~Japan.~~Japan during the fiscal year ended March 31, 2004. The equity in net loss related to Crosswave for the fiscal year ended March 31, 2004 was 1.4 billion yen.

China, accounted for approximately 15 percent of total annual production, ~~approximately 60 percent of which was destined for Japan, the U.S. and Europe. Asia, excluding Japan and China, accounted for approximately 10 percent of total annual production,~~ with
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approximately 60 percent destined for Japan, the U.S. and Europe. The Americas and Europe together accounted for the remaining approximately 25 percent of total annual production, most of which was destined for local distribution and sale. Until July 2003, total annual production included the assembly of ~~PlayStation 2~~PS2 hardware for the Game segment; however, due to the outsourcing of ~~PlayStation 2~~PS2 hardware production to China-based third parties, this assembly activity ceased in July 2003.
Comparison of Results on a Local Currency Basis and Results on a Yen Basis
~~Comparison of Results on a Local Currency Basis and Results on a Yen Basis~~
      In the Electronics segment, the negative effect of the appreciation of the yen against the U.S. dollar slightly exceeded the positive effect of the appreciation of the euro against the yen. Sales for the fiscal year ended March 31, 2004 decreased, on a yen basis, by ~~0.9~~1.1 percent, but increased on a local currency basis by approximately 1 percent. In terms of operating performance on a local currency basis, ana small operating ~~loss~~profit was recorded compared to the operating ~~profit in the previous year, but the amount of that~~ loss ~~was less than~~ on a yen basis.
      Regarding sales to outside customers by geographic area, sales on a yen basis increased in Japan by 11 percent, in Europe by 10 percent, and in Other Areas by 8 percent. Sales on a yen basis in the ~~U.S~~U.S. decreased 7 percent. Sales on a local currency basis for regions outside Japan increased in every region, with ~~sales in Japan increasing 11 percent,~~ sales in Europe increasing 4 percent, sales in Other Areas increasing 14 percent and sales in the U.S. increasing 1 percent.
Game
      Sales for the fiscal year ended March 31, 2004 decreased by 174.8 billion yen, or 18.3 percent, to 780.2 billion yen compared with the previous fiscal year. Operating income decreased by 45.1 billion yen, or 40.0 percent, to 67.6 billion yen compared with the previous fiscal year, and the operating income margin decreased from 11.8 percent to 8.7 percent.
      Sales in the Game segment on a local currency basis decreased 18 percent, approximately the same as on a yen basis. In regards to operating income, the positive impact of the depreciation of the yen against the euro exceeded the negative impact of the appreciation of the yen against the U.S. dollar, resulting in a 52 percent decrease in operating income on a local currency basis.
      By region, sales decreased in Japan, the U.S. and Europe. In Japan, hardware sales declined due to a strategic price reduction of ~~PlayStation 2~~PS2 hardware, despite higher unit sales of ~~PlayStation 2~~PS2 hardware. Software sales in Japan also decreased due to lower unit sales. In the U.S., sales declined due to a decrease in unit sales of ~~PlayStation 2~~PS2 hardware, a strategic price reduction of ~~PlayStation 2~~PS2 hardware and a decrease in software unit sales. In Europe, although hardware unit sales increased as the market penetration of ~~PlayStation 2~~PS2 hardware continued to expand, hardware sales declined due to a strategic price reduction of ~~PlayStation 2~~PS2 hardware. Software unit sales and software sales in Europe both increased.
Total worldwide production shipments of hardware and software were as follows:

Year Ended
March 31
Cumulative as of
2003 2004 March 31, 2004
(Million units)
Total Production Shipments of Hardware
PlayStation + PS one 6.78 3.31 99.72
PlayStation 2 22.52 20.10 71.30
Total Production Shipments of Software*
PlayStation 61.00 32.00 949.00
PlayStation 2 189.90 222.00 572.00

Fiscal Year Ended
March 31
Cumulative as of
2003 2004 March 31, 2004

(Million units)
Total Production Shipments of Hardware*
PlayStation + PS one 6.78 3.31 99.72
PlayStation 2 22.52 20.10 71.30
Total Production Shipments of Software*/**
PlayStation 61.00 32.00 949.00
PlayStation 2 189.90 222.00 572.00
* Production shipments of hardware and software are counted upon shipment of the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers.
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** Including those both from Sony and third parties under Sony licenses.
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      In terms of profitability, operating income decreased compared with the previous fiscal year. This decrease was due to an increase in research and development costs for future businesses and a decrease in hardware sales. Research and development costs increased by 21.9 billion yen to 83.4 billion yen compared with the previous fiscal year. Although research and development costs for software development increased only slightly, costs for the development of semiconductors and process technologies increased significantly.
      Cost of sales in the Game segment decreased due to the decrease in hardware unit sales and reductions in the cost of producing hardware. The cost of sales to sales ratio, however, remained unchanged as the cost of producing ~~PlayStation 2~~PS2 hardware decreased in line with the decrease in hardware sales. Selling, general and administrative expenses decreased as a result of a decline in advertising and promotion expenses, reflecting the decrease in hardware units sold. However, the ratio of selling, general and administrative expenses to sales rose compared to the previous fiscal year as the ratio of personnel related costs and advertising and promotion expenses to sales rose compared with the previous fiscal year.
Music
      Sales for the fiscal year ended March 31, 2004 decreased by ~~37.6~~26.0 billion yen, or ~~6.3~~5.6 percent, to ~~559.9~~440.3 billion yen compared with the previous fiscal year. ~~Compared to an~~The operating loss ~~of 7.9~~for the year ended March 31, 2004 decreased by 22.3 billion yen, inor 78.8 percent, to 6.0 billion yen compared with the previous fiscal ~~year, operating income of 19.0 billion yen was recorded this~~ year.
     ~~On a local currency basis, sales in the Music segment were flat while the Music segment recorded operating income as compared to an operating loss in the previous fiscal year.~~
Sales at ~~Sony Music Entertainment Inc. (“SMEI”),~~SMEI, a U.S. based subsidiary, were flat on a U.S. dollar ~~basis (refer~~basis. (Refer to“Foreign Exchange Fluctuations and Risk ~~Hedging~~Hedging”~~” below).~~ below. ) In terms of profitability, operating results improved as the operating loss for SMEI ~~recorded operating income in the fiscal year as~~decreased compared to ~~an operating loss in~~ the previous fiscal year. The appreciation of European currencies against the U.S. dollar contributed to higher sales outside of the U.S. which were offset by lower sales in the U.S. On a worldwide basis, total album sales at SMEI decreased due to the continued contraction of the global music industry and the lack of hit releases. Although unit sales in various markets such as the U.S. have begun to reverse their downward trend, the global music market has continued to experience an overall contraction primarily due to piracy (i.e. unauthorized file sharing and CD burning) and competition from other entertainment sectors.
     ~~The increase in profitability resulted in operating income at SMEI, compared to an operating loss recorded in the previous fiscal year.~~
      The improvement in profitability primarily resulted from the benefits realized from the worldwide restructuring activities implemented over the past two fiscal years to reduce costs in response to the downward trend of the market. These activities included the rationalization of ~~manufacturing, distribution and~~ support functions including record label shared services through elimination of redundancy. Operating income also benefited from lower restructuring charges as compared to the prior fiscal year. The total ~~cost of~~ restructuring charges for the fiscal year ended March 31, 2004 was 9576 million U.S. dollars or ~~10.7~~8.6 billion yen, a decrease of 9546 million U.S. dollars from the prior fiscal year ~~(refer~~(Refer to “Restructuring” above for details.) A third factor contributing to the improved operating results were lower advertising and promotion expenses. The above factors more than offset the negative effect of lower worldwide album sales. The savings realized from previously implemented restructuring initiatives, lower restructuring charges and the decrease in advertising and promotion expenses resulted in a decrease in selling, general and administrative expenses for the fiscal year and an improvement in the ratio of selling, general and administrative expenses to sales.
      Regarding the results of ~~Sony Music Entertainment (Japan) Inc. (“SMEJ”),~~SMEJ, sales were flat compared with the previous fiscal year, despite the continued contraction of the music industry. Operating income increased 69 percent compared with the prior fiscal year due to a reduction in selling, general and administrative expenses, primarily advertising and promotion expenses, and strong sales of Japanese artists’ recordings.
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      On a yen basis, 7467 percent of the Music segment’s sales were generated by SMEI while 2633 percent were generated by SMEJ.
     In December 2003, Sony and Bertelsmann AG announced that they had signed a binding agreement to combine their recorded music businesses in a joint venture. The newly formed company, which will be known as Sony BMG, will be 50% owned by each parent company. It will not include SMEI’s music publishing, physical distribution and disc manufacturing business or SMEJ. The merger is subject to regulatory approvals in the U.S. and the European Union.
Pictures
      Sales for the fiscal year ended March 31, 2004 decreased by 46.4 billion yen, or 5.8 percent, to 756.4 billion yen compared with the previous fiscal year. Operating income decreased by ~~23.8~~23.7 billion yen, or
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40.3 percent, to 35.2 billion yen and the operating income margin decreased from 7.3 percent to 4.7 percent. The results in the Pictures segment consist of the results of ~~Sony Pictures Entertainment (“SPE”),~~SPE, a U.S. based subsidiary.
On a ~~U.S~~U.S. dollar basis, sales for the fiscal year in the Pictures segment increased approximately 2 percent and operating income decreased approximately 30 percent. The increase in sales was primarily due to higher television performance in the fiscal year. Television revenues increased significantly due to initial syndication sales ofThe King of Queensand third cycle syndication sales ofSeinfeld,as well as the extension of a licensing agreement forWheel of Fortune. This increase in sales was partially offset by lower theatrical and home entertainment revenues from the fiscal year release slate, which included such notable titles asBad Boys 2,S.W.A.T.,Anger ManagementandSomething’s Gotta Give,when compared to the prior fiscal year release slate, which includedSpider-Man,the highest grossing film in SPE’s history,Men in Black II, xXxandMr. Deeds. Sales for the fiscal year release slate decreased 359 million U.S. dollars as compared to the previous fiscal year. Operating income for the segment decreased significantly due to the absence of profits contributed by the record breaking performance ofSpider-Manin the previous fiscal year and, to a lesser extent, the aggregate disappointing performance of several films from the fiscal year release slate includingGigli, Hollywood Homicide, The MissingandCharlie’s Angels: Full Throttle,resulting in ~~a decrease~~an increase in operating ~~income~~loss of 412 million U.S. dollars ~~from~~compared to the prior fiscal year release slate. Additionally, operating income was also negatively impacted by a 38 million U.S. dollar increase in restructuring charges recorded in the fiscal ~~year (refer~~year. (Refer to “Restructuring” above for ~~details).~~details.) Partially offsetting these decreases in operating income was the contribution from the syndication sales and extension of a licensing agreement noted above, DVD sales of television library product and an additional syndication sale ofDawson’s Creek,resulting in a 201 million U.S. dollar increase in operating income. Further improving operating income was the absence of the 66 million U.S. dollar provision recorded in the prior fiscal year with respect to previously recorded revenue from KirchMedia, a licensee in Germany of SPE’s feature film and television product, and related adjustments to ultimate film income.
      As of March 31, 2004, unrecognized license fee revenue at SPE was approximately 1.2 billion U.S. dollars. SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television product. The license fee revenue will be recognized in the fiscal year that the product is available for broadcast.
Financial Services
      The revenue and operating income at Sony Life, Sony Assurance and Sony Bank discussed below differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
      Financial Services revenue for the fiscal year ended March 31, 2004 increased by 56.3 billion yen, or 10.5 percent, to 593.5 billion yen compared with the previous fiscal year. Operating income increased by 32.4 billion yen, or 142.4 percent, to 55.2 billion yen and the operating income margin increased to 9.3 percent compared with the 4.2 percent of the previous fiscal year.
      At Sony Life, revenue increased by 46.4 billion yen, or 9.9 percent, to 513.0 billion yen and operating income increased by 33.6 billion yen, or 113.3 percent, to 63.2 billion yen compared with the previous fiscal year. Revenue increased due to improvements in valuation gains and losses from investments in the separate account and the general account, reflecting strength in the equity markets. This increase occurred
41
despite a 30.8 billion yen reduction in revenue resulting from a change in the method of recognizing insurance premiums received on certain products from being recorded as revenues to being offset against the related provision for future insurance policy benefits since the third quarter beginning October 1, 2003. Insurance revenue decreased as a result of this change in method of recording revenue but the actual life insurance business remained strong as new insurance sales increased compared with the previous fiscal year, and the amount of insurance-in-force at the end of the fiscal year increased compared with the end of the previous fiscal year. Operating income at Sony Life increased due to improvements in valuation gains and losses from investments in the general account. The above mentioned change in revenue recognition method did not have a material effect on operating income. Valuation gains and losses from investments in the separate account accrue directly to the account of policyholders and, therefore, do not affect operating income.
54
      At Sony Assurance, ~~Inc. (“Sony Assurance”),~~ revenue increased due to higher insurance revenue brought about by an expansion in automobile insurance-in-force. Operating income was recorded during the fiscal year compared to an operating loss in the previous fiscal year due to the increase in insurance revenue and an improvement in the expense ratio (the ratio of operating expenses to premiums) and the loss ratio (the ratio of insurance payouts to premiums).
     At
      Sony Finance International, Inc. (“Sony Finance”), a leasing and credit financing business subsidiary in Japan, revenue was unchanged compared to the previous year as credit financing revenue increased slightly and leasing revenue and rent revenue decreased slightly. In terms of profitability, operating loss increased due to the recording of a loss from the lease of certain fixed assets to Crosswave Communications Inc., which commenced reorganization proceedings under the Corporate Reorganization Law of Japan, and an increase in expenses associated with the start, in earnest, of a credit card business.
     ~~Sony~~ Bank, ~~Inc. (“Sony Bank”),~~ which started business in June 2001, recorded a loss, as was also the case in the previous fiscal year, but the amount of loss decreased.
* ~~The revenue and operating income at Sony Life, Sony Assurance and Sony Bank discussed here differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.~~
      At Sony Finance, a leasing and credit financing business subsidiary in Japan, revenue was unchanged compared to the previous fiscal year as credit financing revenue increased slightly and leasing revenue and rent revenue decreased slightly. In terms of profitability, the operating loss increased due to the recording of a loss from the lease of certain fixed assets to Crosswave, which commenced reorganization proceedings under the Corporate Reorganization Law of Japan, and an increase in expenses associated with the start of a credit card business.
~~Condensed Statements of Income Separating Out the Financial Services Segment (Unaudited)~~
Condensed Statements of Income Separating Out the Financial Services Segment (Unaudited)
      The following schedule shows unaudited condensed statements of income for the Financial Services segment and all other segments excluding Financial Services as well as condensed consolidated statements of income. This presentation is not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements.
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Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.

All other segments
All other segments excluding
excluding Financial Services Financial Services Consolidated
Financial Services Financial Services Consolidated
Year Ended March 31 2003 2004 2003 2004 2003 2004
Fiscal Year Ended March 31 2003 2004 2003 2004 2003 2004

(Yen in millions) (Yen in millions)
Financial Services revenue 537,276 593,544 — — 509,398 565,752 537,276 593,544 — — 509,398 565,752
Net sales and operating revenue — — 6,974,980 6,939,964 6,964,235 6,930,639 — — 6,974,980 6,939,964 6,964,235 6,930,639

537,276 593,544 6,974,980 6,939,964 7,473,633 7,496,391 537,276 593,544 6,974,980 6,939,964 7,473,633 7,496,391

Costs and expenses 514,518 538,383 6,811,292 6,896,377 7,288,193 7,397,489 514,518 538,383 6,811,292 6,896,377 7,288,193 7,397,489

Operating income 22,758 55,161 163,688 43,587 185,440 98,902 22,758 55,161 163,688 43,587 185,440 98,902

Other income (expenses), net (1,282 ) 1,958 67,846 52,746 62,181 45,165
Other income (expenses) net (1,282 ) 1,958 67,846 52,746 62,181 45,165

Income before income taxes 21,476 57,119 231,534 96,333 247,621 144,067 21,476 57,119 231,534 96,333 247,621 144,067

Income taxes and other 13,071 22,975 120,089 30,916 132,102 53,439 13,071 22,975 120,089 30,916 132,102 53,439
Cumulative effect of accounting changes — — — (2,117 ) — (2,117 ) — — — (2,117 ) — (2,117 )

Net income 8,405 34,144 111,445 63,300 115,519 88,511 8,405 34,144 111,445 63,300 115,519 88,511

Other
      During the fiscal year ended March 31, 2004, sales of the Other segment were comprised mainly of an ~~in-house oriented information system service business, an~~ advertising agency business in Japan and ~~Sony Communication Network Corporation (“SCN”),~~SCN, an Internet-related service business subsidiary operating mainly in Japan.
      Sales for the fiscal year ended March 31, 2004 increased by ~~24.1~~7.2 billion yen, or ~~7.9~~2.7 percent, to ~~330.4~~268.3 billion yen, compared with the previous fiscal year. Of total segment sales, 5364 percent were sales to outside customers.
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In terms of profit performance, operating losses for the segment decreased from ~~25.0~~28.3 billion yen to ~~10.0~~12.1 billion yen.
During the fiscal year ended March 31, 2004, sales increased primarily due to an increase in sales at the in-house oriented information system service business, reflecting greater demand for its services by other businesses within ~~the Sony Group.~~Sony. Regarding profit performance, the segment recorded a loss primarily due to the recording of expenses associated with the development of network and content technology and services, intended to facilitate new businesses in the broadband age. Overall segment losses decreased compared to the previous fiscal year primarily because a U.S. subsidiary recorded a one-time gain of 7.7 billion yen on the sale of rights related to a portion of the Sony Card portfolio and because software in a discontinued professional-use video software business had been written off in the previous fiscal year. On the other hand, an operating loss was recorded at SCN compared with operating income in the previous fiscal year, due to increased expenses for subscriber acquisition.
Foreign Exchange Fluctuations and Risk Hedging
~~Foreign Exchange Fluctuations and Risk Hedging~~
      During the fiscal year ended March 31, 2004, the average value of the yen was 112.1 yen against the U.S. dollar, and 131.1 yen against the euro, which was 7.3 percent higher against the U.S. dollar and 9.7 percent lower against the euro, respectively, compared with the average of the previous fiscal year. Operating results on a local currency basis described in “Overview” and “Operating Performance” show results of sales and operating revenue and operating income obtained by applying the yen’s monthly average exchange rate in the previous fiscal year to monthly local currency-denominated sales, cost of sales, and selling, general and administrative expenses for the fiscal year ended March 31, 2004, as if the value of the yen had remained constant. In the Music segment, Sony consolidates the yen-translated
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results of SMEI (a U.S. based operation that aggregates the results of its worldwide subsidiaries on a U.S. dollar basis) and the results of SMEJ (a Japan based operation that aggregates the results of its operations in yen). In the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of SPE (a U.S. based operation that has worldwide subsidiaries). Therefore, analysis and discussion of certain portions of the operating results of SMEI and SPE are specified as being on “a U.S. dollar basis.” Results on a local currency basis and results on a U.S. dollar basis are not on the same basis as Sony’s consolidated financial statements and do not conform with U.S. GAAP. In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that local currency basis results provide additional useful information to investors regarding operating performance.
      Sony’s consolidated results are subject to foreign currency fluctuations mainly derived from the fact that the countries where manufacturing takes place may be different from those where such products are sold. In order to reduce the risk caused by such fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy. Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies.
      In 2001, ~~Sony Global Treasury Services Plc (“SGTS”)~~SGTS was established in London for the purpose of providing integrated treasury services for Sony Corporation and its subsidiaries. Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should enter into commitments with SGTS for hedging their exposures. Sony Corporation and most of its subsidiaries utilize SGTS for this purpose. The concentration of foreign exchange exposures at SGTS means that, in effect, SGTS hedges the net foreign exchange exposure of Sony Corporation and its subsidiaries. SGTS in turn enters into foreign exchange transactions with creditworthy third-party financial institutions. Most of the transactions are entered into against projected exposures before the actual export and import transactions take place. In particular SGTS hedges the majority of the exposures on major currency pairs such as U.S. dollar against Japanese yen, euro against Japanese yen and euro against U.S. dollar, on average three months before the actual transactions take place. In the case of emerging market currencies, such as Brazil, with high inflation and high interest rates, the majority of the projected exposures are hedged one month before the actual transactions take place due to cost effectiveness considerations. Sony enters into
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foreign exchange transactions with financial institutions only for hedging purposes and does not undertake speculative transactions.
      To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.
Changes in the fair value of derivatives designated as cash flow hedges, including foreign exchange forward contracts and foreign currency option contracts, are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges are marked-to-market with changes in value recognized in Other Income and Expenses. The notional amounts of foreign exchange forward contracts, currency option contracts purchased and currency option contracts written as of March 31, 2004 were 1,348.2 billion yen, 375.6 billion yen and 124.9 billion yen, respectively.
~~Operating Results for the Fiscal Year Ended March 31, 2003 compared with the Fiscal Year Ended March 31, 2002~~Assets, Liabilities and Stockholders’ Equity
~~Overview~~Assets
     Although the global economy showed some signs of growth in the fiscal year ended March 31, 2003, military action in Iraq contributed to increased economic uncertainty in the second half of the year, particularly in the U.S., and the year ended without any indications of a sustained recovery. In Japan, in addition to stagnant consumer demand and an increase in unemployment, declines in the stock market contributed to the unfavorable economic climate.
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     Under such difficult market conditions and reflecting the impact of the translation of financial results into yen in accordance with U.S. GAAP, the currency in which Sony’s financial statements are prepared, Sony’s sales for the fiscal year ended March 31, 2003 decreased 1.4 percent compared with the previous fiscal year. This decrease was principally due to industry-wide declines in personal consumption in the Electronics segment, and also increased price competition in certain markets, including the PC, DVD-Video player and home-use video camera markets. However, operating income increased 37.7 percent compared with the previous fiscal year due to the beneficial effect of the depreciation of the yen against the euro, as well as increased profitability of the Electronics segment, resulting from restructuring initiatives in previous fiscal years, of the Game segment, due to increased software sales and decreased production costs, and of the Pictures segment, due to strong worldwide performance of certain releases in the fiscal year ended March 31, 2003.
~~On a local currency basis (regarding references to results of operations expressed on a local currency basis, refer to~~~~“Foreign Exchange Fluctuations and Risk Hedging”~~ ~~below), Sony’s sales for the fiscal year ended March 31, 2003 decreased approximately 2 percent and operating income decreased approximately 5 percent compared with the previous fiscal year.~~
~~Restructuring~~
Restructuring charges for the fiscal year ended March 31, 2003 amounted to 106.3 billion yen, compared to 107.0 billion yen in the previous fiscal year. The primary restructuring activities were in the Electronics and Music segments.
~~Electronics~~
     Restructuring charges in the Electronics segment for the fiscal year ended March 31, 2003, were 72.5 billion yen, compared to 86.9 billion yen in the previous fiscal year, but exceeded the 60.0 billion yen total that was estimated at the beginning of the year.
     In the year ended March 31, 2003, a decision was made to reduce production capacity of CRT computer display manufacturing facilities in Japan and Southeast Asia, in response to market contraction resulting from the demand shift from CRT computer displays to flat panel displays such as LCDs. Although the worldwide market for CRT computer displays in the fiscal year ended March 31, 2002 was approximately 96.0 million units, in the fiscal year ended March 31, 2003 it had fallen to approximately 81.0 million units. In order to restore the profitability of the CRT computer display business, which, due to the decrease in demand, had been suffering from low utilization ratios at manufacturing facilities, higher ratios of fixed costs to sales and lower operating income margins, Sony decided to close under-utilized manufacturing facilities. The resulting charges totaled 6.9 billion yen, of which 1.3 billion yen was recorded in cost of sales, 1.7 billion yen was recorded in selling, general and administrative expenses, and 4.0 billion yen was recorded in loss on sale, disposal or impairment of assets, net.
     The restructuring program implemented in the previous fiscal year was accelerated at Aiwa in response to a continued decline in operating performance, caused by further declines in the worldwide market for audio products, which form the majority of Aiwa’s sales. After further reductions in personnel and reductions in the number of unprofitable product lines which resulted in the closure of all of Aiwa’s manufacturing facilities, Aiwa’s operations were integrated with those of Sony. (Aiwa became a wholly-owned subsidiary of Sony Corporation in October 2002, and merged into Sony Corporation on December 1, 2002.) Charges resulting from the restructuring of Aiwa totaled 23.0 billion yen, of which 13.8 billion yen was recorded in cost of sales, 5.7 billion yen in selling, general and administrative expenses, and 3.5 billion yen in loss on sale, disposal or impairment of assets, net.
     In the fourth quarter of the fiscal year ended March 31, 2003, Sony decided to close a semiconductor plant in the U.S. that produced semiconductor wafers for both internal use and the original equipment manufacturer (OEM) market. This closure was both a response to a significant decline in the business conditions of the semiconductor industry in the U.S., and the result of a shift in Sony’s semiconductor strategy. Sony’s semiconductor manufacturing for internal use is moving toward an emphasis on high-end,
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network-centric devices and components because Sony is focusing its efforts on broadband and network-related businesses in response to rapid increases in broadband Internet access. The restructuring activity was completed in the year ended March 31, 2004 (refer to “Restructuring” under~~“Operating Results for the Fiscal Year Ended March 31, 2004”). During the fiscal year ended March 31, 2003, 5.9 billion yen was recorded for this restructuring, all of which was recorded in cost of sales.~~
In addition to these restructuring activities, Sony has continued to reduce headcount through the implementation of several early retirement programs in Japan to further reduce costs in the Electronics segment. The resulting charges totaled 10.9 billion yen, compared to 12.3 billion yen in the previous fiscal year. These charges were recorded in selling, general and administrative expenses.
~~Music~~
     In response to the continued contraction of the worldwide music market due to slow worldwide economic growth, the saturation of the CD market, the effects of piracy and other illegal duplication, parallel imports, pricing pressures and the diversification of customer preferences brought on by increased competition from other entertainment sectors, Sony has been actively repositioning the Music segment for the future by looking to create a more effective and profitable business model. As a result, the Music segment has undertaken a worldwide restructuring program since the fiscal year ended March 31, 2001 to reduce staffing and other costs through the consolidation and rationalization of facilities worldwide. Under this worldwide restructuring program, SMEI incurred restructuring charges of 22.4 billion yen for the fiscal year ended March 31, 2003, compared to 8.6 billion yen in the previous fiscal year. This exceeded the estimate made in January 2003, as certain restructuring initiatives originally expected to be undertaken in the fiscal year ended March 31, 2004 were accelerated as a result of a management change and the continued decline in the worldwide music market. Of the 22.4 billion yen in total charges at SMEI, 19.1 billion yen was recorded in selling, general and administrative expense and 3.3 billion yen was recorded in loss on sale, disposal or impairment of assets, net.
     Restructuring activities included the further consolidation of operations through the shutdown of a CD and cassette manufacturing and distribution center in Holland, the shutdown of a CD manufacturing facility in the U.S. (announced on April 2, 2003, although the decision to shut down the facility was made during the fiscal year ended March 31, 2003) as well as further staff reductions to consolidate various support functions across labels and operating units. These restructuring activities resulted in the termination of over 1,400 jobs during the fiscal year ended March 31, 2003, of which approximately 600 were in the U.S.
     ~~Total restructuring charges in the Music segment, including SMEJ, were 23.9 billion yen.~~
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~~The table below summarizes major restructuring activities for which charges of over 5 billion yen were recorded during the fiscal year ended March 31, 2003.~~
~~Costs incurred in~~
~~the fiscal Year~~
~~Ended~~
~~Segment~~ ~~Nature of Restructuring~~ ~~March 31, 2003~~ ~~Additional Information~~
~~Electronics~~ ~~Reduction of CRT production capacity in Japan and SE Asia~~ ~~6.9 billion yen~~ ~~Remaining liability balance of 0.4 billion yen at March 31, 2003 was used during the fiscal year ended March 31, 2004.~~
~~Personnel reductions and closure of all Aiwa’s facilities~~ ~~23.0 billion yen~~ ~~No remaining liability balance at March 31, 2003.~~
~~Closure of semiconductor plant in U.S.~~ ~~5.9 billion yen~~ ~~Remaining liability balance of 1.5 billion yen at March 31, 2003 was used during the fiscal year ended March 31, 2004.~~
~~Early retirement program~~ ~~10.9 billion yen~~ ~~Remaining liability balance of 1.0 billion yen at March 31, 2003 was used during the fiscal year ended March 31, 2004.~~
~~Music~~ ~~Closure of CD and cassette manufacturing and distribution facility in Holland, CD manufacturing facility in U.S., and others~~ ~~23.9 billion yen~~ Remaining reserve balance of 11.5 billion yen at March 31, 2003 to be used by March 31, 2006. Estimated total charges at SMEI, for years ended March 31, 2001 to March 31, 2006, are 43.4 billion yen with an estimated 4.5 billion yen of these charges expected to be incurred in the future.
~~Operating Performance~~

Year Ended
March 31
2002 2003 Percent change
(Yen in billions)
Sales and operating revenue 7,578.3 7,473.6 -1.4 %
Operating income 134.6 185.4 +37.7
Income before income taxes 92.8 247.6 +166.9
Net income 15.3 115.5 +654.5
~~Sales~~
Sales for the fiscal year ended March 31, 2003 decreased by 104.6 billion yen, or 1.4 percent, to 7,473.6 billion yen compared with the previous fiscal year. A further breakdown of sales figures is presented under~~“Operating Performance by Business Segment”~~ ~~below.~~
     (“Sales” in this analysis of the ratio of selling, general and administrative expenses to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue, and excludes Financial Service revenue. This is because Financial Service expenses are recorded separately from cost of sales and selling, general and administrative expenses. Furthermore, in the analysis of cost of sales, including research and development costs, to sales, only “net sales” are used. This is because cost of
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~~sales is an expense associated only with net sales. All the ratios below that pertain to business segments are calculated with intersegment transactions included.)~~

~~Cost of Sales and Selling, General and Administrative Expenses~~
     Cost of sales for the fiscal year ended March 31, 2003 decreased by 260.2 billion yen, or 5.0 percent, to 4,979.4 billion yen compared with the previous fiscal year, and decreased from 74.2 percent to 72.0 percent as a percentage of sales. Year on year, the cost of sales ratio decreased from 80.5 percent to 78.8 percent in the Electronics segment, 74.7 percent to 70.2 percent in the Game segment, 64.0 percent to 61.5 percent in the Music segment, and 62.0 percent to 58.2 percent in the Pictures segment. The cost of sales ratio in the Electronics segment improved due to the effects of prior restructuring and other cost reduction measures, and the cost of sales ratio in the Game segment improved due to reductions in PlayStation 2 hardware production costs. These improvements occurred despite declining sales in the Electronics and Game segments. The cost of sales ratio in the Pictures segment improved due to increased revenue resulting from the strong worldwide performance, both theatrically and in home entertainment, of releases in the fiscal year ended March 31, 2003.
     Although the cost of sales ratio decreased year on year, assisted by the positive effect of the appreciation of the euro against the yen on sales, the cost of sales ratio in the fourth quarter of the fiscal year ended March 31, 2003 increased due to declining sales and temporary reductions in production volume for the purpose of lowering inventory to target levels at the end of the fourth quarter. These production adjustments were carried out primarily in March 2003, mainly in the Electronics segment. Research and development costs (included in cost of sales) for the fiscal year ended March 31, 2003 increased by 9.9 billion yen, or 2.3 percent, to 443.1 billion yen compared with the previous fiscal year, with much of this increase in the Game segment. The ratio of research and development costs to sales increased from 6.1 percent to 6.4 percent.
     Selling, general and administrative expenses for the fiscal year ended March 31, 2003 increased by 86.5 billion yen, or 5.1 percent, to 1,782.4 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales increased from 23.9 percent in the previous fiscal year to 25.6 percent. Year on year, the ratio of selling, general and administrative expenses to sales increased from 18.9 percent to 20.3 percent in the Electronics segment, from 16.7 percent to 18.0 percent in the Game segment, from 32.7 percent to 39.8 percent in the Music segment, and from 32.8 percent to 34.4 percent in the Pictures segment.
     Advertising and promotion expenses increased 40.8 billion yen mainly due to increased expenses in the Pictures segment, which contributed to increased box office and home entertainment revenue. Increased competition and the continued reduction in the time interval between theatrical and home entertainment release has resulted in a trend towards larger initial advertising expenditures. Personnel related costs increased 30.5 billion yen compared with the previous fiscal year, and have increased over each of the last three years. A major factor in this increase is the recording of increased severance related expenses, as Sony accelerates its restructuring activities. Severance-related charges in the fiscal year ended March 31, 2003 increased by 14.6 billion yen, or 23.3 percent, mainly in the Electronics and Music segments, to reach a total of 77.4 billion yen. Royalty expenses increased 16.9 billion yen.
     The increase in selling, general and administrative expenses was partially offset by a 33.9 billion yen decrease in after-sales service expenses in the fiscal year ended March 31, 2003, caused mainly by the absence of non-recurring expenses recorded during the previous fiscal year due to mobile phone-related quality issues. The increase in selling, general and administrative expenses was also offset by a decrease of 10.0 billion yen in loss on the sale, disposal or impairment of assets, net. This was due to a 19.0 billion yen decrease in such losses in the Electronics segment, offset by a 6.4 billion yen increase in such losses in the Other segment.
     The ratio of selling, general and administrative expenses to sales in the fourth quarter was 32.5 percent, an increase from 26.6 percent in the fourth quarter of the previous fiscal year. This was due to an increase in selling, general and administrative expenses and a decrease in sales compared with the
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same quarter of the previous fiscal year. Selling, general and administrative expenses increased primarily due to an increase in royalty expenses amounting to 23.3 billion yen. Sales decreased due to pricing pressure and discount selling of goods for the purpose of lowering inventory to target levels at the end of the quarter.
~~Operating Income~~
Operating income for the fiscal year ended March 31, 2003 increased by 50.8 billion yen, or 37.7 percent, to 185.4 billion yen compared with the previous fiscal year. Operating income margin increased from 1.8 percent to 2.5 percent. The segments making the most significant contributions to the year on year increase in operating income were the Electronics segment, the Game segment and the Pictures segment, in descending order of financial impact.
~~Other Income and Expenses~~
     In the consolidated results for the fiscal year ended March 31, 2003, other income increased by 61.2 billion yen, or 63.5 percent, to 157.5 billion yen, while other expenses decreased by 42.8 billion yen, or 31.0 percent, to 95.3 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 62.2 billion yen compared to net other expense of 41.9 billion yen in the previous fiscal year.
     The increase in other income was primarily due to the recording of a 72.6 billion yen gain on sales of securities investments and other, net, for the year ended March 31, 2003. This was mostly due to a 66.5 billion yen gain on the sale, in April 2002, of Sony’s equity interest in Telemundo, a U.S. based Spanish language television network and station group that was accounted for under the equity method. In addition, Sony deferred an approximate 6.0 billion yen gain on this sale due to provisions in the sale agreement that required a partial refund of the purchase price for certain losses or claims as defined in the agreement. The right of the acquirer to claim such refunds expired in April 2003 without any such claim being made. Therefore, Sony recorded an additional gain of 6.0 billion yen in April 2003. Gains were also recorded on the sale of the equity interest in Sony Tektronix Inc., which develops, manufactures and sells electronic measuring instruments and related devices, and Columbia House Company (“CHC”), a direct marketer of music and videos. Other income was positively impacted by a net foreign exchange gain of 1.9 billion yen recorded during the year, compared with a net foreign exchange loss of 31.7 billion yen recorded in the previous fiscal year. The net foreign exchange gain recorded during the year was primarily due to gains incurred on foreign exchange forward contracts and foreign currency option contracts, which Sony employs to hedge the risk from exchange rate fluctuations, while the foreign exchange losses recorded during the previous fiscal year were due to losses incurred on such contracts due to the rapid depreciation of the yen between December 2001 and March 2002. Compared to the previous fiscal year, interest and dividends received decreased from 16.0 billion yen in the previous fiscal year to 14.4 billion yen, primarily due to lower interest earned from investments.
     The decrease in other expenses was primarily due to the absence of the net foreign exchange loss recorded in the previous fiscal year as noted above. Interest expense also decreased by 9.1 billion yen, or 25.0 percent, to 27.3 billion yen, primarily due to lower average balances of short-term borrowings and lower interest rates. As a result, the amount of income from interest and dividends less interest expense improved to a net expense of 12.9 billion yen, compared with a net expense of 20.4 billion yen in the previous fiscal year. Partially offsetting the decrease in other expenses was an increase of 4.7 billion yen, or 25.7 percent, to 23.2 billion yen, in losses on the devaluation of securities investments, including securities issued by companies in the U.S. and Europe with which Sony has strategic relationships for the purpose of developing and marketing new technologies. Such companies include Canal+ Technologies, a developer of middleware and conditional access technologies for digital broadcasting, TIVO Inc., a marketer of digital video recorders, and Transmeta Corporation, a chip manufacturer.
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~~Income before Income Taxes~~
Income before income taxes for the fiscal year ended March 31, 2003 increased by 154.8 billion yen, or 166.9 percent, to 247.6 billion yen compared with the previous fiscal year. Significant contributors to the year on year increase in income before income taxes, in descending order of significance, were the increase in operating income, the increase in gains on sales of securities investments and other, net, and the absence of the foreign exchange loss recorded in the previous fiscal year.
~~Income Taxes~~
     Income taxes for the fiscal year ended March 31, 2003 increased by 15.6 billion yen, or 24.0 percent, to 80.8 billion yen. The increase in income tax was principally due to the increase in income before income taxes described above, although this increase was partially offset by a tax benefit of 51.9 billion yen recorded due to the reversal of valuation allowances on deferred tax assets held by Aiwa as these assets became recoverable as a result of Sony’s decision to merge with Aiwa.
~~The ratio of income taxes to income before income taxes (the effective tax rate) decreased from 70.3 percent in the previous fiscal year to 32.6 percent.~~
~~Results of Affiliated Companies Accounted for under the Equity Method~~
     During the fiscal year ended March 31, 2003, equity in net losses of affiliated companies increased from 34.5 billion yen in the previous fiscal year to 44.7 billion yen. Sony Ericsson, a joint venture focused on mobile phone handsets recorded a 20.8 billion yen loss. In addition, equity affiliates recording losses included ST-LCD, an LCD joint venture in Japan, Crosswave, a data communications carrier offering customers broadband networks and network services in Japan, and BE-ST Bellevuestrasse Development GmbH & Co. First Real Estate KG, Berlin, a real estate business in Germany. Regarding the significant losses at Sony Ericsson, no year on year comparison is available because Sony Ericsson was established in October 2001. However, the loss of 10.7 billion yen recorded due to Sony Ericsson in the second half of the fiscal year ended March 31, 2003 was greater than the 7.4 billion yen loss recorded in the second half of the fiscal year ended March 31, 2002. This increase in losses was due to the following factors: decreased sales in the fourth quarter ended March 31, 2003, compared to the fourth quarter ended March 31, 2002, due to increased pricing pressure; increased expenses due to the phase-in of new products in the GSM and Japanese markets; and the recording of an operating loss in the fourth quarter ended March 31, 2003 compared to income in the fourth quarter ended March 31, 2002, which benefited from the successful introduction of two high-end models in the Japanese and European markets. In the fourth quarter ended March 31, 2003, Sony and Telefonaktiebolaget LM Ericsson each invested an additional 150 million euro in Sony Ericsson to strengthen its financial position (refer to “Electronics”, above).
In the first quarter of the fiscal year ended March 31, 2003, SPE and other non-Sony investors sold Telemundo to NBC, a media company owned by the General Electric Company. In the same quarter, SMEI and AOL Time Warner Inc.’s Warner Music Group each sold the majority of their holding in CHC to Blackstone Capital Partners, an affiliate of The Blackstone Group, an investment bank. The Chairman of the Blackstone Group was a director of Sony Corporation until June 2002.
~~Minority Interest in Income (Loss) of Consolidated Subsidiaries~~
     In the fiscal year ended March 31, 2003, minority interest in the income of consolidated subsidiaries, which is excluded from income before income taxes, was 6.6 billion yen, compared to a 16.2 billion yen minority interest in the loss of consolidated subsidiaries recorded in the previous fiscal year. This change was principally due to the reversal of valuation allowances on deferred tax assets held by Aiwa and because Sony no longer recorded a minority interest in Aiwa’s losses as Sony took Aiwa private in October 2002.
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~~Net Income~~
     Net income for the fiscal year ended March 31, 2003 increased by 100.2 billion yen, or 654.5 percent, to 115.5 billion yen compared with the previous fiscal year. As a percentage of sales, net income increased from 0.2 percent to 1.5 percent. The most significant contribution to the year on year increase in net income was the increase in income before income taxes. However the effect of the minority interest in the income of consolidated subsidiaries, the absolute increase in income taxes, and the increase in losses in equity of affiliated companies caused net income to be 132.1 billion yen less than income before income taxes, compared to a difference of 77.5 billion yen in the previous fiscal year.
     The return on stockholders’ equity increased from 0.7 percent to 5.0 percent. (This ratio is calculated by dividing net income by the simple average of stockholders’ equity at the end of the previous fiscal year and at the end of the fiscal year ended March 31, 2003.)
Basic net income per share was 125.74 yen compared with 16.72 yen in the previous fiscal year, and diluted net income per share was 118.21 yen compared with 16.67 yen in the previous fiscal year. Refer to Notes 2 and 20 of Notes to Consolidated Financial Statements.
~~Operating Performance by Business Segment~~
The following discussion is based on segment information. Sales and operating revenue in each business segment include intersegment transactions. Refer to Note 23 of Notes to Consolidated Financial Statements.
~~Business Segment Information~~

Year Ended
March 31
2002 2003 Percent change
(Yen in billions)
Sales and Operating revenue

Electronics 5,286.2 4,940.5 -6.5 %
Game 1,003.7 955.0 -4.9
Music 600.1 597.5 -0.4
Pictures 635.8 802.8 +26.3
Financial Services 509.1 537.3 +5.5
Other 261.5 306.3 +17.1

Elimination (718.1 ) (665.7 ) —

Consolidated 7,578.3 7,473.6 -1.4

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Year Ended
March 31
2002 2003 Percent change
(Yen in billions)
Operating income (loss)

Electronics (1.2 ) 41.4 —
Game 82.9 112.7 +35.9 %
Music 22.1 (7.9 ) —
Pictures 31.3 59.0 +88.6
Financial Services 21.8 22.8 +4.3
Other (18.2 ) (25.0 ) —

Elimination and unallocated corporate expenses (4.1 ) (17.5 ) —

Consolidated 134.6 185.4 +37.7

     Commencing with the first quarter ended June 30, 2003, Sony partly realigned its business segment configuration. Expenses incurred in connection with the creation of a network platform business were transferred out of the Other segment and reclassified as unallocated corporate expenses, because the expected future benefits of this business will be spread across the Sony Group. In accordance with this realignment, results of the fiscal years ended March 31, 2002 and 2003 have been reclassified to conform to the presentation for the fiscal year ended March 31, 2004.
     The above reclassification also reflects the effect of Sony’s realignment of its business segment configuration and Electronics segment product category configuration from the first quarter ended June 30, 2002. From the first quarter ended June 30, 2002, sales of businesses devoted to the creation of a network platform business and of businesses devoted to the development of network and content technology and services have been included in the “Other” segment. In addition to SCN, which was originally contained in the “Other” segment, these businesses include an in-house oriented information system service business and an IC card business formerly contained in the “Other” category of the Electronics segment.
~~Electronics~~
     Sales for the fiscal year ended March 31, 2003 decreased by 345.7 billion yen, or 6.5 percent, to 4,940.5 billion yen compared with the previous fiscal year. Operating income of 41.4 billion yen was recorded compared to an operating loss of 1.2 billion yen in the previous fiscal year. The year on year decrease in sales was due to the continued industry-wide effects of falling consumption in markets for certain products in the Electronics segment, increased price competition worldwide, and the impact of business withdrawals and rationalization of product lines (refer to Note 16 of Notes to Consolidated Financial Statements).
     Regarding sales to outside customers by geographic area, sales decreased by 12 percent in the U.S. and by 9 percent in Japan, but sales increased by 2 percent in Europe and Other Areas, respectively. Sales decreased in the U.S. over a wide range of products including, in descending order of financial impact, PCs, computer displays, Aiwa products, CRT televisions, DVD-Video players, home-use video cameras, home audio and CD-R/ RW drives. Sales in the U.S. were also negatively impacted by Sony’s withdrawal from the home telephone business in 2001. Products with increased sales in the U.S. included personal digital assistants, projection televisions and digital still cameras. In Japan, overall demand decreased substantially, with PCs, Aiwa products, home-use video cameras and CRT televisions showing year on year sales declines; however, sales of semiconductors increased. In Europe, sales of PCs, digital still cameras and digital home-use video cameras showed strong sales growth, while sales of Aiwa products and computer displays decreased. Sales in Europe were also positively impacted by the strength of the euro against the yen in the second half of the year. In Other Areas, sales of digital still cameras, home-use video cameras and PCs increased while sales of Aiwa products and broadcast- and professional-use products decreased. The transfer of Sony’s mobile phone business to Sony Ericsson, an affiliate accounted
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for under the equity method since October 2001, also had a negative impact on sales, particularly in Japan and Europe. This was because before the transfer of the business to Sony Ericsson, Sony handled all aspects of the mobile phone operation from manufacturing through to sales, while now Sony only manufactures handsets for Sony Ericsson and Sony Ericsson is responsible for the remainder of the operation. These sales are recorded in the Electronics segment.
The sales decrease during the fiscal year ended March 31, 2003, accelerated in the fourth quarter, as sales decreased by 227.0 billion yen, or 18.1 percent, to 1,025.3 billion yen compared to the fourth quarter of the previous fiscal year. This was principally due to declines in sales, in descending order of financial impact, of PCs, CRT televisions, Aiwa products, computer displays, home-use video cameras and home audio.
~~Performance by Product Category~~
     Sales and operating revenue by product category discussed below represent sales to customers, which do not include intersegment transactions. Refer to Note 23 of Notes to Consolidated Financial Statements.
     “Audio” sales decreased by 65.0 billion yen, or 8.7 percent, to 682.5 billion yen. Sales of home audio declined in all geographic areas, although sales of home theater systems increased principally in Europe and the U.S. Regarding headphone stereos, MD format sales increased due to rapid market growth particularly in the U.S. However, CD format headphone stereos sales decreased overall due to the contraction of the U.S. market, although such sales rose strongly in Europe aided by continued market expansion and the depreciation of the yen against the euro. Sales of both formats declined in Japan. Overall sales for the cassette format decreased due to the continued contraction of the market in all areas. Worldwide shipments of MD format headphone stereos increased by approximately 370,000 units to approximately 3.32 million units. Worldwide shipments of CD format headphone stereos increased by approximately 250,000 units to approximately 10.72 million units. Sales of home telephones declined because of Sony’s withdrawal from the home telephone business in the U.S. and Japan in the previous fiscal year.
     “Video” sales increased by 3.8 billion yen, or 0.4 percent, to 851.1 billion yen. The increase was principally due to higher sales of digital still cameras in all areas and digital home-use video cameras in Other Areas, particularly Asia, and Europe. Worldwide shipments of digital still cameras increased by approximately 2.2 million units to approximately 5.6 million units. Worldwide shipments of home-use video cameras, both analog and digital, increased by approximately 350,000 units to approximately 5.75 million units. However, analog home-use video camera sales decreased due to lower demand, particularly in the U.S. Overall sales of home-use video cameras decreased in Japan and the U.S. due to increased price competition. DVD-Video player sales decreased primarily in the U.S. where pricing pressure was severe, although the market expanded. Sales from set-top boxes decreased due to a decline in unit sales in the U.S. and Europe.
     “Televisions” sales decreased by 34.1 billion yen, or 3.5 percent, to 950.2 billion yen. One factor leading to the decrease was a substantial decline in CRT television sales in the U.S. and Japan, as a result of market contraction, although sales in Europe increased partly due to the appreciation of the euro against the yen. Worldwide shipments of CRT televisions were approximately 10 million units, almost flat compared with the previous fiscal year. Another factor causing the decrease was a decline in sales of CRT computer displays in the U.S., Europe and Japan, resulting from the shift in demand towards flat panel computer displays. A third factor was a decrease in the sales of CRTs, reflecting the decline in the market for CRT televisions and CRT computer displays. Offsetting these decreases were higher sales of large-screen projection televisions, particularly in the U.S., and plasma and LCD flat panel televisions.
     “Information and Communications” sales decreased by 162.0 billion yen, or 16.2 percent, to 836.7 billion yen. The decrease was primarily due to lower sales of PCs and broadcast- and professional-use products. Further, since October 2001, when Sony began recording mobile phone handset sales as sales to Sony Ericsson in “Other”, no sales of mobile phone handsets have been recorded under “Information and Communications”. Sales of PCs decreased in Japan and the U.S. due to increased price competition.
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Worldwide shipments of PCs decreased by approximately 400,000 units to approximately 3.1 million units. Sales of personal digital assistants increased significantly, particularly in the U.S. and Europe, as the market for these products expanded. Sales of broadcast- and professional-use products decreased as many broadcasters postponed the installation of new systems due to economic uncertainty.
     “Semiconductors” sales increased by 22.4 billion yen, or 12.3 percent, to 204.7 billion yen. The increase was primarily due to a significant increase in sales of CCDs, particularly in Japan and Other Areas, reflecting higher demand for digital still cameras, and a significant increase in sales of bipolar integrated circuits for CD-R/ RW and DVD drives, particularly in Japan. Partially offsetting the above increase was a decrease in sales revenue from high temperature LCDs in all geographic areas due to pricing pressure.
     “Components” sales increased by 16.2 billion yen, or 3.2 percent, to 527.8 billion yen. The increase was primarily due to significant increases in sales of DVD drives, Memory Stick and batteries. DVD drive sales increased as the strong performance of Sony branded products, particularly in the U.S., allowed Sony to avoid unit price reductions. Memory Stick sales increased due to continued demand for digital still cameras, with worldwide shipments of Memory Stick increasing by approximately 8 million units to approximately 19 million units. At the end of the fiscal year ended March 31, 2003, Sony’s cumulative shipments of Memory Stick had reached 39 million units. Regarding batteries, the growing market for lithium-ion batteries led to strong revenue growth despite declines in the average selling price. On the other hand, sales of CD-R/ RW drives decreased due to severe price competition.
     “Other” sales decreased by 10.5 billion yen, or 2.1 percent, to 490.4 billion yen, primarily due to lower sales of Aiwa products in all geographic areas. This decrease was partially offset by the sales of mobile phone handsets which were transferred from “Information and Communications” to “Other” in October 2001, as a result of their becoming sales to Sony Ericsson.
     In the Electronics segment, cost of sales for the fiscal year ended March 31, 2003 decreased by 368.5 billion yen, or 8.7 percent to 3,869.2 billion yen compared with the previous fiscal year. This decrease was due to the effects of restructuring carried out in the previous fiscal year in CRTs and other products, the increased profitability as a result of increased sales in semiconductors, batteries and other products, and the favorable impact of the appreciation of the euro against the yen. A majority of goods sold in Europe are imported from other regions; therefore an appreciation of the euro causes increased sales without a corresponding increase in the cost of sales. Research and development costs were 380.3 billion yen, almost flat year on year. The cost of sales ratio decreased from 80.5 percent to 78.8 percent.
     Selling, general and administrative expenses decreased by 0.8 billion yen, or 0.1 percent to 1,000.8 billion yen compared with the previous fiscal year. After-sales service expenses decreased by 36.5 billion yen, partially because of the absence of mobile phone-related after-sales service expenses recorded in the previous fiscal year. Royalty expenses increased 16.9 billion yen. The ratio of selling, general and administrative expenses to sales increased from 18.9 percent to 20.3 percent due to the decrease in sales.
     Loss on sale, disposal or impairment of assets, net also decreased, by 19.0 billion yen, primarily because of a decrease in restructuring charges related to reductions in CRT computer display manufacturing capacity, mainly in the U.S. In the fiscal year ended March 31, 2003, due to CRT computer display related restructuring in Japan and South-East Asia, a restructuring charge of 4.0 billion yen was recorded in loss on sale, disposal or impairment of assets, net.
     Regarding profit performance by product compared with the previous fiscal year, the largest gains in operating income were recorded in CRTs, portable audio, batteries, CRT televisions, recording media and digital still cameras. Increased demand for semiconductors resulted in a substantial decrease in the size of losses. On the other hand, losses increased in PCs and Aiwa products. Restructuring carried out in the previous fiscal year also led to improved profitability in several component businesses, including CRTs and recording media, as a result of the reduction of fixed costs and the concentration of resources toward
54
successful products. Also contributing to the increase in profitability was the withdrawal from the loss-making home telephone business and the transfer, in October 2001, of Sony’s mobile handset business, which was recording a loss, to Sony Ericsson. Further, operating income benefited from the depreciation of the yen against the euro, which exceeded the negative impact of the appreciation of the yen against the U.S. dollar.
     Partially offsetting the increase in profitability were losses recorded in PCs, where sales declined due to increased competition from lower priced products. Large operating losses were also recorded by Aiwa in almost all geographic areas as a result of reduced sales because of a decline in the competitiveness of Aiwa’s mainstay products such as audio, restructuring charges including costs of headcount reductions, inventory write-downs brought about by the elimination of product lines, and the sale and disposal of production facilities. Sony Corporation absorbed Aiwa by merger on December 1, 2002.
In the past Sony has recorded losses in the fourth quarter, due to a seasonal decline in demand for electronics products. However, the loss in the fourth quarter of the fiscal year ended March 31, 2003 increased substantially due to, in descending order of financial impact, a decline in sales, an increase in selling, general and administrative expenses associated with an increase in patent-related and other expenses, and a deterioration in the cost of sales ratio due to reductions in production undertaken to lower inventory to target levels and pricing pressure. Fourth quarter operating losses in the Electronics segment totaled 116.1 billion yen compared with an operating loss of 51.3 billion yen in the same quarter of the previous fiscal year. Significant losses were recorded by products including Aiwa products, semiconductors, digital still cameras and home audio. An approximate 5.9 billion yen restructuring charge for the closure of a semiconductor plant in the U.S. impacted the loss in the semiconductor business.
~~Manufacturing by Geographic Area~~
Regarding the geographic breakdown of total annual production in the Electronics segment (including the assembly of PlayStation 2 for the Game segment), and the final destination of such production, half of total production was in Japan, including production of digital still cameras, semiconductors, personal digital assistants, components (including batteries and Memory Stick), and plasma televisions. Approximately 55 percent of production in Japan was destined for other regions. Asia, here excluding Japan and China, accounted for more than 15 percent of total production, more than 60 percent of which was destined for Japan, the U.S. and Europe. China accounted for less than 10 percent of total production, more than 70 percent of which was destined for Japan, the U.S. and Europe. The Americas and Europe together accounted for the remaining quarter of total production, most of which was sold in the area where it was produced.
~~Comparison of Results on a Local Currency Basis and Results on a Yen Basis~~
     Results in the Electronics segment, on a yen basis, were positively impacted overall by the appreciation of the euro against the yen, although this impact was partially offset by the negative impact of the depreciation of the U.S. dollar against the yen. On a local currency basis, sales for the fiscal year ended March 31, 2003 decreased by approximately 7 percent compared with the previous fiscal year and operating income was recorded where an operating loss had been recorded in the previous fiscal year.
     Due to the negative impact of the depreciation of the U.S. dollar against the yen, year on year increases in sales of products in the U.S. were generally smaller, and decreases generally larger, when stated in yen than when stated on a local currency basis. However, no products which recorded a sales increase on a local currency basis recorded a sales decrease on a yen basis.
     Sales in Europe were positively affected by currency fluctuations, in particular the appreciation of the euro against the yen. Year on year increases in sales of products in Europe were generally larger, and decreases generally smaller, when stated in yen than when stated on a local currency basis. Regarding significant differences between results on a yen basis and results on a local currency basis, CRT televisions and home-use video cameras recorded an increase in sales on a yen basis but a decrease in sales on a local
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~~currency basis while portable audio and batteries, which all recorded increases in sales on a yen basis, were flat year on year on a local currency basis.~~
     The net effect of currency fluctuations on product sales in Other Areas was negative. Sales increases were generally smaller, and decreases larger, when stated in yen than when stated on a local currency basis. Regarding significant differences between results on a yen basis and results on a local currency basis, sales of CRT televisions were flat year on year on a local currency basis but showed a slight decrease on a yen basis. Sales trends for other products were not significantly different on a local currency basis or a yen basis.
~~Game~~
     Sales for the fiscal year ended March 31, 2003 decreased by 48.7 billion yen, or 4.9 percent, to 955.0 billion yen compared with the previous fiscal year. Operating income increased by 29.7 billion yen, or 35.9 percent, to 112.7 billion yen compared with the previous fiscal year, and the operating income margin increased from 8.3 percent to 11.8 percent.
     Sales in the Game segment were positively impacted by the yen’s depreciation against the euro. On a local currency basis, sales for the fiscal year ended March 31, 2003 decreased approximately 7 percent and operating income increased 12 percent compared with the previous fiscal year.
     Regarding sales by geographic area, sales decreased in Japan and the U.S. but increased in Europe. In Japan, hardware sales declined due to lower unit sales of PlayStation 2 hardware, brought on by a stagnation of the game industry, and a price reduction of PlayStation 2 hardware. Software sales decreased slightly due to lower unit sales of software published by SCE. As a result overall sales in Japan decreased. In the U.S., unit sales of PlayStation 2 hardware increased mainly due to strategic price reductions. Despite an increase in unit sales, hardware sales decreased due to the negative impact of the price reductions exceeding the positive impact of the increase in unit sales. Software sales increased due to an increase in unit sales brought on by an expansion of the software market as a result of the increase in hardware unit sales. As the decrease in hardware sales exceeded the increase in software sales, overall sales in the U.S. decreased. In Europe the market penetration of PlayStation 2 hardware continued to expand as hardware unit sales increased mainly in Western Europe, primarily due to a strategic price reduction of PlayStation 2 hardware. As a result, software sales increased and overall sales in Europe increased. The depreciation of the yen against the euro also had a positive impact on sales in Europe.
~~Total worldwide production shipments of hardware and software were as follows:~~

Year Ended
March 31
Cumulative as of
2002 2003 March 31, 2003
(Million units)
Total Production Shipments of Hardware
PlayStation + PS one 7.40 6.78 96.41
PlayStation 2 18.07 22.52 51.20
Total Production Shipments of Software*
PlayStation 91.00 61.00 917.00
PlayStation 2 121.80 189.90 350.00
* ~~Including those both from Sony and third parties under Sony licenses.~~
     In terms of total software unit sales, PlayStation 2 titles represented 76 percent of the software unit sales for the fiscal year ended March 31, 2003, an increase from 57 percent of software unit sales recorded in the previous fiscal year.
     In terms of profitability, operating income increased as compared with the previous fiscal year. This increase was due to an improvement in profitability of the hardware business as a result of a reduction in
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the cost of producing PlayStation 2 hardware and the positive impact of the yen’s depreciation against the euro. The increase in operating income was also due to an increase in profitability of the software business brought on by an increase in unit sales mainly in the U.S. and Europe. Cost of sales in the Game segment decreased due to a decrease in manufacturing-related expenses of PlayStation 2 hardware, resulting in a decrease in the ratio of cost of sales to sales compared to the previous fiscal year. Although selling, general and administrative expenses increased primarily due to an increase in advertising and promotion expenses in conjunction with the increase in units sold, the ratio of selling, general and administrative expenses to sales decreased as compared to the previous fiscal year.
~~Music~~
     Sales for the fiscal year ended March 31, 2003 decreased by 2.5 billion yen, or 0.4 percent, to 597.5 billion yen compared with the previous fiscal year. Compared to operating income of 22.1 billion yen in the previous fiscal year, an operating loss of 7.9 billion yen was recorded.
     ~~On a local currency basis, sales in the Music segment increased by 1 percent while the Music segment incurred an operating loss as compared to operating income in the previous fiscal year.~~
~~Sales at SMEI increased approximately 6 percent on a U.S. dollar basis (refer to “~~~~Foreign Exchange Fluctuations and Risk Hedging~~” below). In terms of profitability, SMEI incurred an operating loss in the current year as compared to operating income in the previous fiscal year. The increase in sales was primarily due to an increase in sales of DVD software, manufactured in the Music segment, to the Pictures and Game segments. Sales to the Pictures segment increased as a result of the greater popularity of DVD media in the home entertainment market and sales to the Game segment increased due to higher unit sales of PlayStation 2 software titles, which are packaged on DVDs. Partially offsetting the increase in sales at SMEI was a decline in album sales in many regions worldwide. Album sales at SMEI have been declining due to the continued contraction of the global market for music. Industry-wide album unit sales in the U.S. decreased for 19 consecutive months up to and including March 2003. Such sales in the fiscal year ended March 31, 2003 were 10 percent lower than in the previous fiscal year. This contraction trend has been caused by slow economic growth, the saturation of the CD market, the effects of digital piracy and other illegal duplication, parallel imports, pricing pressures and a diversification of customer preferences brought on by increased competition from other entertainment sectors.
     The decline in profitability resulting in an operating loss at SMEI primarily resulted from a 120 million U.S. dollar year on year increase in restructuring charges undertaken to reduce costs in response to the downward trend of the market. The total cost of restructuring for the fiscal year ended March 31, 2003 was 190 million U.S. dollars, or 22.4 billion yen (refer to “Restructuring” above for details) net of a reversal of an expense of 30.8 million U.S. dollars accrued in previous fiscal years as a result of reduced compensation expense. The second largest factor leading to the operating loss was a decrease in gross profit brought about by the decrease in album sales. A third factor leading to operating loss was an increase in talent-related expenses, primarily because the continued decline in album sales led to an increase in impairments of capitalized advances paid to artists. Partially offsetting the decline in operating profitability, in descending order of magnitude, were a decrease in advertising and promotion expenses, savings realized from previously implemented restructuring initiatives and higher income generated by the increase in DVD software manufacturing activity. Although restructuring charges increased significantly compared with the previous fiscal year, the decrease in advertising and promotion expenses and savings realized from previously implemented restructuring initiatives caused a decrease in selling, general and administrative expenses for the year and an improvement in the ratio of selling, general and administrative expenses to sales.
     Regarding the results of SMEJ, sales decreased by 10 percent and operating income decreased 59 percent year on year. Sales decreased due to the continued contraction of the music industry. The decrease in operating income resulted from the decrease in sales and, to a lesser extent, an increase in severance-related expenses incurred from restructuring. Restructuring activity at SMEJ during the fiscal year centered on headcount reductions.
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     ~~On a yen basis, 76 percent of the Music segment’s sales were generated by SMEI while 24 percent were generated by SMEJ.~~
~~Pictures~~
     Sales for the fiscal year ended March 31, 2003 increased by 167.0 billion yen, or 26.3 percent, to 802.8 billion yen compared with the previous fiscal year. Operating income increased by 27.7 billion yen, or 88.6 percent, to 59.0 billion yen and the operating income margin increased from 4.9 percent to 7.3 percent. The results in the Pictures segment consist of the results of SPE.
On a U.S. dollar basis, sales for the fiscal year in the Pictures segment increased approximately 30 percent and operating income increased approximately 92 percent. The increase in sales was due to the strong worldwide performance, both theatrically and in home entertainment, of fiscal year releases including~~Spider-Man,~~ ~~the highest grossing film in SPE’s history,~~~~Men in Black II, xXx~~ ~~and~~~~Mr. Deeds.~~ The increased worldwide popularity of DVDs also contributed to the higher home entertainment revenues. As a result of these factors, sales for the release slate for the fiscal year ended March 31, 2003 increased 1.6 billion U.S. dollars compared with the previous fiscal year’s slate. Operating income for the segment increased significantly due to the higher theatrical and home entertainment revenues from the fiscal year release slate, partially offset by the aggregate disappointing performance of several films including~~I Spyand~~~~Stuart Little 2~~, resulting in an increase of 221 million U.S. dollars in profit from the fiscal year release slate, the benefit of restructuring initiatives undertaken in the previous fiscal year, resulting in an increase of 52 million U.S. dollars, and, less significantly, increased operating income in the television business due to higher revenues from the game show,~~Wheel of Fortune~~. The primary benefit of the restructuring undertaken in the previous fiscal year was a reduction in losses recorded on the production of new network television shows and pilots. Losses declined because the number of new shows and pilots was reduced and because production expenses per new show and pilot were reduced. Operating income for the segment was also higher because the 67 million U.S. dollar, or 8.5 billion yen, restructuring charge recorded in the previous fiscal year was not recorded during the fiscal year (refer to “Restructuring” for details). Partially offsetting the increase in operating income was an additional provision of 66 million U.S. dollars, an increase of 26 million U.S. dollars over the previous fiscal year, with respect to previously recorded revenue from KirchMedia, an insolvent licensee in Germany of SPE’s feature film and television product, and related adjustments to ultimate film income.
     As of March 31, 2003, unrecognized license fee revenue at SPE was approximately 1.3 billion U.S. dollars. SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television product. The license fee revenue will be recognized in the year that the product is available for broadcast.
~~Financial Services~~
     Financial Services revenue for the fiscal year ended March 31, 2003 increased by 28.2 billion yen, or 5.5 percent, to 537.3 billion yen compared with the previous fiscal year. Operating income increased by 0.9 billion yen, or 4.3 percent, to 22.8 billion yen and the operating income margin decreased from 4.3 percent to 4.2 percent.
     At Sony Life, revenue increased by 19.5 billion yen, or 4.4 percent, to 466.6 billion yen and operating income increased by 1.8 billion yen, or 6.4 percent, to 29.6 billion yen compared with the previous fiscal year. Insurance revenue increased as insurance-in-force from individual life insurance products increased due to the maintenance of a lower than industry average rate of contract cancellation, despite a decrease in new insurance sales brought about by a decrease in disposable family incomes due to continued weak economic conditions. The increase in revenue also resulted from an improvement in the valuation gains and losses from investments in the general account which occurred because loss recorded due to the devaluation of Argentine government bonds held in that account decreased significantly compared with the previous fiscal year. On the other hand, the increase in Sony Life’s revenue was partially offset by a deterioration of valuation gains and losses from investments in the separate account, which resulted from
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the stock market downturn. Operating income increased because of the increase in insurance revenue that accompanied the increase in insurance-in-force from individual life insurance products and the improvement in valuation gains and losses from investments in the general account mentioned above. Valuation gains and losses from investments in the separate account accrue directly to the account of policyholders and, therefore, do not affect operating income.
     At Sony Assurance, revenue increased due to higher insurance revenue brought about by an expansion in automobile insurance-in-force reflecting greater customer awareness of the benefit of flexible insurance policies which take into account mileage driven. Regarding profit performance, an operating loss was recorded in the fiscal year ended March 31, 2003, as was the case in each of the previous three fiscal years. The loss was recorded because essential investments necessary for the expansion of the business put pressure on profitability. These investments were for advertising and for computer systems necessary to develop new products and establish customer claims service centers. However, an increase in insurance revenue and a decrease in the expense ratio (the ratio of operating expenses to premiums) and the loss ratio (the ratio of insurance payouts to premiums) caused losses to decrease.
     At Sony Finance, revenue decreased slightly due to a decrease in rent revenue despite an increase in leasing revenue. In terms of profitability, a loss was recorded, compared with an operating income in the previous fiscal year, due to an increase in operating expenses in connection with the issuance of credit cards that utilize contact-free IC card technology.
     ~~Sony Bank, which started business in June 2001, recorded a loss, as was also recorded in the previous fiscal year, primarily due to start-up expenses.~~
* ~~The revenue and operating income at Sony Life, Sony Assurance and Sony Bank discussed here differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.~~
~~Condensed Statements of Income Separating Out the Financial Services Segment (Unaudited)~~
     The following schedule shows unaudited condensed statements of income for the Financial Services segment and all other segments excluding Financial Services as well as condensed consolidated statements of income. This presentation is not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
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Reflecting the realignment of the business segment configuration, results for fiscal year ended March 31, 2002, and 2003 have been reclassified to conform to the presentation for the fiscal year ended March 31, 2004.

All other segments
excluding
Financial Services Financial Services Consolidated
Year Ended March 31 2002 2003 2002 2003 2002 2003
(Yen in millions)
Financial Services revenue 509,122 537,276 — — 480,190 509,398
Net sales and operating revenue — — 7,105,491 6,974,980 7,098,068 6,964,235

509,122 537,276 7,105,491 6,974,980 7,578,258 7,473,633

Costs and expenses 487,300 514,518 6,992,254 6,811,292 7,443,627 7,288,193

Operating income 21,822 22,758 113,237 163,688 134,631 185,440

Other income (expenses), net (1,833 ) (1,282 ) (40,451 ) 67,846 (41,856 ) 62,181

Income before income taxes 19,989 21,476 72,786 231,534 92,775 247,621

Income taxes and other 11,477 13,071 72,799 120,089 83,443 132,102
Cumulative effect of accounting changes 4,305 — 1,673 — 5,978 —

Net income 12,817 8,405 1,660 111,445 15,310 115,519

~~Other~~
     Reflecting the realignment of the business segment configuration, results for fiscal year ended March 31, 2002, and 2003 have been reclassified to conform to the presentation for the fiscal year ended March 31, 2004. Based on that reclassification, sales of the Other segment in the fiscal year ended March 31, 2003 were comprised mainly of an in-house oriented information system service business, an advertising agency business in Japan, and SCN, an Internet-related service business subsidiary operating mainly in Japan.
     Sales for the fiscal year increased by 44.8 billion yen, or 17.1 percent, to 306.3 billion yen, compared with the previous fiscal year. Of total sales, 55 percent were sales to outside customers. In terms of profit performance, operating losses for the segment increased from 18.2 billion yen to 25.0 billion yen.
During the fiscal year, intersegment sales increased primarily due to an increase in sales at the advertising agency business in Japan due to its taking over the media buying for all Sony Group companies in Japan, and at the in-house oriented information system service business, in addition to an increase in sales at SCN. Regarding profit performance, the segment recorded a loss primarily due to expenses associated with the development of network and content technology and services, intended to facilitate new businesses in the broadband age, and the advertising agency business in Japan. In comparison with the previous fiscal year, segment losses increased primarily due to an increase in the aforementioned expenses and the write-off of professional-use video software in the professional-use video software business due to a discontinuation of that business. Operating losses for the Other segment increased despite the fact that operating income was recorded at SCN, as compared to an operating loss in the previous fiscal year. SCN recorded operating income due to an increase in sales resulting from a rise in broadband subscribers and a reduction in costs associated with communication line usage.
~~Foreign Exchange Fluctuations and Risk Hedging~~
     During the fiscal year ended March 31, 2003, the average value of the yen was 120.9 yen against the U.S. dollar, and 119.5 yen against the euro, which was 2.6 percent higher against the U.S. dollar and 8.8 percent lower against the euro, respectively, compared with the average of the previous fiscal year. Operating results on a local currency basis described in “Overview” and “Operating Performance” show
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results of sales and operating income obtained by applying the yen’s monthly average exchange rate in the previous fiscal year to monthly local currency-denominated sales, cost of sales, and selling, general and administrative expenses for the fiscal year ended March 31, 2003, as if the value of the yen had remained constant. In the Music segment, Sony consolidates the yen-translated results of SMEI (a U.S. based operation that aggregates the results of its worldwide subsidiaries on a U.S. dollar basis) and the results of SMEJ (a Japan based operation that aggregates the results of its operations in yen). In the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of SPE (a U.S. based operation that has worldwide subsidiaries). Therefore, in the results of SMEI and SPE, analysis and discussion of certain portions of their operating results are specified as being on “a U.S. dollar basis.” Results on a local currency basis and results on a U.S. dollar basis are not on the same basis as Sony’s consolidated financial statements and do not conform with U.S. GAAP. In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that local currency basis results provide additional useful information to investors regarding operating performance.
     Sony’s consolidated results are subject to foreign currency fluctuations mainly derived from the fact that the countries where manufacturing takes place may be different from those where such products are sold. In order to reduce the risk caused by such fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy. Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies.
     In 2001, SGTS was established in London for the purpose of providing integrated treasury services for Sony Corporation and its subsidiaries. Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should enter into commitments with SGTS for hedging their exposures. Sony Corporation and most of its subsidiaries utilize SGTS for this purpose. The concentration of foreign exchange exposures at SGTS means that, in effect, SGTS hedges the net foreign exchange exposure of Sony Corporation and its subsidiaries. SGTS in turn enters into foreign exchange transactions with creditworthy third-party financial institutions. Most of the transactions are entered into against projected exposures before the actual export and import transactions take place. In particular SGTS hedges the majority of the exposures of major currency pairs such as U.S. dollar against Japanese yen, euro against Japanese yen and euro against U.S. dollar, on average three months before the actual transactions take place. In the case of emerging market currencies, such as Brazil, with high inflation and high interest rates, the majority of the projected exposures are hedged one month before the actual transactions take place due to cost effectiveness considerations. Sony enters into foreign exchange transactions with financial institutions only for hedging purposes and does not undertake speculative transactions.
     To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.
Changes in the fair value of derivatives designated as cash flow hedges, including foreign exchange forward contracts and foreign currency option contracts, are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges are marked-to-market with changes in value recognized in Other Income and Expenses. The notional amounts of foreign exchange forward contracts, currency option contracts purchased and currency option contracts written as of March 31, 2003 were 1,139.3 billion yen, 484.5 billion yen and 238.8 billion yen, respectively.
~~Assets, Liabilities and Stockholders’ Equity~~
     ~~(Regarding Assets and Liabilities refer also to “Increase in Assets and Liabilities as a Result of Consolidation of Variable Interest Entities” below.)~~
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~~Assets~~
Total assets on March 31, ~~2004~~2005 increased by ~~720.1~~408.4 billion yen, or ~~8.6~~4.5 percent, to ~~9,090.7~~9,499.1 billion yen, compared with the previous fiscal year-end. Total assets on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment ~~increased~~decreased by ~~235.0~~32.9 billion yen, or ~~4.0~~0.5 percent, to ~~6,060.8~~6,027.9 billion yen and total assets on March 31, ~~2004~~2005 in the Financial Services segment increased by ~~577.9~~410.5 billion yen, or ~~19.9~~11.8 percent, to ~~3,475.0~~3,885.5 billion yen, compared with the previous fiscal year-end. Total assets on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment would have ~~increased~~decreased by approximately 92 percent compared with the previous fiscal year-end if the value of the yen had remained the same on March 31, ~~2004~~2005 as it was on March 31, ~~2003.~~2004.
Current Assets
~~Current Assets~~
      Current assets on March 31, ~~2004~~2005 increased by ~~209.1~~192.8 billion yen, or ~~6.6~~5.7 percent, to ~~3,363.4~~3,556.2 billion yen compared with the previous fiscal year-end. Current assets on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment ~~increased~~decreased by ~~188.5~~99.6 billion yen, or ~~7.5~~3.7 percent, to ~~2,692.4~~2,592.8 billion yen.
      Cash and cash equivalents on March 31, 2005 in all segments excluding Financial Services ~~increased 154.4~~segment decreased 73.2 billion yen, or ~~35.2~~12.3 percent, to ~~592.9~~519.7 billion yen compared with the previous fiscal ~~year.~~year-end. This ~~increase was~~is primarily ~~due to the issuance, in December 2003,~~a result of ~~250~~57.3 billion yen ~~in euro yen convertible bonds. The proceeds from this issuance will be applied towards investments in~~repayment of long-term debt relating to a variable interest entity responsible for the operation and development of ~~and production equipment for, key devices, such as the next generation broadband processor (for more information on cash and cash equivalents, refer to “Liquidity Management” below).~~
a real estate complex in Berlin, Germany.
      Notes and accounts receivable, trade (net of ~~deductions~~allowance for doubtful accounts and ~~allowances for~~sales returns) on March 31, 2005, in all segments excluding Financial Services segment increased ~~3.8~~9.1 billion yen, or 1.0 percent, compared with the previous fiscal year-end to ~~1,011.2~~952.7 billion yen.
      Inventories on March 31, ~~2004 increased~~2005 decreased by ~~40.8~~35.2 billion yen, or ~~6.5~~5.3 percent, to ~~666.5~~631.3 billion yen compared with the previous fiscal year-end. The inventory to cost of sales turnover ratio (based on the average of inventories at the end of each fiscal year and previous fiscal year) ~~decreased from 1.57~~was 1.56 months compared to 1.53 months at the end of the previous fiscal ~~year to 1.53 months.~~year. Sony considers this level of inventory to be appropriate in the aggregate. ~~During the fiscal year ended March 31, 2004, Sony did not engage in the kind of aggressive inventory reduction that it engaged in during the fourth quarter of the fiscal year ended March 31, 2003.~~
Current assets on March 31, ~~2004~~2005 in the Financial Services segment increased by ~~14.8~~290.5 billion yen, or ~~2.2~~41.5 percent, to ~~699.7~~990.2 billion yen, compared with the previous fiscal year-end. The increase was primarily attributable to an increase in marketable securities. (Refer to Note 7 of Notes to Consolidated Financial Statements.)
Investments and Advances
~~Investments and Advances~~
     ~~(Also see “Investments” below.)~~
      Investments and advances on March 31, ~~2004~~2005 increased by ~~518.8~~232.7 billion yen, or ~~26.0~~9.3 percent, to ~~2,513.0~~2,745.7 billion yen, compared with the previous fiscal year-end.
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      Investments and advances on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment ~~decreased~~increased by ~~24.4~~86.8 billion yen, or ~~6.4~~24.2 percent, to ~~358.6~~445.4 billion yen. This ~~decrease~~increase was mainly ~~due to~~ the recording of an impairment loss on securities issued by a privately held Japanese company, which Sony accounted for under the cost method, that is engaged in cable broadcasting and other businesses and a decrease in the amount recorded in “investments” due to the consolidation of an affiliated company that was formerly accounted for under the equity method as a result of investments associated with the ~~adoption during~~establishment of S-LCD, a joint venture with Samsung Electronics Co., Ltd. for the ~~fiscal year ended March 31, 2004~~manufacture of ~~Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) 46 (refer to Notes 5 and 6 in the Notes to the Consolidated Financial Statements).~~
amorphous TFT LCD panels.
      Investments and advances on March 31, ~~2004~~2005 in the Financial Services segment increased by ~~543.1~~104.5 billion yen, or ~~31.4~~4.6 percent, to ~~2,274.5~~2,379.0 billion yen, compared with the previous fiscal year-end. This increase was primarily due to investments mainly in Japanese fixed income securities resulting from an increase in ~~assets under management.~~
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insurance premiums at Sony Life, and an increase in housing loans due to a campaign carried out at Sony Bank.
      Also see “Investments” below.
~~Property, plant and equipment (after deduction of accumulated depreciation)~~
Property, Plant and Equipment (after deduction of accumulated depreciation)
      Property, plant and equipment on March 31, ~~2004~~2005 increased by ~~86.7~~7.4 billion yen, or ~~6.8~~0.5 percent, to ~~1,365.0~~1,372.4 billion yen, compared with the previous fiscal year-end.
      Property, plant and equipment on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment increased by ~~91.9~~9.6 billion yen, or ~~7.5~~0.7 percent, to ~~1,324.2~~1,333.8 billion yen, compared with the previous fiscal year-end. ~~The increase was mainly due to an increase in assets resulting from the adoption of FIN 46.~~
      Capital expenditures (part of the increase in property, plant and equipment) for the fiscal year ended March 31, ~~2004 increased~~2005 decreased by ~~117.0~~21.4 billion yen, or ~~44.8~~5.7 percent, to ~~378.3~~356.8 billion yen compared with the previous fiscal year. Capital expenditures in the Electronics segment increased ~~72.4~~by 59.1 billion yen, or ~~42.5~~23.5 percent, to ~~242.7~~311.1 billion yen ~~and~~but decreased in the Game segment by ~~59.4~~81.5 billion yen, or ~~144.9~~81.2 percent, to ~~100.4~~18.8 billion yen. Capital expenditures in the semiconductor businesses ~~(included~~mainly in the ~~capital expenditures of both the~~ Electronics ~~and Game segments)~~segment amounted to ~~175.0~~150.0 billion yen, of which investments in production equipment for system LSI including next generation broadband microprocessors amounted to ~~69.0~~90.0 billion yen.
Capital expenditures in the Music segment decreased by ~~8.9~~0.8 billion yen, or ~~40.9~~20.7 percent, to ~~12.9~~2.9 billion yen, and decreased in the Pictures segment by ~~1.1~~0.2 billion yen, or ~~15.8~~3.4 percent to ~~6.0~~5.8 billion yen, and decreased in the Other segment by ~~5.3~~4.0 billion yen, or ~~34.3~~39.3 percent, to ~~10.1~~6.1 billion yen.
Property, plant and equipment on March 31, ~~2004~~2005 in the Financial Services segment decreased ~~5.2~~by 2.3 billion yen, or ~~11.2~~5.6 percent, to ~~40.8~~38.6 billion yen compared with the previous fiscal year-end. Capital expenditures in the Financial Services segment ~~increased 1.0~~decreased by 0.8 billion yen, or ~~26.3~~16.7 percent, to ~~4.6~~3.8 billion yen.
Other Assets
~~Other Assets~~
      Other assets on March 31, ~~2004~~2005 decreased by ~~63.5~~46.7 billion yen, or ~~3.8~~2.9 percent, to ~~1,592.6~~1,545.9 billion yen, compared with the previous fiscal year-end.
      Other assets on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment ~~increased~~decreased by ~~0.1~~62.5 billion yen to ~~1,251.9~~1,189.4 billion yen. ~~Other~~This decrease was primarily the result of the fact that, due to the establishment of SONY BMG, artist’s contracts belonging to the joint venture are no longer recorded as intangible assets within Sony’s consolidated balance sheets.
      Deferred tax assets on March 31, ~~2004 in the Financial Services segment~~2005 increased ~~25.2~~by 37.2 billion yen, or ~~5.8~~18.3 percent, to ~~460.0~~240.4 billion yen compared with the previous ~~year.~~fiscal year-end. As a result of the recording of operating losses in the past, certain U.S. subsidiaries of Sony have had valuation allowances against deferred tax assets for U.S. federal taxes and certain state taxes. However, in the fiscal year ended March 31, 2005, based on both improved operating results in recent years and a sound outlook for the future operating performance at Sony’s U.S. subsidiaries, Sony reversed 67.9 billion yen of such valuation allowances. On the other hand, certain of Sony’s subsidiaries recorded new valuation allowances against deferred tax assets during the fiscal year ended March 31, 2005.
      Other assets in the Financial Services segment on March 31, 2005 increased by 17.8 billion yen, or 3.9 percent, to 477.8 billion yen compared with the previous fiscal year-end. This was mainly due to an increase in deferred insurance acquisition costs at Sony Life.
Deferred tax assets on March 31, 2004 decreased by 124.9 billion yen, or 38.1 percent, to 203.2 billion yen compared with the previous fiscal year-end. The decrease was due to the offset between deferred tax assets and liabilities recorded at each of the companies within the Sony Group, as a result of the adoption of consolidated tax filing in Japan.58
Liabilities

~~Liabilities~~
Total current and long-term liabilities on March 31, ~~2004 increased~~2005 decreased by ~~622.2~~84.9 billion yen, or ~~10.3~~1.3 percent, to ~~6,689.8~~6,604.9 billion yen compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment ~~increased~~decreased by ~~189.6~~489.5 billion yen, or ~~5.2~~12.7 percent, to ~~3,855.9~~3,366.4 billion yen. Total current and long-term liabilities ~~on March 31, 2004,~~ in the Financial Services segment on March 31, 2005 increased by ~~515.4~~365.5 billion yen, or ~~19.9~~11.8 percent, to ~~3,099.8~~3,465.3 billion yen, compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment would have ~~increased~~decreased by approximately 1014 percent compared with the previous fiscal year-end if the value of the yen had remained the same on March 31, ~~2004~~2005 as it was on March 31, ~~of the previous fiscal year.~~2004.
Current Liabilities
~~Current Liabilities~~
      Current liabilities on March 31, ~~2004 increased~~2005 decreased by ~~547.2~~172.8 billion yen, or ~~22.5~~5.8 percent, to ~~2,982.2~~2,809.4 billion yen compared with the previous fiscal year-end. Current liabilities on March 31, ~~2004~~2005 in all segments
63
excluding the Financial Services segment ~~increased~~decreased by ~~307.7~~236.1 billion yen, or ~~14.9~~9.9 percent, to ~~2,373.6~~2,137.5 billion yen.
      Short-term borrowings and current portion of long-term debt on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment ~~increased 283.1~~decreased 205.7 billion yen, or ~~223.4~~50.2 percent, to ~~409.8~~204.0 billion yen compared with the previous fiscal year-end. This ~~increase~~decrease was mainly ~~due to~~a result of the ~~shift from long-term liabilities to current liabilities~~fact that of ~~287.8~~300.0 billion yen ~~(as~~ of ~~March 31, 2004) in outstanding~~ convertible bonds due ~~for redemption~~ on March 31, 2005, ~~and an increase of 57.3~~5.0 billion yen ~~in bank syndicated loans, which will reach~~were redeemed on the maturity ~~by November 2004, as a result~~date with 282.8 billion yen of the ~~adoption of FIN 46. Partially offsetting these items was a 52.8~~287.8 billion yen ~~repayment~~balance outstanding at the start of ~~commercial paper~~the fiscal year being converted into common stock, which was partially offset by the reclassification of long term debt to current liabilities mainly consisting of 119.0 billion yen of straight bonds and bonds with warrants redeemable during the fiscal ~~year.~~
year ending March 31, 2006. (Refer to Note 11 of Notes to Consolidated Financial Statements.)
      Notes and accounts payable, trade on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment increased by ~~79.6~~28.0 billion yen, or ~~11.5~~3.6 percent, to ~~773.2~~801.3 billion yen compared with the previous fiscal ~~year-end. This~~year-end, mainly due to an increase ~~was particularly conspicuous in~~within the ~~Electronics segment, where inventories also increased.~~
Game segment.
Current liabilities on March 31, ~~2004~~2005 in the Financial Services segment increased by ~~232.9~~59.8 billion yen, or ~~56.0~~9.2 percent, to ~~648.8~~708.6 billion yen, mainly due to the increase in deposits from customers ~~and interbank short-term borrowings~~ in the banking business. Deposits from customers in the banking business increased by ~~130.1~~167.9 billion yen, or ~~52.3~~44.3 percent, to ~~378.9~~546.7 billion yen, due to the expansion of the banking business.
Long-term Liabilities
~~Long-term Liabilities~~
      Long-term liabilities on March 31, ~~2004~~2005 increased by ~~75.0~~88.0 billion yen, or ~~2.1~~2.4 percent, to ~~3,707.6~~3,795.5 billion yen compared with the previous fiscal year-end.
      Long-term liabilities on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment decreased by ~~118.1~~253.5 billion yen, or ~~7.4~~17.1 percent, to ~~1,482.4~~1,228.9 billion yen. This decrease was mainly due to a 129.2 billion yen, or 26.5 percent, decrease to 358.2 billion yen of accrued pension and severance costs primarily resulting from an increase in pension assets due to the rise in value of equity investment in Japan.
Long-term debt on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment decreased ~~27.7~~147.9 billion yen, or ~~3.4%,~~19.1 percent, to ~~775.2~~627.4 billion yen. This was ~~mainly~~primarily the result of the reclassification of long-term debt to current liabilities, including 119.0 billion yen of bonds redeemable during the fiscal year ending March 31, 2006 and a decrease in accrued pension and severance costs of 20.2 billion yen, or 5.6 percent, to 338.0 billion yen, primarily due to the ~~shift to current liabilities~~reform of ~~287.8 billion yen (as of March 31, 2004)~~Sony’s employee retirement pension plan in ~~outstanding convertible bonds, due for redemption on March 31, 2005, and despite the issuance of the 250.0 billion yen in euro yen convertible bonds (bonds with stock acquisition rights).~~
Japan.
Long-term liabilities on March 31, ~~2004~~2005 in the Financial Services segment increased by ~~282.5~~305.7 billion yen, or ~~13.0~~12.5 percent, to ~~2,451.0~~2,756.7 billion yen. This was due to an increase in insurance-in-force in the life insurance business which resulted in an increase in future insurance policy benefits and other of ~~264.2~~285.7 billion yen, or ~~13.8~~13.1 percent, to ~~2,178.6~~2,464.3 billion yen.
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Total Interest-bearing Debt

~~Total Interest-bearing Debt~~
Total interest-bearing debt on March 31, ~~2004 increased~~2005 decreased by ~~286.5~~343.4 billion yen, or ~~29.7~~27.4 percent, to ~~1,252.7~~909.3 billion yen, compared with the previous fiscal year-end. Total interest-bearing debt on March 31, ~~2004~~2005 in all segments excluding the Financial Services segment ~~increased~~decreased by ~~255.4~~353.6 billion yen, or ~~27.5~~29.8 percent, to ~~1,185.0~~831.4 billion yen.
Stockholders’ Equity
~~Increase in Assets and Liabilities as a Result of Consolidation of Variable Interest Entities~~
     Sony adopted FIN 46 on July 1, 2003. As a result, Sony’s assets and liabilities increased as non-cash transactions, which resulted in no cash flows, by 95.3 billion yen and 98.0 billion yen, respectively. Cash
64
~~and cash equivalents also increased by 1.5 billion yen. The Variable Interest Entities (“VIEs”) consolidated by Sony include the following:~~
     Sony leases the headquarters of its U.S. subsidiary from a VIE. Upon consolidation of the VIE, assets and liabilities increased by 25.3 billion yen and 27.0 billion yen, respectively. Sony has the option to purchase the building at any time for 26.9 billion yen during the lease term which expires in December 2008. The debt held by the VIE is unsecured. At the end of the lease term, Sony has agreed to either renew the lease, purchase the building or remarket it to a third party on behalf of the owner.
     A subsidiary in the Pictures business entered into a joint venture agreement with a VIE for the purpose of funding the acquisition of certain international film rights. Upon consolidation of the VIE, assets and liabilities increased by 10.2 billion yen and 10.6 billion yen, respectively. Under the agreement, the subsidiary’s 1.2 billion yen equity investment is the last equity to be repaid.
     Sony has utilized a VIE to erect and operate a multi-use real estate complex in Berlin, Germany, which was accounted for under the equity method by Sony until June 30, 2003. On July 1, 2003, Sony consolidated this entity. Upon consolidation of the VIE, assets and liabilities increased by 61.3 billion yen and 60.3 billion yen, respectively. These liabilities include a 57.3 billion yen syndicated bank loan which matures in November 2004. The syndicated bank loan is secured by the multi-use real estate complex.
~~Regarding further information on transactions with VIEs please refer to Notes 21 and 22 of Notes to Consolidated Financial Statements.~~
~~Stockholders’ Equity~~
      Stockholders’ equity on March 31, ~~2004~~2005 increased by ~~97.1~~492.3 billion yen, or ~~4.3~~20.7 percent, to ~~2,378.0~~2,870.3 billion yen compared with the previous fiscal year-end. As noted above, of 300.0 billion yen of convertible bonds due on March 31, 2005, 5.0 billion yen were redeemed on the maturity date with 282.8 billion yen of the 287.8 billion yen balance outstanding at the start of the fiscal year being converted into common stock, and, therefore, incorporated into stockholders’ equity and additional paid-in capital. Retained earnings increased ~~65.3~~139.0 billion yen compared with the previous fiscal year-end, and other comprehensive income (net of tax) was 64.3 billion yen. This was primarily due to comprehensive income of 74.2 billion yen arising from foreign currency translation adjustments in current fiscal year due to the ~~amount~~devaluation of ~~deductions recorded~~the yen, partially offset by the recording of a change in accumulated other comprehensive income decreased 22.0 billion yen. Accumulated other comprehensive income improved because, although foreign currency translation adjustments (deduction from accumulated other comprehensive income) increased 127.9of 7.3 billion yen ~~year on year, due to the appreciation of the yen, minimum pension liability adjustments (deduction~~arising from ~~accumulated other comprehensive income) decreased 93.4 billion yen, due to an increase in pension assets resulting from the rise in value of equity investment in Japan, and~~ unrealized gains on securities ~~increased 52.3 billion yen compared with~~in the ~~previous~~current fiscal ~~year-end.~~year. The ratio of stockholders’ equity to total assets ~~decreased 1.0~~increased 4.0 percent from ~~27.2~~26.2 percent to ~~26.2~~30.2 percent.
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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.

During the fiscal year ended March 31, 2003, Sony generated 853.8 billion yen of net cash from operating activities, an improvement of 116.2 billion yen, or 15.8 percent compared with the previous fiscal year.

All segments excluding the Financial Services segment generated 542.8 billion yen of net cash from operating activities. The primary reasons for the positive cash flow were the contribution to profit by the

The Financial Services segment generated 316.0 billion yen of net cash from operating activities. While cash declined primarily as a result of an increase in deferred insurance acquisition costs, an increase in future insurance policy benefits and other as a result of an increase in insurance-in-force resulted in cash generated from operating activities exceeding expenditures. Compared with the previous fiscal year, cash generated from operating activities in the Financial Services segment improved by 14.3 billion yen, or 4.8 percent.

~~During the fiscal year, 706.4 billion yen in cash was used in investing activities (a decrease of 60.7 billion yen, or 7.9 percent compared with the previous fiscal year).~~

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

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

As a result of these factors, the difference between cash generated from operating activities and cash used in investing activities was a positive 147.4 billion yen for the fiscal year, an improvement of 176.9 billion yen compared with the previous fiscal year (in the previous fiscal year, net cash flow was a negative 29.5 billion yen). In terms of net cash flow from all segments excluding the Financial Services segment, net cash flow was a positive 357.7 billion yen for the fiscal year, an improvement of 290.6 billion yen, or 433.0 percent, compared with the previous fiscal year. Net cash flow from the Financial Services segment was a negative 201.4 billion yen, a deterioration of 101.2 billion yen compared with the previous fiscal year.

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

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

In the Financial Services segment, 149.1 billion yen of net cash was provided by financing activities compared to 120.3 billion yen of net cash provided by financing activities. This was due to a 142.2 billion yen, or 133.6 percent, increase in deposits from customers in the banking business.

Accounting for all these factors and the effect of exchange rate changes, the total outstanding balance of cash and cash equivalents at the end of the fiscal year increased 29.3 billion yen, or 4.3 percent, to

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.

In the Financial Services segment, the value of assets accumulated by the businesses in the segment has grown continuously over the past several fiscal years, resulting in a large portion (approximately 40 percent) of Sony’s total assets being accounted for by the Financial Services segment. To strengthen asset management and risk management in parallel with this growing asset value, enhance disclosure of business details, and offer customers integrated financial services tailored to their individual needs, in April 2004 Sony established Sony Financial Holdings Inc. ~~in April 2004. This~~, a holding company is comprised of Sony Life, Sony Assurance and Sony Bank, ~~and will serve to increase~~with the aim of both increasing the synergies between these ~~businesses.~~businesses and targeting an initial public offering during the fiscal year ending March 31, 2007.

Sales are expected to increase primarily due to an increase in the sales of products such as ~~digital still cameras,~~ flat panel televisions and ~~DVD recorders are expected~~LCD rear projection televisions. With regard to ~~continue to increase, resulting in~~operating performance, although an ~~anticipated increase in overall sales of the segment, despite an expected decrease in sales of CRT televisions. Operating income~~improvement is expected ~~to increase~~ due to the increase in sales and ~~the benefit of~~a reduction in fixed costs relating to restructuring ~~activities undertaken in~~implemented during the previous fiscal year, ~~despite an anticipated~~a decline in unit prices, appreciation of the yen against the U.S. dollar and ~~an expected~~euro and increase in ~~research~~both depreciation and ~~development costs.~~

~~From the fiscal year ending March 31, 2005,~~amortization and research and development costs ~~associated with process technologies, including those technologies used~~are also anticipated. An improvement in operating performance is expected, reflecting the ~~Game segment, which were previously recorded~~abovementioned factors, as well as an anticipated reduction in ~~the~~ restructuring charges.

In the fiscal year ending March 31, ~~2005,~~2006, capital expenditures (additions to fixed assets) are expected to be 410 billion yen, an increase of 815 percent compared with the ~~previous year. More than~~fiscal year ended March 31, 2005. Approximately 90 percent of the amount is expected to be spent in the Electronics ~~and Game segments.~~segment. Of this amount, capital expenditures on semiconductors ~~(in the Electronics and Game segments)~~ during the fiscal year are expected to amount to ~~190~~160 billion yen (actual amount in the fiscal year ended March 31, ~~2004~~2005 was 175 billion yen). Of the capital expenditures on semiconductors, 120 billion yen is expected to be spent for the installation of semiconductor production equipment designed for next generation broadband microprocessors (actual amount in the fiscal year ended March 31, 2004 was 69150 billion yen). For an explanation regarding fund procurement, refer to “Liquidity and Capital Resources” above.

In the fiscal year ending March 31, ~~2005,~~2006, expenses for depreciation and amortization, which includes the amortization of intangible assets and the amortization of deferred insurance acquisition costs, are expected to be ~~370~~390 billion yen, an increase of 15 percent compared with the ~~previous year. Although~~fiscal year ended March 31, 2005. Both expenses for the amortization of deferred insurance acquisition costs in the Financial Services segment ~~are expected to decrease, total~~and expenses for depreciation and amortization in the Electronics ~~and Game segments~~segment are expected to increase.

Sony expects research and development costs (total of expenses for the development of new product prototypes and expenses for the development of mid-to long-term new technologies) for the fiscal year ending March 31, ~~2005~~2006 to be ~~550~~520 billion yen, a 74 percent increase compared with the fiscal year ended March 31, ~~2004.~~2005. Research and development costs associated with process technologies, including those technologies used in the Game segment, which were previously recorded in the Game segment, will be recorded in the Electronics segment from the fiscal year ending March 31, 2005, due to the integration of the semiconductor businesses infor both the Electronics and Game ~~segments. As a result, research and development costs in the Electronics segment~~segments are expected to increase more than 10 percent compared with the 429.4 billion yen recorded in the previous year. On the other hand, in the Game segment, overall research and development costs are expected to decrease by only 10 percent compared to the 83.4 billion yen recorded in the previous year. The relatively small decrease is due to the fact that, although research and development costs associated with process technologies will decrease, research and development costs associated with next generation semiconductor design, new platforms such as the PSP and software are expected to increase.

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~~
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Investments
      Sony’s investments are comprised of debt and equity securities accounted for under both the cost and equity method of accounting. If it has been determined that an investment has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings. Sony regularly evaluates its investment portfolio to identify other-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether an other-than-temporary decline in value has occurred include: the length of time and extent to which the market value of the security has been less than its original cost, the financial condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors affecting the market value, deterioration of credit condition of the issuers, sovereign risk, and ability to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value.
      In evaluating the factors for available-for-sale securities whose fair values are readily determinable, management presumes a decline in value to be other-than-temporary if the fair value of the security is
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20 percent or more below its original cost for an extended period of time (generally a period of up to six to twelve months). This criteria is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20% or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value is other-than-temporary.
The assessment of whether a decline in the value of an investment is other-than-temporary often requires management judgment based on evaluation of relevant factors. Those factors include business plans and future cash flows of the issuer of the security, the regulatory, economic or technological environment of the investee, and the general market condition of either the geographic area or the industry in which the investee operates. Accordingly, it is possible that investments in Sony’s portfolio that have had a decline in value that are currently believed to be temporary may determine to be other-than-temporary in the future based on Sony’s evaluation of additional information such as continued poor operating results, future broad declines in value of worldwide equity markets or circumstances in market interest rate fluctuations. As a result, unrealized losses recorded for investments may be recognized into income in future periods.
Impairment of Long-Lived assets
~~Impairment of long-lived assets~~
      Sony reviews the carrying value of its long-lived assets held and used and long-lived assets to be disposed of whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. This review is performed using estimates of future cash flows by product category (e.g. TV display CRTs) or entity (e.g. semiconductor manufacturing division in the U.S.). If the carrying value of the asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset exceeds its fair value. Fair value is determined using the present value of estimated net cash flows or comparable market values.
      Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business assumptions could negatively affect the valuations of those long-lived assets. These unforeseen changes include a possible further decline in demand for TV display CRTs due to a shift in demand from CRT displays to LCD and plasma panel displays.
      In the fiscal year ended March 31, 2003, Sony recorded impairment charges for long-lived assets totaling 12.4 billion yen. ItThis included 8.1 billion yen for the impairment of semiconductor and computer display CRT manufacturing equipment to be abandoned or to be sold in connection with certain restructuring activities in the Electronics segment. It also included 2.7 billion yen for the impairment of a CD manufacturing facility in the U.S., the fair value of which was estimated by using methods such as a survey of the local real estate market.
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In the fiscal year ended March 31, 2004, Sony recorded impairment charges for long-lived assets totaling 16.1 billion yen. ItThis included 5.3 billion yen for the impairment of long-lived assets such as semiconductor and TV display CRT manufacturing equipment to be abandoned or sold in connection with certain restructuring activities in the Electronics segment. It also included 3.0 billion yen for the impairment of long-lived assets in the Music segment ~~including~~such as a certain CD manufacturing facility to be abandoned or sold and a recording studio and equipment to be held and used in Japan. Fair value of these assets iswas determined using estimated future discounted cash flows ~~which are~~ based on the best information available.
      In the fiscal year ended March 31, 2005, Sony recorded impairment charges for long-lived assets totaling 19.2 billion yen. This included 7.5 billion yen for the impairment of long-lived assets of CRT TV display manufacturing facilities to be held and used in Europe in connection with certain restructuring activities in the Electronics segment. Fair value of these assets was determined using estimated future discounted cash flows based on the best information available.
~~Goodwill and Other Intangible Assets~~
Goodwill and Other Intangible Assets
      Goodwill and other intangible assets that are determined to have an indefinite life are not amortized, but are tested for impairment in accordance with FAS No. 142 on an annual basis and between annual
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tests if an event occurs or circumstances change that would more likely than not reduce the fair value of these assets below their carrying value. Such an event would include unfavorable variances from established business plans, significant changes in forecasted results or volatility inherent to external markets and industries, which are periodically reviewed by management. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit ~~(Sony’s operating segments or one level below the~~(generally, Sony’s operating segments) with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Other intangible assets are tested for impairment by comparing the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
      Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. These estimates and assumptions could significantly impact whether or not an impairment charge is recognized as well as the magnitude of any such charge. In its impairment review, Sony performs internal valuation analyses or utilizes third-party valuations when management believes it to be appropriate, and considers other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flow analysis. This approach uses significant estimates and assumptions including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. During the fourth quarter of the fiscal year ended March 31, ~~2004,~~2005, Sony ~~recorded a charge for~~performed the annual impairment ~~of goodwill of 6.0 billion yen in the Electronics segment. This~~analysis and no impairment charge reflected the overall decline in the fair value of a subsidiary within the Electronics segment. The fair value of that reporting unit was estimated principally using the expected present value of future cash flows utilizing a third party valuation.
loss has been recognized.
Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business
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assumptions could negatively affect the valuations, which may result in Sony recognizing impairment charges for goodwill and other intangible assets in the future. AsIn order to evaluate the sensitivity of ~~March 31, 2004,~~the fair value calculations on the impairment analysis, Sony applied a hypothetical 10% decrease into the fair value of each reporting unit. As of ~~Sony’s~~March 31, 2005, a 10% hypothetical decrease to the fair value of each reporting units would not have resulted in a material impairment ~~charge.~~loss.
Pension Benefits Costs
~~Pension benefits costs~~
      Employee pension benefit costs and obligations are dependent on certain assumptions including discount rates, retirement rates and mortality rates, which are based upon current statistical data, as well as expected long-term rates of return on plan assets and other factors. Specifically, the discount rate and expected long-term rate of return on assets are two critical assumptions in the determination of periodic pension costs and pension liabilities. Assumptions are evaluated at least annually, ~~and~~or at the time when events occur or circumstances change ~~which~~and these events or changes could have a significant effect on these critical assumptions. In accordance
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with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods. Therefore, actual results generally affect recognized expenses and the recorded obligations for pensions in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect Sony’s pension obligations and future ~~expense.~~expenses.
      Sony’s principal pension plans are its Japanese pension plans. Foreign pension plans are not significant individually with total assets and pension obligations amounting to less than 10% of those of the aggregate of the Japanese pension plans.
      To determine the benefit obligation of the Japanese pension plans, Sony used a discount rate of ~~2.4%~~2.3% for its Japanese pension plans as of March 31, ~~2004.~~2005. The discount rate was determined by using available information about rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefit obligation. The ~~2.4%~~2.3% discount rate represents a 5010 basis point ~~increase~~decrease from the ~~1.9%~~2.4% discount rate used for fiscal year ended March 31, ~~2003~~2004 and reflects current market interest rate conditions. For Japanese pension plans, a 5010 basis point ~~increase~~decrease in the discount rate would ~~decrease~~increase pension costs by approximately ~~12.0~~1.2 billion yen ~~compared to~~for the fiscal year ~~ended~~ending March 31, ~~2004.~~
2006.
      To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as historical and expected long-term rates of return on various categories of plan assets. For Japanese pension plans, the expected long-term rate of return on pension plan assets was 4.0% and 3.2% as of March 31, ~~2003~~2004 and ~~2004.~~2005 respectively. The actual ~~return~~loss on pension plan assets for the fiscal year ended March 31, ~~2004~~2005 was ~~23.0%~~0.1%. ~~Consistent with U.S. GAAP, actual~~Actual results that differ from the expected return on plan assets are accumulated and amortized as a component of pension ~~expense~~costs over the average future service period, thereby reducing the year-to-year volatility in pension ~~expense. At~~costs. As of March 31, ~~2003~~2004 and ~~2004,~~2005, Sony had unrecognized actuarial losses of ~~513.0~~328.5 billion yen and ~~328.5~~322.2 billion yen, respectively, including losses related to plan assets. ~~For the year ended March 31, 2004, the unrecognized actuarial loss decreased primarily due to the improved performance of equity markets.~~ The unrecognized actuarial losses reflect the overall unfavorable performance of equity markets over the past several years and will result in an increase in pension ~~expense~~costs as they are recognized.
      Sony recorded a liability for the unfunded accumulated benefit obligation for Japanese pension plans of ~~308.7~~149.4 billion yen and ~~149.4~~128.6 billion yen as of March 31, ~~2003~~2004 and ~~2004,~~2005, respectively. This liability represents the excess of the accumulated benefit obligation under Sony’s qualified defined benefit pension plans over the fair value of the plans’ assets. ~~In accordance with U.S. GAAP, this~~This liability was established by a charge to stockholders’ equity, resulting in no impact to the accompanying consolidated statements of income.
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The following table illustrates the sensitivity to a change in the discount rate and the expected return on pension plan assets, while holding all other assumptions constant, for Japanese pension plans as of March 31, ~~2004:~~2005:

Pre-Tax Pension Equity
Change in Assumption PBO Expense (Net of Tax)

~~Equity~~
~~Change in Assumption~~ ~~Pre-Tax PBO~~ ~~Pension Expense~~ ~~(Net of Tax)~~
(Yen in billions)
25 basis point increase/decrease in discount rate -/+ ~~50.0~~ 45.0 -/+ ~~6.0~~ 3.0 +/~~- 3.4~~-1.8
25 basis point increase/decrease in expected return on assets — -/+ ~~1.0~~ 1.3 +/~~- 0.6~~-0.8
Deferred Tax Asset Valuation
~~Deferred tax asset valuation~~
      Sony records a valuation allowance to reduce the deferred tax assets to an amount that management believes is more likely than not to be realized. In establishing the appropriate valuation allowance for deferred tax assets (including deferred tax assets on tax loss carry-forwards), all available evidence, both positive and negative, is considered. Information on historical results is supplemented by all currently available information on future years, asbecause realization of deferred tax assets is dependent on whether each tax-filing unit generates sufficient taxable income. The estimates and assumptions used in determining
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future taxable income are consistent with those used in Sony’s approved forecasts of future operations. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, less valuation allowance, will be realized.
      Sony applied to file its corporate income tax return under the consolidated tax filing system in Japan beginning with the fiscal year ended March 31, 2004. Under the consolidated tax filing system, the tax-filing unit consists of Sony Corporation, the ultimate parent company of the Sony Group, and its ~~fully~~wholly owned Japanese subsidiaries. The eventual ~~realizability of~~ability to realize the tax benefit of its deferred tax assets is dependent on whether the tax-filing unit ~~generates~~as a whole will be able to generate sufficient taxable income in the future. In addition, Sony is subject to local income taxes in ~~Japan, in which, the tax-filing unit, for~~Japan. For purposes of local income taxes, each entity is ontaxed as a stand alone ~~entity basis.~~tax filing unit. The eventual ~~realizability of~~ability to realize the tax benefit of deferred tax assets for local income taxes is dependent on whether Sony Corporation and each subsidiary ~~generates~~will be able to generate sufficient taxable income in the future. As of March 31, ~~2004,~~2005, Sony Corporation had deferred tax assets for local income taxes totaling ~~86.5~~77.5 billion yen. The eventual ~~realizability of~~ability to realize the tax benefit of its deferred tax assets is dependent on whether Sony Corporation ~~generates~~will be able to generate sufficient taxable income in the future. Management believes that Sony Corporation’s historical results, when evaluated in connection with relevant qualitative factors and available information concerning its business and industry, provided substantial positive evidence, which outweighs the negative evidence available. However, under recent conditions, management considers that it is possible that Sony Corporation’s future results may yield sufficient negative evidence to support the ~~conclusion~~future determination that it is more likely than not that Sony Corporation will not realize the tax benefit of all these deferred tax assets. If this is the case, subject to review of relevant qualitative factors and uncertainties, Sony may establish a valuation allowance against part or all of the deferred tax assets of Sony ~~Corporation that~~Corporation. Such valuation allowances would be charged to income as an increase in tax expense.
As of March 31, 2004, the U.S. subsidiaries of Sony had a valuation allowance of 81.0 billion yen against deferred tax assets for federal and certain state taxes. Since the U.S. subsidiaries did not have a sufficient history of taxable income at this time to conclude that it is more likely than not that the tax benefit from these deferred tax assets would be realized, a valuation allowance was established. Management believes this lack of sufficient earnings history, when evaluated in connection with relevant qualitative factors and uncertainties concerning the U.S. subsidiaries’ businesses and industries, provided substantial negative evidence, which outweighs any positive evidence, regarding the eventual realizability of the tax benefit of the deferred tax assets as of March 31, 2004. However, under recent conditions, management considers that it is possible that the U.S. subsidiaries’ future results may yield sufficient positive evidence to support the conclusion that it is more likely than not that the U.S. subsidiaries could realize the tax benefit of these deferred tax assets and that such a conclusion may be reached as early as during the fiscal year ending March 31, 2005. If this is the case, subject to review of relevant qualitative factors and uncertainties, Sony may reverse part or all of the valuation allowance that would be recognized into income as a reduction to tax expense.
Film Accounting
~~Film accounting~~
      An aspect of film accounting that requires the exercise of judgment relates to the process of estimating the total revenues to be received throughout a film’s life cycle. Such estimate of a film’s ultimate revenue is important for two reasons. First, while a film is being produced and the related costs are being capitalized, it is necessary for management to estimate the ultimate revenue, less additional costs to be incurred, including exploitation costs which are expensed as incurred, in order to determine whether the value of a film has been impaired and thus requires an immediate write off of unrecoverable film costs. Second, the amount of film costs recognized as cost of sales for a given film as it is exhibited in various markets throughout its life cycle is based upon the proportion that current period actual revenues bear to the estimated ultimate total revenues.
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      Management bases its estimates of ultimate revenue for each film on several factors including the historical performance of similar genre films, the star power of the lead actors and actresses, the expected number of theaters at which the film will be released, anticipated performance in the home entertainment, television and other ancillary markets, and agreements for future sales. Management updates such
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estimates based on the actual results to date of each film. For example, a film that has resulted in lower than expected theatrical revenues in its initial weeks of release would generally have its theatrical, home ~~video~~entertainment and television distribution ultimate revenues adjusted downward; a failure to do so would result in the understatement of amortized film costs for the period. Since the total film cost to be amortized for a given film is fixed, the estimate of ultimate revenues impacts only the timing of film cost amortization.
Future Insurance Policy Benefits
~~Future insurance policy benefits~~
     ~~Long-term liabilities~~
      Liabilities for future insurance policy benefits are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities are computed by the net level premium method based upon estimates as to future investment yield, morbidity, mortality, ~~morbidity,~~ withdrawals and other factors. Future policy benefits are computed using interest rates ranging from approximately ~~1.00%~~1.30% to ~~5.50%~~5.20%. Mortality, morbidity and withdrawal assumptions for all policies are based on either the life insurance subsidiary’s own experience or various actuarial tables. Generally these assumptions are “locked-in” upon the issuance of new insurance. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect Sony’s future insurance policy benefits.
~~For a summary of Sony’s significant accounting policies, including the critical accounting policies discussed above, please see Note 2 of Notes to the Consolidated Financial Statements.~~
RECENTLY ADOPTED ACCOUNTING STANDARDS
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts

~~Employers’ Disclosures about Pensions and Other Postretirement Benefits~~
In ~~December~~July 2003, the ~~FASB revised~~Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued the Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP 03-1, Sony’s operating income decreased by 5.2 billion yen for the fiscal year ended March 31, 2005. Additionally, on April 1, 2004, Sony recorded a 4.7 billion yen charge (net of income taxes of 2.7 billion yen) as a cumulative effect of an accounting change. In addition, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” in the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets.
The Effect of Contingently Convertible Instruments on Diluted Earnings per Share
      In July 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.” In accordance with Statement of Financial Accounting Standards (“FAS”) No. 128, “Earnings per Share”, Sony had not previously included in the computation of diluted earnings per share (“EPS”) the number of potential common stock issuable upon the conversion of contingently convertible debt instruments (“Co-Cos”) that had not met the conditions to exercise the stock acquisition rights. EITF Issue No. 04-8 requires that the maximum number of common stock that could be issued upon the conversion of Co-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise the stock acquisition rights have been met. EITF Issue No. 04-8 is effective for reporting periods ending after December 15, 2004. Sony adopted EITF Issue No. 04-8 during the quarter ended December 31, 2004. As a result of the adoption of EITF Issue No. 04-8, Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the fiscal year ended March 31, 2004 were restated respectively. Sony’s diluted EPS of income before
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cumulative effect of an accounting change and net income for the fiscal year ended March 31, 2005 were decreased by 7.26 yen and 7.06 yen, respectively, compared to those before adopting EITF Issue No. 04-8.
Employers’ Disclosures about Pensions and Other Postretirement Benefits
      In December 2003, the Financial Accounting Standards Board (“FASB”) issued FAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“FAS No. 132(R)”), which revised FAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, an amendment of FAS No. 87, “Employers’ Accounting for Pensions”, FAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and FAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. ~~The new~~ FAS No. ~~132~~132(R) revised employers’ disclosures about pension plans and other postretirement benefit plans. It did not change the measurement or recognition of those plans required by FAS No. 87, 88 and 106. While retaining the disclosure requirements of FAS No. 132, ~~the new~~ FAS No. ~~132~~132(R) requires additional disclosures about assets, obligations and cash ~~flows, and net periodic benefit costs of defined benefit plans and other defined benefit postretirement plans.~~flows. The provisions of ~~the new~~ FAS No. ~~132 are~~132(R) were generally effective for financial statements with fiscal years ending after December 15, 2003, excluding the disclosure of certain information about foreign plans. The information about foreign plans ~~which shall be~~is effective for fiscal years ending after June 15, 2004. In accordance with ~~the transition provisions of~~FAS No. 132(R), Consolidated Financial Statements Note 14, Pension and severance plans, has been expanded to include the new ~~FAS No. 132, the disclosure provisions have been adopted in the consolidated financial statements.~~disclosures.
Consolidation of Variable Interest Entities
~~Consolidation of Variable Interest Entities~~
      In January 2003, the FASB issued ~~FIN~~FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51”~~, which~~. FIN No. 46 addresses consolidation by a primary beneficiary of a VIE. FIN No. 46 became effective immediately for all new VIEs created or acquired after January 31, 2003. Sony has not entered into any new agreements with VIEs on or after February 1, 2003. For VIEs created or acquired prior to February 1, 2003,variable interest entity (“VIE”). Sony early adopted the provisions of FIN No. 46 on July 1, 2003. Under FIN No. 46, any difference between the net amount added to the balance sheet and the amount of any previously recognized interest in the VIE shall be recognized as a cumulative effect of accounting changes. As a result of adopting the original FIN No. 46, Sony recognized a one-time charge with no tax effect of 2.1 billion yen as a cumulative effect of accounting change in the consolidated statement of income, and Sony’s assets and liabilities increased by 95.3 billion yen and 98.0 billion yen, respectively. These increases were treated as non-cash transactions in the consolidated ~~statements~~statement of cash flows. In addition, cash and cash equivalents increased by 1.5 billion yen. See Note 22 of Notes to Consolidated Financial Statements ~~Note 21~~ for further discussion on the VIEs that are used by Sony.
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In December 2003, the FASB issued ~~a revision to~~revised FIN No. 46 (“FIN No. 46R”), which ~~replaces~~replaced FIN No. 46. FIN No. 46R retains many of the basic concepts introduced in FIN No. 46; however, it also introduces a new scope exception for certain types of entities that qualify as a “business” as defined in FIN No. 46R, revises the method of calculating expected losses and residual returns for determination of a primary beneficiary, and includes new guidance for assessing variable interests. Sony early adopted the provisions of FIN No. 46R upon its issuance. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or impact the way Sony had previously accounted for VIEs.
RECENT PRONOUNCEMENTS
Accounting for Stock-Based Compensation

~~Impairment of securities investments~~
In ~~November 2003,~~December 2004, the ~~Emerging Issues Task Force~~FASB issued FAS No. 123 (revised 2004), “Share-Based Payment” (“~~EITF”~~FAS No. 123(R)”). This statement requires the use of the fair value based method of accounting for employee stock-based compensation and eliminates the alternative use of the intrinsic value method prescribed by Accounting Principle Board Opinion (“APB”) ~~reached a consensus~~No. 25, “Accounting for Stock Issued to Employees.” With limited exceptions, FAS No. 123(R) requires that the grant-date fair value of share-based payments to employees be expensed over the period the service is received. Sony has accounted for its employee stock-based compensation in accordance with the provisions prescribed by APB No. 25 and its related interpretations and has disclosed the net effect on ~~EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment~~net income and ~~Its Application~~net income per share allocated to ~~Certain Investments”. EITF Issue No. 03-01 establishes additional disclosure requirements for each category~~the common stock if Sony had applied the fair value recognition provisions of FAS No. ~~115 investments~~123 to stock-based compensation as described in ~~a loss position. In March 2004,~~Consolidated Financial Statements Note 2(2) Significant accounting policies — Stock-based compensation. This statement shall be effective for fiscal years beginning after June 15, 2005, with early adoption encouraged during the ~~EITF also reached a consensus on~~fiscal years beginning after the ~~additional accounting guidance~~date this statement is issued. The options for ~~other-than-temporary impairments and its application~~transition methods prescribed in FAS No. 123(R) include either the modified prospective or the modified retrospective methods. Sony intends to ~~debt and equity investments. In accordance~~adopt the modified prospective method of transition, which
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requires that compensation expense be recorded for all unvested stock acquisition rights as the requisite service is rendered beginning with the first period of adoption. Sony is currently evaluating the impact of adopting this new ~~disclosure requirements under EITF Issue No. 03-01,~~pronouncement. However, Sony expects that the ~~disclosure~~total expenses to be recorded in the ~~consolidated financial statements has been expanded to include certain additional~~future periods will be consistent with the pro forma information ~~regarding Sony’s securities investments.~~in Consolidated Financial Statements Note 2(2) Significant accounting policies — Stock-based compensation.
Inventory Costs

~~Multiple Element Revenue Arrangements~~
In November ~~2002,~~2004, the FASB issued ~~EITF Issue~~FAS No. ~~00-21, “Accounting~~151, “Inventory Costs, an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4.” This statement requires certain abnormal expenditures to be recognized as expenses in the current period. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities. This statement shall be effective for ~~Revenue Arrangements~~fiscal years beginning after June 15, 2005, with ~~Multiple Deliverables”. EITF Issue No. 00-21 provides guidance on when and how to account for arrangements that involve~~early adoption encouraged during the ~~delivery or performance of multiple products, services and/or rights to use assets. Sony adopted EITF Issue No. 00-21 on July 1, 2003.~~fiscal years beginning after the date this statement is issued. The adoption of ~~EITF Issue~~FAS No. ~~00-21 did~~151 is not expected to have a material impact on Sony’s results of operations and financial ~~position for the year ended March 31, 2004.~~position.
Exchanges of Nonmonetary Assets

~~Derivative Instruments and Hedging Activities~~
In ~~April 2003,~~December 2004, the FASB issued FAS No. ~~149, “Amendment~~153, “Exchanges of ~~Statement 133 on Derivative Instruments and Hedging Activities”.~~Nonmonetary Assets, an amendment of APB Opinion No. 29.” This statement ~~amends and clarifies financial accounting and reporting~~requires that exchanges of productive assets be accounted for derivative instruments, including derivative instruments embedded in other contracts and for hedging activities under FAS No. 133. Sony adopted FAS No. 149 on July 1, 2003. The adoption of FAS No. 149 did not have an impact on Sony’s results of operations and financial position.
~~Accounting for Asset Retirement Obligations~~
~~On April 1, 2003, Sony adopted FAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses financial accounting and reporting for obligations associated with~~at fair value unless fair value cannot be reasonably determined or the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of FAS No. 143 did not have a material impact on Sony’s results of operations and financial position for the year ended March 31, 2004.
~~Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity~~
     In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS No. 150 establishes standards for how certain financial instruments with characteristics of both liabilities and equity shall be classified and measured. Sony adopted FAS No. 150 during the first quarter of the year ended March 31, 2004. The adoption of FAS No. 150 did not have an impact on Sony’s results of operations and financial position for the year ended March 31, 2004.
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~~RECENT PRONOUNCEMENTS~~
~~Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts~~
In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants 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 provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts.transaction lacks commercial substance. This statement shall be effective for nonmonetary asset exchanges occurring in the fiscal ~~years~~periods beginning after ~~December~~June 15, ~~2003.~~2005, with early adoption during the fiscal periods beginning after the date this statement is issued encouraged. Sony is currently evaluating the impact of adopting this ~~guidance.~~new pronouncement.
~~Item 6.~~     ~~Directors, Senior Management and Employees~~
Item 6. Directors, Senior Management and Employees
Directors and Senior Management
Set forth below are the current Sony Corporation Board of Directors and Corporate Executive Officers, their date of birth, the year in which they were first elected, their current position at ~~the~~ Sony, ~~Group,~~ prior positions, and other principal business activities outside ~~the~~ Sony ~~Group~~ as of June ~~22, 2004.~~21, 2005.
Board of Directors
~~Board of Directors~~

Nobuyuki Idei
Date of Birth: November 22, 1937
Director (Member of the Board) Since: 1989
Corporate Executive Officer Since: 2003
Current Positions: Chairman and Group Chief Executive Officer, Representative Corporate Executive Officer
Prior Positions:
2000 Chairman and Chief Executive Officer, Representative Director, Sony Corporation
1999 President and Representative Director, Chief Executive Officer, Sony Corporation
1995 President and Representative Director, Chief Operating Officer, Sony Corporation
1990 Senior General Manager, Advertising & Marketing Communication Strategy Group, Sony Corporation
1989 Director, Sony Corporation
1988 Senior General Manager, Home Video Group, Sony Corporation
1960 Entered Sony Corporation
Principal Business Activities Outside Sony:
Director of Nestlé S.A., Switzerland
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Kunitake Ando
Date of Birth: January 1, 1942
Director (Member of the Board) Since: 2000 (and from 1994 through 1997)
Corporate Executive Officer Since: 2003
Current Positions: President and Global Hub President, Representative Corporate Executive Officer,
Officer in charge of Personal Solutions Business Group
Prior Positions:
2003 President and Group Chief Operating Officer, Representative Corporate Executive Officer, Sony Corporation
2000 President and Chief Operating Officer, Representative Director, Sony Corporation
1999 President and Chief Operating Officer, Personal IT Network Company, Sony Corporation
1998 Corporate Senior Vice President, Sony Corporation
1997 Corporate Vice President (resigns as Director), Sony Corporation
1994 Director, Sony Corporation
1990 President and Chief Operating Officer, Sony Engineering and Manufacturing of America
1985 Deputy President, Sony Prudential Life Insurance Co., Ltd.
1969 Entered Sony Corporation
Principal Business Activities Outside Sony: None

Teruo Masaki
Date of Birth: August 7, 1943
Director (Member of the Board) Since: 1999
Corporate Executive Officer Since: 2003
Current Positions: Executive Deputy President and Group General Counsel ~~Corporate Executive Officer~~
Prior Positions:
2000 Corporate Senior Executive Vice President, Director, Sony Corporation
1999 Senior Managing Director, Sony Corporation
1997 Executive Vice President, Sony Corporation of America
1991 Deputy Senior General Manager, Legal and Intellectual Property Group, Sony Corporation
1971 Entered Sony Corporation
Principal Business Activities Outside Sony: None

Sir Howard Stringer
Date of Birth: February 19, 1942
Director (Member of the Board) Since: 1999
Corporate Executive Officer Since: 2003
Current Positions: Vice Chairman and Sony Group Americas Representative, Chief Operating Officer in
charge of Game Business Group and Entertainment Business Group, ~~Corporate Executive~~ Officer in
charge of Connect Company, Sony Corporation Chairman and Chief Executive
Officer, Sony Corporation of America
Chairman, Sony Electronics Inc. (a U.S. subsidiary of Sony Corporation)
Prior Positions:
1999 Director, Sony Corporation
1997 President, Sony Corporation of America
1995 Chairman and Chief Executive Officer, TELE-TV, U.S.A.
1988 President, CBS Broadcast Group, CBS Inc., U.S.A.
1986 President, CBS News, U.S.A.
Principal Business Activities Outside Sony:
Director of InterContinental Hotels Group
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Ken Kutaragi
Date of Birth: August 2, 1950
Director (Member of the Board) Since: 2000
Current Positions: Group Executive ~~Deputy~~Officer, Sony Corporation President and Group Chief Executive
Officer, Sony Computer Entertainment Inc.
Prior Positions:
2004 Chief Operating Officer in charge of Game Business Group and Home Electronics Network Company
2003 Executive Deputy President, Corporate Executive Officer and Chief Operating Officer in charge of Home Network Company, Game Business Group, Broadband Network Company, NC President, Semiconductor Solutions Network Company, ~~(SSNC), Corporate Executive Officer, NC President, SSNC~~
~~Prior Positions:~~Sony Corporation
2000 Director, Sony Corporation
1999 Executive President, Sony Computer Entertainment Inc.
1991 Manager, PS Project, Video Disc Player Group, Sony Corporation
1975 Entered Sony Corporation
Principal Business Activities Outside Sony: None

Teruhisa Tokunaka
Date of Birth: August 9, 1945
Director (Member of the Board) Since: 1999
Current Positions: Group Executive Officer, Sony Corporation President, Representative Director,
Sony Financial Holdings Inc.
Prior Positions:
2003 Group Chief Strategy Officer, Representative Corporate Executive Officer, Officer in charge of Network Application & Content Service Sector, Personal Solutions Business Group, Sony Corporation
2000 Executive Deputy President and Chief Financial Officer, Representative Director,
Sony Corporation
1999 Senior Managing Director and Chief Financial Officer, Sony Corporation
1995 President, Sony Computer Entertainment Inc.
1989 Deputy Senior General Manager, Corporate Strategy Group, Sony Corporation
1969 Entered Sony Corporation
Principal Business Activities Outside Sony: None

Göran Lindahl
Date of Birth: April 28, 1945
Director (Member of the Board) Since: 2001
Prior Positions:
2003 Corporate Executive Officer, Sony Group Europe Representative, Chairman of Sony Group in Europe
2001 Director, Sony Corporation
1999 Director, Telefonaktiebolaget LM Ericsson, ~~Telephone Co., Ltd.,~~ Sweden
1997 President and Chief Executive Officer, Asea Brown Boveri Ltd., Switzerland
1985 President, ASEA Transmission AB, Sweden
1983 President, ASEA Transformers AB, Sweden
Principal Business Activities Outside Sony:
Director, Anglo American Plc, U.K.
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Akihisa Ohnishi
Date of Birth: March 10, 1937
Director (Member of the Board) Since: 2003 (and from 1989 through 1993)
Prior Positions:
1993 Standing Statutory Auditor, Sony Corporation
1989 Senior General Manager, Corporate Planning Group, Sony Corporation (concurrent with prior position)
1989 Director, Sony Corporation
1988 General Manager, Accounting Division, Sony Corporation
1977 Managing Director, Hispano Sony S.A.
1961 Entered Sony Corporation
Principal Business Activities Outside Sony: None

Iwao Nakatani
Date of Birth: January 22, 1942
Outside Director (Member of the Board) Since: 1999
Current Position: Chairman of the Board
Prior Positions:
1999 Professor, School of Management and Information Sciences, Tama University
1991 Professor, Faculty of Commerce, Hitotsubashi University
1984 Professor, Faculty of Economics, Osaka University
1973 Lecturer and Researcher, Faculty of Economics, Harvard University
Principal Business Activities Outside Sony:
President, Tama University
Director of Research, UFJ Institute Ltd.
Director, JSAT Corporation
Director, ASKUL Corporation

Akishige Okada
Date of Birth: April 9, 1938
Outside Director (Member of the Board) Since: 2002
Current Position: Chairman of the Compensation Committee
Prior Positions:
1997 President, The Sakura Bank, Ltd.
1996 Senior Managing Director, The Sakura Bank, Ltd.
1995 Managing Director, The Sakura Bank, Ltd.
1991 Director, The Mitsui Taiyo Kobe Bank, Ltd.
Principal Business Activities Outside Sony:
Chairman of the Board (Representative Director), Sumitomo Mitsui Financial Group, Inc.
Chairman of the Board (Representative Director), Sumitomo Mitsui Banking Corporation
~~Director, Kao Corporation~~
~~Director, Mitsui & Co., Ltd.~~
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Hirobumi Kawano
Date of Birth: January 1, 1946
Outside Director (Member of the Board) Since: 2003
Current Position: Vice Chairman of the Board
Prior Positions:
1999 Director-General, Agency for Natural Resources and Energy, Ministry of International Trade and Industry (“MITI”) (later renamed the Ministry of Economy, Trade and Industry (METI))
1998 Director-General, Basic Industries Bureau, MITI
1996 Director-General, Machinery and Information Industries Policy, Machinery and Information Industries Bureau, MITI
1995 Director-General, Petroleum Department, Agency of Natural Resources and Energy, MITI
1993 Director, General Coordination Division, Minister’s Secretariat, MITI
1992 Director, General Industrial Machinery Division, Machinery and Information Industries Bureau, MITI
1989 Director, Americas-Oceania Division, International Trade Policy Bureau, MITI
1969 Entered MITI
Principal Business Activities Outside Sony:
~~Executive Adviser, The Tokio Marine and Fire Insurance Co., Ltd.~~ Senior Vice President, JFE Steel Corporation

Yotaro Kobayashi
Date of Birth: April 25, 1933
Outside Director (Member of the Board) Since: 2003
Current Position: Chairman of the Nominating Committee
Prior Positions:
1996 Director, ABB Ltd., Switzerland
1978 President and Chief Executive Officer, Fuji Xerox Co., Ltd.
Principal Business Activities Outside Sony:
Chairman of the Board, Fuji Xerox Co., Ltd.
Director, Callaway Golf Company
Director, Nippon Telegraph and Telephone Corporation

Carlos Ghosn
Date of Birth: March 9, 1954
Outside Director (Member of the Board) Since: 2003
Prior Positions:
1990 Chairman, President and Chief Executive Officer, Michelin North America Inc.
1985 Chief Operating Officer, Michelin — Brazil
Principal Business Activities Outside Sony:
President and Chief Executive Officer, Nissan Motor Co., Ltd.
Director, Alcoa Inc., U.S.A.
~~Director,~~President and Chief Executive Officer, Renault S.A., France
~~Director, IBM Corporation~~
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Sakie T. Fukushima
Date of Birth: September 10, 1949
Outside Director (Member of the Board) Since: 2003
Prior ~~Positions:~~ Position:
2000 Managing Director, Korn/Ferry International — Japan
Principal Business Activities Outside Sony:
~~Representative Director & Regional Managing Director — Japan, Korn/ Ferry International~~
Member, Board of Directors, Korn/ Ferry International, U.S.A.
Director, Kao Corporation
Advisory Board Member, All Nippon Airways Co., Ltd.

Yoshihiko Miyauchi
Date of Birth: September 13, 1935
Outside Director (Member of the Board) Since: 2003
Prior Positions:
2000 Representative Director, Chairman and Chief Executive Officer, ORIX Corporation
1980 Representative Director, President, ORIX Corporation
Principal Business Activities Outside Sony:
Director, Representative Executive Officer, Chairman and ~~Group Chief Executive~~
Group Chief Executive Officer, ORIX Corporation
Director, Aozora Bank Ltd.
Director, Fuji Xerox Co., Ltd.
Director, ~~Mercian Corporation~~
~~Director,~~ Showa Shell Sekiyu K.K.
Director, Daikyo Incorporated
Yoshiaki Yamauchi
Date of Birth: June 30, 1937
Outside Director (Member of the Board) Since: 2003
Current Position: Chairman of the Audit Committee
Prior Positions:
1999 Director, Sumitomo Banking Corporation
1993 Executive Director, Asahi & Co.
1991 President, Inoue Saito Eiwa Audit Corporation
1986 President, Eiwa Audit Corporation
Country Managing Partner — Japan, Arthur Andersen & Co.
Principal Business Activities Outside Sony:
Deputy President, ARI Research Institute
Statutory Auditor, Stanley Electric Co., Ltd.
Director, Amana Corporation
Statutory Auditor, Seiko Watch Corporation
Director, Sumitomo Mitsui Financial Group, Inc.
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      As of the conclusion of the Ordinary General Meeting of Shareholders to be held on June 22, 2005, Messrs. Idei, Ando, Masaki, Kutaragi, Tokunaka, Ohnishi, Nakatani and Ghosn are scheduled to resign from the position of Director (Member of the Board). In addition, at its Board of Directors meeting held on April 26, 2005, Sony Corporation nominated the following candidates for the positions of Director (note that these nominations are subject to the approval of the Ordinary General Meeting of Shareholders mentioned above).
Candidates for Member of the Board of Directors as of June 22, 2005
      In addition to Messrs. Stringer, Okada, Kawano, Kobayashi, Miyauchi, Yamauchi and Lindahl, and Ms. Fukushima, the following are candidates for the position of Director (Member of the Board) subject to the approval of the Ordinary General Meeting of Shareholders to be held on June 22, 2005:
Ryoji Chubachi
   Date of Birth: September 4, 1947
   Corporate Executive Officer Since: 2004
   Current Positions: Executive Deputy President, Electronics Chief Executive Officer
   Prior Positions:
     2004 Chief Operating Officer in charge of Micro Systems Network Company (MSNC) and Engineering, Manufacturing and Customer Services (“EMCS”), President, Production Strategy Group, Sony Corporation
     2003 Executive Vice President, Executive Officer, NC President, MSNC, Sony Corporation
     2002 NC President, Core Technology & Network Company (“CNC”), Sony Corporation
     2002 Corporate Senior Vice President, Sony Corporation
     1999 Corporate Vice President, President, Recording Media Company, CNC, Senior Vice President, CNC, Sony Corporation
     1977 Entered Sony Corporation
   Principal Business Activities Outside Sony: None
Katsumi Ihara
   Date of Birth: September 24, 1950
   Corporate Executive Officer Since: 2004
Current Positions: Executive Deputy President, Group Chief Strategy Officer and Group Chief Financial
Officer, NC President, Home Electronics Network Company
   Prior Positions:
     2001 Group Executive Officer, Sony Corporation
President, Sony Ericsson Mobile Communications AB
     2000 Corporate Senior Vice President, NC President, Personal IT Network Company,
Sony Corporation
     1997 Corporate Vice President, Sony Corporation
     1996 President, Home A&V Products Company, Sony Corporation
     1981 Entered Sony Corporation
     1973 Entered Mitsui Knowledge Industry Co., Ltd.
   Principal Business Activities Outside Sony: None
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Sir Peter Bonfield
   Date of Birth: June 3, 1946
   Current Position: Member of the Advisory Board
   Prior Positions:
     1996 Chief Executive Officer, British Telecom plc
     1986 Chairman, ICL plc
     1984 Managing Director, ICL plc
   Principal Business Activities Outside Sony:
Member of the Board, AstraZeneca plc
Member of Audit Committee of the Board, Telefonaktiebolaget LM Ericsson
Member of the Board, Mentor Graphics Inc.
Member of the Board and Chairman of Audit Committee, Taiwan Semiconductor Manufacturing Company Ltd.
Fueo Sumita
   Date of Birth: May 24, 1938
   Prior Positions:
     2002 Executive Vice President, Kawada Corp.
     2001 Vice Chairman, Ernst & Young ShinNihon
     2000 Deputy Director, Ohta-Showa Century Audit Corp.
     1999 Chairman, Century Audit Corp.
     1985 Deputy General Manager, Corporate Accounting Dept., Hitachi, Ltd.
   Principal Business Activities Outside Sony:
Chief of Sumita Accounting Office
Corporate Executive Officers
      In addition to Messrs. Idei, Ando, Masaki, Stringer, ~~Kutaragi,~~Chubachi and Ihara, the ~~ten~~seven individuals set forth below are the current Corporate Executive Officers of Sony ~~Corporation.~~Corporation as of June 21, 2005. Refer to “Board Practices” below.
~~Corporate Executive Officers~~93

Shizuo Takashino
Date of Birth: September 2, 1943
Corporate Executive Officer Since: ~~1997~~2003
Current Positions: Executive Deputy President ~~and~~& Sony Group China Representative, President, China
Design & Engineering Group, Sony China Limited, Chief Operating Officer in
charge of ITInformation Technology & ~~Mobile Solutions~~Communications Network Company, ~~and~~Personal
Audio Visual Network Company, Professional Solutions Network Company
Prior Positions:
2000 ~~Network Company~~NC President, Broadband Solutions Network Company, Sony Corporation
1999 Senior Executive Vice President, ~~and~~Corporate Executive Officer, Chief Operating Officer,
NC President, Home Network Company, Sony Corporation
1997 Corporate Senior Vice President, (resigned as Director), Sony Corporation
1996 President, Personal A&V Products Company, Sony Corporation
1995 Executive Vice President, Consumer A&V Products Company, Sony Corporation
1995 Director, Sony Corporation
1990 Senior General Manager, General Audio Group, Sony Corporation
1962 Entered Sony Corporation
Principal Business Activities Outside Sony: None
~~Katsumi Ihara~~
~~Date of Birth: September 24, 1950~~
~~Corporate Executive Officer Since: 2004~~
~~Current Positions: Executive Deputy President, Group Chief Strategy Officer and Chief Financial Officer~~
~~Prior Positions:~~
~~2001~~ ~~Group Executive Officer, Sony Corporation~~
~~President, Sony Ericsson Mobile Communications AB~~
~~2000~~ ~~Corporate Executive Vice President, Sony Corporation~~
~~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~~
~~Ryoji Chubachi~~
~~Date of Birth: September 4, 1947~~
~~Corporate Executive Officer Since: 2004~~
~~Current Positions: Executive Deputy President and Chief Operating Officer in charge of Micro Systems Network Company(MSNC) and EMCS, NC President, MSNC~~
~~Prior Positions:~~
~~2002~~ ~~NC President, Core Technology & Network Company (“CNC”), Sony Corporation~~
~~2002~~ ~~Corporate Senior Vice President, Sony Corporation~~
~~1999~~ ~~Corporate Vice President, Sony Corporation~~
~~President, Recording Media Company, CNC, Sony Corporation~~
~~Senior Vice President, CNC, Sony Corporation~~
~~1977~~ ~~Entered Sony Corporation,~~
~~Principal Business Activities Outside Sony: None~~
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Keiji Kimura
Date of Birth: April 4, 1952
Corporate Executive Officer Since: 2004
Current Positions: Senior Executive Vice President, NC President, ITInformation Technology & ~~Mobile Solutions~~
Communications Network Company, Officer in charge of Connect Company
Prior Positions:
2003 Senior Vice President, Executive Officer, Sony Corporation
2002 Corporate Senior Vice President, Sony Corporation
2001 NC President, Mobile Network Company, Sony Corporation
2000 Corporate Vice President, Sony Corporation
NC President, Information Technology Company, Personal Network Company, Sony Corporation
1977 Entered Sony Corporation
Principal Business Activities Outside Sony: None
~~Tsutomu Niimura~~
~~Date of Birth: June 14, 1947~~
~~Corporate Executive Officer Since: 2004~~
~~Current Positions: Executive Vice President, NC President, Home Electronics Network Company~~
~~Prior Positions:~~
~~2003~~ ~~President, Display Company, Home Network Company (“HNC”), Sony Corporation~~
94
~~Executive Vice President, Executive Officer, Sony Corporation~~
~~2002~~ ~~Co-President, Semiconductor Network Company, Sony Corporation~~
~~2001~~ ~~Corporate Senior Vice President, Sony Corporation~~
~~President, S&S Architecture Center, Sony Corporation~~
~~1999~~ ~~Corporate Vice President, Sony Corporation~~
~~Executive Vice President, PNC, Sony Corporation~~
~~Principal Business Activities Outside Sony: None~~
Fujio Nishida
Date of Birth: November 26, 1948
Corporate Executive Officer Since: 2004
Current Positions: Executive Vice President, President, Global Marketing Group, Deputy President,
Information Technology & Communications Network Company, Deputy President,
Personal Audio Visual Network Company, Officer in charge of Marketing and
Corporate Communications
Prior Positions:
2003 Senior Vice President and Electronics Chief Marketing Officer, Executive Officer,
Sony Corporation
2000 Group Executive Officer, Sony Corporation
President and Chief Operating Officer,
Sony Electronics Inc.
2000 President, Consumer Electronics Group, Sony Electronics Inc.
1998 President, Consumer Products Marketing Group, Sony Electronics Inc.
1996 Senior Vice President, Home A/V Division, Consumer AV Group,
Sony Electronics Inc. (a U.S. subsidiary of Sony Corporation)
1972 Entered Sony Corporation
Principal Business Activities Outside Sony: None
97

Takao Yuhara
Date of Birth: June 7, 1946
Corporate Executive Officer Since: 2003
Current Positions: Senior Vice President, Officer in charge of Finance and Investor Relations
Prior Positions:
2003 Group Chief Financial Officer, Sony Corporation
2001 Senior General Manager, Corporate Planning & Control, Global Hub, Sony Corporation
1999 Senior Vice President, Corporate Planning & Control, Group HQ, Sony Corporation
1996 Vice President, Display Company, General Manager, Planning & Control Department, Display Company, Sony Corporation
1995 General Manager, Planning & Control Department, Display Device Division, Component Company, Sony Corporation
1971 Entered Sony Corporation
1969 Entered Nippon Chemical Industrial Co., Ltd.
Principal Business Activities Outside Sony: None
95

Nobuyuki Oneda
Date of Birth: May 6, 1945
Corporate Executive Officer Since: 2004
Current Positions: Senior Vice President, Officer in charge of Transformation 60, Corporate Planning &
Control, Accounting and Information Systems
Prior Positions:
2003 Senior Vice President, Executive Officer, Sony Corporation
2002 Officer and Chief Financial Officer, Network Application & Content Service Sector,
Sony Corporation,
Corporate Senior Vice President, Sony Corporation
2000 Deputy President, and Chief Financial Officer, Sony Electronics Inc.
Group Executive Officer, Sony Corporation
1999 Executive Vice President and Chief Financial Officer, Sony Electronics Inc. (a
(a U.S. subsidiary of Sony Corporation)
1996 General Manager, Corporate Planning & Control Department, Sony Corporation
1969 Entered Sony Corporation
Principal Business Activities Outside Sony: None

Yasunori Kirihara
Date of Birth: November 20, 1946
Corporate Executive Officer Since: 2004
Current Positions: Senior Vice President, Officer in charge of Corporate Human Resources
Prior Positions:
2003 Vice President, Executive Officer, Sony Corporation
1998 Representative Director and President, Sony Service Corporation
1997 Senior Vice President, Recording Media & Energy Company, Sony Corporation
1989 General Manager, Human Resources, Human Resources Development, Sony Corporation
1970 Entered Sony Corporation
Principal Business Activities Outside Sony: None
98

Nicole Seligman
Date of Birth: October 25, 1956
Corporate Executive Officer Since: 2003
Current Positions: Group Deputy General Counsel, Sony Corporation
Executive Vice President and General Counsel, Sony Corporation of America
Prior Positions:
2000 Entered Sony Corporation of America as Executive Vice President and General Counsel
1992 Partner, Williams & Connolly LLP
1985 Entered Williams & Connolly LLP
1978 Associate Editorial Page Editor for The Asian Wall Street Journal, Hong Kong
Principal Business Activities Outside Sony: None
Candidates for Corporate Executive Officer as of June 22, 2005
      As of June 22, 2005, Messrs. Idei, Ando, Takashino, Masaki, Nishida, Yuhara and Kirihara are scheduled to resign from the position of Corporate Executive Officer. In addition to Messrs. Stringer, Chubachi, Ihara, Oneda and Kimura, and Ms. Seligman, the following candidate has been selected for the position of Corporate Executive Officer. These appointments are subject to approval by the Board of Directors at the Board of Directors meeting to be held on June 22, 2005.
96
Yutaka Nakagawa
Date of Birth: December 4, 1945
Current Positions: Executive Vice President, Executive Officer, NC President, Personal Audio Visual
Network Company, President, Personal Audio Business Group
Prior Positions:
2003 Deputy President, Micro Systems Network Company, President, Energy Company, MSNC, Sony Corporation
1999 Corporate Senior Vice President, Sony Corporation
1998 President, Personal and Mobile Communication Company, Sony Corporation
1997 Corporate Vice President, Sony Corporation
1992 General Manager, Camcorder Products Division, Personal Video Group, Sony Corporation
1968 Entered Sony Corporation
Principal Business Activities Outside Sony: None
All of the aforementioned persons, with the exception of ~~Mr.~~Messrs. Nakatani, ~~Mr.~~ Okada, ~~Mr.~~ Kawano, ~~Mr.~~ Kobayashi, ~~Mr.~~ Ghosn, Miyauchi, Yamauchi, Bonfield and Sumita, and Ms. Fukushima, ~~Mr. Miyauchi and Mr. Yamauchi~~ are, or will be, engaged on a full-time basis ~~in the affairs of~~by Sony. There is no family relationship between any of the persons named above. There is no arrangement or understanding with major shareholders, customers, suppliers, or others pursuant to which any person named above was selected as a Director or a Corporate Executive Officer.
Compensation
      The aggregate amount of remuneration, including bonuses paid and benefits in kind granted by Sony during the fiscal year ended March 31, ~~2004~~2005 to all Directors and Corporate Executive Officers (refer to “Board Practices” below) of Sony Corporation who served during the fiscal year ended March 31, ~~2004,~~2005, as a group ~~(21~~(28 people), totaled ~~2,424~~2,748 million yen. Also, as a part of Sony’s incentive compensation arrangements, Sony Corporation issued stock acquisition rights during the fiscal year ended March 31, ~~2004.~~2005. The stock acquisition rights, which represent rights to subscribe for shares of common stock of Sony Corporation, have been granted to the Directors, Corporate Executive Officers, Executive Officers, Group Executive Officers, and selected employees. The stock acquisition rights generally vest ratably up to three years from the date of grant and are generally exercisable up to ten years from the date of grant. The portion of those stock acquisition rights which was granted by Sony during the fiscal year ended March 31, ~~2004~~2005 to the Directors, and Corporate Executive Officers as of May 31, ~~2004~~2005 confers rights to purchase a total number of ~~669,000~~712,000 shares of Sony Corporation’s Common Stock. The exercise price for these stock acquisition rights issued as of November ~~14, 2003 is 4,101~~18, 2004 was 3,782 yen per share, and the exercise price for these stock acquisition rights issued as of March 31, ~~2004 is 40.90~~2005 was 40.34 U.S. dollars.
      Regarding the above compensation plans, refer to Note 1516 of Notes to Consolidated Financial Statements.
The aggregate amount accrued for lump-sum severance indemnities by Sony during the fiscal year ended March 31, ~~2004~~2005 for all Directors, and Corporate Executive Officers of Sony Corporation as of May 31, ~~2004,~~2005, as a group ~~(21~~(26 people), totaled ~~210~~320 million yen.
Board Practices
~~As required under~~
      Sony has adopted a corporate governance system called the “Company with Committees” system ~~which was introduced by an amendment to~~under the Japanese Commercial Code (Shoho) and related legislation (including the Law for Special Exceptions to the Commercial Code concerning Audit, etc. ofKabushiki Kaisha,collectively the “Commercial Code”)~~, Sony adopted a new corporate governance~~. Under this system, ~~at its General Meeting of Shareholders held on June 20, 2003.~~ Sony Corporation has ~~established~~ three committees: the Nominating Committee, the Audit Committee and the Compensation Committee. Under the Commercial Code, each committee is required to consist of not less than three Directors, the majority of whom must be outside Directors. Under the committee system, Directors as such have no power to execute the business of Sony Corporation except for limited circumstances as permitted by law. The Board of Directors ~~has designated 15~~must elect Corporate Executive Officers (~~Shikko-yaku~~Shikko-
97
yaku), ~~some of whom are also Directors,~~ who are responsible for
99
execution of the business of Sony Corporation. A summary of the new governance system adopted by Sony Corporation is set forth below.
      The Board of Directors determines the fundamental management policy and other important matters related to management of ~~the~~ Sony ~~Group~~ and oversees the performance of the duties of Directors and Corporate Executive Officers. Under the Commercial Code, all Directors must be elected at the General Meeting of Shareholders from ~~among~~ the candidates determined by the Nominating Committee. Under the Commercial Code, the terms of office of Directors expire at the conclusion of the General Meeting of Shareholders held with respect to the last closing of accounts within one year after their assumption of office. Directors may serve any number of consecutive terms; although, under the Regulations of the Board of Directors of Sony Corporation, outside Directors may not be reelected more than five times without the consent of all Directors.
      The Nominating Committee, which pursuant to the Regulations of the Board of Directors of Sony Corporation consists of five or more Directors, determines the content of proposals to be submitted at the General Meeting of Shareholders regarding the appointment and dismissal of Directors. As stated above, under the Commercial Code, a majority of the members of the Nominating Committee must be outside Directors. In order to qualify as an outside Director under the Commercial Code, a Director must be a person who is not engaged in the business of Sony Corporation and has never been a director, a corporate executive officer, a general manager or an employee of Sony Corporation or of any of its subsidiaries and is not a director who is also engaged in the business or a corporate executive officer of such a subsidiary or a general manager or an employee of Sony Corporation or of any subsidiary of Sony Corporation. Under the Regulations of the Board of Directors of Sony Corporation, two or more members of the Nominating Committee must concurrently be Corporate Executive Officers. The Nominating Committee is composed of the following members as of June ~~22, 2004:~~21, 2005: Yotaro Kobayashi, who is the Chairman of the Nominating Committee and an outside Director; Hirobumi Kawano and Carlos Ghosn, who are outside Directors; and Nobuyuki Idei and Kunitake Ando, who are Corporate Executive Officers. ~~From June 20, 2003, the day Sony adopted the Company with Committees system, until March 31, 2004, the day~~During the fiscal year ended March 31, 2005, the Nominating Committee held ~~four~~seven meetings. ~~Prior to June 20, the old nominating committee held one meeting in the same fiscal year.~~
      Under the Regulations of the Board of Directors of Sony Corporation, the Audit Committee must consist of three or more Directors, a majority of whom, as stated above, must be outside Directors. In addition, under the Commercial Code, a member of the Audit Committee may not concurrently be a ~~corporate executive officer,~~Corporate Executive Officer, a general manager or any other employee of Sony Corporation or any of its subsidiaries, or a director who is engaged in the business of any of such subsidiaries. Further, under the Regulations of the Board of Directors of Sony Corporation, members of the Audit Committee must meet the independence and other equivalent requirements of U.S. securities laws and regulations to the extent applicable to Sony Corporation. Each member of the Audit Committee has the statutory duty to examine the consolidated and non-consolidated financial statements and business (annual) reports to be submitted by the Board of Directors at the General Meeting of Shareholders. The Audit Committee operates under ~~a written charter~~regulations adopted by the Board of Directors. The Audit Committee’s primary responsibility is to ~~monitor~~audit the execution of duties by ~~the~~ Directors and Corporate Executive Officers ~~by overseeing their~~with regard to financial statements, disclosure controls and procedures, internal controls, compliance ~~with the Commercial Code~~structure, risk management structure, internal audit structure, whistleblower protections and other ~~relevant laws~~matters; to propose appointment/dismissal of, approve the compensation of, oversee and ~~regulations of host countries where Sony Corporation is listed and also their adherence to the Sony Group Code of Conduct.~~evaluate Sony’s independent auditors. Under the Commercial Code, the Audit Committee has a statutory duty to prepare and submit its audit report to the Board of Directors each year. A member of the Audit Committee may note his or her opinion in the audit report if it is different from the opinion of the Audit Committee that is expressed in the audit report. Other major responsibilities include the oversight, selection and evaluation of Sony’s independent auditor and the establishment of procedures for and the regular auditing of Sony’s internal complaint system concerning accounting and auditing matters.
      The Audit Committee discusses with Sony Corporation’s independent auditor, ChuoAoyama PricewaterhouseCoopers, the scope and results of their audits including their evaluation of Sony Corporation’s internal controls, compatibility with Generally Accepted Accounting Principles in the U.S., and the overall quality of financial reporting. The Audit Committee ensures the
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independence of ChuoAoyama PricewaterhouseCoopers by overseeing their activities through regular communications and discussions with ChuoAoyama ~~PricewaterhouseCoopers.~~PricewaterhouseCoopers as well as making pre-approval of audit and non-audit services provided. The Audit Committee is composed of the following members as of June ~~22, 2004:~~21, 2005: Yoshiaki Yamauchi, who is the Chairman of the Audit Committee and an outside Director; Sakie T. Fukushima, who is an outside Director; and Akihisa Ohnishi, who is a Director and full-time member of the Audit Committee. Both Yoshiaki Yamauchi and Akihisa Ohnishi are “audit committee financial experts” within the meaning of Item 16A of this report. ~~All the members of the Audit Committee are “independent” as defined in Rule 10A-3 under the Securities and Exchange Act of 1934, as amended.~~ The Audit Committee held ~~eight~~15 meetings in the fiscal year ended March 31, 2004, with the first meeting held on June 20, 2003, the day the Audit Committee was established. Prior to June 20, 2003, instead of the Audit Committee Sony had a Board of Statutory Auditors which held four meetings between April 1, 2003 and June 20, 2003.2005.
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      As required by the Commercial Code, the Compensation Committee determines the compensation (including equity-related rights or options given for the purpose of stock incentive options) to be received by each Director and Corporate Executive Officer. In addition to such statutory duties, the Compensation Committee determines the compensation to be received by each Executive Officer and Group Executive Officer, and also proposes to the Board of Directors stock option plans (involving the issuance of share acquisition rights and other forms of stock price based compensation) to be granted to ~~directors,~~Directors, officers and employees of ~~the Sony Group.~~Sony. Under the Regulations of the Board of Directors, the Compensation Committee shall consist of three or more Directors and one or more members must concurrently serve as Corporate Executive Officers. As stated above, a majority of the members of the Compensation Committee must be outside Directors. The Compensation Committee is composed of the following members as of June ~~22, 2004:~~21, 2005: Akishige Okada, who is the Chairman of the Compensation Committee and an outside Director; Yoshihiko Miyauchi, who is an outside Director; and Teruo Masaki, who is a Corporate Executive Officer. ~~From June 20, 2003, the day Sony adopted the Company with Committees system, until March 31, 2004, the day~~During the fiscal year ended March 31, 2005, the Compensation Committee held ~~six~~seven meetings. ~~Prior to June 20, the old compensation committee held two meetings in the same fiscal year.~~
      No Directors have service contracts with Sony providing for benefits upon termination of service as a Director.
      Under the Commercial Code and the Articles of Incorporation of Sony Corporation, Sony Corporation may, by a resolution of the Board of Directors, exempt Directors from liabilities to Sony Corporation to the extent permitted by law arising in connection with their failure to perform their duties. In addition, Sony Corporation has entered into a liability limitation agreement with each outside Director which limits the maximum amount of their liabilities owed to Sony Corporation arising in connection with their failure to perform their duties to the greater of either 30 million yen or an amount equal to the aggregate sum of the amounts prescribed in each item of Paragraph 19 of Article 266 of the Commercial ~~Code.~~
Code (or, when the New Company Law becomes effective, the larger of the amount determined by Sony Corporation or the minimum responsibility amount as set forth by the New Company Law).
      The Board of Directors must appoint one or more Corporate Executive Officers who are authorized to determine matters delegated to them by the Board of Directors. The Corporate Executive Officers are responsible for conducting all the business operations of ~~the~~ Sony ~~Group~~ within the scope of authority delegated by the Board of Directors. As of June 21, 2005, there are 13 Corporate Executive Officers, some of whom are also Directors. Significant decision-making authority has been delegated to the ~~Executive Board, which is made up of all Corporate Executive Officers,~~Group CEO and also to each Corporate Executive Officer with regard to investments, strategic alliances and other actions related to the execution of business operations. Sony Corporation believes that this significant delegation enables ~~the~~ Sony ~~Group~~ to be managed in a more dynamic and responsive manner than in the past. The terms of office of Corporate Executive Officers must expire at the conclusion of the first meeting of the Board of Directors held immediately after the conclusion of the General Meeting of Shareholders held with respect to the last closing of accounts within one year after their assumption of office. From among the Corporate Executive Officers who are also Directors, the Board of Directors must elect one or more Representative Corporate Executive ~~Officer(s).~~Officers. Each Representative Corporate Executive Officer has the statutory authority to represent Sony Corporation in the conduct of its affairs.
Employees
      As of March 31, 2005, Sony had approximately 151,400 employees. Although employees increased at manufacturing facilities in Asia, particularly in China, the total number of employees declined due to the reductions associated with the implementation of restructuring activities in Japan, the U.S., Europe and South-East Asia, and a decrease in the number of employees as a result of Sony combining its recorded music business outside Japan with the recorded music business of Bertelsmann AG forming the jointly-owned company SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”). The fiscal year-end totals include approximately 2,000 employees in Japan who left Sony mainly through the early retirement program on March 31, 2005 and 3,600 employees in Japan who left Sony mainly through the program on March 31, 2004. As of March 31, 2005, approximately 62,300 employees were located in Japan and approximately 89,100 outside Japan, and approximately 16 percent were members of labor unions.
~~101~~99
~~Employees~~
      As of March 31, 2004, Sony had approximately 162,000 employees, ~~including fixed-term employees. Although the number of employees was reduced through restructuring activities, due to~~ an increase ~~at manufacturing facilities in Asia, primarily in China, the number~~ of ~~employees at the end of March 2004 increased by~~ approximately 900 from ~~the end of March 2003. In addition, approximately 3,600 employees in Japan who left Sony on~~ March 31, ~~2004, through the early retirement program and other means, are included in this year-end total.~~2003. As of March 31, 2004, approximately 65,600 employees were located in Japan and approximately 96,400 outside Japan, and approximately 13 percent were members of labor unions.
As of March 31, 2003, Sony had approximately 161,100 employees, including fixed-term employees, a decrease of approximately 6,900 from the number as of March 31, 2002. As of March 31, 2003, approximately 67,100 employees were located in Japan and approximately 94,100 outside Japan, and approximately 13 percent were members of labor unions. The following table shows the number of employees by segment as of March 31, ~~2002,~~ 2003, 2004 and ~~2004.~~2005.
Number of Employees by Segment

March 31

2003 2004 2005

Electronics 128,000 127,100 123,600
Game 4,400 4,800 4,300
Music 8,400 6,600 2,100
Pictures 5,700 6,200 5,900
Financial Services 6,600 6,700 6,800
Other 7,300 8,300 6,800
Unallocated — Corporate employees 700 2,300 1,900

Total 161,100 162,000 151,400

      In addition, the average number of employees for the fiscal years ended March 31, 2003, 2004 and 2005, calculated by averaging the total number of employees at the end of each quarter, was 165,300, 165,300 and 154,200 respectively.
~~Number of Employees by Segment~~

March 31
2002 2003 2004
Electronics 131,500 122,100 121,700
Game 4,100 4,400 4,800
Music 14,900 13,400 12,000
Pictures 5,500 5,700 6,200
Financial Services 6,800 6,600 6,700
Other 4,500 7,300 8,300
Unallocated — Corporate employees 700 1,600 2,300

Total 168,000 161,100 162,000

      Sony generally considers its labor relations to be good. Only a few manufacturing facilities have labor unions and, of these, only a few have union contracts.
      Regarding labor relations in the Electronics segment by area, in Asia, where Sony operates many manufacturing facilities, only a few manufacturing facilities have labor unions that have union contracts. In May 2003, Sony completed negotiations with a labor union regarding the terms of severance for employees who had been working at a manufacturing facility in Indonesia which was closed in the second half of the fiscal year ended March 31, 2003. The outcome of these negotiations did not have a significant impact on Sony’s consolidated financial results.
      In the U.S., no manufacturing facilities have labor ~~unions that have union contracts.~~unions. In Mexico, one manufacturing facility has a labor union that has a union contract, but labor relations are good and there have been no significant problems in renegotiating the contract. In Europe, Sony maintains good labor relations with the Work Councils in each country, and, while some employees belong to unions, they are not eligible for union contracts.
      In the Music segment, ~~overall employee~~as a result of the establishment of SONY BMG, 6,000 non-unionized employees of Sony Music’s disc manufacturing and ~~labor relations at~~distribution operations have now been reclassified to the Electronics segment and 3,600 employees of Sony Music Entertainment Inc. (“SMEI”)’s recorded music business, a certain number of whom were represented by labor unions, are ~~good. Sony Music’s U.S. manufacturing and distribution operations remain non-unionized. Sony~~now no longer employees of Sony’s consolidated subsidiaries. As the approximately 300 remaining employees of SMEI’s music publishing business still classified within the Music ~~Studio is a signatory to a~~segment are non-unionized, there are no labor unions within the Music segment with union contract with the International Brotherhood of Electrical Workers (“IBEW”), which represents a unit of recording engineers. Renegotiation of the union contract with the IBEW was completed without any adverse impact on business, and the contract now runs through May 31, 2006. Sony is also subject to agreements with the American Federation of Television and Radio Artists (“AFTRA”), which represents recording artists, and the American Federation of Musicians (“AFM”), which represents musicians. The union contract with AFTRA runs through June 30, 2006.
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contracts.
      In the Pictures segment, Sony also generally considers its labor relations to be good. A number of Pictures’ subsidiaries are signatories to union contracts. ~~Renegotiations with Alliance of Canadian Cinema, Televisions and Radio Artists (“ACTRA”) were successfully concluded in July 2003.~~ During the fiscal year ended March 31, ~~2004, negotiations to renew a contract that expires on June 30,~~ 2005, renegotiations for new three-year agreements were successfully concluded with the Directors Guild of America (“DGA”), Screen Actors Guild ~~were completed without any production interruptions. A collective bargaining agreement with the~~(“SAG”), American Federation of Television and Radio Artists (“AFTRA”), Writers Guild of America (“WGA”) expired on May 1, 2004. The industry gave the WGA a final offer on June 1, 2004. No further negotiation dates have been scheduled at this time and the industry is awaiting a response from the WGA to the June 1st offer. The industry negotiations with, International Brotherhood of Teamsters ~~IBEW~~(“IBT”), International Brotherhood of Electrical Workers (“IBEW”), Basic Craft Unions (“Basic Crafts”), and Office and Professional Employees International Union Local #174 (“Local #174”). On June 10, 2005, renegotiations for a new three and one-half year agreement were concluded with the ~~Basic Crafts Unions commenced on June 2, 2004. If~~American Federation of Musicians (“AFM”). The tentative agreement is subject to ratification by the parties are unable to reach agreement, there is the possibility of one or more strikes that could slow down film and television production, impact future planned releases and increase idle capacity in Pictures’ production facilities.AFM membership.
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Sony continuously strives to provide competitive wages and benefits and good working conditions for all of its employees.
Share Ownership
The following is the total number of shares of Sony Corporation’s Common Stock beneficially owned by Directors and Corporate Executive Officers as of May 31, ~~2004 (21~~2005 (25 people). Refer to “Board Practices” above.

Number of shares Percentage Number of shares Percentage
Title of class Identity of person or group beneficially owned of class Identity of person or group beneficially owned of class

(in thousands) (In thousands)
Common Stock Directors and Executive Officers 1,158 0.1 Directors and Executive Officers 1,161 0.1
     ~~None of Sony’s Directors or Executive Officers is a beneficial owner of more than one percent of Sony Corporation’s Common Stock.~~
Regarding compensation plans, following the amendments to the Commercial Code of Japan effective May 2002, Sony integrated different equity-related securities it had previously issued for the purpose of giving stock incentives into one unified stock option right. During the fiscal year ended March 31, ~~2004,~~2005, Sony granted stock acquisition rights, which represent rights to subscribe for shares of common stock of Sony Corporation, to Directors, Corporate Executive Officers, Executive Officers, Group Executive Officers, and selected employees. The stock acquisition rights generally vest ratably up to three years from the date of grant and are generally exercisable up to ten years from the date of grant. The following table shows the portion of those stock acquisition rights which were granted by Sony to Directors and Corporate Executive Officers as of May 31, ~~2004~~2005 and which were outstanding as of the same date.

Total number of Total number of
Year granted shares subject to stock shares subject to stock
(Year ended March 31) acquisition rights Exercise price per share
(Fiscal Year Ended March 31) acquisition rights Exercise price per share

(in thousands) (In thousands)
2005 230    40.34 U.S. dollars
2005 482    3,782 yen
2004 225 40.90 U.S. dollars 225    40.90 U.S. dollars
2004 444 4,101 yen 444    4,101 yen
2003 200 36.57 U.S. dollars 200    36.57 U.S. dollars
2003 375 5,396 yen 345    5,396 yen
      Prior to the introduction of stock acquisition rights, Sony had granted warrants, which represent rights to subscribe to Sony Corporation’s Common Stock, to Directors, Executive Officers, Group Executive Officers, and selected employees. The warrants generally vest ratably up to three years from the date of grant and are generally exercisable up to six years from the date of grant. The following table shows the portion of those warrants which were granted by Sony to Directors, and Corporate Executive Officers as of May 31, ~~2004~~2005 and which were outstanding as of the same date. The exercise price per share has been
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adjusted for the two-for-one stock split effective on May 19, 2000 and is subject to anti-dilution adjustment.

Year granted Total number of shares Total number of shares
(Year ended March 31) subject to warrants Exercise price per share
(Fiscal Year ended March 31) subject to warrants Exercise price per share

(in thousands) (yen) (In thousands) (Yen)
1999 139 6,264
2000 171 7,167 153   7,167
2001 261 12,457 245 12,457
2002 291 6,039 275   6,039
In addition, in order to provide equity-based compensation to selected executives at Sony’s U.S. subsidiaries, Sony Corporation has issued U.S. dollar-denominated Convertible Bonds (“CBs”) to a holding company in the U.S. and the holding company has sold the CBs to those executives. For the purpose of carrying out this plan, the holding company lent an amount equal to the ~~conversion price~~principal amount of CBs to such executives for their purchase of the CBs until the date of conversion. The CBs generally vest ratably up to three years from the date of sale and are generally exercisable up to ten years from the date of sale. The
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following table shows the portion of those CBs which were held by Directors and Corporate Executive Officers as of May 31, ~~2004~~2005 and which were outstanding as of the same date.

Year issued Total number of shares Total number of shares
(Year ended March 31) subject to CBs Exercise price per share
(Fiscal Year Ended March 31) subject to CBs Exercise price per share

(in thousands) (U.S. dollars) (In thousands) (U.S. dollars)
2001 60 122.98   60 122.98
2002 106 71.28 106   71.28
2003 115 52.29 115   52.29
Furthermore, Sony has granted stock appreciation rights (“SARs”) in Japan, Europe, and the U.S. to selected employees. Under the terms of these plans, employees receive upon exercise cash equal to the amount by which the market price of Sony Corporation’s Common Stock exceeds the strike price of the SARs. The SARs generally vest ratably up to three years from the date of grant and are generally exercisable up to six years from the date of grant. The following table shows the portion of those SARs which were granted by Sony to selected employees who are Directors and Corporate Executive Officers as of May 31, ~~2004~~2005 and which were outstanding as of the same date. The exercise price per share has been adjusted for the two-for-one stock split and is subject to anti-dilution adjustment. A range of exercise prices is given when such compensation was granted several times during the respective fiscal year.

Year granted Total number of shares Total number of shares
(Year ended March 31) subject to SARs Exercise price per share
(Fiscal Year Ended March 31) subject to SARs Exercise price per share

(Yen for the Japanese plan, (In thousands) (Yen for the Japanese plan,
(in thousands) U.S. dollars for the U.S. plan) U.S. dollars for the U.S. plan)
The Japanese plan
1999 2 5,586
2000 3 7,445 10 7,445
The U.S. plan
1999 236 37.28
2002 11 44.00 10 44.00
      Regarding the above compensation plans, refer to Note 1516 of Notes to Consolidated Financial Statements.
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Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
~~Persons or groups that~~
      Dodge & Cox, an institutional investor based in San Francisco, California, filed a Schedule 13-G with the SEC on February 10, 2005. According to this filing, Dodge & Cox beneficially owned 49,551,146 shares, of ~~record or beneficially more than five~~outstanding Sony Corporation Common Stock, representing 5.4 percent of the ~~outstanding Common Stock as of March 31, 2004 were as follows:~~
Identity of Number of Percentage of
Title of class person or group shares owned class owned
(in thousands)
Common Stock Moxley & Co. 115,546 12.5
Common Stock Japan Trustee Services Bank, Ltd. (Trust Account) 48,748 5.3
     ~~Moxley & Co. is~~total. To the ~~nominee of JPMorgan Chase Bank, which is the depositary~~knowledge of Sony Corporation’s American Depositary Receipts (“ADRs”). The shares held by Japan Trustee Services Bank, Ltd. (Trust Account) are held in trust for investors, including shares in securities investment trusts. There wasCorporation, there is no other significant change in the percentage ownership held by any major beneficial shareholders during the past three years. Major shareholders of Sony Corporation do not have different voting rights.
      As of March 31, ~~2004,~~2005, there were ~~926,418,280~~997,211,213 shares of Common Stock outstanding, of which ~~115,382,856~~136,342,744 shares were in the form of ADRs and ~~49,498,353~~84,481,532 shares were held of record in the form of Common Stock by residents in the U.S. The number of registered ADR holders was ~~7,355,~~7,209, and the number of registered holders of shares of Common Stock in the U.S. was ~~239.~~
238.
To the knowledge of Sony Corporation, it is not directly or indirectly owned or controlled by any other corporation, by any foreign government or by any other natural or legal person severally or jointly. As far as is known to Sony Corporation, there are no arrangements the operation of which may, at a subsequent date, result in a change in control of Sony Corporation.
Related Party Transactions
      In the ordinary course of business, Sony purchases materials, supplies, and services from numerous suppliers throughout the world, including firms with which certain members of the Board of Directors are affiliated. In addition, in the fiscal year ended March 31, ~~2004,~~2005, Sony entered into the following sales/purchase
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transactions with equity affiliates accounted for under the equity method: sales to Sony Ericsson Mobile Communications, AB (“Sony Ericsson”), a joint venture focused on mobile phone handsets, totaling ~~182.5~~168.3 billion yen; sales to Kyoshin Technosonic Co., ~~Ltd~~Ltd. (“Kyoshin”), a joint venture focused on marketing semiconductors and other electronic components, totaling ~~71.1~~63.6 billion yen; sales to SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), a joint venture focused on recorded music business, totaling 19.1 billion yen; purchases from S.T. Liquid Crystal Display Corp. ~~(“ST-LCD”)~~, a liquid crystal display (“LCD”) joint venture in Japan, totaling ~~58.5~~66.8 billion yen; and purchases from Oita TS Semiconductor Corporation, a semiconductor manufacturing joint venture in Japan, totaling ~~38.0~~25.4 billion yen. As of March 31, ~~2004,~~2005, Sony held notes and accounts receivable, trade due from Sony Ericsson, SONY BMG, and Kyoshin worth ~~39.1~~25.9 billion yen, 11.3 billion yen, and ~~16.9~~10.6 billion yen, respectively. Sony held advances to SONY BMG worth 16.0 billion yen. Because of the size of these transactions, Sony does not consider the amounts involved to be material to its business. Refer to Note 5 of Notes to Consolidated Financial Statements for additional information regarding Sony’s investments in and transactions with equity affiliates.
      Sumitomo Mitsui Financial Group, Inc. and Sumitomo Mitsui Banking Corporation have performed and continue to perform commercial banking services for Sony. Akishige Okada, elected as a Sony Corporation Director effective as of June 20, 2002, is a Representative Director of Sumitomo Mitsui Financial Group, Inc. and Sumitomo Mitsui Banking Corporation. Yoshiaki Yamauchi, elected as a Sony Corporation Director effective as of June 20, 2003, is a Director of Sumitomo Mitsui Financial Group, Inc.
As of April 1, 2004, Sony Computer Entertainment Inc. (“SCE”) became a wholly-owned subsidiary of Sony ~~Coporation~~Corporation through a stock for stock exchange pursuant to Article 358 of the Japanese Commercial Code (Shoho), which does not require approval of such transactions at a General Meeting of ~~Shareholders.~~Shareholders of Sony Corporation. The stock for stock exchange ratio was determined based on the estimated equity values of SCE and Sony on a consolidated basis. Through the stock for stock exchange, Sony Corporation provided 1,000,000 shares of its common stock to an Executive Deputy President who was also a Corporate Executive Officer of Sony Corporation and who owned 100 shares of SCE’s common stock. This transaction isdid not ~~expected to~~ have a material impact on Sony’s results of operations and financial position for the fiscal year ending March 31, 2005.
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Interests of Experts and Counsel
Not Applicable
Item 8. Financial Information
Consolidated Statements and Other Financial Information
Refer to Consolidated Financial Statements and Notes to Consolidated Financial Statements.
Legal Proceedings
Sony Corporation and certain of its subsidiaries are defendants in several pending ~~lawsuits.~~legal proceedings. However, based upon the information currently available to Sony, management of Sony believes that damages from such ~~lawsuits,~~legal proceedings, if any, would not have a material effect on Sony’s consolidated financial results and condition.
Dividend Policy
      Sony believes that continuously increasing corporate value and providing dividends are essential to rewarding shareholders. It is Sony’s policy to utilize retained earnings, after ensuring the perpetuation of stable dividends, to carry out various investments that contribute to an increase in corporate value such as those that ensure future growth and strengthen competitiveness.
      A fiscal year-end cash dividend of 12.5 yen per share of Sony Corporation Common Stock was approved at the Board of Directors meeting held on ~~April 26, 2004~~May 16, 2005 and was paid on June 1, ~~2004.~~2005. Sony Corporation has
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already paid an interim dividend for Common Stock of 12.5 yen per share to each shareholder; accordingly, the total annual cash dividend per share of Common Stock is 25.0 yen.
Regarding shares of subsidiary tracking stock issued in Japan by Sony Corporation, Sony Communication Network Corporation (“SCN”) has been working to manage its operations so as to expand cash flow, fully solidify its financial base and increase its retained earnings to aggressively expand its business to strengthen its foundation and respond to the quickly expanding Internet market. For these reasons, SCN does not plan to distribute earnings to SCN shareholders for the time being. As such, Sony Corporation will continue its policy of not paying dividends to shareholders of the subsidiary tracking stock.
Significant Changes
No significant change has occurred since the date of the annual financial statements included in this annual report. Regarding subsequent events after the end of March ~~2004,~~2005, refer to “Forecast of Consolidated Results” in “Item 5.Operating and Financial Review and Prospects.”
Item 9. The Offer and Listing
Offer and Listing Details
Not Applicable
Plan of Distribution
Not Applicable
Markets
Trading Markets
~~Trading Markets~~
      The principal trading markets for Sony Corporation’s ordinary shares are the Tokyo Stock Exchange (the “TSE”) in the form of Common Stock and the New York Stock Exchange (the “NYSE”) in the
~~106~~
form of American Depositary Shares (“ADSs”) evidenced by American Depositary Receipts (“ADRs”). Each ADS represents one share of Common Stock.
      Sony Corporation’s Common Stock, with no par value per share, has been listed on the TSE since 1958, and is also listed on ~~four other stock exchanges~~the Osaka Securities Exchange in ~~Japan: Osaka, Nagoya, Fukuoka and Sapporo.~~Japan. In addition, Sony Corporation’s Common Stock is listed on the following stock exchanges outside Japan: Pacific, Chicago, Toronto, London, Paris, Frankfurt, Düsseldorf, Brussels, Vienna, and Swiss.
      Sony Corporation’s ADRs have been traded in the U.S. since 1961 and have been listed on the NYSE since 1970 under the symbol “SNE.” Sony Corporation’s ADRs are issued and exchanged by JPMorgan Chase Bank, as Depositary.
In June 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which is intended to be linked to the economic value of Sony Communication Network Corporation, ~~(“SCN”),~~ a directly and indirectly wholly-owned subsidiary of Sony Corporation which is engaged in Internet-related services. The subsidiary tracking stock, totaling 3,072,000 shares, was issued at 3,300 yen per share and listed on the TSE. The shares were not offered or sold in the U.S.
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Trading on the TSE and NYSE
~~Trading on the TSE and NYSE~~
The following table sets forth for the periods indicated the reported high and low sales prices per share of Sony Corporation’s Common Stock on the TSE and the reported high and low sales prices per share of Sony Corporation’s ADS on the NYSE.

Tokyo Stock Exchange New York Stock
Price Per Share of Exchange Price Per
Common Stock Share of ADS
High Low High Low
(yen) (U.S. dollars)
Annual highs and lows
The fiscal year ended March 31, 2000* 16,950 5,360 157.38 44.63
The fiscal year ended March 31, 2001 15,100 7,510 141.25 65.40
The fiscal year ended March 31, 2002 10,340 3,960 85.75 32.80

Quarterly highs and lows
The fiscal year ended March 31, 2003
1st quarter 7,460 5,800 59.95 47.91
2nd quarter 6,360 4,810 53.49 40.20
3rd quarter 5,590 4,850 45.84 39.79
4th quarter 5,130 4,070 43.40 34.85
The fiscal year ended March 31, 2004
1st quarter 4,240 2,720 35.82 23.16
2nd quarter 4,450 3,350 38.30 28.33
3rd quarter 4,280 3,490 38.04 32.42
4th quarter 4,670 3,760 42.81 34.81

Tokyo Stock New York Stock
Exchange Price Exchange Price
Per Share of Per Share of
Common Stock ADS

High Low High Low

(Yen) (U.S. dollars)
Annual highs and lows*
The fiscal year ended March 31, 2001 15,100 7,510 141.25 65.40
The fiscal year ended March 31, 2002 10,340 3,960 85.75 32.80
The fiscal year ended March 31, 2003 7,460 4,070 59.95 34.85
Quarterly highs and lows*
The fiscal year ended March 31, 2004
1st quarter 4,240 2,720 35.82 23.16
2nd quarter 4,450 3,350 38.30 28.33
3rd quarter 4,280 3,490 38.04 32.42
4th quarter 4,670 3,760 42.81 34.81
The fiscal year ended March 31, 2005
1st quarter 4,710 3,880 43.67 33.95
2nd quarter 4,200 3,550 38.50 32.35
3rd quarter 3,990 3,620 39.20 33.77
4th quarter 4,420 3,750 41.81 36.26
Monthly highs and lows*
2004
December 3,990 3,670 38.76 35.75
2005
January 4,090 3,750 39.53 36.26
February 4,010 3,770 38.31 36.46
March 4,420 3,960 41.81 37.85
April 4,410 3,830 40.79 35.77
May 4,140 3,850 38.45 36.30
June (through June 20) 4,080 3,860 37.63 35.10
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Tokyo Stock Exchange New York Stock
Price Per Share of Exchange Price Per
Common Stock Share of ADS
High Low High Low
(yen) (U.S. dollars)
Monthly highs and lows
2003
December 3,830 3,490 34.89 32.42
2004
January 4,470 3,760 42.00 34.81
February 4,610 4,150 42.81 39.52
March 4,670 4,120 42.15 38.29
April 4,710 4,240 43.67 38.13
May 4,340 3,880 39.34 33.95
June (through June 21) 4,130 3,910 37.49 35.36
* ~~The reported high and low share prices of Sony Corporation for the fiscal year ended March 31, 2000 have been restated for the two-for-one stock split that has become effective on May 19, 2000.~~ Stock price data are based on prices throughout the sessions for each corresponding period at each stock exchange.
On June ~~21, 2004,~~20, 2005, the closing sales price per share of Sony Corporation’s Common Stock on the TSE was ~~4,050~~3,860 yen. On June ~~21, 2004,~~20, 2005, the closing sales price per share of Sony Corporation’s ADS on the NYSE was ~~36.90~~35.39 U.S. dollars.
~~Selling Shareholders~~
~~Not Applicable~~
~~Dilution~~
~~Not Applicable~~
~~Expenses of the Issue~~
~~Not Applicable~~
~~Item 10.~~ ~~Additional Information~~
~~Share Capital~~
~~Not applicable~~
~~Memorandum and Articles of Association~~
~~Organization~~
~~Sony Corporation is a joint stock corporation~~~~(Kabushiki Kaisha)~~~~incorporated in Japan under the Commercial Code~~~~(Shoho)~~~~of Japan. It is registered in the Commercial Register~~~~(Shogyo Tokibo)~~~~maintained by the Shinagawa Branch Office of the Tokyo Bureau of Legal Affairs.~~
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~~Objects and purposes~~
     ~~Article 3 of the Articles of Incorporation of Sony Corporation provides that its purpose is to engage in the following business activities:~~
~~(i)~~ ~~manufacture and sale of electronic and electrical machines and equipment, medical instruments, optical instruments and other equipment, machines and instruments;~~
~~(ii)~~ ~~planning, production and sale of audio-visual software and computer software programs;~~
~~(iii)~~ manufacture and sale of metal industrial products, chemical industrial products and ceramic industrial products, textile products, paper products and wood-crafted articles, daily necessities, foodstuffs and toys, transportation machines, equipment, petroleum and coal products;
~~(iv)~~ ~~real estate activities, construction business, transportation business and warehousing business;~~
~~(v)~~ ~~publishing business and printing business;~~
~~(vi)~~ ~~advertising agency business, insurance agency business, broadcasting enterprise, recreation business such as travel, management of sporting facilities, etc. and other service enterprises;~~
~~(vii)~~ ~~financial business;~~
~~(viii)~~ ~~Type I and Type II telecommunications business under the Telecommunications Business Law;~~
~~(ix)~~ ~~investing in stocks and bonds, etc.;~~
~~(x)~~ ~~manufacture, sale, export and import of products which are incidental to or related to those mentioned above;~~
~~(xi)~~ ~~rendering of services related to those mentioned above;~~
~~(xii)~~ ~~investment in businesses mentioned above operated by other companies or persons; and~~
~~(xiii)~~ ~~all businesses which are incidental to or related to those mentioned above.~~
~~Directors~~
~~Under the Commercial Code (including the Law for Special Exceptions to the Commercial Code concerning Audit, etc. of~~~~Kabushiki-Kaisha~~, collectively the “Commercial Code”), Directors have no power to execute the business of Sony Corporation except in limited circumstances permitted by law. If a Director also serves concurrently as a Corporate Executive Officer, then he or she can execute the business of Sony Corporation in the capacity of Corporate Executive Officer. Under the Commercial Code, Directors must refrain from engaging in any business competing with Sony Corporation unless approved by the Board of Directors, and any Director who has a material interest in the subject matter of a resolution to be taken by the Board of Directors cannot vote on such resolution. The amount of remuneration to each Director is determined by the Compensation Committee which consists of Directors, the majority of whom are outside Directors (refer to “Board Practices” in “Item 6.~~Directors, Senior Management and Employees”). No member of the Compensation Committee may vote on a resolution with respect to his or her own compensation as a Director or a Corporate Executive Officer.~~
     Except as stated below, neither the Commercial Code nor Sony Corporation’s Articles of Incorporation make a special provision as to the borrowing powers exercisable by Directors, their retirement age, or a requirement to hold any shares of capital stock of Sony Corporation.
     The Commercial Code specifically requires a resolution of the Board of Directors, or a determination of the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors, for Sony Corporation to acquire or dispose of material assets; to borrow a substantial amount of money; to employ or discharge from employment important employees, such as general managers; and to establish, change or abolish a material corporate organization such as a branch office. The Regulations of the Board of Directors of Sony Corporation require a
~~109~~
~~resolution of the Board of Directors for Sony Corporation’s lending in an amount not less than one hundred billion yen or its equivalent.~~
~~Capital stock~~
~~Unless otherwise indicated or the context otherwise requires, the following discussion applies equally to both the shares of Common Stock and the shares of subsidiary tracking stock.~~
~~(General)~~
     Set forth below is information relating to Sony Corporation’s capital stock, including brief summaries of the relevant provisions of Sony Corporation’s Articles of Incorporation and Share Handling Regulations, as currently in effect, and of the Commercial Code and related legislation.
     In order to assert shareholders’ rights against Sony Corporation, a shareholder must, except as set forth below, have its name and address registered on Sony Corporation’s register of shareholders, in accordance with Sony Corporation’s Share Handling Regulations. The registered beneficial holder of deposited shares underlying the American Depositary Shares (“ADSs”) is the Depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders’ rights against Sony Corporation.
     UFJ Trust Bank Limited is the transfer agent for Sony Corporation’s capital stock. As such, it keeps Sony Corporation’s registers of shareholders and beneficial shareholders in its office at 4-3, Marunouchi 1-chome, Chiyoda-ku, Tokyo, and records transfers of shares upon presentation of the certificates representing the transferred shares.
A holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan. Participating shareholders must deposit certificates representing all of the shares to be included in this clearing system with Japan Securities Depository Center, Inc., or JASDEC. If a holder is not a participating institution in JASDEC, it must participate through a participating institution, such as a securities company or bank having a clearing account with JASDEC. All shares deposited with JASDEC will be registered in the name of JASDEC on Sony Corporation’s register of shareholders. Each participating shareholder will in turn be registered on Sony Corporation’s register of beneficial shareholders and be treated in the same way as shareholders registered on Sony Corporation’s register of shareholders. Entry of the share transfer in the book maintained by JASDEC for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The registered beneficial shareholders may exercise the rights attached to the shares, such as voting rights, and will receive dividends (if any) and notices to shareholders directly from Sony Corporation. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial shareholder are aggregated for these purposes. Beneficial owners may at any time withdraw their shares from deposit and receive share certificates.
~~(Authorized capital)~~
     Article 5 of the Articles of Incorporation of Sony Corporation provides that Sony Corporation may issue both shares of Common Stock and shares of subsidiary tracking stock. Subsidiary tracking stock is stock which dividend rights track the dividend rights of a particular subsidiary of Sony Corporation. The rights of the holders of such stock may be different from those of the holders of Sony Corporation’s Common Stock in certain other respects such as rights to receive residual assets in the event of liquidation of Sony Corporation.
     Paragraph 2 of Article 5 of Sony Corporation’s Articles of Incorporation provides that the total number of shares authorized to be issued by Sony Corporation is 3.6 billion shares, of which 3.5 billion shares shall be Common Stock and 100 million shares shall be subsidiary tracking stock. If shares of Common Stock are retired or shares of subsidiary tracking stock are either retired or converted into shares
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~~of Common Stock, the respective numbers of shares so retired or converted shall be deducted from the respective total numbers of shares authorized to be issued by Sony Corporation.~~
~~All shares of capital stock of Sony Corporation have no par value.~~
~~(Dividends)~~
     The Articles of Incorporation of Sony Corporation provide that the accounts shall be closed on March 31 of each year. Year-end dividends, if any, shall be paid to shareholders, beneficial shareholders and pledgees of record as of the end of such day. After the close of the fiscal period, a Corporate Executive Officer designated by the Board of Directors prepares, among other things, a proposed allocation of profits for dividends and other purposes; this proposal is submitted to the Audit Committee and to independent certified public accountants and then submitted for approval to the Board of Directors. If each independent certified accountant states in his or her audit report the opinion that the financial statements prepared by such Corporate Executive Officer and proposed allocation of profits are in accordance with relevant laws and the Articles of Incorporation, and if the Audit Committee does not state in its audit report any objection to such independent accountants’ opinion or an opinion that the proposed allocation of profits is significantly inappropriate, such proposal shall be deemed to be approved by the shareholders when approved by the Board of Directors. In addition to year-end dividends, the Board of Directors may by its resolution declare a cash distribution pursuant to Article 293-5 of the Commercial Code (an “interim dividend”) to shareholders, beneficial shareholders and pledgees of record at the end of each September 30, without shareholders’ approval, but subject to the limitation described below.
     The Commercial Code provides that a company may not make any distribution of profit by way of dividends or interim dividends unless it has set aside in its legal reserve an amount equal to at least one-tenth of the amount paid by way of appropriation of retained earnings for such fiscal period, or equal to one-tenth of the amount of interim dividends, until the aggregate amount of its additional paid-in capital and its legal reserve is at least one-quarter of its stated capital. Under the Commercial Code, Sony Corporation is permitted to distribute profits by way of year-end or interim dividends out of the excess of its net assets, on a non-consolidated basis, over the aggregate of:
~~(i)~~ ~~its stated capital;~~
~~(ii)~~ ~~its additional paid-in capital;~~
~~(iii)~~ ~~its accumulated legal reserve;~~
~~(iv)~~ ~~the legal reserve to be set aside in respect of the fiscal period concerned; and~~
~~(v)~~ ~~such other amounts as are provided for by an ordinance of the Ministry of Justice.~~
In the case of interim dividends, the net assets are calculated by reference to the non-consolidated balance sheet as at the last date of the preceding fiscal year, but adjusted to reflect (a) the legal reserve to be set aside in respect of interim dividends, (b) any subsequent payment by way of appropriation of retained earnings and transfer to legal reserve in respect thereof, (c) any subsequent transfer of retained earnings to stated capital and (d) if Sony Corporation has been authorized, pursuant to a resolution of an Ordinary General Meeting of Shareholders, a resolution of the Board of Directors or both, to purchase shares of its Common Stock or shares of its subsidiary tracking stock (refer to “(~~Acquisition by Sony Corporation of its capital stock~~~~)” and “~~~~Subsidiary tracking stock~~ ~~— (~~~~Acquisition by Sony Corporation of its subsidiary tracking stock~~)” below), the total amount of the purchase price of such shares so authorized by such resolution that may be paid by Sony Corporation and (e) such other amounts as are set out in an ordinance of the Ministry of Justice of Japan, provided that the amount distributable as interim dividends, as described above, will be increased by (x) any amount reduced by Sony Corporation if Sony Corporation reduces the amount of its stated capital, additional paid-in capital or accumulated legal reserve after the end of the preceding fiscal year, less the amount paid to shareholders upon such reduction and certain other amounts, and (y) such other amounts as are set out in an ordinance of the Ministry of Justice of Japan.
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     ~~In Japan the “ex-dividend” date and the record date for dividends precede the date of determination of the amount of the dividend to be paid.~~
~~Under its Articles of Incorporation, Sony Corporation is not obliged to pay any dividends which are left unclaimed for a period of five years after the date on which they first became payable.~~
~~(Stock Splits)~~
     ~~Sony Corporation may at any time split shares in issue into a greater number of shares by a resolution of the Executive Board.~~
In the event of a stock split, generally, shareholders will not be required to exchange share certificates for new share certificates, but certificates representing the additional shares resulting from the stock split will be issued to shareholders. When a stock split is to be made Sony Corporation must give public notice of the stock split, specifying the record date thereof, at least two weeks prior to such record date. In addition, promptly after the stock split takes effect Sony Corporation must give notice to each shareholder specifying the number of shares to which such shareholder is entitled by virtue of the stock split.
~~(General Meeting of Shareholders)~~
     The Ordinary General Meeting of Shareholders of Sony Corporation for each fiscal year is normally held in June of each year in Tokyo, Japan. In addition, Sony Corporation may hold an Extraordinary General Meeting of Shareholders whenever necessary by giving notice thereof at least two weeks prior to the date set for the meeting.
     Notice of a shareholders’ meeting setting forth the place, time and purpose thereof, must be mailed to each shareholder having voting rights (or, in the case of a non-resident shareholder, to such shareholder’s resident proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Under the Commercial Code, such notice may be given to shareholders by electronic means, subject to obtaining consent by the relevant shareholders. The record date for an Ordinary General Meeting of Shareholders is March 31 of each year.
     Any shareholder or group of shareholders holding at least three percent of the total number of voting rights for a period of six months or more may require the convocation of a General Meeting of Shareholders for a particular purpose. Unless such shareholders’ meeting is convened promptly or a convocation notice of a meeting which is to be held not later than eight weeks from the day of such demand is dispatched, the requiring shareholder may, upon obtaining a court approval, convene such a shareholders’ meeting.
Any shareholder or group of shareholders holding at least 300 voting rights or one percent of the total number of voting rights for a period of six months or more may propose a matter to be considered at a General Meeting of Shareholders by submitting a written request to Sony Corporation at least eight weeks prior to the date set for such meeting.
~~(Voting rights)~~
So long as Sony Corporation maintains the unit share system, a holder of shares (whether shares of Common Stock or shares of subsidiary tracking stock) constituting one or more units is entitled to one vote for each such unit of stock (refer to “~~(Unit share system)~~” below, currently 100 shares constitute one unit), except that no voting rights with respect to shares of capital stock of Sony Corporation are afforded to Sony Corporation or any corporate shareholder more than one-quarter of the total voting rights of which are directly or indirectly held by Sony Corporation. If Sony Corporation eliminates from its Articles of Incorporation the provisions relating to units of stock, holders of capital stock will have one vote for each share they hold. Except as otherwise provided by law or by the Articles of Incorporation of Sony Corporation, a resolution can be adopted at a General Meeting of Shareholders by a majority of the number of voting rights of all the shareholders represented at the meeting. The Commercial Code and Sony Corporation’s Articles of Incorporation provide, however, that the quorum for the election of
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Directors shall not be less than one-third of the total number of voting rights of all the shareholders. Sony Corporation’s shareholders are not entitled to cumulative voting in the election of Directors. Shareholders may cast their votes in writing and may also exercise their voting rights through proxies, provided that the proxies are also shareholders holding voting rights. Shareholders may also exercise their voting rights by electronic means pursuant to the method designated by Sony Corporation.
The Commercial Code and the Articles of Incorporation of Sony Corporation provide that in order to amend the Articles of Incorporation and in certain other instances, including a reduction of stated capital, the removal of a Director, dissolution, merger or consolidation requiring shareholders resolution, the transfer of the whole or a substantial part of the business, the taking over of the whole of the business of any other corporation requiring shareholders resolution, share exchange or share transfer requiring shareholders resolution for the purpose of establishing 100 percent parent-subsidiary relationships, any splitting of the company into two or more corporations requiring shareholders resolution, any offering of new shares at a “specially favorable” price to any persons other than shareholders, any granting of rights to subscribe for or acquire shares from Sony Corporation (~~shinkabu-yoyakuken~~; “stock acquisition rights”) or bonds with stock acquisition rights, under “specially favorable” conditions to any persons other than shareholders, the quorum shall be one-third of the total number of voting rights of all the shareholders, and the approval by at least two-thirds of the number of voting rights of all the shareholders represented at the meeting is required (the “special shareholders resolutions”).
~~(Issue of additional shares and pre-emptive rights)~~
Holders of Sony Corporation’s shares of capital stock have no pre-emptive rights under its Articles of Incorporation. Authorized but unissued shares (whether of Common Stock or of subsidiary tracking stock) may be issued at such times and upon such terms as the Board of Directors or the Executive Board determines, subject to the limitations as to the offering of new shares at a “specially favorable” price mentioned under “~~(Voting rights)~~” above. The Board of Directors or the Executive Board may, however, determine that shareholders of a particular class of stock shall be given subscription rights regarding a particular issue of new shares of that class, in which case such rights must be given on uniform terms to all shareholders of that class of stock as at a record date of which not less than two weeks’ prior public notice must be given. Each of the shareholders to whom such rights are given must also be given notice of the expiry thereof at least two weeks prior to the date on which such rights expire.
Subject to certain conditions, Sony Corporation may issue stock acquisition rights by a resolution of the Board of Directors or the Executive Board. Holders of stock acquisition rights may exercise their rights to acquire a certain number of shares within the exercise period as prescribed in the terms of their stock acquisition rights. Upon exercise of stock acquisition rights, Sony Corporation will be obliged to issue the relevant number of new shares or alternatively to transfer the necessary number of treasury stock held by it.
~~(Liquidation rights)~~
In the event of a liquidation of Sony Corporation, the assets remaining after payment of all debts, liquidation expenses and taxes will, subject to the rights of the holders of subsidiary tracking stock discussed under “~~Subsidiary tracking stock~~ —~~(Distribution of residual assets)~~~~” below, be distributed among the holders of shares of Common Stock in proportion to the respective numbers of shares of Common Stock held.~~
~~(Record date)~~
     March 31 is the record date for Sony Corporation’s year-end dividends, if declared. So long as Sony Corporation maintains the unit share system, the shareholders and beneficial shareholders who are registered as the holders of one or more unit of stock in Sony Corporation’s register of shareholders and/or beneficial shareholders at the end of each March 31 are also entitled to exercise shareholders’ rights at the Ordinary General Meeting of Shareholders with respect to the fiscal year ending on such March 31.
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September 30 is the record date for interim dividends. In addition, Sony Corporation may set a record date for determining the shareholders and/or beneficial shareholders entitled to other rights and for other purposes by giving at least two weeks prior public notice.
The price of shares generally goes ex-dividend or ex-rights on Japanese stock exchanges on the third business day prior to a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings.
~~(Acquisition by Sony Corporation of its capital stock)~~
Sony Corporation may acquire its own shares through a stock exchange on which such shares are listed (pursuant to an ordinary resolution of an Ordinary General Meeting of Shareholders or a resolution of the Board of Directors), by way of tender offer (pursuant to an ordinary resolution of an Ordinary General Meeting of Shareholders or a resolution of the Board of Directors), by purchase from a specific party other than a subsidiary of Sony Corporation (pursuant to a special resolution of an Ordinary General Meeting of Shareholders) or from a subsidiary of Sony Corporation (pursuant to a resolution of the Executive Board). When such acquisition is made by Sony Corporation from a specific party other than a subsidiary of Sony Corporation, any other shareholder may make a request to the Company in writing, not later than five days prior to the relevant shareholders’ meeting, to include him/her as a seller in the proposed purchase. Any such acquisition of shares must satisfy certain requirements, including that in cases other than the acquisition by Sony Corporation of its own shares pursuant to a resolution of the Board of Directors, the total amount of the purchase price may not exceed the sum of the amount of retained earnings available for year-end dividend payments after taking into account any reduction, if any, of the stated capital, additional paid-in capital or legal reserve (if such reduction of the stated capital, additional paid-in capital or legal reserve has been authorized pursuant to a resolution of the relevant Ordinay General Meeting of Shareholders), minus the sum of the amount to be paid by way of appropriation of retained earnings for the relevant fiscal year and the amount to be transferred to stated capital in respect of the relevant fiscal year pursuant to a resolution of such General Meeting of Shareholders. If Sony Corporation purchases shares pursuant to a resolution of the Board of Directors, the total amount of the purchase price may not exceed the amount of the retained earnings available for an interim dividend payment minus the amount of any interim dividend Sony Corporation actually paid. However, if it is anticipated that the net assets on the non-consolidated balance sheet as at the end of the relevant fiscal year will be less than the aggregate amount of the stated capital, additional paid-in capital and other items as described in (i) through (v) to “~~(Dividends)~~~~” above, Sony Corporation may not acquire such shares.~~
Shares acquired by Sony Corporation may be held by it for any period or may be retired by resolution of the Executive Board. Sony Corporation may also transfer (public or private sale or otherwise) to any person the shares held by it, subject to a resolution of the the Executive Board, and subject also to other requirements similar to those applicable to the issuance of new shares, as described in “~~(Issue of additional shares and pre-emptive rights)~~” above. Sony Corporation may also utilize its treasury stock for the purpose of transfer to any person upon exercise of stock acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through exchange of treasury stock for shares or assets of the acquired company.
~~(Unit share system)~~
     The Articles of Incorporation of Sony Corporation provide that 100 shares constitute one “unit” of shares of stock. The Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors is permitted to amend the Articles of Incorporation to reduce the number of shares that constitute a unit or to abolish the unit share system entirely. The number of shares constituting one unit cannot exceed 1,000 shares or one-two hundredth (1/200) of the aggregate number of all issued shares.
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     Under the unit share system, shareholders have one voting right for each unit of stock that they hold. Any number of shares less than one full unit have no voting rights nor rights related to voting rights. The Articles of Incorporation of Sony Corporation provide that no share certificates may be issued with respect to any number of shares constituting less than one full unit, unless Sony Corporation deems the issue of such share certificates to be necessary for any shareholder(s). As the transfer of shares normally requires delivery of the certificates therefor, fractions of a unit for which no share certificate has been issued are not transferable.
     ~~Except as otherwise described above, holders of the shares constituting less than one full unit will have all the rights granted to shareholders under the Commercial Code.~~
     A holder of shares constituting less than one full unit may require Sony Corporation to purchase such Shares at their market value in accordance with the provisions of the Share Handling Regulations of Sony Corporation.
     The Articles of Incorporation of Sony Corporation provide that a holder of shares constituting less than one full unit may request Sony Corporation to sell to such holder such amount of shares which will, when added together with the shares constituting less than one full unit, constitute one full unit of stock. Such request by a holder and the sale by Sony Corporation must be made in accordance with the provisions of the Share Handling Regulations of Sony Corporation.
A holder who owns ADRs evidencing less than 100 ADSs will indirectly own less than one full unit. Although, as discussed above, under the unit share system holders of less than one full unit have the right to require Sony Corporation to purchase their shares or sell shares held by Sony Corporation to such holders, holders of ADRs evidencing ADSs that represent other than integral multiples of whole units are unable to withdraw the underlying shares of capital stock representing less than one full unit and, therefore, are unable, as a practical matter, to exercise the rights to require Sony Corporation to purchase such underlying shares or sell shares held by Sony Corporation to such holders. As a result, access to the Japanese markets by holders of ADRs through the withdrawal mechanism will not be available for dispositions of shares in lots less than one full unit. The unit share system does not affect the transferability of ADSs, which may be transferred in lots of any size.
~~(Sale by Sony Corporation of shares held by shareholders whose location is unknown)~~
     Sony Corporation is not required to send a notice to a shareholder if a notice to such shareholder fails to arrive at the registered address of the shareholder in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation continuously for five years or more.
In addition, Sony Corporation may sell or otherwise dispose of shares of capital stock for which the location of the shareholder is unknown. Generally, if (i) notices to a shareholder fail to arrive continuously for five years or more at the shareholder’s registered address in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation, and (ii) the shareholder fails to receive dividends on the shares continuously for five years or more at the address registered in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation, Sony Corporation may sell or otherwise dispose of the shareholder’s shares at the then market price of the shares by a determination of the Corporate Executive Officer serving as Group Chief Strategy Officer and after giving at least three months’ prior public and individual notice, and hold or deposit the proceeds of such sale or disposal of shares for such shareholder.
~~Subsidiary tracking stock~~
     By a special resolution of the Extraordinary General Meeting of Shareholders held on January 25, 2001, Sony Corporation’s Articles of Incorporation were amended to enable Sony Corporation to issue shares of subsidiary tracking stock. By resolutions of the Board of Directors dated May 15 and 31, 2001, Sony Corporation created and issued 3,072,000 shares of a series of subsidiary tracking stock. The subsidiary whose economic value this series of subsidiary tracking stock tracks is Sony Communication
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Network Corporation (“SCN”), a Japanese corporation directly and indirectly wholly-owned by Sony Corporation. Except as otherwise stated in the preceding paragraphs and as stated in the following paragraphs, the shares of the subsidiary tracking stock have the same rights and characteristics as those of shares of Common Stock described above.
~~(Dividends)~~
The dividend (the year-end dividend and the interim dividend) on the shares of this series of subsidiary tracking stock is payable only when the board of directors of SCN has resolved to pay to the holders of its common stock a dividend (in the case of year-end dividend, SCN’s year-end dividend, and in the case of interim dividend, SCN’s interim dividend) in an amount per share of the subsidiary tracking stock equal to the smaller of the amount of SCN’s dividend per share of its common stock multiplied by the Standard Ratio (as defined in the Articles of Incorporation: currently one one-hundredth, which is subject to adjustment in the occurrence of certain dilutive events) or 100,000 yen multiplied by the Standard Ratio per share (the “Maximum Dividend Amount”), subject to statutory restriction on Sony Corporation’s ability to pay dividends on its shares of capital stock referred to under “~~Capital stock~~ —~~(Dividends)~~” above. If the amount of interim dividend paid to the holders of shares of a series of subsidiary tracking stock for any fiscal year is less than the amount calculated in accordance with the foregoing formula, such shortfall will be added to the amount of the year-end dividend of such fiscal year. If the amount of dividends paid to the holders of shares of a series of subsidiary tracking stock is less than the amount which should have been paid pursuant to the formula set forth above due to the statutory restriction referred to above or for any other reason, such shortfall will be accumulated and such cumulative amount will be paid to the holders of shares of the subsidiary tracking stock for subsequent fiscal period(s), subject to the statutory limitation set forth above and the Maximum Dividend Amount. Any such dividend on the subsidiary tracking stock is payable in priority to the payment of dividends to the holders of shares of Common Stock. However, the holders of shares of subsidiary tracking stock have no right to participate in the dividends to holders of shares of Common Stock. Furthermore, even if the Board of Directors of SCN does not take a resolution for the payment of dividends to the holders of SCN common stock, Sony Corporation may decide to pay dividends to the holders of its Common Stock.
~~(Voting rights)~~
The holders of shares of subsidiary tracking stock have the same voting rights, subject to the same limitation on voting rights, as those of the holders of shares of Common Stock and, thus, are entitled to participate and vote at any General Meeting of Shareholders in the same way as the shareholders of Common Stock. In addition, as each series of subsidiary tracking stock is a separate class of stock different from the Common Stock, if any resolution of the General Meeting of Shareholders for amending the Articles of Incorporation, any granting to shareholders of any series of subsidiary tracking stock certain rights with respect to certain matters including the issue of new shares, stock acquisition rights, bonds with stock acquisition rights, consolidation, split, purchase or retirement of shares, share exchange or share transfer, or a merger or consolidation or splitting of Sony Corporation would adversely affect the rights of the holders of shares of a particular class or classes of subsidiary tracking stock, the holders of shares of each such class of subsidiary tracking stock will have the right to approve or disapprove such resolution by a special resolution of the meeting of holders of shares of that class of subsidiary tracking stock.
~~(Distribution of residual assets)~~
     In the event of distribution of residual assets to the shareholders of Sony Corporation, as long as such assets include shares of common stock of SCN, the number of shares of SCN common stock obtained by multiplying the number of shares of the subsidiary tracking stock held by each holder by the Standard Ratio (if the total number of shares of SCN common stock available for distribution is less than the total number so to be distributed, the lesser number adjusted in proportion to the respective numbers of shares of the subsidiary tracking stock held by such holders) or the net proceeds from the sale of the shares of SCN common stock so to be distributed will be distributed to the holders of shares of the subsidiary
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tracking stock. Such distribution will be made in priority to the distribution of residual assets to the holders of shares of Common Stock. No other distribution of residual assets will be made to the holders of shares of subsidiary tracking stock.
~~(Acquisition of shares of tracking stock)~~
~~The shares of subsidiary tracking stock may be subject to acquisition in the same manner and under the same restriction as the shares of Common Stock referred to under “~~~~Capital stock~~ —~~(Acquisition by Sony Corporation of its capital stock)~~~~” above.~~
     In addition, Sony Corporation may at any time retire the entire amount of all outstanding shares of that series of subsidiary tracking stock upon paying to the holders thereof an amount equal to the current market price (as defined in the Articles of Incorporation) of shares of the subsidiary tracking stock out of Sony Corporation’s retained earnings available for dividend payments.
Sony Corporation may also retire the shares of a series of subsidiary tracking stock in their entirety pursuant to the procedures prescribed by the Commercial Code for the reduction of capital upon payment to the holders of shares of the subsidiary tracking stock an amount equal to the market value thereof as set forth above.
~~(Conversion of subsidiary tracking stock)~~
So long as the shares of Sony Corporation’s Common Stock are listed or registered on any stock exchange or over-the-counter market (a “Stock Exchange”), Sony Corporation may at any time convert the entire amount of all outstanding shares of the subsidiary tracking stock into shares of Sony Corporation’s Common Stock at the rate of the multiple of 1.1 of the market value (as defined in the Articles of Incorporation) of shares of the subsidiary tracking stock divided by the market value (as similarly defined) of shares of Sony Corporation’s Common Stock.
~~(Compulsory termination)~~
     If any of the following events occurs, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s Common Stock at the price or rate set forth above:
~~(i)~~ SCN transfers its assets representing 80 percent or more of the total assets appearing on its most recent consolidated balance sheet or transfers its business as a result of which its consolidated revenue is expected to decrease by 80 percent or more from its most recent consolidated profit and loss statement;
~~(ii)~~ ~~SCN ceases to be a subsidiary of Sony Corporation;~~
~~(iii)~~ the number of shares of capital stock of SCN which Sony Corporation directly holds becomes less than the total number of outstanding shares of tracking stock multiplied by the Standard Ratio and such situation continues for a period of 3 months or more;
~~(iv)~~ ~~a resolution was taken by SCN’s shareholders for its dissolution;~~
~~(v)~~ ~~certain events of bankruptcy; or~~
~~(vi)~~ ~~occurrence of any event which causes de-listing or de-registration of the subsidiary tracking stock from all Stock Exchanges where the tracking stock is listed or registered.~~
     If the shares of capital stock of SCN are approved by any Stock Exchange for listing or registration thereon, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s Common Stock at the price or rate set forth above on the date determined by Sony Corporation’s Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors prior to the date of such approval of the Stock Exchange; or, they may be retired in their entirety by
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distributing the number of shares of SCN common stock to each holder of shares of the subsidiary tracking stock at the rate calculated by multiplying the number of such shares by the Standard Ratio on the date of such listing or registration or the date prior to such date determined by Sony Corporation’s Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors.
~~(Miscellaneous)~~
Either or both of the shares of Common Stock and the shares of subsidiary tracking stock may be consolidated or split at the same ratio or at different ratios. The holders of shares of Common Stock and/or the holders of shares of subsidiary tracking stock may be allotted rights to subscribe for new shares (to the holders of Common Stock, new shares of Common Stock, and to the holders of subsidiary tracking stock, new shares of subsidiary tracking stock) at the same ratio or different ratios and on different conditions.
~~Reporting of substantial shareholdings~~
     The Securities and Exchange Law of Japan and its related regulations require any person, regardless of residence, who has become, beneficially and solely or jointly, a holder of more than five percent of the total issued shares of capital stock of a company listed on any Japanese stock exchange or whose shares are traded on the over-the-counter market in Japan to file with the Director General of the competent Regional Finance Bureau of the Ministry of Finance within five business days a report concerning such shareholdings.
     A similar report must also be filed in respect of any subsequent change of one percent or more in any such holding, with certain exceptions. For this purpose, shares issuable to such persons upon conversion of convertible securities or exercise of share subscription warrants or stock acquisition rights are taken into account in determining both the number of shares held by such holders and the issuer’s total issued share capital. Copies of such report must also be furnished to the issuer of such shares and all Japanese stock exchanges on which the shares are listed or (in the case of shares traded over-the-counter) the Japan Securities Dealers Association.
     Except for the general limitation under Japanese anti-trust and anti-monopoly regulations against holding of shares of capital stock of a Japanese corporation which leads or may lead to a restraint of trade or monopoly, and except for general limitations under the Commercial Code or Sony Corporation’s Articles of Incorporation on the rights of shareholders applicable regardless of residence or nationality, there is no limitation under Japanese laws and regulations applicable to Sony Corporation or under its Articles of Incorporation on the rights of non-resident or foreign shareholders to hold or exercise voting rights on the shares of capital stock of Sony Corporation.
There is no provision in Sony Corporation’s Articles of Incorporation or by-laws that would have an effect of delaying, deferring or preventing a change in control of Sony Corporation and that would operate only with respect to merger, acquisition or corporate restructuring involving Sony Corporation.
~~Material Contracts~~
~~None~~
~~Exchange Controls~~
     The Foreign Exchange and Foreign Trade Law of Japan and its related cabinet orders and ministerial ordinances (the“Foreign Exchange Regulations”) govern the acquisition and holding of shares of capital stock of Sony Corporation by “exchange non-residents” and by “foreign investors.” The Foreign Exchange Regulations currently in effect do not, however, affect transactions between exchange non-residents to purchase or sell shares outside Japan using currencies other than Japanese yen.
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     ~~Exchange non-residents are:~~
• ~~individuals who do not reside in Japan; and~~
• ~~corporations whose principal offices are located outside Japan.~~
     Generally, branches and other offices of non-resident corporations that are located within Japan are regarded as residents of Japan. Conversely, branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents.
     ~~Foreign investors are:~~
• ~~individuals who are exchange non-residents;~~
• ~~corporations that are organized under the laws of foreign countries or whose principal offices are located outside of Japan; and~~
• corporations (1) of which 50 percent or more of their shares are held by individuals who are exchange non-residents and/or corporations (a) that are organized under the laws of foreign countries or (b) whose principal offices are located outside of Japan or (2) a majority of whose officers, or officers having the power of representation, are individuals who are exchange non-residents.
     In general, the acquisition of shares of a Japanese company (such as the shares of capital stock of Sony Corporation) by an exchange non-resident from a resident of Japan is not subject to any prior filing requirements. In certain limited circumstances, however, the Minister of Finance may require prior approval of an acquisition of this type. While prior approval, as described above, is not required, in the case where a resident of Japan transfers shares of a Japanese company (such as the shares of capital stock of Sony Corporation) for consideration exceeding 100 million yen to an exchange non-resident, the resident of Japan who transfers the shares is required to report the transfer to the Minister of Finance within 20 days from the date of the transfer, unless the transfer was made through a bank, securities company or financial futures trader licensed under Japanese law.
     If a foreign investor acquires shares of a Japanese company that is listed on a Japanese stock exchange (such as the shares of capital stock of Sony Corporation) or that is traded on an over-the-counter market in Japan and, as a result of the acquisition, the foreign investor, in combination with any existing holdings, directly or indirectly holds 10 percent or more of the issued shares of the relevant company, the foreign investor must file a report of the acquisition with the Minister of Finance and any other competent Ministers having jurisdiction over that Japanese company within 15 days from and including the date of the acquisition, except where the offering of the company’s shares was made overseas. In limited circumstances, such as where the foreign investor is in a country that is not listed on an exemption schedule in the Foreign Exchange Regulations, a prior notification of the acquisition must be filed with the Minister of Finance and any other competent Ministers, who may then modify or prohibit the proposed acquisition.
Under the Foreign Exchange Regulations, dividends paid on and the proceeds from sales in Japan of shares of capital stock of Sony Corporation held by non-residents of Japan may generally be converted into any foreign currency and repatriated abroad.
~~Taxation~~
The following is a summary of the major Japanese national tax and U.S. federal tax consequences of the ownership, acquisition and disposition of shares of Common Stock of Sony Corporation and of ADRs evidencing ADSs representing shares of Common Stock of Sony Corporation by a non-resident of Japan or a non-Japanese corporation without a permanent establishment in Japan. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular investor depending on its individual circumstances. Accordingly, holders of shares of Common Stock or
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~~ADSs of Sony Corporation are encouraged to consult their tax advisors regarding the application of the considerations discussed below to their particular circumstances.~~
     U.S. holders (as defined below) should note that the United States and Japan have ratified the new income tax convention (the “New Treaty”), which is to replace its predecessor income tax convention signed on March 8, 1971 (the “Prior Treaty”). The New Treaty entered into force on March 30, 2004 and shall be applicable in Japan, in place of the Prior Treaty, (i) with respect to taxes withheld at source, for amounts taxable on or after July 1, 2004, and (ii) with respect to taxes on income which are not withheld at source and the enterprise taxes, as regards income for any taxable year beginning on or after January 1, 2005 (subject to certain transitional rules with respect to both items (i) and (ii) above). The Prior Treaty shall cease to have effect in relation to any tax from the date on which the New Treaty shall be applicable (subject to certain transitional rules allowing for exceptions). Where relevant, U.S. holders are urged to confirm with their tax advisors whether they are entitled to the treaty benefit provided under the Prior Treaty or the New Treaty, as the case may be.
     In addition, this summary is based upon the representations of the Depositary and the assumption that each obligation in the deposit agreement in relation to the ADSs dated as of June 1, 1961, as amended and restated as of October 31, 1991, as further amended and restated as of March 17, 1995, and in any related agreement, will be performed under its terms.
     For purposes of the Prior Treaty and/or New Treaty and the U.S. Internal Revenue Code of 1986, as amended (the “Code”), U.S. holders of ADSs generally will be treated as owning the Common Stock underlying the ADSs evidenced by the ADRs. For the purposes of the following discussion, a “U.S. holder” is a holder that:
~~(i)~~ ~~is a resident of the U.S. for purposes of the Prior Treaty or the New Treaty, as applicable from time to time;~~
~~(ii)~~ does not maintain a permanent establishment or fixed base in Japan to which shares of Common Stock or ADSs of Sony Corporation are attributable and through which the beneficial owner carries on or has carried on business (or, in the case of an individual, performs or has performed independent personal services); and
~~(iii)~~ is not otherwise ineligible for benefits under the Prior Treaty or the New Treaty, as applicable, with respect to income and gain derived in connection with shares of Common Stock or ADSs of Sony Corporation.
~~Japanese Taxation~~
     The following is a summary of the principal Japanese tax consequences (limited to national taxes) to holders of shares of Common Stock of Sony Corporation and of ADRs evidencing ADSs representing shares of Common Stock of Sony Corporation who are non-resident individuals or non-Japanese corporations, without a permanent establishment in Japan (“non-resident Holders”).
     Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations. Sony Corporation withholds taxes from dividends it pays as required by Japanese law. Stock splits in themselves are not subject to Japanese income tax.
     In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of Japanese withholding tax or allowing exemption from Japanese withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to individuals who are non-residents of Japan or non-Japanese corporations is 20 percent. With respect to dividends paid on listed shares issued by a Japanese corporation (such as the shares of Common Stock of Sony Corporation) to any corporate or individual shareholders (including those shareholders who are non-Japanese corporations or Japanese non-resident individuals, such as non-resident Holders), except for any individual shareholder who holds 5 percent or more of the total shares issued by the relevant Japanese corporation, the aforementioned 20 percent withholding tax rate is reduced to (i) 7 percent for dividends due and payable on or before
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March 31, 2008, and (ii) 15 percent for dividends due and payable on or after April 1, 2008. As of the date of this document, Japan has income tax treaties, conventions or agreements whereby the above-mentioned withholding tax rate is reduced, in most cases to 15 percent for portfolio investors with, among other countries, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and the U.K.
     Under the Prior Treaty, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to a U.S. holder that is a portfolio investor was limited to 15 percent of the gross amount actually distributed. However, under the New Treaty which would become applicable to dividends declared by Sony Corporation on or after July 1, 2004, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to a U.S. holder that is a portfolio investor is generally limited to 10 percent of the gross amount actually distributed, and Japanese withholding tax with respect to dividends paid by a Japanese corporation to a U.S. holder that is a pension fund is exempt from Japanese taxation by way of withholding or otherwise unless such dividends are derived from the carrying on of a business, directly or indirectly, by such pension fund.
     If the maximum tax rate provided for in the income tax treaty applicable to dividends paid by Sony Corporation to any particular non-resident Holder is lower than the withholding tax rate otherwise applicable under Japanese tax law or any particular non-resident Holder is exempt from Japanese income tax with respect to such dividends under the income tax treaty applicable to such particular non-resident Holder, such non-resident Holder is required to submit an Application Form for Income Tax Convention Regarding Relief from Japanese Income Tax on Dividends in advance through Sony Corporation to the relevant tax authority before the payment of dividends. A standing proxy for non-resident Holders of a Japanese corporation may provide this application service. With respect to ADSs, this reduced rate or exemption is applicable if the Depositary or its agent submits two Application Forms (one before payment of dividends and the other within eight months after Sony Corporation’s fiscal year-end). To claim this reduced rate or exemption, a non-resident Holder of ADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the Depositary. A non-resident Holder who is entitled, under an applicable income tax treaty, to a reduced rate which is lower than the withholding tax rate otherwise applicable under Japanese tax law or an exemption from the withholding tax, but failed to submit the required application in advance will be entitled to claim the refund of taxes withheld in excess of the rate under an applicable tax treaty (if such non-resident Holder is entitled to a reduced treaty rate under the applicable income tax treaty) or the full amount of tax withheld (if such non-resident Holder is entitled to an exemption under the applicable income tax treaty) from the relevant Japanese tax authority. Sony Corporation does not assume any responsibility to ensure withholding at the reduced treaty rate or to ensure not withholding for shareholders who would be eligible under any applicable income tax treaty but do not follow the required procedures as stated above.
     Gains derived from the sale of shares of Common Stock or ADSs of Sony Corporation outside Japan by a non-resident Holder holding such shares or ADSs as portfolio investors are, in general, not subject to Japanese income or corporation tax. U.S. holders are not subject to Japanese income or corporation tax with respect to such gains under the Prior Treaty or the New Treaty, as applicable.
     Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired shares of Common Stock or ADSs of Sony Corporation as a legatee, heir or donee even though neither the individual nor the deceased nor donor is a Japanese resident.
     Holders of shares of Common Stock or ADSs of Sony Corporation should consult their tax advisors regarding the effect of these taxes and, in the case of U.S. holders, the possible application of the Estate and Gift Tax Treaty between the U.S. and Japan.
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~~United States Taxation with respect to shares of Common Stock and ADSs~~
     The U.S. dollar amount of dividends received (prior to deduction of Japanese taxes) by a U.S. holder of ADSs or Common Stock will be includable in income as ordinary income for U.S. federal income tax purposes to the extent paid out of current or accumulated earnings and profits of Sony Corporation as determined for U.S. federal income tax purposes. Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2009 with respect to the ADSs or Common Stock will be subject to taxation at a maximum rate of 15 percent if the dividends are “qualified dividends.” Dividends paid on the Common Stock or ADSs will be treated as qualified dividends if we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”), foreign personal holding company (“FPHC”) or foreign investment company (“FIC”). Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC, FPHC or FIC for U.S. federal income tax purposes with respect to our 2003 taxable year. In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC, FPHC or FIC for the 2004 taxable year. The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs or Common Stock and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to treat dividends as qualified for tax reporting purposes. Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them. Holders of ADSs and Common Stock should consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of the considerations discussed above and their own particular circumstances.
     Subject to limitations set out in the Code, a U.S. holder of ADSs or Common Stock of Sony Corporation will be entitled to a credit for Japanese tax withheld in accordance with the Tax Convention from dividends paid by Sony Corporation. For purposes of the foreign tax credit limitation, dividends will be foreign source income, but will constitute “passive” or “financial services” income.
     ~~Dividends paid by Sony Corporation to U.S. corporate holders of ADSs or Common Stock will not be eligible for the dividends-received deduction.~~
In general, a U.S. holder will recognize capital gain or loss upon the sale or other disposition of ADSs or Common Stock equal to the difference between the amount realized on the sale or disposition and the U.S. holder’s tax basis in the ADSs or Common Stock. Such capital gain or loss will be long-term capital gain or loss if the ADSs or Common Stock have been held for more than one year. The net amount of long-term capital gain recognized by an individual holder after May 5, 2003 and before January 1, 2009 generally is subject to taxation at a maximum rate of 15 percent. The net long-term capital gain recognized by an individual holder before May 6, 2003 or after December 31, 2008 generally is subject to taxation at a maximum rate of 20 percent.
~~Dividends and Paying Agent~~
~~Not Applicable~~
~~Statement by Experts~~
~~Not Applicable~~
~~Documents on Display~~
     It is possible to read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. You can also access the documents at the SEC’s home page (http://www.sec.gov/index.html).
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~~Subsidiary Information~~Selling Shareholders
Not Applicable
Dilution
      Not Applicable
Expenses of the Issue
      Not Applicable
Item ~~11.~~10. ~~Quantitative and Qualitative Disclosures About Market Risk~~
     Sony’s normal course of business is continuously exposed to market fluctuations, such as fluctuations in currency exchange rates, interest rates or stock prices. Sony utilizes several derivative instruments, such as foreign exchange forward contracts, foreign currency option contracts, interest rate swap agreements and currency swap agreements in order to hedge the potential downside risk on the cash flow from the normal course of business caused by market fluctuation. Sony uses foreign exchange forward contracts and foreign currency option contracts primarily to reduce the foreign exchange volatility risk that accounts receivable or accounts payable denominated in yen, U.S. dollars, euros or other currencies have through the normal course of Sony’s worldwide business. Interest rate swap agreements and currency swap agreements are utilized to diversify funding conditions or to reduce funding costs. Sony uses these derivative financial instruments solely for risk-hedging purposes as described above, and no derivative transactions are held or utilized for trading purposes. If hedge accounting cannot be applied because the accounts receivables or accounts payables to be hedged are not yet booked, or because cash flows from derivative transactions do not coincide with the underlying exposures recorded on Sony’s balance sheet, then Sony understands that such derivatives agreements should be subject to a mark-to-market evaluation and their unrealized gains or losses are recognized in earnings. In addition, Sony holds marketable securities in the Financial Services segment in order to realize interest income or capital gain on the financial assets under management. Sony understands that such investment in marketable securities is also subject to market fluctuation.
     Sony measures the economic impact of market fluctuations on the value of derivatives agreements and marketable securities by using Value-at-Risk (“VaR”) analysis in order to comply with Item 11 disclosure requirements. VaR in this context indicates the potential maximum amount of loss in fair value resulting from adverse market fluctuations for a selected period of time and at a selected level of confidence.
     Until March 31, 2004, Sony disclosed market risk solely on a consolidated basis. Henceforth, however, in addition to disclosing market risk on a consolidated basis, Sony will make two additional disclosures: (i) the risk for the Financial Services segment and (ii) the risk for all other segments excluding Financial Services. Sony believes that such a comparative presentation may be useful in understanding and analyzing Sony’s market risk on a consolidated basis, since the risks faced by the Financial Services segment are different from those faced by Sony’s other business segments.
     The following table shows the results of VaR. These analyses for the fiscal year ending March 31, 2004 indicate the potential maximum loss in fair value as predicted by the VaR analysis resulting from market fluctuations in one day at a 95% confidence level. The VaR of currency exchange rate risk principally consists of risks arising from the volatility of the exchange rates between the yen and U.S. dollar and between the yen and the euro, the currencies in which a significant amount of financial assets and liabilities and derivative transactions are maintained on a consolidated basis. The VaR of interest rate risk and stock price risk consist of risks arising from the volatility of the interest rates and stock prices against trading securities in the Financial Services segment.
     The net VaR for Sony’s entire portfolio is smaller than the simple aggregate of VaR for each component of market risk. This is due to the fact that market risk factors such as currency exchange rates, interest rates, and stock prices are not completely independent and potential profits and losses arising from each component of market risk may to some degree be mutually offsetting.
     ~~The disclosed VaR amounts simply represents the calculated potential maximum loss on the specified dates and do not necessarily indicate an estimate of actual or future loss.~~
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~~Consolidated~~

March 31, June 30, September 30, December 31, March 31,
2003 2003 2003 2003 2004
(Yen in billions)
Net VaR 0.7 1.1 1.3 1.7 2.1
VaR of currency exchange rate risk 0.3 0.8 1.2 0.5 1.1
VaR of interest rate risk 0.1 0.3 0.4 0.4 0.7
VaR of stock price risk 0.8 0.8 0.6 1.8 1.7
~~Financial Services~~

March 31, June 30, September 30, December 31, March 31,
2003 2003 2003 2003 2004
(Yen in billions)
Net VaR 0.7 0.8 0.8 1.5 1.5
VaR of currency exchange rate risk 0.0 0.0 0.0 0.0 0.0
VaR of interest rate risk 0.1 0.4 0.5 0.5 0.8
VaR of stock price risk 0.8 0.8 0.6 1.8 1.7
~~All other segments excluding Financial Services~~

March 31, June 30, September 30, December 31, March 31,
2003 2003 2003 2003 2004
(Yen in billions)
Net VaR 0.3 0.8 1.2 0.5 1.1
VaR of currency exchange rate risk 0.3 0.8 1.2 0.5 1.1
VaR of interest rate risk 0.0 0.1 0.2 0.1 0.1
VaR of stock price risk 0.0 0.0 0.0 0.0 0.0
~~Item 12.~~ ~~Description of Securities Other Than Equity Securities~~
~~Not Applicable~~
~~Item 13.~~ ~~Defaults, Dividend Arrearages and Delinquencies~~
~~None~~
~~Item 14.~~ ~~Material Modifications to the Rights of Security Holders and Use of Proceeds~~
In June 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which is intended to be linked to the economic value of Sony Communication Network Corporation (“SCN”), a directly and indirectly wholly-owned subsidiary of Sony Corporation, which is engaged in Internet-related services. Regarding the rights of holders of Sony Corporation’s Common Stock and subsidiary tracking stock, refer to “Memorandum and Articles of Association” in “Item 10.Additional Information.”
Share Capital
      Not applicable
Memorandum and Articles of Association
Organization
      Sony Corporation is a joint stock corporation(Kabushiki Kaisha)incorporated in Japan under the Commercial Code(Shoho)of Japan. It is registered in the Commercial Register(Shogyo Tokibo)maintained by the Shinagawa Branch Office of the Tokyo Bureau of Legal Affairs.
Objects and purposes
      Article 3 of the Articles of Incorporation of Sony Corporation provides that its purpose is to engage in the following business activities:
~~Item 15.~~ ~~Controls and Procedures~~
     ~~Sony has carried out an evaluation~~(i)manufacture and sale of electronic and electrical machines and equipment, medical instruments, optical instruments and other equipment, machines and instruments;(ii)planning, production and sale of audio-visual software and computer software programs;(iii)manufacture and sale of metal industrial products, chemical industrial products and ceramic industrial products, textile products, paper products and wood-crafted articles, daily necessities, foodstuffs and toys, transportation machines, equipment, petroleum and coal products;(iv)real estate activities, construction business, transportation business and warehousing business;(v)publishing business and printing business;(vi)advertising agency business, insurance agency business, broadcasting enterprise, recreation business such as travel, management of sporting facilities, etc. and other service enterprises;(vii)financial business;(viii)Type I and Type II telecommunications business under the ~~supervision~~Telecommunications Business Law;(ix)investing in stocks and bonds, etc.;(x)manufacture, sale, export and import of products which are incidental to or related to those mentioned above;(xi)rendering of services related to those mentioned above;(xii)investment in businesses mentioned above operated by other companies or persons; and(xiii)all businesses which are incidental to or related to those mentioned above.
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Directors
      Under the Commercial Code (including the Law for Special Exceptions to the Commercial Code concerning Audit, etc. ofKabushiki-Kaisha, collectively the “Commercial Code”), Directors have no power to execute the business of Sony Corporation except in limited circumstances permitted by law. If a Director also serves concurrently as a Corporate Executive Officer, then he or she can execute the business of Sony Corporation in the capacity of Corporate Executive Officer. Under the Commercial Code, Directors must refrain from engaging in any business competing with Sony Corporation unless approved by the Board of Directors, and any Director who has a material interest in the subject matter of a resolution to be taken by the Board of Directors cannot vote on such resolution. The amount of remuneration to each Director is determined by the Compensation Committee, which consists of Directors, the majority of whom are outside Directors (Refer to “Board Practices” in “Item 6.Directors, Senior Management and Employees”). No member of the Compensation Committee may vote on a resolution with respect to his or her own compensation as a Director or a Corporate Executive Officer.
      Except as stated below, neither the Commercial Code nor Sony Corporation’s Articles of Incorporation make a special provision as to the borrowing powers exercisable by Directors, their retirement age, or a requirement to hold any shares of capital stock of Sony Corporation.
      The Commercial Code specifically requires a resolution of the Board of Directors, or a determination of the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors, for Sony Corporation to acquire or dispose of material assets; to borrow a substantial amount of money; to employ or discharge from employment important employees, such as general managers; and to establish, change or abolish a material corporate organization such as a branch office. The Regulations of the Board of Directors of Sony Corporation and regulations thereunder require a resolution of the Board of Directors for Sony Corporation’s lending in an amount not less than one hundred billion yen or its equivalent.
Capital stock
Unless otherwise indicated or the context otherwise requires, the following discussion applies equally to both the shares of Common Stock and the shares of subsidiary tracking stock.
(General)
      Except as otherwise stated, set forth below is information relating to Sony Corporation’s capital stock, including brief summaries of the relevant provisions of Sony Corporation’s Articles of Incorporation and Share Handling Regulations, as currently in effect, and of the Commercial Code and related legislation.
      A bill to modernize and make overall amendments to the Commercial Code by replacing the current provisions with regard to corporations with a new company law (the “New Company Law”) was submitted to the Diet on March 22, 2005. The proposed New Company Law is to be enacted during the first half of 2005 and will come into effect within one year and half after its promulgation, and currently, it is expected that it will take effect in April 2006. The proposed legislation is subject to discussion at, and approval by, the Diet.
      In order to assert shareholders’ rights against Sony Corporation, a shareholder must, except as set forth below, have its name and address registered on Sony Corporation’s register of shareholders, in accordance with Sony Corporation’s Share Handling Regulations. The registered beneficial holder of deposited shares underlying the American Depositary Shares (“ADSs”) is the Depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders’ rights against Sony Corporation.
      UFJ Trust Bank Limited is the transfer agent for Sony Corporation’s capital stock. As such, it keeps Sony Corporation’s registers of shareholders and beneficial shareholders in its office at 4-3, Marunouchi 1-chome, Chiyoda-ku, Tokyo, and records transfers of shares upon presentation of the certificates representing the transferred shares.
107
      A holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan. Participating shareholders must deposit certificates representing all of the shares to be included in this clearing system with Japan Securities Depository Center, Inc., or JASDEC. If a holder is not a participating institution in JASDEC, it must participate through a participating institution, such as a securities company or bank having a clearing account with JASDEC. All shares deposited with JASDEC will be registered in the name of JASDEC on Sony Corporation’s register of shareholders. Each participating shareholder will in turn be registered on Sony Corporation’s register of beneficial shareholders and be treated in the same way as shareholders registered on Sony Corporation’s register of shareholders. Entry of the share transfer in the book maintained by JASDEC for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The registered beneficial shareholders may exercise the rights attached to the shares, such as voting rights, and will receive dividends (if any) and notices to shareholders directly from Sony Corporation. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial shareholder are aggregated for these purposes. Beneficial owners may at any time withdraw their shares from deposit and receive share certificates.
      A new law to establish a new central clearing system for shares of listed companies and to eliminate the issuance and use of certificates for such shares was promulgated in June 2004 and the relevant part of the law will come into effect within five years of the date of the promulgation. On the effective date, a new central clearing system will be established and the shares of all Japanese companies listed on any Japanese stock exchange, including the shares of Common Stock of Sony Corporation, will be subject to the new central clearing system. On the same day, all existing share certificates will become null and void and the companies are not required to withdraw those share certificates from shareholders. The transfer of such shares will be effected through entry in the books maintained under the new central clearing system.
(Authorized capital)
      Article 5 of the Articles of Incorporation of Sony Corporation provides that Sony Corporation may issue both shares of Common Stock and shares of subsidiary tracking stock. Subsidiary tracking stock is stock which dividend rights track the dividend rights of a particular subsidiary of Sony Corporation. The rights of the holders of such stock may be different from those of the holders of Sony Corporation’s Common Stock in certain other respects such as rights to receive residual assets in the event of liquidation of Sony Corporation.
      Paragraph 2 of Article 5 of Sony Corporation’s Articles of Incorporation provides that the total number of shares authorized to be issued by Sony Corporation is 3.6 billion shares, of which 3.5 billion shares shall be Common Stock and 100 million shares shall be subsidiary tracking stock. If shares of Common Stock are retired or shares of subsidiary tracking stock are either retired or converted into shares of Common Stock, the respective numbers of shares so retired or converted shall be deducted from the respective total numbers of shares authorized to be issued by Sony Corporation.
      All shares of capital stock of Sony Corporation have no par value.
(Dividends)
Dividends — General
      The Articles of Incorporation of Sony Corporation provide that the accounts shall be closed on March 31 of each year. Year-end cash dividends, if any, shall be paid to shareholders, beneficial shareholders and pledgees of record as of the end of such day. After the close of the fiscal period, a Corporate Executive Officer designated by the Board of Directors prepares, among other things, a proposed allocation of profits for dividends and other purposes; this proposal is submitted to the Audit Committee and to independent certified public accountants and then submitted for approval to the Board of Directors. If each independent certified accountant states in his or her audit report the opinion that the financial statements prepared by such Corporate Executive Officer and proposed allocation of profits are in accordance with relevant laws and the Articles of Incorporation, and if the Audit Committee does not state in its audit report any objection to such independent accountants’ opinion or an opinion that the proposed allocation of profits is significantly
108
inappropriate, such proposal shall be deemed to be approved by the shareholders when approved by the Board of Directors.
      Under the New Company Law, subject to certain limitations on the distributable surplus as described below, dividends, if any, may be paid to shareholders, beneficial shareholders, and pledgees of record as of a record date as set forth by the Articles of Incorporation of Sony Corporation or as determined by the Board of Directors from time to time. Dividends shall be paid by way of distribution of surplus. Dividends may be distributed in cash or in kind. In distributing dividends, Sony Corporation may determine the kind of assets to be distributed, the book value of such assets, matters regarding allocation of such assets, and the effective date of such dividends, by a resolution of a general meeting of shareholders. However, Sony Corporation may generally determine such matters by a resolution of the Board of Directors if (a) the Articles of Incorporation of Sony Corporation so provide, (b) the term of its Directors is set to be until the conclusion of the ordinary general meeting of shareholders held with respect to the last closing of accounts within one year after such Director’s assumption of office, and (c) certain requirements regarding the financial statements and certain documents of Sony Corporation as set forth in an ordinance of the Ministry of Justice are met; provided, however, that when Sony Corporation is to pay dividends in-kind without giving shareholders the right to request payment of cash dividends in lieu of in-kind dividends, it shall determine such matters by a special shareholders resolution (as defined in “(Voting Rights)”). When Sony Corporation makes payment of dividends, it shall allocate such dividends in proportion to the number of shares of any specific class held by each shareholder.
Dividends — Interim cash dividends
      In addition to fiscal year-end cash dividends, the Board of Directors may by its resolution declare a cash distribution pursuant to Article 293-5 of the Commercial Code (an “interim dividend”) payable to shareholders, beneficial shareholders and pledgees of record at the end of each September 30, without shareholders’ approval, but subject to the limitation described below.
      Under the New Company Law, Sony Corporation is allowed to make payment of interim dividends during a fiscal year by way of distribution of surplus by resolution of the Board of Directors; provided, however, that such payment of interim dividends shall be limited to cash dividends and also limited to once per any fiscal year.
Dividends — Legal reserve
      The Commercial Code provides that a company may not make any distribution of profit by way of dividends or interim dividends unless it has set aside in its legal reserve an amount equal to at least one-tenth of the amount paid by way of appropriation of retained earnings for such fiscal period, or equal to one-tenth of the amount of interim dividends, until the aggregate amount of its additional paid-in capital and its legal reserve is at least one-quarter of its stated capital.
      The New Company Law provides that when a stock company like Sony Corporation makes distribution of surplus, it shall set aside in its legal reserve an amount equal to 10 percent of the amount of the surplus to be decreased as a result of such distribution of surplus in accordance with the provisions set forth in an ordinance of the Ministry of Justice.
Dividends — Distributable amount
      Under the Commercial Code, Sony Corporation is permitted to distribute profits by way of fiscal year-end or interim dividends out of the excess of its net assets, on a non-consolidated basis, over the aggregate of:
(i) its stated capital;
(ii) its additional paid-in capital;
(iii) its accumulated legal reserve;
(iv) the legal reserve to be set aside in respect of the fiscal period concerned; and
(v) such other amounts as are provided for by an ordinance of the Ministry of Justice.
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      In the case of interim dividends, the net assets are calculated by reference to the non-consolidated balance sheet as at the last date of the preceding fiscal year, but adjusted to reflect (a) the legal reserve to be set aside in respect of interim dividends, (b) any subsequent payment by way of appropriation of retained earnings and transfer to legal reserve in respect thereof, (c) any subsequent transfer of retained earnings to stated capital and (d) if Sony Corporation has been authorized, pursuant to a resolution of an ordinary general meeting of shareholders, a resolution of the Board of Directors or both, to purchase shares of its Common Stock or shares of its subsidiary tracking stock (Refer to “(Acquisition by Sony Corporation of its capital stock)” and “Subsidiary tracking stock — (Acquisition by Sony Corporation of its subsidiary tracking stock)” below), the total amount of the purchase price of such shares so authorized by such resolution that may be paid by Sony Corporation and (e) such other amounts as are set out in an ordinance of the Ministry of Justice of Japan, provided that the amount distributable as interim dividends, as described above, will be increased by (x) any amount reduced by Sony Corporation if Sony Corporation reduces the amount of its stated capital, additional paid-in capital or accumulated legal reserve after the end of the preceding fiscal year, less the amount paid to shareholders upon such reduction and certain other amounts, and (y) such other amounts as are set out in an ordinance of the Ministry of Justice of Japan.
      Under the New Company Law, Sony Corporation is permitted to make distribution of surplus to the extent that the aggregate book value of the assets to be distributed to shareholders does not exceed the Distributable Amount (as defined below) as at the effective date of such distribution of surplus.
      The amount of surplus at any given time shall be the amount of Sony Corporation’s assets and the book value of Sony Corporation’s treasury stock after subtracting the amounts of the following items (1) through (4) as they appear on Sony Corporation’s non-consolidated balance sheet as at the end of Sony Corporation’s last fiscal year, and after reflecting the changes in Sony Corporation’s surplus after the end of Sony Corporation’s last fiscal year, by adding the amounts of the following items (5), (6) and (7) and/or subtracting the amounts of the following items (8), (9) and (10):
(1) its liabilities;
(2) its stated capital;
(3) its additional paid-in capital and accumulated legal reserve;
(4) other amounts as provided for by an ordinance of the Ministry of Justice;
(5) (if Sony Corporation transferred its treasury stock after the end of the last fiscal year) the transfer price of its treasury stock after subtracting the book value thereof;
(6) (if Sony Corporation decreased its stated capital after the end of the last fiscal year) the amount of decrease in its stated capital (excluding the amount transferred to the additional paid-in capital or legal reserve);
(7) (if Sony Corporation decreased its additional paid-in capital or legal reserve after the end of the last fiscal year) the amount of decrease in its additional paid-in capital or legal reserve (excluding the amount transferred to the stated capital);
(8) (if Sony Corporation cancelled its treasury stock after the end of the last fiscal year) the book value of its treasury stock so cancelled;
(9) (if Sony Corporation distributed surplus to shareholders after the end of the last fiscal year) the assets distributed to shareholders by way of such distribution of surplus; and
(10) other amounts as provided for by an ordinance of the Ministry of Justice.
      The Distributable Amount of Sony Corporation at any given time shall be the aggregate amount of (a) the surplus, (b) the amount of profit as recorded for the period after the end of Sony Corporation’s last fiscal year until the date of an extraordinary settlement of account (if any) as provided for in an ordinance of
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the Ministry of Justice and (c) the transfer price of its treasury stock in the same period, after subtracting the amounts of the following items:
(1) the book value of its treasury stock;
(2) (if Sony Corporation transferred its treasury stock after the end of the last fiscal year) the transfer price of its treasury stock;
(3) the losses as recorded for the period after the end of Sony Corporation’s last fiscal year until the date of an extraordinary settlement of account (if any) as provided for in an ordinance of the Ministry of Justice; and
(4) other amounts as provided for by an ordinance of the Ministry of Justice.
Dividends — Ex-dividend date and prescription
      In Japan the “ex-dividend” date and the record date for dividends precede the date of determination of the amount of the dividend to be paid.
      Under its Articles of Incorporation, Sony Corporation is not obliged to pay any dividends that are left unclaimed for a period of five years after the date on which they first became payable.
Dividends — Liabilities
      Under the Commercial Code, if Sony Corporation were to pay interim dividends for a fiscal year and at the end of a fiscal year in which there had been no excess of net assets over the aggregate of the amounts referred to in (i) through (v) in “Dividends — Distributable amount” above, the Directors who authorized such interim dividends would be jointly and severally liable to Sony Corporation for the lesser of the amount of such deficit or the amount of such dividends, unless such Directors prove that they did not fail to exercise due care in determining such interim dividends.
      Under the New Company Law, where dividends are paid out of the surplus, if the aggregate amount of the following items (1), (2) and (3) as at the end of the relevant fiscal year exceeds the amount of surplus, Directors who have authorized such dividends, would be liable to Sony Corporation for the lesser of such amount in excess or the amount of money or book value of such distributed surplus unless such Directors prove that they did not fail to exercise due care in determining such distribution:
(1) the book value of Sony Corporation’s treasury stock;
(2) (if Sony Corporation transferred its treasury stock after the end of the last fiscal year) the transfer price of its treasury stock after the end of Sony Corporation’s last fiscal year;
(3) other amounts as provided for by an ordinance of the Ministry of Justice.
      However, the Directors shall not be liable to Sony Corporation for the distributions of surplus made pursuant to the resolution of the ordinary general meeting of shareholders.
(Stock Splits)
      Sony Corporation may at any time split shares in issue into a greater number of shares at the determination of the Group CEO.
      In the event of a stock split, generally, shareholders will not be required to exchange share certificates for new share certificates, but certificates representing the additional shares resulting from the stock split will be issued to shareholders. When a stock split is to be made Sony Corporation must give public notice of the stock split, specifying the record date thereof, at least two weeks prior to such record date. In addition, promptly after the stock split takes effect Sony Corporation must give notice to each shareholder specifying the number of shares to which such shareholder is entitled by virtue of the stock split. After the New Company Law becomes effective, no such notice to each shareholder is required.
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(Consolidation of Shares)
      Sony Corporation may at any time consolidate issued shares into a smaller number of shares by a special shareholders resolution (as defined in “(Voting Rights)”). When a consolidation of shares is to be made, Sony Corporation must give public notice and notice to each shareholder that, within a period of not less than one month specified in the notice, share certificates must be submitted to Sony Corporation for exchange. Sony Corporation must disclose the reason for the consolidation of shares at the general meeting of shareholders.
(General Meeting of Shareholders)
      The ordinary general meeting of shareholders of Sony Corporation for each fiscal year is normally held in June of each year in Tokyo, Japan. In addition, Sony Corporation may hold an extraordinary general meeting of shareholders whenever necessary by giving notice thereof at least two weeks prior to the date set for the meeting.
      Notice of a shareholders’ meeting setting forth the place, time and purpose thereof, must be mailed to each shareholder having voting rights (or, in the case of a non-resident shareholder, to such shareholder’s resident proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Under the Commercial Code, such notice may be given to shareholders by electronic means, subject to obtaining consent by the relevant shareholders. The record date for an ordinary general meeting of shareholders is March 31 of each year.
      Any shareholder or group of shareholders holding at least three percent (or, when the New Company Law becomes effective and in the event that Sony Corporation’s Articles of Incorporations provide for a percentage lower than three percent, such percentage) of the total number of voting rights for a period of six months (or, when the New Company Law becomes effective and in the event that Sony Corporation’s Articles of Incorporations provide for a period shorter than six months, such period) or more may require the convocation of a general meeting of shareholders for a particular purpose. Unless such a shareholders’ meeting is convened promptly or a convocation notice of a meeting which is to be held not later than eight weeks (or, when the New Company Law becomes effective and in the event that Sony Corporation’s Articles of Incorporations provide for a period shorter than eight weeks, such period) from the day of such demand is dispatched, the requiring shareholder may, upon obtaining a court approval, convene such a shareholders’ meeting.
      Any shareholder or group of shareholders holding at least 300 (or, when the New Company Law becomes effective and in the event that Sony Corporation’s Articles of Incorporations provide for a number less than 300, such number) voting rights or one percent (or, when the New Company Law becomes effective and in the event that Sony Corporation’s Articles of Incorporations provide for a percentage lower than one percent, such percentage) of the total number of voting rights for a period of six months (or, when the New Company Law becomes effective and in the event that Sony Corporation’s Articles of Incorporations provide for a period shorter than six months, such period) or more may propose a matter to be considered at a general meeting of shareholders by submitting a written request to Sony Corporation at least eight weeks (or, when the New Company Law becomes effective and in the event that Sony Corporation’s Articles of Incorporations provide for a period shorter than eight weeks, such period) prior to the date set for such meeting.
(Voting rights)
      So long as Sony Corporation maintains the unit share system, a holder of shares (whether shares of Common Stock or shares of subsidiary tracking stock) constituting one or more units is entitled to one vote for each such unit of stock (Refer to “(Unit share system)” below, currently 100 shares constitute one unit), except that no voting rights with respect to shares of capital stock of Sony Corporation are afforded to Sony Corporation or any corporate shareholder more than one-quarter of the total voting rights of which are directly or indirectly held by Sony Corporation (or, when the New Company Law becomes effective, management of which is being controlled in substance by Sony Corporation as provided for by an ordinance of the Ministry of Justice). If Sony Corporation eliminates from its Articles of Incorporation the provisions relating to units of stock, holders of capital stock will have one vote for each share they hold. Except as otherwise provided by law
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or by the Articles of Incorporation of Sony Corporation, a resolution can be adopted at a general meeting of shareholders by a majority of the number of voting rights of all the shareholders represented at the meeting. The Commercial Code (or, when the New Company Law becomes effective, the New Company Law) and Sony Corporation’s Articles of Incorporation provide, however, that the quorum for the election of Directors shall not be less than one-third of the total number of voting rights of all the shareholders. Sony Corporation’s shareholders are not entitled to cumulative voting in the election of Directors. Shareholders may cast their votes in writing and may also exercise their voting rights through proxies, provided that the proxies are also shareholders holding voting rights. Shareholders may also exercise their voting rights by electronic means pursuant to the method designated by Sony Corporation.
      The Commercial Code (or, when the New Company Law becomes effective, the New Company Law) and the Articles of Incorporation of Sony Corporation provide that in order to amend the Articles of Incorporation and in certain other instances, including:
(1) acquisition of its own shares from a specific party;
(2) consolidation of shares;
(3) any offering of new shares at a “specially favorable” price (or any offering of stock acquisition rights to subscribe for or acquire shares of capital stock, or bonds with stock acquisition rights at “specially favorable” conditions) to any persons other than shareholders;
(4) the ~~participation~~removal of ~~Sony’s management, including~~a Director (when the ~~Group Chief~~New Company Law becomes effective, the removal of a Director who is elected by cumulative voting);
(5) the exemption of liability of a Director or Corporate Executive Officer ~~Group Chief Strategy Officer and Group Chief Financial Officer,~~with certain exceptions;
(6) a reduction of stated capital (when the New Company Law becomes effective, with certain exceptions in which a shareholders’ resolution is not required);
(7) (when the New Company Law becomes effective) a distribution of in-kind dividends which meets certain requirements;
(8) dissolution, merger, or consolidation with certain exceptions in which a shareholders’ resolution is not required;
(9) the transfer of the ~~effectiveness~~whole or a material part of the ~~design~~business;
(10) the taking over of the whole of the business of any other corporation with certain exceptions in which a shareholders’ resolution is not required;
(11) share exchange or share transfer for the purpose of establishing 100 percent parent-subsidiary relationships with certain exceptions in which a shareholders’ resolution is not required; or
(12) separating of the corporation into two or more corporations with certain exceptions in which a shareholders’ resolution is not required,
the quorum shall be one-third of the total number of voting rights of all the shareholders, and the approval by at least two-thirds (or, when the New Company Law becomes effective and in the event that Sony Corporation’s Articles of Incorporations provide for a percentage more than two-thirds, such percentage) of the number of voting rights of all the shareholders represented at the meeting is required (in addition, when the New Company Law becomes effective and in the event that Sony Corporation’s Articles of Incorporation provide that the approval by certain number of shareholders is required, such approval is also required) (the “special shareholders resolutions”).
(Issue of additional shares and pre-emptive rights)
      Holders of Sony Corporation’s shares of capital stock have no pre-emptive rights under its Articles of Incorporation. Authorized but unissued shares (whether of Common Stock or of subsidiary tracking stock) may be issued at such times and upon such terms as the Board of Directors or the Group CEO determines,
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subject to the limitations as to the offering of new shares at a “specially favorable” price mentioned under “(Voting rights)” above. The Board of Directors or the Group CEO may, however, determine that shareholders of a particular class of stock shall be given subscription rights regarding a particular issue of new shares of that class, in which case such rights must be given on uniform terms to all shareholders of that class of stock as at a record date of which not less than two weeks’ prior public notice must be given. Each of the shareholders to whom such rights are given must also be given notice of the expiry thereof at least two weeks prior to the date on which such rights expire.
      Subject to certain conditions, Sony Corporation may issue stock acquisition rights by a resolution of the Board of Directors or a determination by the Group CEO. Holders of stock acquisition rights may exercise their rights to acquire a certain number of shares within the exercise period as prescribed in the terms of their stock acquisition rights. Upon exercise of stock acquisition rights, Sony Corporation will be obliged to issue the relevant number of new shares or alternatively to transfer the necessary number of treasury stock held by it.
      In cases where a particular issue of new shares or stock acquisition rights (i) violates laws and regulations or Sony Corporation’s Articles of Incorporation, or (ii) will be performed in a manner materially unfair, and shareholders may suffer disadvantages therefrom, such shareholder may file an injunction to enjoin such issue with a court.
(Liquidation rights)
      In the event of a liquidation of Sony Corporation, the assets remaining after payment of all debts, liquidation expenses and taxes will, subject to the rights of the holders of subsidiary tracking stock discussed under “Subsidiary tracking stock —(Distribution of residual assets)” below, be distributed among the holders of shares of Common Stock in proportion to the respective numbers of shares of Common Stock held.
(Record date)
      March 31 is the record date for Sony Corporation’s year-end dividends, if declared. So long as Sony Corporation maintains the unit share system, the shareholders and beneficial shareholders who are registered as the holders of one or more unit of stock in Sony Corporation’s register of shareholders and/or beneficial shareholders at the end of each March 31 are also entitled to exercise shareholders’ rights at the ordinary general meeting of shareholders with respect to the fiscal year ending on such March 31. September 30 is the record date for interim dividends. In addition, Sony Corporation may set a record date for determining the shareholders and/or beneficial shareholders entitled to other rights and for other purposes by giving at least two weeks prior public notice.
      The price of shares generally goes ex-dividend or ex-rights on Japanese stock exchanges on the third business day prior to a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings.
(Acquisition by Sony Corporation of its capital stock)
      Sony Corporation may acquire its own shares through a stock exchange on which such shares are listed (pursuant to an ordinary resolution of an ordinary general meeting of shareholders or a resolution of the Board of Directors), by way of tender offer (pursuant to an ordinary resolution of an ordinary general meeting of shareholders or a resolution of the Board of Directors), by purchase from a specific party other than a subsidiary of Sony Corporation (pursuant to a special resolution of an ordinary general meeting of shareholders) or from a subsidiary of Sony Corporation (pursuant to a determination by the Group CEO). Under the New Company Law, not only ordinary general meetings of shareholders but also extraordinary general meetings of shareholders will be able to approve the acquisition by Sony Corporation of its own shares in the cases of (a) and (b) above. When such acquisition is made by Sony Corporation from a specific party other than a subsidiary of Sony Corporation, any other shareholder may make a request to the Company in writing, not later than five days prior to the relevant shareholders’ meeting, to include him/her as a seller in the proposed purchase. However, under the New Company Law, the acquisition of its own shares at a price
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not exceeding the then market price to be provided under an ordinance of the Ministry of Justice will not trigger the right of any shareholder to be included as a seller of his/her shares in such proposed purchase. Any such acquisition of shares must satisfy certain requirements, including the requirement that in cases other than the acquisition by Sony Corporation of its own shares pursuant to a resolution of the Board of Directors, the total amount of the purchase price may not exceed the sum of the amount of retained earnings available for year-end dividend payments after taking into account any reduction, if any, of the stated capital, additional paid-in capital or legal reserve (if such reduction of the stated capital, additional paid-in capital or legal reserve has been authorized pursuant to a resolution of the relevant ordinary general meeting of shareholders), minus the sum of the amount to be paid by way of appropriation of retained earnings for the relevant fiscal year and the amount to be transferred to stated capital in respect of the relevant fiscal year pursuant to a resolution of such general meeting of shareholders. If Sony Corporation purchases shares pursuant to a resolution of the Board of Directors, the total amount of the purchase price may not exceed the amount of the retained earnings available for an interim dividend payment minus the amount of any interim dividend Sony Corporation actually paid. However, if it is anticipated that the net assets on the non-consolidated balance sheet as at the end of the relevant fiscal year will be less than the aggregate amount of the stated capital, additional paid-in capital and other items as described in (i) through (v) to “Dividends — Distributable amount” above, Sony Corporation may not acquire such shares. Under the New Company Law, the restriction on the source of funds for the acquisition by Sony Corporation of its own shares will be integrated into those for the distribution of surplus to the shareholders. See “(Dividends)”.
      Shares acquired by Sony Corporation may be held for any period or may be retired at the determination of the Group CEO. Sony Corporation may also transfer (by public or private sale or otherwise) to any person the shares held by it, subject to a determination by the Group CEO, and subject also to other requirements similar to those applicable to the issuance of new shares, as described in “(Issue of additional shares and pre-emptive rights)” above. Sony Corporation may also utilize its treasury stock for the purpose of transfer to any person upon exercise of stock acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through exchange of treasury stock for shares or assets of the acquired company.
(Unit share system)
      The Articles of Incorporation of Sony Corporation provide that 100 shares constitute one “unit” of shares of stock. The Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors is permitted to amend the Articles of Incorporation to reduce the number of shares that constitute a unit or to abolish the unit share system entirely. The number of shares constituting one unit cannot exceed 1,000 shares or one-two hundredth (1/200) of the aggregate number of all issued shares.
      Under the unit share system, shareholders have one voting right for each unit of stock that they hold. Any number of shares less than one full unit have no voting rights nor rights related to voting rights. The Articles of Incorporation of Sony Corporation provide that no share certificates may be issued with respect to any number of shares constituting less than one full unit, unless Sony Corporation deems the issue of such share certificates to be necessary for any shareholder(s). As the transfer of shares normally requires delivery of the certificates therefor, fractions of a unit for which no share certificate has been issued are not transferable.
      Except as otherwise described above, holders of the shares constituting less than one full unit will have all the rights granted to shareholders under the Commercial Code.
      A holder of shares constituting less than one full unit may require Sony Corporation to purchase such Shares at their market value in accordance with the provisions of the Share Handling Regulations of Sony Corporation.
      The Articles of Incorporation of Sony Corporation provide that a holder of shares constituting less than one full unit may request Sony Corporation to sell to such holder such amount of shares which will, when added together with the shares constituting less than one full unit, constitute one full unit of stock. Such
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request by a holder and the sale by Sony Corporation must be made in accordance with the provisions of the Share Handling Regulations of Sony Corporation.
      A holder who owns ADRs evidencing less than 100 ADSs will indirectly own less than one full unit. Although, as discussed above, under the unit share system holders of less than one full unit have the right to require Sony Corporation to purchase their shares or sell shares held by Sony Corporation to such holders, holders of ADRs evidencing ADSs that represent other than integral multiples of whole units are unable to withdraw the underlying shares of capital stock representing less than one full unit and, therefore, are unable, as a practical matter, to exercise the rights to require Sony Corporation to purchase such underlying shares or sell shares held by Sony Corporation to such holders. As a result, access to the Japanese markets by holders of ADRs through the withdrawal mechanism will not be available for dispositions of shares in lots less than one full unit. The unit share system does not affect the transferability of ADSs, which may be transferred in lots of any size.
(Sale by Sony Corporation of shares held by shareholders whose location is unknown)
      Sony Corporation is not required to send a notice to a shareholder if a notice to such shareholder fails to arrive at the registered address of the shareholder in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation continuously for five years or more.
      In addition, Sony Corporation may sell or otherwise dispose of shares of capital stock for which the location of the shareholder is unknown. Generally, if (i) notices to a shareholder fail to arrive continuously for five years or more at the shareholder’s registered address in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation, and (ii) the shareholder fails to receive dividends on the shares continuously for five years or more at the address registered in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation, Sony Corporation may sell or otherwise dispose of the shareholder’s shares at the then market price of the shares by a determination of a Corporate Executive Officer and after giving at least three months’ prior public and individual notice, and hold or deposit the proceeds of such sale or disposal of shares for such shareholder.
Subsidiary tracking stock
      By a special resolution of the Extraordinary General Meeting of Shareholders held on January 25, 2001, Sony Corporation’s Articles of Incorporation were amended to enable Sony Corporation to issue shares of subsidiary tracking stock. By resolutions of the Board of Directors dated May 15 and 31, 2001, Sony Corporation created and issued 3,072,000 shares of a series of subsidiary tracking stock. The subsidiary whose economic value this series of subsidiary tracking stock tracks is Sony Communication Network Corporation (“SCN”), a Japanese corporation directly and indirectly wholly-owned by Sony Corporation. Except as otherwise stated in the preceding paragraphs and as stated in the following paragraphs, the shares of the subsidiary tracking stock have the same rights and characteristics as those of shares of Common Stock described above.
(Dividends)
      The dividend (the year-end dividend and the interim dividend) on the shares of this series of subsidiary tracking stock is payable only when the board of directors of SCN has resolved to pay to the holders of its common stock a dividend (in the case of year-end dividend, SCN’s year-end dividend, and in the case of interim dividend, SCN’s interim dividend) in an amount per share of the subsidiary tracking stock equal to the smaller of the amount of SCN’s dividend per share of its common stock multiplied by the Standard Ratio (as defined in the Articles of Incorporation: currently one one-hundredth, which is subject to adjustment in the occurrence of certain dilutive events) or 100,000 yen multiplied by the Standard Ratio per share (the “Maximum Dividend Amount”), subject to statutory restriction on Sony Corporation’s ability to pay dividends on its shares of capital stock referred to under “Capital stock —(Dividends)” above. If the amount of interim dividend paid to the holders of shares of a series of subsidiary tracking stock for any fiscal year is less than the amount calculated in accordance with the foregoing formula, such shortfall will be added to the
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amount of the year-end dividend of such fiscal year. If the amount of dividends paid to the holders of shares of a series of subsidiary tracking stock is less than the amount which should have been paid pursuant to the formula set forth above due to the statutory restriction referred to above or for any other reason, such shortfall will be accumulated and such cumulative amount will be paid to the holders of shares of the subsidiary tracking stock for subsequent fiscal period(s), subject to the statutory limitation set forth above and the Maximum Dividend Amount. Any such dividend on the subsidiary tracking stock is payable in priority to the payment of dividends to the holders of shares of Common Stock. However, the holders of shares of subsidiary tracking stock have no right to participate in the dividends to holders of shares of Common Stock. Furthermore, even if the Board of Directors of SCN does not take a resolution for the payment of dividends to the holders of SCN common stock, Sony Corporation may decide to pay dividends to the holders of its Common Stock.
(Voting rights)
      The holders of shares of subsidiary tracking stock have the same voting rights, subject to the same limitation on voting rights, as those of the holders of shares of Common Stock and, thus, are entitled to participate and vote at any general meeting of shareholders in the same way as the shareholders of Common Stock. In addition, as each series of subsidiary tracking stock is a separate class of stock different from the Common Stock, if any resolution of the general meeting of shareholders for amending the Articles of Incorporation, any granting to shareholders of any series of subsidiary tracking stock certain rights with respect to certain matters including the issue of new shares, stock acquisition rights, bonds with stock acquisition rights, consolidation, split, purchase or retirement of shares, share exchange or share transfer, or a merger or consolidation or splitting of Sony Corporation would adversely affect the rights of the holders of shares of a particular class or classes of subsidiary tracking stock, the holders of shares of each such class of subsidiary tracking stock will have the right to approve or disapprove such resolution by a special resolution of the meeting of holders of shares of that class of subsidiary tracking stock.
(Distribution of residual assets)
      In the event of distribution of residual assets to the shareholders of Sony Corporation, as long as such assets include shares of common stock of SCN, the number of shares of SCN common stock obtained by multiplying the number of shares of the subsidiary tracking stock held by each holder by the Standard Ratio (if the total number of shares of SCN common stock available for distribution is less than the total number so to be distributed, the lesser number adjusted in proportion to the respective numbers of shares of the subsidiary tracking stock held by such holders) or the net proceeds from the sale of the shares of SCN common stock so to be distributed will be distributed to the holders of shares of the subsidiary tracking stock. Such distribution will be made in priority to the distribution of residual assets to the holders of shares of Common Stock. No other distribution of residual assets will be made to the holders of shares of subsidiary tracking stock.
(Acquisition of shares of tracking stock)
      The shares of subsidiary tracking stock may be subject to acquisition in the same manner and under the same restriction as the shares of Common Stock referred to under “Capital stock —(Acquisition by Sony Corporation of its capital stock)” above.
      In addition, Sony Corporation may at any time retire the entire amount of all outstanding shares of that series of subsidiary tracking stock upon paying to the holders thereof an amount equal to the current market price (as defined in the Articles of Incorporation) of shares of the subsidiary tracking stock out of Sony Corporation’s retained earnings available for dividend payments.
      Sony Corporation may also retire the shares of a series of subsidiary tracking stock in their entirety pursuant to the procedures prescribed by the Commercial Code for the reduction of capital upon payment to the holders of shares of the subsidiary tracking stock an amount equal to the market value thereof as set forth above.
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(Conversion of subsidiary tracking stock)
      So long as the shares of Sony Corporation’s Common Stock are listed or registered on any stock exchange or over-the-counter market (a “Stock Exchange”), Sony Corporation may at any time convert the entire amount of all outstanding shares of the subsidiary tracking stock into shares of Sony Corporation’s Common Stock at the rate of the multiple of 1.1 of the market value (as defined in the Articles of Incorporation) of shares of the subsidiary tracking stock divided by the market value (as similarly defined) of shares of Sony Corporation’s Common Stock.
(Compulsory termination)
      If any of the following events occurs, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s Common Stock at the price or rate set forth above:
(i) SCN transfers its assets representing 80 percent or more of the total assets appearing on its most recent consolidated balance sheet or transfers its business as a result of which its consolidated revenue is expected to decrease by 80 percent or more from its most recent consolidated profit and ~~operation~~loss statement;
(ii) SCN ceases to be a subsidiary of ~~Sony’s disclosure controls~~Sony Corporation;
(iii) the number of shares of capital stock of SCN which Sony Corporation directly holds becomes less than the total number of outstanding shares of tracking stock multiplied by the Standard Ratio and ~~procedures as~~such situation continues for a period of ~~March 31, 2004.~~3 months or more;
(iv) a resolution was taken by SCN’s shareholders for its dissolution;
(v) certain events of bankruptcy; or
(vi) occurrence of any event which causes de-listing or de-registration of the subsidiary tracking stock from all Stock Exchanges where the tracking stock is listed or registered.
      If the shares of capital stock of SCN are approved by any Stock Exchange for listing or registration thereon, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s Common Stock at the price or rate set forth above on the date determined by Sony Corporation’s Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors prior to the date of such approval of the Stock Exchange; or, they may be retired in their entirety by distributing the number of shares of SCN common stock to each holder of shares of the subsidiary tracking stock at the rate calculated by multiplying the number of such shares by the Standard Ratio on the date of such listing or registration or the date prior to such date determined by Sony Corporation’s Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors.
(Miscellaneous)
      Either or both of the shares of Common Stock and the shares of subsidiary tracking stock may be consolidated or split at the same ratio or at different ratios. The holders of shares of Common Stock and/or the holders of shares of subsidiary tracking stock may be allotted rights to subscribe for new shares (to the holders of Common Stock, new shares of Common Stock, and to the holders of subsidiary tracking stock, new shares of subsidiary tracking stock) at the same ratio or different ratios and on different conditions.
      At a meeting of the Board of Directors held on April 26, 2005, Sony decided to consider the possibility of an initial public offering of common stock of SCN. In response to recent changes in the Internet-related industry, Sony believes that it will be desirable for Sony and the Sony Group, as well as for SCN, to seek the enhancement of SCN’s enterprise value through SCN’s own business operations and to employ a strategy
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more directed at making SCN more independent from Sony and allowing SCN to raise funds with enhanced flexibility on the capital markets.
      In accordance with the above revised policy, SCN will start making preparations required for or in connection with the listing of its common stock on a stock exchange. If the listing of SCN common stock is approved by the stock exchange, subject to required procedures, Sony will be required under its articles of incorporation to terminate all the shares of the subsidiary tracking stock. Sony Corporation’s Articles of Incorporation stipulate that the method of such termination may be any one of the following: (1) compulsory retirement in cash, (2) compulsory conversion to common stock of Sony Corporation, or (3) compulsory exchange with SCN common stock. With respect to the method of exchange with SCN common stock referred to (3) above, Sony’s initial policy was that such method would not be taken unless and until a tax deferment on the difference between the acquisition cost of the subsidiary tracking stock and the market value of SCN common stock is permitted under tax law. No tax law revision that allows such deferral has yet been enacted. Regardless of whether such a revision will ever be enacted, Sony has changed its policy and now permits such a method (compulsory exchange with SCN common stock) of terminating shares of the subsidiary tracking stock.
Reporting of substantial shareholdings
      The Securities and Exchange Law of Japan and its related regulations require any person, regardless of residence, who has become, beneficially and solely or jointly, a holder of more than five percent of the total issued shares of capital stock of a company listed on any Japanese stock exchange or whose shares are traded on the over-the-counter market in Japan to file with the Director General of the competent Regional Finance Bureau of the Ministry of Finance within five business days a report concerning such shareholdings.
      A similar report must also be filed in respect of any subsequent change of one percent or more in any such holding, with certain exceptions. For this purpose, shares issuable to such persons upon conversion of convertible securities or exercise of share subscription warrants or stock acquisition rights are taken into account in determining both the number of shares held by such holders and the issuer’s total issued share capital. Copies of such report must also be furnished to the issuer of such shares and all Japanese stock exchanges on which the shares are listed or (in the case of shares traded over-the-counter) the Japan Securities Dealers Association.
      Except for the general limitation under Japanese anti-trust and anti-monopoly regulations against holding of shares of capital stock of a Japanese corporation which leads or may lead to a restraint of trade or monopoly, and except for general limitations under the Commercial Code or Sony Corporation’s Articles of Incorporation on the rights of shareholders applicable regardless of residence or nationality, there is no limitation under Japanese laws and regulations applicable to Sony Corporation or under its Articles of Incorporation on the rights of non-resident or foreign shareholders to hold or exercise voting rights on the shares of capital stock of Sony Corporation.
      There is no provision in Sony Corporation’s Articles of Incorporation or by-laws that would have an effect of delaying, deferring or preventing a change in control of Sony Corporation and that would operate only with respect to merger, acquisition or corporate restructuring involving Sony Corporation.
Material Contracts
      None
Exchange Controls
      The Foreign Exchange and Foreign Trade Law of Japan and its related cabinet orders and ministerial ordinances (the “Foreign Exchange Regulations”) govern the acquisition and holding of shares of capital stock of Sony Corporation by “exchange non-residents” and by “foreign investors.” The Foreign Exchange Regulations currently in effect do not, however, affect transactions between exchange non-residents to purchase or sell shares outside Japan using currencies other than Japanese yen.
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      Exchange non-residents are:
• individuals who do not reside in Japan; and
• corporations whose principal offices are ~~inherent~~located outside Japan.
      Generally, branches and other offices of non-resident corporations that are located within Japan are regarded as residents of Japan. Conversely, branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents.
      Foreign investors are:
• individuals who are exchange non-residents;
• corporations that are organized under the laws of foreign countries or whose principal offices are located outside of Japan; and
• corporations (1) of which 50 percent or more of their shares are held by individuals who are exchange non-residents and/or corporations (a) that are organized under the laws of foreign countries or (b) whose principal offices are located outside of Japan or (2) a majority of whose officers, or officers having the power of representation, are individuals who are exchange non-residents.
      In general, the acquisition of shares of a Japanese company (such as the shares of capital stock of Sony Corporation) by an exchange non-resident from a resident of Japan is not subject to any prior filing requirements. In certain limited circumstances, however, the Minister of Finance may require prior approval of an acquisition of this type. While prior approval, as described above, is not required, in the case where a resident of Japan transfers shares of a Japanese company (such as the shares of capital stock of Sony Corporation) for consideration exceeding 100 million yen to an exchange non-resident, the resident of Japan who transfers the shares is required to report the transfer to the Minister of Finance within 20 days from the date of the transfer, unless the transfer was made through a bank, securities company or financial futures trader licensed under Japanese law.
      If a foreign investor acquires shares of a Japanese company that is listed on a Japanese stock exchange (such as the shares of capital stock of Sony Corporation) or that is traded on an over-the-counter market in Japan and, as a result of the acquisition, the foreign investor, in combination with any existing holdings, directly or indirectly holds 10 percent or more of the issued shares of the relevant company, the foreign investor must file a report of the acquisition with the Minister of Finance and any other competent Ministers having jurisdiction over that Japanese company within 15 days from and including the date of the acquisition, except where the offering of the company’s shares was made overseas. In limited circumstances, such as where the foreign investor is in a country that is not listed on an exemption schedule in the Foreign Exchange Regulations, a prior notification of the acquisition must be filed with the Minister of Finance and any other competent Ministers, who may then modify or prohibit the proposed acquisition.
      Under the Foreign Exchange Regulations, dividends paid on and the proceeds from sales in Japan of shares of capital stock of Sony Corporation held by non-residents of Japan may generally be converted into any foreign currency and repatriated abroad.
Taxation
The following is a summary of the major Japanese national tax and U.S. federal income tax consequences of the ownership, acquisition and disposition of shares of Common Stock of Sony Corporation and of ADRs evidencing ADSs representing shares of Common Stock of Sony Corporation by a non-resident of Japan or a non-Japanese corporation without a permanent establishment in Japan. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular investor depending on its individual circumstances. Accordingly, holders of shares of Common Stock or ADSs of Sony Corporation are encouraged to consult their tax advisors regarding the application of the considerations discussed below to their particular circumstances.
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      This summary is based upon the representations of the Depositary and the assumption that each obligation in the deposit agreement in relation to the ADSs dated as of June 1, 1961, as amended and restated as of October 31, 1991, as further amended and restated as of March 17, 1995, and in any related agreement, will be performed under its terms.
      For purposes of the income tax convention between Japan and the United States (the “Treaty”) and the U.S. Internal Revenue Code of 1986, as amended (the “Code”), U.S. holders of ADSs generally will be treated as owning shares of Common Stock of Sony Corporation underlying the ADSs evidenced by the ADRs. For the purposes of the following discussion, a “U.S. holder” is a holder that:
(i) is a resident of the U.S. for purposes of the Treaty;
(ii) does not maintain a permanent establishment in Japan (a) with which shares of Common Stock or ADSs of Sony Corporation are effectively connected or (b) of which shares of Common Stock or ADSs of Sony Corporation form part of the business property; and
(iii) is eligible for benefits under the Treaty with respect to income and gain derived in connection with shares of Common Stock or ADSs of Sony Corporation.
Japanese Taxation
      The following is a summary of the principal Japanese tax consequences (limited to national taxes) to holders of shares of Common Stock of Sony Corporation and of ADRs evidencing ADSs representing shares of Common Stock of Sony Corporation who are non-residents of Japan or non-Japanese corporations, without a permanent establishment in Japan (“non-resident Holders”).
      Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations. Sony Corporation withholds taxes from dividends it pays as required by Japanese law. Stock splits in themselves are not subject to Japanese income tax.
      In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of Japanese withholding tax or allowing exemption from Japanese withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to non-residents of Japan or non-Japanese corporations is 20 percent. With respect to dividends paid on listed shares issued by a Japanese corporation (such as the shares of Common Stock of Sony Corporation) to any corporate or individual shareholders (including those shareholders who are non-Japanese corporations or non-residents of Japan, such as non-resident Holders), except for any individual shareholder who holds 5 percent or more of the total shares issued by the relevant Japanese corporation, the aforementioned 20 percent withholding tax rate is reduced to (i) 7 percent for dividends due and payable on or before March 31, 2008, and (ii) 15 percent for dividends due and payable on or after April 1, 2008. As of the date of this document, Japan has income tax treaties, conventions or agreements whereby the above-mentioned withholding tax rate is reduced, in most cases to 15 percent for portfolio investors with, among other countries, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and the U.K.
      Under the Treaty, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to a U.S. holder that does not own directly or indirectly at least 10 percent of the voting stock of the Japanese corporation is generally limited to 10 percent of the gross amount actually distributed, and Japanese withholding tax with respect to dividends paid by a Japanese corporation to a U.S. holder that is a pension fund is exempt from Japanese taxation by way of withholding or otherwise unless such dividends are derived from the carrying on of a business, directly or indirectly, by such pension fund.
      If the maximum tax rate provided for in the income tax treaty applicable to dividends paid by Sony Corporation to any particular non-resident Holder is lower than the withholding tax rate otherwise applicable under Japanese tax law or any particular non-resident Holder is exempt from Japanese income tax with respect to such dividends under the income tax treaty applicable to such particular non-resident Holder, such non-resident Holder is required to submit an Application Form for Income Tax Convention Regarding Relief
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from Japanese Income Tax on Dividends in advance through Sony Corporation to the relevant tax authority before the payment of dividends. A standing proxy for non-resident Holders of a Japanese corporation may provide this application service. With respect to ADSs, this reduced rate or exemption is applicable if the Depositary or its agent submits two Application Forms (one before payment of dividends and the other within eight months after Sony Corporation’s fiscal year-end or semi-fiscal year-end). To claim this reduced rate or exemption, a non-resident Holder of ADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the Depositary. A non-resident Holder who is entitled, under an applicable income tax treaty, to a reduced rate which is lower than the withholding tax rate otherwise applicable under Japanese tax law or an exemption from the withholding tax, but failed to submit the required application in advance will be entitled to claim the refund of taxes withheld in excess of the rate under an applicable tax treaty (if such non-resident Holder is entitled to a reduced treaty rate under the applicable income tax treaty) or the full amount of tax withheld (if such non-resident Holder is entitled to an exemption under the applicable income tax treaty) from the relevant Japanese tax authority. Sony Corporation does not assume any responsibility to ensure withholding at the reduced treaty rate or to ensure not withholding for shareholders who would be eligible under any applicable income tax treaty but do not follow the required procedures as stated above.
      Gains derived from the sale of shares of Common Stock or ADSs of Sony Corporation outside Japan by a non-resident Holder holding such shares or ADSs as portfolio investors are, in general, not subject to Japanese income or corporation tax. U.S. holders are not subject to Japanese income or corporation tax with respect to such gains under the Treaty.
      Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired shares of Common Stock or ADSs of Sony Corporation as a legatee, heir or donee even though neither the individual nor the deceased nor donor is a Japanese resident.
      Holders of shares of Common Stock or ADSs of Sony Corporation should consult their tax advisors regarding the effect of these taxes and, in the case of U.S. holders, the possible application of the Estate and Gift Tax Treaty between the U.S. and Japan.
United States Taxation with respect to shares of Common Stock and ADSs
      The U.S. dollar amount of dividends received (prior to deduction of Japanese taxes) by a U.S. holder of ADSs or Common Stock will be includable in income as ordinary income for U.S. federal income tax purposes to the extent paid out of current or accumulated earnings and profits of Sony Corporation as determined for U.S. federal income tax purposes. Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2009 with respect to the ADSs or Common Stock will be subject to taxation at a maximum rate of 15 percent if the dividends are “qualified dividends.” Dividends paid on the Common Stock or ADSs will be treated as qualified dividends if Sony Corporation was not, in the year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid, (a) a passive foreign investment company (“PFIC”), or (b) for the dividend paid prior to the 2005 tax year, a foreign personal holding company (“FPHC”) or foreign investment company (“FIC”). Based on Sony Corporation’s audited financial statements and relevant market and shareholder data, Sony Corporation believes that it was not treated as a PFIC, FPHC or FIC for U.S. federal income tax purposes with respect to its 2003 or 2004 taxable year. In addition, based on Sony Corporation’s audited financial statements and Sony Corporation’s current expectations regarding the value and nature of its assets, the sources and nature of its income, and relevant market and shareholder data, Sony Corporation does not anticipate becoming a PFIC for the 2005 taxable year. The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs or Common Stock and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to treat dividends as qualified for tax reporting purposes. Because such procedures have not yet been issued, it is not clear whether Sony Corporation will be able to comply with them. Holders of ADSs and Common Stock should consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of the considerations discussed above and their own particular circumstances.
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      Subject to applicable limitations and special considerations discussed below, a U.S. holder of ADSs or Common Stock of Sony Corporation will be entitled to a credit for Japanese tax withheld in accordance with the Tax Convention from dividends paid by Sony Corporation. For purposes of the foreign tax credit limitation, dividends will be foreign source income, and will constitute “passive” or “financial services” income. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term of hedged positions and may not be allowed in respect of arrangements in which economic profit, after non-U.S. taxes, is insubstantial. Holders of Ads and Common Stock should consult their own tax advisors regarding the implications of these rules in light of their particular circumstances.
      Dividends paid by Sony Corporation to U.S. corporate holders of ADSs or Common Stock will not be eligible for the dividends-received deduction.
      In general, a U.S. holder will recognize capital gain or loss upon the sale or other disposition of ADSs or Common Stock equal to the difference between the amount realized on the sale or disposition and the U.S. holder’s tax basis in the ADSs or Common Stock. Such capital gain or loss will be long-term capital gain or loss if the ADSs or Common Stock have been held for more than one year on the date of the sale or disposition. The net amount of long-term capital gain recognized by an individual holder after May 5, 2003 and before January 1, 2009 generally is subject to taxation at a maximum rate of 15 percent. The net long-term capital gain recognized by an individual holder before May 6, 2003 or after December 31, 2008 generally is subject to taxation at a maximum rate of 20 percent.
Dividends and Paying Agent
      Not Applicable
Statement by Experts
      Not Applicable
Documents on Display
      It is possible to read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. You can also access the documents at the SEC’s home page (http://www.sec.gov/index.html).
Subsidiary Information
      Not Applicable
Item 11. Quantitative and Qualitative Disclosures about Market Risk
      Sony’s normal course of business is continuously exposed to market fluctuation, such as fluctuations in currency exchange rates, interest rates or stock prices. Sony utilizes several derivative instruments, such as foreign exchange forward contracts, foreign currency option contracts, interest rate swap agreements and currency swap agreements in order to hedge the potential downside risk on the cash flow from the normal course of business caused by market fluctuation. Sony uses foreign exchange forward contracts and foreign currency option contracts primarily to reduce the foreign exchange volatility risk that accounts receivable or accounts payable denominated in yen, U.S. dollars, euros or other currencies have through the normal course of Sony’s worldwide business. Interest rate swap agreements and currency swap agreements are utilized to diversify funding conditions or to reduce funding costs, and in Financial Services segment, these transactions are used for asset liability management. Sony uses these derivative financial instruments mainly for risk-hedging purposes as described above, and few derivative transactions, such as bond futures and bond options are held or utilized for trading purposes in Financial Services segment. If hedge accounting cannot be applied because the accounts receivables or accounts payables to be hedged are not yet booked, or because cash flows
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from derivative transactions do not coincide with the underlying exposures recorded on Sony’s balance sheet, then Sony understands that such derivatives agreements should be subject to a mark-to-market evaluation and their unrealized gains or losses are recognized in earnings. In addition, Sony holds marketable securities such as straight bonds, convertible bonds, and stocks in yen or other currencies in the Financial Services segment in order to obtain interest income or capital gain on the financial assets under management. Sony understands that such investment in marketable securities is also subjected to market fluctuation.
      Sony measures the economic impact of market fluctuations on the value of derivatives agreements and marketable securities by using Value-at-Risk (“VaR”) analysis in order to comply with Item 11 disclosure requirements. VaR in this context indicates the potential maximum amount of loss in fair value resulting from adverse market fluctuations for a selected period of time and at a selected level of confidence.
      The following table shows the results of VaR. These analyses for the fiscal year ended March 31, 2005 indicate the potential maximum loss in fair value as predicted by the VaR analysis resulting from market fluctuations in one day at a 95% confidence level. The VaR of currency exchange rate risk principally consists of risks arising from the volatility of the exchange rates between the yen and U.S. dollar and between the yen and the euro, the currencies in which a significant amount of financial assets and liabilities and derivative transactions are maintained on a consolidated basis. The VaR of interest rate risk and stock price risk consists of risks arising from the volatility of the interest rates and stock prices against trading securities in the Financial Services segment.
      The net VaR for Sony’s entire portfolio is smaller than the simple aggregate of VaR for each component of market risk. This is due to the fact that market risk factors such as currency exchange rates, interest rates, and stock prices are not completely independent, and potential profits and losses arising from each market risk may to some degree be mutually offsetting.
      The disclosed VaR amounts simply represents the calculated potential maximum loss on the specified date and does not necessarily indicate an estimate of actual or future loss.
Consolidated

June 30, September 30, December 30, March 31,
2004 2004 2004 2005

(Yen in billions)
Net VaR 3.5 1.7 2.3 1.9
VaR of currency exchange rate risk 1.1 0.8 0.7 0.6
VaR of interest rate risk 0.2 0.1 0.1 0.1
VaR of stock price risk 3.1 1.5 2.1 1.7
Financial Services

June 30, September 30, December 30, March 31,
2004 2004 2004 2005

(Yen in billions)
Net VaR 3.2 1.4 2.1 1.7
VaR of currency exchange rate risk 0.2 0.2 0.2 0.2
VaR of interest rate risk 0.2 0.1 0.1 0.1
VaR of stock price risk 3.1 1.5 2.1 1.7
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All other segments excluding Financial Services

June 30, September 30, December 30, March 31,
2004 2004 2004 2005

(Yen in billions)
Net VaR 1.0 0.8 0.6 0.5
VaR of currency exchange rate risk 1.0 0.8 0.6 0.5
VaR of interest rate risk 0.0 0.0 0.0 0.0
VaR of stock price risk 0.0 0.0 0.0 �� 0.0
Item 12. Description of Securities Other Than Equity Securities
      Not Applicable
Item 13. Defaults, Dividend Arrearages and Delinquencies
      None
Item 14. Material Modifications to the ~~effectiveness~~Rights of ~~any system~~Security Holders and Use of ~~disclosure controls~~Proceeds
      In June 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which is intended to be linked to the economic value of Sony Communication Network Corporation, a directly and indirectly wholly-owned subsidiary of Sony Corporation, which is engaged in Internet-related services. Regarding the rights of holders of Sony Corporation’s Common Stock and subsidiary tracking stock, refer to “Memorandum and Articles of Association” in “Item 10.Additional Information.”
Item 15. Controls and Procedures
      Sony has carried out an evaluation under the supervision and with the participation of Sony’s management, including the Group Chief Executive Officer, Group Chief Strategy Officer and Group Chief Financial Officer, of the effectiveness of the design and operation of Sony’s disclosure controls and procedures as of March 31, 2005. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon Sony’s evaluation, the Group Chief Executive Officer, Group Chief Strategy Officer and Group Chief Financial Officer have concluded that, as of March 31, 2005, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports Sony files and submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported as and when required.
      There has been no change in Sony’s internal control over financial reporting during the fiscal year ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, Sony’s internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
      Sony’s Board of Directors has determined that Mr. Yoshiaki Yamauchi and Mr. Akihisa Ohnishi each qualify as an “audit committee financial expert” as defined in this Item 16A.
Item 16B. Code of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon Sony’s evaluation,
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the Group Chief Executive Officer, Group Chief Strategy Officer and Group Chief Financial Officer have concluded that, as of March 31, 2004, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports Sony files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.Ethics
      Sony has adopted a code of ethics, as defined in Item 16B of Form 20-F under the Securities Exchange Act of 1934, as amended. The code of ethics applies to Sony’s chief executive officer, chief financial officer, chief accounting officer and persons performing similar functions, as well as to directors and all other officers and employees of Sony, as defined in the code of ethics. The code of ethics is available at
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http://www.sony.net/ SonyInfo/ Environment/management/code/qfhh7c0000000w8w-att/ codeofconduct.pdf
There has been no change in Sony’s internal control over financial reporting during the fiscal year ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, Sony’s internal control over financial reporting.
Item 16C.     Principal Accountant Fees and Services
Audit and Non-Audit Fees
~~Item 16.~~ ~~[Reserved]~~
~~Item 16A.~~ ~~Audit Committee Financial Expert~~
Sony’s Board of Directors has determined that Mr. Yoshiaki Yamauchi and Mr. Akihisa Ohnishi each qualify as an “audit committee financial expert” as defined in this Item 16A, and are both “independent” as defined in Rule 10A-3 under the Securities and Exchange Act of 1934, as amended.
~~Item 16B.~~ ~~Code of Ethics~~
Sony has adopted a code of ethics, as defined in Item 16B of Form 20-F under the Securities Exchange Act of 1934, as amended. The code of ethics applies to Sony’s chief executive officer, chief financial officer, chief accounting officer and persons performing similar functions, as well as to directors and all other officers and employees of Sony Group, as defined in the code of ethics. The code of ethics is available at~~http://www.sony.net/SonyInfo/Environment/management/code/pdf/code~~of~~conduct.pdf~~
~~Item 16C.~~ ~~Principal Accountant Fees and Services~~
~~Audit and Non-Audit Fees~~
~~PricewaterhouseCoopers has served as Sony’s principal accountant for the three fiscal years ended March 31, 2004.~~      ChuoAoyama PricewaterhouseCoopers is a member firm of PricewaterhouseCoopers in Japan. The following table presents fees for audit and other services rendered by PricewaterhouseCoopers for the years ended March 31, 2004 and March 31, 2005.

March 31

2004 2005

(Yen in millions)
Audit Fees 2,118 1,939
Audit-Related Fees(1) 284 570
Tax Fees(2) 970 737
All Other Fees(3) 150 68

3,522 3,314

(1) Audit-Related Fees consist primarily of employee benefit plan audits and due diligence related to mergers.
(2) Tax Fees primarily include tax compliance, tax advice, tax planning and expatriate tax services.
(3) All Other Fees comprise fees for all other services not included in any of the other categories noted above.
Audit Committee’s Pre-Approval Policies and Procedures
      Consistent with U.S. Securities and Exchange Commission rules regarding auditor independence, the Audit Committee of Sony Corporation is responsible for appointing, reviewing and setting compensation, retaining, and overseeing the work of Sony’s independent auditor, so that the auditor’s independence will not be impaired, including overseeing any separate firm that audits the financial statements of any subsidiary if Sony’s independent auditor expressly relies on the audit report of such firm. The Audit Committee has established a formal policy requiring pre-approval of all audit and permissible non-audit services provided by the independent auditor to Sony or any of its affiliates. The Audit Committee shall periodically review this policy with due regard to complying with laws and regulations of host countries where Sony is listed.
      Prior to the engagement of the independent auditor for the following fiscal year’s audit, management shall submit an application form to the Audit Committee for comprehensive pre-approval of all recurring services expected to be rendered during that year. In order to obtain comprehensive pre-approval, management shall provide sufficient information regarding each service so that each service can be classified into one of four categories (Audit, Audit-related, Tax, or All Other) as well as information regarding the fees expected to be budgeted for each service. Management shall describe each service in detail and indicate precisely and unambiguously the nature and scope of each particular service. Any additional services not contemplated in the application form shall require the Audit Committee’s separate pre-approval on an individual basis. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees from changes in the scope of services to be provided or other circumstances. The Audit Committee may delegate pre-approval authority to a full-time member of the Audit Committee. The full-time member must report any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Audit Committee or its designee shall establish procedures to assure that the independent auditor is aware in a timely manner of the services that have been pre-approved.
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Item 16D.     Exemptions From Listing Standards for Audit Committees
      Not applicable.
Item 16E.     Purchases of Equity Securities by the Issuer and Affiliated Purchasers
      The following table sets out information concerning purchases made by Sony during the fiscal year ended March 31, 2005.

(c) Total Number (d) Maximum
of Shares Number of Shares
(a) Total Purchased as Part that May Yet Be
Number of (b) Average of Publicly Purchased Under
Shares Price Paid Announced Plans the Plans or
Period Purchased per Share or Programs Programs

April 1st — 30th, 2005 5,532 4,461.48 N/A N/A
May 1st — 31st, 2005 3,448 4,087.27 N/A N/A
June 1st — 30th, 2005 7,476 4,040.85 N/A N/A
July 1st — 31st, 2005 7,284 4,021.33 N/A N/A
August 1st — 31st, 2005 4,464 3,752.49 N/A N/A
September 1st — 30th, 2005 6,530 3,837.16 N/A N/A
October 1st — 31st, 2005 7,131 3,772.45 N/A N/A
November 1st — 30th, 2005 12,726 3,749.51 N/A N/A
December 1st — 31st, 2005 21,959 3,874.00 N/A N/A
January 1st — 31st, 2005 8,355 3,963.88 N/A N/A
February 1st — 28th, 2005 6,133 3,905.57 N/A N/A
March 1st — 31st, 2005 13,847 4,232.54 N/A N/A
Total 104,885 3,960.99 N/A N/A
      Under the Commercial Code of Japan, a holder of shares constituting less than one full unit may require Sony Corporation to purchase such shares at their market value (See “Memorandum and Articles of Association — Capital stock —(Unit share system)” in “Item 10.Additional Information”). During the year ended March 31, 2005, Sony Corporation purchased 104,885 shares for a total purchase price of 415,448,110 yen upon such requests from holders of shares constituting less than one full unit.
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Item 17. Financial Statements
      Not applicable
Item 18. Financial Statements
      Refer to Consolidated Financial Statements.
Item 19.     Exhibits
      Documents filed as exhibits to this annual report:
1.1 Articles of Incorporation, including proposed amendments to be ratified at the Ordinary General Shareholders’ Meeting to be held on June 22, 2005 (English Translation)
1.2 Regulations of the Board of Directors, as amended, including an amendment to be effective as of June 22, 2005 (English Translation)
8.1 Significant subsidiaries (as defined in §210.1-02(w) of Regulation S-X) of Sony Corporation, including additional subsidiaries that management has deemed to be significant, as of March 31, 2005: Incorporated by reference to “Business Overview and Organizational Structure” in “Item 4. Information on the Company”
12.1 Principal Executive Officer Certification Required by 17 C.F.R. 240.13a-14(a)
12.2 Principal Financial Officer Certification Required by 17 C.F.R. 240.13a-14(a)
13 Chief Executive Officer Certification required by 18 U.S.C. Section 1350
Chief Financial Officer Certification required by 18 U.S.C. Section 1350
15.1 Consent of ChuoAoyama PricewaterhouseCoopers
128
SIGNATURES
      Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Sony Corporation
(Registrant)
By: /s/Katsumi Ihara
(Signature)
Katsumi Ihara
Executive Deputy President
Group Chief Strategy Officer &
Group Chief Financial Officer
Date: June 21, 2005
129
Consolidated Financial Statements
Sony Corporation and Consolidated Subsidiaries
March 31, 2005
(This page intentionally left blank)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Page
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets at March 31, 2004 and 2005
F-4
Consolidated Statements of Income for the years ended March 31, 2003, 2004 and ~~March 31, 2004.~~
March 31
2003 2004
Yen in millions
Audit Fees 1,690 2,118
Audit-Related Fees(1) 38 284
Tax Fees(2) 822 970
All Other Fees(3) 1,925 150

4,475 3,522

~~(1)~~ ~~Audit-Related Fees consist primarily of employee benefit plan audits and due diligence related to mergers.~~
~~(2)~~ ~~Tax Fees primarily include tax compliance, tax advice, tax planning and expatriate tax services.~~
~~(3)~~ All Other Fees comprise fees for all other services not included in any of the other categories noted above. These services for the year ended March 31, 2003 were primarily for system consulting and were incurred prior to the sale of PricewaterhouseCoopers’ consulting business to IBM Corporation in October 2002.
2005
~~Audit Committee’s Pre-Approval Policies and Procedures~~
     Consistent with U.S. Securities and Exchange Commission rules regarding auditor independence, the Audit Committee of Sony Corporation is responsible for appointing, reviewing and setting compensation,
~~125~~
retaining, and overseeing the work of Sony’s independent auditor, so that the auditor’s independence will not be impaired, including overseeing any separate firm that audits the financial statements of any subsidiary if Sony’s independent auditor expressly relies on the audit report of such firm. The Audit Committee has established a formal policy requiring pre-approval of all audit and permissible non-audit services provided by the independent auditor to Sony or any of its affiliates. The Audit Committee shall periodically review this policy with due regard to complying with laws and regulations of host countries where Sony is listed.
Prior to the engagement of the independent auditor for the following fiscal year’s audit, management shall submit an application form to the Audit Committee for comprehensive pre-approval of all recurring services expected to be rendered during that year. In order to obtain comprehensive pre-approval, management shall provide sufficient information regarding each service so that each service can be classified into one of four categories (Audit, Audit-related, Tax, or All Other) as well as information regarding the fees expected to be budgeted for each service. Management shall describe each service in detail and indicate precisely and unambiguously the nature and scope of each particular service. Any additional services not contemplated in the application form shall require the Audit Committee’s separate pre-approval on an individual basis. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees from changes in the scope of services to be provided or other circumstances. The Audit Committee may delegate pre-approval authority to a full-time member of the Audit Committee. The full-time member must report any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Audit Committee or its designee shall establish procedures to assure that the independent auditor is aware in a timely manner of the services that have been pre-approved.
~~Item 16D.~~ ~~Exemptions From Listing Standards for Audit Committees~~
~~Not applicable.~~
~~Item 16E.~~ ~~Purchases of Equity Securities by the Issuer and Affiliated Purchasers~~
~~Not yet applicable.~~
~~Item 17.~~ ~~Financial Statements~~
~~Not applicable~~
~~Item 18.~~ ~~Financial Statements~~
~~Refer to Consolidated Financial Statements.~~
~~Item 19.~~ ~~Exhibits~~
~~Documents filed as exhibits to this annual report:~~

1 .1 Articles of Incorporation, as amended (English Translation)
1 .2 Board of Directors Regulations (English Translation)
8 Significant subsidiaries (as defined in §210.1-02(w) of Regulation S-X) of Sony Corporation, including additional subsidiaries that management has deemed to be significant, as of March 31, 2004: Incorporated by reference to “Business Overview and Organizational Structure” in “Item 4.Information on the Company”
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
~~126~~
~~SIGNATURES~~
     Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
~~SONY CORPORATION~~
~~(Registrant)~~
~~By:~~ ~~/s/ KATSUMI IHARA~~
~~(Signature)~~
~~Katsumi Ihara~~
~~Executive Deputy President~~
~~Group Chief Strategy Officer &~~
~~Group Chief Financial Officer~~
~~By:~~ ~~/s/ TERUHISA TOKUNAKA~~
~~(Signature)~~
~~Teruhisa Tokunaka~~
~~Member of the Board of Directors~~
~~(Group Chief Strategy Officer until~~
~~June 22, 2004)~~
~~By:~~ ~~/s/ TAKAO YUHARA~~
~~(Signature)~~
~~Takao Yuhara~~
~~Corporate Senior Vice President~~
~~(Group Chief Financial Officer until~~
~~June 22, 2004)~~
~~Date: June 22, 2004~~
~~127~~
~~Consolidated Financial Statements~~
~~Sony Corporation and Consolidated Subsidiaries~~
~~March 31, 2004~~
~~INDEX TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~Page~~
~~Report of Independent Registered Public Accounting Firm~~
~~F-2~~
~~Consolidated Balance Sheets at March 31, 2003 and 2004~~
~~F-4~~
~~Consolidated Statements of Income for the years ended March 31, 2002, 2003 and 2004~~
F-6
Consolidated Statements of Cash Flows for the years ended ~~March 31, 2002, 2003 and 2004~~
~~F-8~~
~~Consolidated Statements of Changes in Stockholders’ Equity for the years ended March 31, 2002, 2003 and 2004~~
~~F-10~~
~~Index to Notes to Consolidated Financial Statements~~
~~F-13~~
~~Notes to Consolidated Financial Statements~~
~~F-14~~
~~Financial Statement Schedule II for the years ended March 31, 2002, 2003 and 2004 — Valuation and Qualifying Accounts~~
~~F-73~~
     ~~All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.~~
     Financial statements of majority-owned subsidiaries of the registrant not consolidated and of 50% or less owned persons accounted for by the equity method have been omitted because the registrant’s proportionate share of the income from continuing operations before income taxes, and total assets of each such company is less than 20% of the respective consolidated amounts, and the investment in and advances to each company is less than 20% of consolidated total assets.
~~F-1~~
~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~
~~To the Stockholders and Board of Directors of~~
~~Sony Corporation (Sony Kabushiki Kaisha)~~
     In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Sony Corporation and its subsidiaries (“the Company”) at March 31, 2003, ~~and~~ 2004 and 2005
F-8
Consolidated Statements of Changes in Stockholders’ Equity for the ~~results of their operations and their cash flows for each of the three~~ years ~~in the period~~ ended March 31, 2003, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and ~~financial statement schedule are the responsibility of the Company’s management. Our responsibility is~~2005
F-10
Index to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
     As discussed in Note 2 to the consolidated financial statements, the Company changed its methods of accounting for derivative instruments and hedging activities and for goodwill and other intangible assets in the year ended March 31, 2002, and its method of accounting for variable interest entities in the year ended March 31, 2004.
~~/s/ CHUOAOYAMA PRICEWATERHOUSECOOPERS~~
~~Tokyo, Japan~~
~~May 20, 2004~~
~~F-2~~
~~(This page intentionally left blank)~~
~~F-3~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~CONSOLIDATED BALANCE SHEETS~~

March 31
2003 2004
(Yen in millions)
ASSETS
Current assets:

Cash and cash equivalents 713,058 849,211
Time deposits 3,689 4,662
Marketable securities 241,520 274,748
Notes and accounts receivable, trade 1,117,889 1,123,863
Allowance for doubtful accounts and sales returns (110,494 ) (112,674 )
Inventories 625,727 666,507
Deferred income taxes 143,999 125,532
Prepaid expenses and other current assets 418,826 431,506

Total current assets 3,154,214 3,363,355

Film costs 287,778 256,740

Investments and advances:

Affiliated companies 111,510 86,253
Securities investments and other 1,882,613 2,426,697

1,994,123 2,512,950

Property, plant and equipment:

Land 188,365 189,785
Buildings 872,228 930,983
Machinery and equipment 2,054,219 2,053,085
Construction in progress 60,383 98,480

3,175,195 3,272,333
Less — Accumulated depreciation 1,896,845 1,907,289

1,278,350 1,365,044

Other assets:

Intangibles, net 258,624 248,010
Goodwill 290,127 277,870
Deferred insurance acquisition costs 327,869 349,194
Deferred income taxes 328,091 203,203
Other 451,369 514,296

1,656,080 1,592,573

8,370,545 9,090,662

~~(Continued on following page.)~~
~~F-4~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~CONSOLIDATED BALANCE SHEETS — (Continued)~~

March 31
2003 2004
(Yen in millions)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Short-term borrowings 124,360 91,260
Current portion of long-term debt 34,385 383,757
Notes and accounts payable, trade 697,385 778,773
Accounts payable, other and accrued expenses 864,188 812,175
Accrued income and other taxes 109,199 57,913
Deposits from customers in the banking business 248,721 378,851
Other 356,810 479,486

Total current liabilities 2,435,048 2,982,215

Long-term liabilities:

Long-term debt 807,439 777,649
Accrued pension and severance costs 496,174 368,382
Deferred income taxes 159,079 96,193
Future insurance policy benefits and other 1,914,410 2,178,626
Other 255,478 286,737

3,632,580 3,707,587

Minority interest in consolidated subsidiaries
22,022 22,858

Stockholders’ equity:

Subsidiary tracking stock, no par value —
Authorized 100,000,000 shares, outstanding 3,072,000 shares 3,917 3,917
Common stock, no par value —
2003 — Authorized 3,500,000,000 shares, outstanding 922,385,176 shares 472,361
2004 — Authorized 3,500,000,000 shares, outstanding 926,418,280 shares 476,350
Additional paid-in capital 984,196 992,817
Retained earnings 1,301,740 1,367,060
Accumulated other comprehensive income —
Unrealized gains on securities 17,658 69,950
Unrealized losses on derivative instruments (4,793 ) (600 )
Minimum pension liability adjustment (182,676 ) (89,261 )
Foreign currency translation adjustments (302,167 ) (430,048 )

(471,978 ) (449,959 )
Treasury stock, at cost
(2003 — 1,573,396 shares, 2004 — 2,468,258 shares) (9,341 ) (12,183 )

2,280,895 2,378,002

Commitments and contingent liabilities

8,370,545 9,090,662

~~The accompanying notes are an integral part of these statements.~~
~~F-5~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~CONSOLIDATED STATEMENTS OF INCOME~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Sales and operating revenue:

Net sales 7,058,755 6,916,042 6,883,478
Financial service revenue 480,190 509,398 565,752
Other operating revenue 39,313 48,193 47,161

7,578,258 7,473,633 7,496,391

Costs and expenses:

Cost of sales 5,239,592 4,979,421 5,058,205
Selling, general and administrative 1,695,897 1,782,367 1,798,239
Financial service expenses 458,276 486,464 505,550
Loss on sale, disposal or impairment of assets, net 49,862 39,941 35,495

7,443,627 7,288,193 7,397,489

Operating income
134,631 185,440 98,902

Other income:

Interest and dividends 16,021 14,441 18,756
Royalty income 33,512 32,375 34,244
Foreign exchange gain, net — 1,928 18,059
Gain on sales of securities investments, net 1,398 72,552 11,774
Gain on issuances of stock by subsidiaries and equity investees 503 — 4,870
Other 44,894 36,232 34,587

96,328 157,528 122,290

Other expenses:

Interest 36,436 27,314 27,849
Loss on devaluation of securities investments 18,458 23,198 16,481
Foreign exchange loss, net 31,736 — —
Other 51,554 44,835 32,795

138,184 95,347 77,125

Income before income taxes
92,775 247,621 144,067

Income taxes:

Current 114,930 178,847 87,219
Deferred (49,719 ) (98,016 ) (34,445 )

65,211 80,831 52,774

~~(Continued on following page.)~~
~~F-6~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~CONSOLIDATED STATEMENTS OF INCOME — (Continued)~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Income before minority interest, equity in net income (loss) of affiliated companies and cumulative effect of accounting changes
27,564 166,790 91,293
Minority interest in income (loss)of consolidated subsidiaries (16,240 ) 6,581 2,379
Equity in net income (loss) of affiliated companies (34,472 ) (44,690 ) 1,714

Income before cumulative effect of accounting changes 9,332 115,519 90,628

Cumulative effect of accounting changes
(2002: Net of income taxes of ¥2,975 million
2004: Net of income taxes of ¥0 million) 5,978 — (2,117 )

Net income
15,310 115,519 88,511

Per share data:

Common stock
Income before cumulative effect of accounting changes
— Basic 10.21 125.74 98.26
— Diluted 10.18 118.21 93.00
Cumulative effect of accounting changes
— Basic 6.51 — (2.29 )
— Diluted 6.49 — (2.12 )
Net income
— Basic 16.72 125.74 95.97
— Diluted 16.67 118.21 90.88
Cash dividends 25.00 25.00 25.00
Subsidiary tracking stock
Net income (loss)
— Basic (15.87 ) (41.98 ) (41.80 )
Cash dividends — — —

~~The accompanying notes are an integral part of these statements.~~
~~F-7~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Cash flows from operating activities:

Net income 15,310 115,519 88,511
Adjustments to reconcile net income to net cash provided by operating activities —
Depreciation and amortization, including amortization of deferred insurance acquisition costs 354,135 351,925 366,269
Amortization of film costs 242,614 312,054 305,786
Accrual for pension and severance costs, less payments 14,995 37,858 35,562
Loss on sale, disposal or impairment of assets, net 49,862 39,941 35,495
Gain on sales of securities investments, net (1,398 ) (72,552 ) (11,774 )
Gain on issuances of stock by subsidiaries and equity investees (503 ) — (4,870 )
Deferred income taxes (49,719 ) (98,016 ) (34,445 )
Equity in net (income) losses of affiliated companies, net of dividends 37,537 46,692 1,732
Cumulative effect of accounting changes (5,978 ) — 2,117
Changes in assets and liabilities:
(Increase) decrease in notes and accounts receivable, trade 111,301 174,679 (63,010 )
(Increase) decrease in inventories 290,872 36,039 (78,656 )
Increase in film costs (236,072 ) (317,953 ) (299,843 )
Increase (decrease) in notes and accounts payable, trade (172,626 ) (58,384 ) 93,950
Increase (decrease) in accrued income and other taxes (39,589 ) 14,637 (46,067 )
Increase in future insurance policy benefits and other 314,405 233,992 264,216
Increase in deferred insurance acquisition costs (71,522 ) (66,091 ) (71,219 )
Increase in marketable securities held in the insurance business for trading purpose (55,661 ) — —
(Increase) decrease in other current assets 5,543 29,095 (34,991 )
Increase (decrease) in other current liabilities (19,418 ) 26,205 44,772
Other (46,492 ) 48,148 39,100

Net cash provided by operating activities 737,596 853,788 632,635

~~(Continued on following page.)~~
~~F-8~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Cash flows from investing activities:

Payments for purchases of fixed assets (388,514 ) (275,285 ) (427,344 )
Proceeds from sales of fixed assets 37,434 25,711 33,987
Payments for investments and advances by financial service business (689,944 ) (1,012,508 ) (1,167,945 )
Payments for investments and advances
(other than financial service business) (106,396 ) (123,839 ) (33,329 )
Proceeds from sales of securities investments, maturities of marketable securities and collections of advances by financial service business 330,239 529,395 791,188
Proceeds from sales of securities investments, maturities of marketable securities and collections of advances (other than financial service business) 48,842 148,977 35,521
(Increase) decrease in time deposits 1,222 1,124 (1,456 )
Cash assumed upon acquisition by stock exchange offering — — 3,634
Proceeds from the issuance of stock by subsidiaries — — 3,952

Net cash used in investing activities (767,117 ) (706,425 ) (761,792 )

Cash flows from financing activities:

Proceeds from issuance of long-term debt 228,999 12,323 267,864
Payments of long-term debt (171,739 ) (238,144 ) (32,042 )
Decrease in short-term borrowings (78,104 ) (7,970 ) (57,708 )
Increase in deposits from customers in the banking business 106,472 142,023 129,874
Proceeds from issuance of subsidiary tracking stock 9,529 — —
Dividends paid (22,951 ) (22,871 ) (23,106 )
Other 12,834 21,505 28,401

Net cash provided by (used in) financing activities 85,040 (93,134 ) 313,283

Effect of exchange rate changes on cash and cash equivalents 21,036 (24,971 ) (47,973 )

Net increase in cash and cash equivalents 76,555 29,258 136,153
Cash and cash equivalents at beginning of the fiscal year 607,245 683,800 713,058

Cash and cash equivalents at end of the fiscal year 683,800 713,058 849,211

Supplemental data:

Cash paid during the year for —
Income taxes 148,154 171,531 114,781
Interest 35,371 22,216 22,571

Non-cash investing and financing activities —
Obtaining assets by entering into capital lease 10,572 9,034 18,298
Contribution of assets into an affiliated company 10,545 — —

~~The accompanying notes are an integral part of these statements.~~
~~F-9~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY~~

Year Ended March 31
Accumulated
Subsidiary Additional other Treasury
tracking Common Paid-In Retained comprehensive stock,
Stock Stock Capital earnings income at cost Total
(Yen in millions)
Balance at March 31, 2001 — 472,002 962,401 1,217,110 (328,567 ) (7,493 ) 2,315,453
Exercise of stock purchase warrants 26 26 52
Conversion of convertible bonds 161 162 323
Issuance of subsidiary tracking stock 3,917 5,612 9,529
Comprehensive income:
Net income 15,310 15,310
Other comprehensive income, net of tax —
Unrealized gains on securities:
Unrealized holding gains or losses arising during the period (20,243 ) (20,243 )
Less: Reclassification adjustment for gains or losses included in net income (1,276 ) (1,276 )
Unrealized losses on derivative instruments:
Cumulative effect of an accounting change 1,089 1,089
Unrealized holding gains or losses arising during the period 2,437 2,437
Less: Reclassification adjustment for gains or losses included in net income (4,237 ) (4,237 )
Minimum pension liability adjustment (22,228 ) (22,228 )
Foreign currency translation adjustments 97,432 97,432

Total comprehensive income 68,284

Stock issue costs, net of tax (166 ) (166 )
Dividends declared (22,992 ) (22,992 )
Purchase of treasury stock (468 ) (468 )
Reissuance of treasury stock 22 373 395

Balance at March 31, 2002 3,917 472,189 968,223 1,209,262 (275,593 ) (7,588 ) 2,370,410

~~(Continued on following page.)~~
~~F-10~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)~~

Year Ended March 31
Accumulated
Subsidiary Additional other Treasury
tracking Common Paid-In Retained comprehensive stock,
Stock Stock Capital earnings income at cost Total
(Yen in millions)
Balance at March 31, 2002 3,917 472,189 968,223 1,209,262 (275,593 ) (7,588 ) 2,370,410
Conversion of convertible bonds 172 172 344
Stock issued under exchange offering 15,791 15,791
Comprehensive income:
Net income 115,519 115,519
Other comprehensive income, net of tax —
Unrealized gains on securities:
Unrealized holding gains or losses arising during the period (9,627 ) (9,627 )
Less: Reclassification adjustment for gains or losses included in net income 4,288 4,288
Unrealized losses on derivative instruments:
Unrealized holding gains or losses arising during the period (4,477 ) (4,477 )
Less: Reclassification adjustment for gains or losses included in net income 395 395
Minimum pension liability adjustment (110,636 ) (110,636 )
Foreign currency translation adjustments:
Translation adjustments arising during the period (83,993 ) (83,993 )
Less: Reclassification adjustment for losses included in net income 7,665 7,665

Total comprehensive income (80,866 )

Stock issue costs, net of tax (19 ) (19 )
Dividends declared (23,022 ) (23,022 )
Purchase of treasury stock (1,817 ) (1,817 )
Reissuance of treasury stock 10 64 74

Balance at March 31, 2003 3,917 472,361 984,196 1,301,740 (471,978 ) (9,341 ) 2,280,895

~~(Continued on following page.)~~
~~F-11~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)~~

Year Ended March 31
Accumulated
Subsidiary Additional other Treasury
tracking Common Paid-In Retained comprehensive stock,
Stock Stock Capital earnings income at cost Total
(Yen in millions)
Balance at March 31, 2003 3,917 472,361 984,196 1,301,740 (471,978 ) (9,341 ) 2,280,895
Conversion of convertible bonds 3,989 3,988 7,977
Stock issued under exchange offering 5,409 5,409
Comprehensive income:
Net income 88,511 88,511
Other comprehensive income, net of tax —
Unrealized gains on securities:
Unrealized holding gains or losses arising during the period 57,971 57,971
Less: Reclassification adjustment for gains or losses included in net income (5,679 ) (5,679 )
Unrealized losses on derivative instruments:
Unrealized holding gains or losses arising during the period 7,537 7,537
Less: Reclassification adjustment for gains or losses included in net income (3,344 ) (3,344 )
Minimum pension liability adjustment 93,415 93,415
Foreign currency translation adjustments:
Translation adjustments arising during the period (129,113 ) (129,113 )
Less: Reclassification adjustment for losses included in net income 1,232 1,232

Total comprehensive income 110,530

Stock issue costs, net of tax (53 ) (53 )
Dividends declared (23,138 ) (23,138 )
Purchase of treasury stock (8,523 ) (8,523 )
Reissuance of treasury stock (776 ) 5,681 4,905

Balance at March 31, 2004 3,917 476,350 992,817 1,367,060 (449,959 ) (12,183 ) 2,378,002

~~F-12~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
Notes to Consolidated Financial Statements
F-13
Notes to Consolidated Financial Statements
F-14
Financial Statement Schedule II for the years ended March 31, 2003, 2004 and 2005 — Valuation and Qualifying Accounts
F-75
~~Page~~
      All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
      Financial statements of majority-owned subsidiaries of the registrant not consolidated and of 50% or less owned persons accounted for by the equity method have been omitted because the registrant’s proportionate share of the income from continuing operations before income taxes, and total assets of each such company is less than 20% of the respective consolidated amounts, and the investment in and advances to each company is less than 20% of consolidated total assets.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Sony Corporation (Sony Kabushiki Kaisha)
      In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Sony Corporation and its subsidiaries (“the Company”) at March 31, 2004 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2005, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
      As discussed in Note 2 to the consolidated financial statements, the Company changed its methods of accounting for long-duration life insurance contracts and separate accounts and its treatment of the effects of contingently convertible instruments on diluted earnings per share in the year ended March 31, 2005.
/s/ChuoAoyama PricewaterhouseCoopers
1. ~~Nature of operations~~ ~~F-14~~
2. ~~Summary of significant accounting policies~~ ~~F-17~~
3. ~~Inventories~~ ~~F-25~~
4. ~~Film costs~~ ~~F-26~~
5. ~~Related party transactions~~ ~~F-26~~
6. ~~Marketable securities and securities investments and other~~ ~~F-28~~
7. ~~Leased assets~~ ~~F-30~~
8. ~~Goodwill and intangible assets~~ ~~F-31~~
9. ~~Insurance-related accounts~~ ~~F-33~~
~~10.~~ ~~Short-term borrowings and long-term debt~~ ~~F-34~~
~~11.~~ ~~Deposits from customers in the banking business~~ ~~F-37~~
~~12.~~ ~~Financial instruments~~ ~~F-37~~
~~13.~~ ~~Pension and severance plans~~ ~~F-40~~
~~14.~~ ~~Stockholders’ equity~~ ~~F-45~~
~~15.~~ ~~Stock-based compensation plans~~ ~~F-50~~
~~16.~~ ~~Restructuring charges and asset impairments~~ ~~F-53~~
~~17.~~ ~~Research and development costs, advertising costs and shipping and handling costs~~ ~~F-58~~
~~18.~~ ~~Gain on issuances of stock by subsidiaries and equity investees~~ ~~F-59~~
~~19.~~ ~~Income taxes~~ ~~F-59~~
~~20.~~ ~~Reconciliation of the differences between basic and diluted net income per share (“EPS”)~~ ~~F-62~~
Tokyo, Japan
May 27, 2005
F-2
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F-3
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

Year Ended March 31

2004 2005

(Yen in millions)
ASSETS
Current assets:

Cash and cash equivalents 849,211 779,103
Time deposits 4,662 1,492
Marketable securities 274,748 460,202
Notes and accounts receivable, trade 1,123,863 1,113,071
Allowance for doubtful accounts and sales returns (112,674 ) (87,709 )
Inventories 666,507 631,349
Deferred income taxes 125,532 141,154
Prepaid expenses and other current assets 431,506 517,509

Total current assets 3,363,355 3,556,171

Film costs 256,740 278,961

Investments and advances:

Affiliated companies 86,253 252,905
Securities investments and other 2,426,697 2,492,784

2,512,950 2,745,689

Property, plant and equipment

Land 189,785 182,900
Buildings 930,983 925,796
Machinery and equipment 2,053,085 2,192,038
Construction in progress 98,480 92,611

3,272,333 3,393,345
Less — Accumulated depreciation 1,907,289 2,020,946

1,365,044 1,372,399

Other assets:

Intangibles, net 248,010 187,024
Goodwill 277,870 283,923
Deferred insurance acquisition costs 349,194 374,805
Deferred income taxes 203,203 240,396
Other 514,296 459,732

1,592,573 1,545,880

9,090,662 9,499,100

(Continued on following page.)
F-4
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET — (Continued)

Year Ended March 31

2004 2005

(Yen in millions)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Short-term borrowings 91,260 63,396
Current portion of long-term debt 383,757 166,870
Notes and accounts payable, trade 778,773 806,044
Accounts payable, other and accrued expenses 812,175 746,466
Accrued income and other taxes 57,913 55,651
Deposits from customers in the banking business 378,851 546,718
Other 479,486 424,223

Total current liabilities 2,982,215 2,809,368

Long-term liabilities:

Long-term debt 777,649 678,992
Accrued pension and severance costs 368,382 352,402
Deferred income taxes 96,193 72,227
Future insurance policy benefits and other 2,178,626 2,464,295
Other 286,737 227,631

3,707,587 3,795,547

Minority interest in consolidated subsidiaries
22,858 23,847

Stockholders’ equity:

Subsidiary tracking stock, no par value —
Authorized 100,000,000 shares, outstanding 3,072,000 shares 3,917 3,917
Common stock, no par value —
2004 — Authorized 3,500,000,000 shares, outstanding 926,418,280 shares 476,350
2005 — Authorized 3,500,000,000 shares, outstanding 997,211,213 shares 617,792
Additional paid-in capital 992,817 1,134,222
Retained earnings 1,367,060 1,506,082
Accumulated other comprehensive income —
Unrealized gains on securities 69,950 62,669
Unrealized losses on derivative instruments (600 ) (2,490 )
Minimum pension liability adjustment (89,261 ) (90,030 )
Foreign currency translation adjustments (430,048 ) (355,824 )

(449,959 ) (385,675 )
Treasury stock, at cost
Subsidiary tracking stock
(2004 — 0 shares, 2005 — 32 shares) — (0 )
Common stock
(2004 — 2,468,258 shares, 2005 — 1,118,984 shares) (12,183 ) (6,000 )

2,378,002 2,870,338

Commitments and contingent liabilities

9,090,662 9,499,100

The accompanying notes are an integral part of these statements.
F-5
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

Year Ended March 31

2003 2004 2005

(Yen in millions)
Sales and operating revenue:

Net sales 6,916,042 6,883,478 6,565,010
Financial service revenue 509,398 565,752 537,715
Other operating revenue 48,193 47,161 56,891

7,473,633 7,496,391 7,159,616

Costs and expenses:

Cost of sales 4,979,421 5,058,205 5,000,112
Selling, general and administrative 1,782,367 1,798,239 1,535,015
Financial service expenses 486,464 505,550 482,576
Loss on sale, disposal or impairment of assets, net 39,941 35,495 27,994

7,288,193 7,397,489 7,045,697

Operating income
185,440 98,902 113,919

Other income:

Interest and dividends 14,441 18,756 14,708
Royalty income 32,375 34,244 31,709
Foreign exchange gain, net 1,928 18,059 —
Gain on sale of securities investments, net 72,552 11,774 5,437
Gain on change in interest in subsidiaries and equity investees — 4,870 16,322
Other 36,232 34,587 29,447

157,528 122,290 97,623

Other expenses:

Interest 27,314 27,849 24,578
Loss on devaluation of securities investments 23,198 16,481 3,715
Foreign exchange loss, net — — 524
Other 44,835 32,795 25,518

95,347 77,125 54,335

Income before income taxes
247,621 144,067 157,207

Income taxes:

Current 178,847 87,219 85,510
Deferred (98,016 ) (34,445 ) (69,466 )

80,831 52,774 16,044

(Continued on following page.)
F-6
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME — (Continued)

Year Ended March 31

2003 2004 2005

(Yen in millions)
Income before minority interest, equity in net income (loss) of affiliated companies and cumulative effect of an accounting change
166,790 91,293 141,163
Minority interest in income of consolidated subsidiaries 6,581 2,379 1,651
Equity in net income (loss) of affiliated companies (44,690 ) 1,714 29,039

Income before cumulative effect of an accounting change
115,519 90,628 168,551

Cumulative effect of an accounting change
(2004: Net of income taxes of 0 million 2005: Net of income taxes of 2,675 million) — (2,117 ) (4,713 )

Net income
115,519 88,511 163,838

Per share data:

Common stock
Income before cumulative effect of an accounting change
— Basic 125.74 98.26 180.96
— Diluted 118.21 89.03 162.59
Cumulative effect of an accounting change
— Basic — (2.29 ) (5.06 )
— Diluted — (2.03 ) (4.52 )
Net income
— Basic 125.74 95.97 175.90
— Diluted 118.21 87.00 158.07
Cash dividends 25.00 25.00 25.00
Subsidiary tracking stock
Net income (loss)
— Basic (41.98 ) (41.80 ) 17.21

The accompanying notes are an integral part of these statements.
F-7
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended March 31

2003 2004 2005

(Yen in millions)
Cash flows from operating activities:

Net income 115,519 88,511 163,838
Adjustments to reconcile net income to net cash provided by operating activities —
Depreciation and amortization, including amortization of deferred insurance acquisition costs 351,925 366,269 372,865
Amortization of film costs 312,054 305,786 276,320
Accrual for pension and severance costs, less payments 37,858 35,562 22,837
Loss on sale, disposal or impairment of assets, net 39,941 35,495 27,994
Gain on sale or loss on devaluation of securities investments, net (49,354 ) 4,707 (1,722 )
Gain on change in interest in subsidiaries and equity investees — (4,870 ) (16,322 )
Deferred income taxes (98,016 ) (34,445 ) (69,466 )
Equity in net (income) losses of affiliated companies, net of dividends 46,692 1,732 (15,648 )
Cumulative effect of an accounting change — 2,117 4,713
Changes in assets and liabilities:
(Increase) decrease in notes and accounts receivable, trade 174,679 (63,010 ) (22,056 )
(Increase) decrease in inventories 36,039 (78,656 ) 34,128
Increase in film costs (317,953 ) (299,843 ) (294,272 )
Increase (decrease) in notes and accounts payable, trade (58,384 ) 93,950 31,473
Increase (decrease) in accrued income and other taxes 14,637 (46,067 ) 3
Increase in future insurance policy benefits and other 233,992 264,216 144,143
Increase in deferred insurance acquisition costs (66,091 ) (71,219 ) (65,051 )
(Increase) decrease in marketable securities held in the financial service business for trading purpose — 369 (28,524 )
(Increase) decrease in other current assets 29,095 (34,991 ) (29,699 )
Increase in other current liabilities 26,205 44,772 46,545
Other 24,950 22,250 64,898

Net cash provided by operating activities 853,788 632,635 646,997

(Continued on following page.)
F-8
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

Year Ended March 31

2003 2004 2005

(Yen in millions)
Cash flows from investing activities:

Payments for purchases of fixed assets (275,285 ) (427,344 ) (453,445 )
Proceeds from sales of fixed assets 25,711 33,987 34,184
Payments for investments and advances by financial service business (1,012,508 ) (1,167,945 ) (1,309,092 )
Payments for investments and advances (other than financial service business) (123,839 ) (33,329 ) (158,151 )
Proceeds from maturities of marketable securities, sales of securities investments and collections of advances by financial service business 529,395 791,188 923,593
Proceeds from maturities of marketable securities, sales of securities investments and collections of advances (other than financial service business) 148,977 35,521 25,849
Other 1,124 6,130 5,890

Net cash used in investing activities (706,425 ) (761,792 ) (931,172 )

Cash flows from financing activities:

Proceeds from issuance of long-term debt 12,323 267,864 57,232
Payments of long-term debt (238,144 ) (32,042 ) (94,862 )
Increase (decrease) in short-term borrowings (7,970 ) (57,708 ) 11,397
Increase in deposits from customers in the financial service business 142,023 129,874 294,352
Increase (decrease) in call money and bills sold in the banking business 24,700 30,300 (40,400 )
Dividends paid (22,871 ) (23,106 ) (22,978 )
Other (3,195 ) (1,899 ) 436

Net cash provided by (used in) financing activities (93,134 ) 313,283 205,177

Effect of exchange rate changes on cash and cash equivalents (24,971 ) (47,973 ) 8,890

Net increase (decrease) in cash and cash equivalents 29,258 136,153 (70,108 )
Cash and cash equivalents at beginning of the fiscal year 683,800 713,058 849,211

Cash and cash equivalents at end of the fiscal year 713,058 849,211 779,103

Supplemental data:

Cash paid during the year for —
Income taxes 171,531 114,781 65,477
Interest 22,216 22,571 18,187

Non-cash investing and financing activities —
Conversion of convertible bonds 344 7,977 282,744
Obtaining assets by entering into capital lease 9,034 18,298 19,049
Contribution of Net assets into the Joint Venture with Bertelsmann AG — — 9,402

The accompanying notes are an integral part of these statements..
F-9
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Year Ended March 31

Accumulated
Subsidiary Additional other Treasury
tracking Common paid-in Retained comprehensive stock, at
stock stock capital earnings income cost Total

(Yen in millions)
Balance at March 31, 2002 3,917 472,189 968,223 1,209,262 (275,593 ) (7,588 ) 2,370,410
Conversion of convertible bonds 172 172 344
Stock issued under exchange offering 15,791 15,791
Comprehensive income:
Net income 115,519 115,519
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains or losses arising during the period (9,627 ) (9,627 )
Less: Reclassification adjustment for gains or losses included in net income 4,288 4,288
Unrealized losses on derivative instruments:
Unrealized holding gains or losses arising during the period (4,477 ) (4,477 )
Less: Reclassification adjustment for gains or losses included in net income 395 395
Minimum pension liability adjustment (110,636 ) (110,636 )
Foreign currency translation adjustments:
Translation adjustments arising during the period (83,993 ) (83,993 )
Less: Reclassification adjustment for losses included in net income 7,665 7,665

Total comprehensive income (80,866 )

Stock issue costs, net of tax (19 ) (19 )
Dividends declared (23,022 ) (23,022 )
Purchase of treasury stock (1,817 ) (1,817 )
Reissuance of treasury stock 10 64 74

Balance at March 31, 2003 3,917 472,361 984,196 1,301,740 (471,978 ) (9,341 ) 2,280,895

(Continued on following page.)
F-10
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)

Year Ended March 31

Accumulated
Subsidiary Additional other Treasury
tracking Common paid-in Retained comprehensive stock, at
stock stock capital earnings income cost Total

(Yen in millions)
Balance at March 31, 2003 3,917 472,361 984,196 1,301,740 (471,978 ) (9,341 ) 2,280,895
Conversion of convertible bonds 3,989 3,988 7,977
Stock issued under exchange offering 5,409 5,409

Comprehensive income:
Net income 88,511 88,511
Other comprehensive income, net of tax —
Unrealized gains on securities:
Unrealized holding gains or losses arising during the period 57,971 57,971
Less: Reclassification adjustment for gains or losses included in net income (5,679 ) (5,679 )
Unrealized losses on derivative instruments:
Unrealized holding gains or losses arising during the period 7,537 7,537
Less: Reclassification adjustment for gains or losses included in net income (3,344 ) (3,344 )
Minimum pension liability adjustment 93,415 93,415
Foreign currency translation adjustments:
Translation adjustments arising during the period (129,113 ) (129,113 )
Less: Reclassification adjustment for losses included in net income 1,232 1,232

Total comprehensive income 110,530

Stock issue costs, net of tax (53 ) (53 )
Dividends declared (23,138 ) (23,138 )
Purchase of treasury stock (8,523 ) (8,523 )
Reissuance of treasury stock (776 ) 5,681 4,905

Balance at March 31, 2004 3,917 476,350 992,817 1,367,060 (449,959 ) (12,183 ) 2,378,002

(Continued on following page.)
F-11
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)

Year Ended March 31

Accumulated
Subsidiary Additional other Treasury
tracking Common paid-in Retained comprehensive stock, at
stock stock capital earnings income cost Total

(Yen in millions)
Balance at March 31, 2004 3,917 476,350 992,817 1,367,060 (449,959 ) (12,183 ) 2,378,002
Exercise of stock acquisition rights 52 53 105
Conversion of convertible bonds 141,390 141,354 282,744
Stock based compensation 340 340

Comprehensive income:
Net income 163,838 163,838
Other comprehensive income, net of tax —
Unrealized gains on securities:
Unrealized holding gains or losses arising during the period 5,643 5,643
Less: Reclassification adjustment for gains or losses included in net income (12,924 ) (12,924 )
Unrealized losses on derivative instruments:
Unrealized holding gains or losses arising during the period (209 ) (209 )
Less: Reclassification adjustment for gains or losses included in net income (1,681 ) (1,681 )
Minimum pension liability adjustment (769 ) (769 )
Foreign currency translation adjustments:
Translation adjustments arising during the period 74,224 74,224

Total comprehensive income 228,122

Stock issue costs, net of tax (541 ) (541 )
Dividends declared (24,030 ) (24,030 )
Purchase of treasury stock (416 ) (416 )
Reissuance of treasury stock (342 ) (245 ) 6,599 6,012

Balance at March 31, 2005 3,917 617,792 1,134,222 1,506,082 (385,675 ) (6,000 ) 2,870,338

F-12
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements
Page
1. Nature of operations F-14
2. Summary of significant accounting policies F-14
3. Inventories F-25
4. Film costs F-25
5. Related party transactions F-25
6. Accounts receivable securitization programs F-28
7. Marketable securities and securities investments and other F-29
8. Leased assets F-30
9. Goodwill and intangible assets F-31
10. Insurance-related accounts F-33
11. Short-term borrowings and long-term debt F-35
12. Deposits from customers in the banking business F-37
13. Financial instruments F-37
14. Pension and severance plans F-41
15. Stockholders’ equity F-46
16. Stock-based compensation plans F-51
17. Restructuring charges and asset impairments F-54
18. Research and development costs, advertising costs and shipping and handling costs F-59
19. Gain on change in interest in subsidiaries and equity investees F-59
20. Income taxes F-61
21. ~~Variable interest entities~~ ~~F-64~~
~~22.~~ ~~Commitments and contingent liabilities~~ ~~F-65~~
~~23.~~ ~~Business segment information~~ ~~F-67~~
~~F-13~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
1. ~~Nature of operations~~
Sony Corporation and consolidated subsidiaries (hereinafter collectively referred to as “Sony”) are engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer and industrial markets. Sony also develops, produces, manufactures, and markets home-use game consoles and software. Sony’s principal manufacturing facilities are located in Japan, the United States of America, Europe, and Asia. Its electronic products are marketed throughout the world and game products are marketed mainly in Japan, the United States of America and Europe by sales subsidiaries and unaffiliated local distributors as well as direct sales via the Internet. Sony is engaged in the development, production, manufacture, and distribution of recorded music, in all commercial formats and musical genres. Sony is also engaged in the development, production, manufacture, marketing, distribution and broadcasting of image-based software, including film, video and television. Further, Sony is engaged in various financial service businesses including insurance operations through a Japanese life insurance subsidiary and non-life insurance subsidiaries, banking operations through a Japanese internet-based banking subsidiary and leasing and credit financing operations in Japan. In addition to the above, Sony is engaged in Internet-related businesses, an IC card business and an advertising agency business in Japan.
2. ~~Summary of significant accounting policies~~
Sony Corporation and its subsidiaries in Japan maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan while its foreign subsidiaries maintain their records and prepare their financial statements in conformity with accounting principles generally accepted in the countries of their domiciles. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These adjustments were not recorded in the statutory books of account.
~~(1)~~ ~~Newly adopted accounting pronouncements:~~
~~Employers’ Disclosures about Pensions and Other Postretirement Benefits -~~
In December 2003, the Financial Accounting Standards Board (“FASB”) revised Statement of Financial Accounting Standards (“FAS”) No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, an amendment of FAS No. 87, “Employers’ Accounting for Pensions”, FAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and FAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. The new FAS No. 132 revised employers’ disclosures about pension plans and other postretirement benefit plans. It did not change the measurement or recognition of those plans required by FAS No. 87, 88 and 106. While retaining the disclosure requirements of FAS No. 132, the new FAS No. 132 requires additional disclosures about assets, obligations, cash flows, and net periodic benefit costs of defined benefit plans and other defined benefit postretirement plans. The provisions of the new FAS No. 132 are generally effective for financial statements with fiscal years ending after December 15, 2003, excluding the disclosure of certain information about foreign plans, which shall be effective for fiscal years ending after June 15, 2004. In accordance with the transition provisions of the new FAS No. 132, Note 13, Pension and severance plans, has been expanded to include the new disclosures as of and for the year ended March 31, 2004.
~~Consolidation of Variable Interest Entities -~~
     In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51”. FIN No. 46 addresses consolidation by a primary
~~F-14~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
beneficiary of a variable interest entity (“VIE”). FIN No. 46 was effective immediately for all new VIEs created or acquired after January 31, 2003. Sony has not entered into any new agreements with VIEs on or after February 1, 2003. For VIEs created or acquired prior to February 1, 2003, Sony early adopted the provisions of FIN No. 46 on July 1, 2003. Under FIN No. 46, any difference between the net amount added to the balance sheet and the amount of any previously recognized interest in the VIE shall be recognized as a cumulative effect of accounting changes. As a result of adopting the original FIN No. 46, Sony recognized a one-time charge with no tax effect of 2,117 million yen as a cumulative effect of accounting change in the consolidated statement of income, and Sony’s assets and liabilities increased by 95,255 million yen and 97,950 million yen, respectively. These increases were treated as non-cash transactions in the consolidated statement of cash flows. In addition, cash and cash equivalents increased by 1,521 million yen. See Note 21 for further discussion on the VIEs that are used by Sony.
In December 2003, the FASB issued revised FIN No. 46 (“FIN No. 46R”), which replaces FIN No. 46. FIN No. 46R retains many of the basic concepts introduced in FIN No. 46; however, it also introduces a new scope exception for certain types of entities that qualify as a “business” as defined in FIN No. 46R, revises the method of calculating expected losses and residual returns for determination of a primary beneficiary, and includes new guidance for assessing variable interests. Sony early adopted the provisions of FIN No. 46R upon its issuance. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or impact the way Sony had previously accounted for VIEs.
~~Impairment of securities investments -~~
In November 2003, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. EITF Issue No. 03-01 establishes additional disclosure requirements for each category of FAS No. 115 investments in a loss position. In March 2004, the EITF also reached a consensus on the additional accounting guidance for other-than-temporary impairments and its application to debt and equity investments. In accordance with the new disclosure requirements under EITF Issue No. 03-01, Note 6 has been expanded to include certain additional information regarding Sony’s securities investments.
~~Multiple Element Revenue Arrangements -~~
In November 2002, the FASB issued EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF Issue No. 00-21 provides guidance on when and how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. Sony adopted EITF Issue No. 00-21 on July 1, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on Sony’s results of operations and financial position for the year ended March 31, 2004.
~~Derivative instruments and hedging activities -~~
     On April 1, 2001, Sony adopted FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by FAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities — an Amendment of FASB Statement No. 133”. FAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically, FAS No. 133 requires an entity to recognize all derivatives, including certain derivative instruments embedded in other contracts, as either assets or liabilities in the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders’ equity or net income depending on
~~F-15~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~whether the derivative instruments qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.~~
     As a result of the adoption of the new standards, Sony’s operating income, income before income taxes and net income for the year ended March 31, 2002 decreased by 3,007 million yen, 3,441 million yen and 2,167 million yen, respectively. Additionally, on April 1, 2001, Sony recorded a one-time non-cash after-tax unrealized gain of 1,089 million yen in accumulated other comprehensive income in the consolidated balance sheet, as well as an after-tax gain of 5,978 million yen in the cumulative effect of accounting changes in the consolidated statement of income. The after-tax gain was primarily attributable to fair value adjustments of convertible rights embedded in convertible bonds held by Sony’s life insurance subsidiary as available-for-sale debt securities.
In April 2003, the FASB issued FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. This statement amends and clarifies financial accounting and reporting for derivative instruments, including derivative instruments embedded in other contracts and for hedging activities under FAS No. 133. Sony adopted FAS No. 149 on July 1, 2003. The adoption of FAS No. 149 did not have an impact on Sony’s results of operations and financial position.
~~Accounting for Asset Retirement Obligations -~~
On April 1, 2003, Sony adopted FAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of FAS No. 143 did not have a material impact on Sony’s results of operations and financial position for the year ended March 31, 2004.
~~Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity -~~
In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS No. 150 establishes standards for how certain financial instruments with characteristics of both liabilities and equity shall be classified and measured. Sony adopted FAS No. 150 during the first quarter of the year ended March 31, 2004. The adoption of FAS No. 150 did not have an impact on Sony’s results of operations and financial position for the year ended March 31, 2004.
~~Accounting for Costs Associated with Exit or Disposal Activities -~~
In June 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. FAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. FAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. FAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred, rather than the date of an entity’s commitment to an exit plan. Sony adopted FAS No. 146 on January 1, 2003. The adoption of this statement did not have a material effect on Sony’s results of operations and financial position.
~~Goodwill and other intangible assets -~~
     In July 2001, Sony elected early adoption, retroactive to April 1, 2001, of FAS No. 142, “Goodwill and Other Intangible Assets” which superseded Accounting Principle Board Opinion (“APB”) No. 17, “Intangible Assets”. FAS No. 142 addresses the accounting for acquired goodwill and other intangible
~~F-16~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
assets. Under FAS No. 142, goodwill and certain other intangible assets that are determined to have an indefinite life are no longer amortized, but rather are tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Prior to the adoption of FAS No. 142, goodwill recognized in acquisitions accounted for as purchases was amortized on a straight-line basis principally over a 20 or 40-year period. As a result of the adoption of FAS No. 142, Sony’s operating income and income before income taxes for the year ended March 31, 2002 increased by 20,114 million yen and income before cumulative effect of accounting changes as well as net income for the year ended March 31, 2002 increased by 18,932 million yen.
~~(2)~~ ~~Significant accounting policies:~~
~~Basis of consolidation and accounting for investments in affiliated companies -~~
     The consolidated financial statements include the accounts of Sony Corporation and those of its majority-owned subsidiary companies and all variable interest entities required for which Sony is the primary beneficiary. All intercompany transactions and accounts are eliminated. Investments in which Sony has significant influence or ownership of 20% or more but less than or equal to 50% are accounted for under the equity method. In addition, all investments in limited partnerships and general partnerships are also accounted for under the equity method. Under the equity method, investments are stated at cost plus/minus Sony’s equity in undistributed earnings or losses. Consolidated net income includes Sony’s equity in current earnings or losses of such companies, after elimination of unrealized intercompany profits. If the value of an investment has declined and is judged to be other than temporary, the investment is written down to its fair value.
     On occasion, a consolidated subsidiary or affiliated company accounted for by the equity method may issue its shares to third parties as either a public or private offering or upon conversion of convertible debt to common stock at amounts per share in excess of or less than Sony’s average per share carrying value. With respect to such transactions, where the sale of such shares is not part of a broader corporate reorganization and the reacquisition of such shares is not contemplated at the time of issuance, the resulting gains or losses arising from the change in interest are recorded in income for the year the change in interest transaction occurs. If the sale of such shares is part of a broader corporate reorganization, the reacquisition of such shares is contemplated at the time of issuance or realization of such gain is not reasonably assured (i.e., the entity is newly formed, non-operating, a research and development or start-up/development stage entity, or where the entity’s ability to continue in existence is in question), the transaction is accounted for as a capital transaction.
The excess of the cost over the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for on an equity basis is allocated to identifiable assets and liabilities based on fair values at the date of acquisition. The unassigned residual value of the excess of the cost over the underlying net equity is recognized as goodwill.
~~Use of estimates -~~
     The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
~~F-17~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~Translation of foreign currencies -~~
     All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen at appropriate year-end current rates and all income and expense accounts are translated at rates that approximate those rates prevailing at the time of the transactions. The resulting translation adjustments are accumulated as a component of accumulated other comprehensive income.
~~Foreign currency receivables and payables are translated at appropriate year-end current rates and the resulting translation gains or losses are taken into income.~~
~~Cash and cash equivalents -~~
Cash and cash equivalents include all highly liquid investments, generally with original maturities of three months or less, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.
~~Marketable debt and equity securities -~~
Debt securities and equity securities designated as available-for-sale, whose fair values are readily determinable, are carried at fair value with unrealized gains or losses included as a component of accumulated other comprehensive income, net of applicable taxes. Debt and equity securities classified as trading securities are carried at fair value with unrealized gains or losses included in income. Debt securities that are expected to be held-to-maturity are carried at amortized cost. Individual securities classified as either available-for-sale or held-to-maturity are reduced to net realizable value by a charge to income for other than temporary declines in fair value. Realized gains and losses are determined on the average cost method and are reflected in income.
~~Equity securities in non-public companies -~~
Equity securities in non-public companies are carried at cost as fair value is not readily determinable. If the value of a non-public equity investment is estimated to have declined and such decline is judged to be other than temporary, Sony recognizes the impairment of the investment and the carrying value is reduced to its fair value. Determination of impairment is based on the consideration of such factors as operating results, business plans and estimated future cash flows. Fair value is determined through the use of such methodologies as discounted cash flows, valuation of recent financings and comparable valuations of similar companies.
~~Inventories -~~
Inventories in electronics, game and music as well as non-film inventories for pictures are valued at cost, not in excess of market, cost being determined on the “average cost” basis except for the cost of finished products carried by certain subsidiary companies in electronics which is determined on the “first-in, first-out” basis.
~~Film costs -~~
     Film costs related to theatrical and television product (which includes direct production costs, production overhead and acquisition costs) are stated at the lower of unamortized cost or estimated fair value and classified as non-current assets. Film costs are amortized, and the estimated liabilities for residuals and participations are accrued, for an individual product based on the proportion that current period actual revenues bear to the estimated remaining total lifetime revenues. These estimates are reviewed on a periodic basis.
~~F-18~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~Property, plant and equipment and depreciation -~~
Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is primarily computed on the declining-balance method for Sony Corporation and Japanese subsidiaries, except for certain semiconductor manufacturing facilities whose depreciation is computed on the straight-line method, and on the straight-line method for foreign subsidiaries at rates based on estimated useful lives of the assets, principally, ranging from 15 years up to 50 years for buildings and from 2 years up to 10 years for machinery and equipment. Significant renewals and additions are capitalized at cost. Maintenance and repairs, and minor renewals and betterments are charged to income as incurred.
~~Goodwill and other intangible assets -~~
     Goodwill and certain other intangible assets that are determined to have an indefinite life are not amortized and are tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Fair value for those assets is generally determined using a discounted cash flow analysis.
Intangible assets that are determined not to have an indefinite life mainly consist of artist contracts, music catalogs, acquired patent rights and software to be sold, leased or otherwise marketed. Artist contracts and music catalogs are amortized on a straight-line basis principally over a period of up to 40 years. Acquired patent rights and software to be sold, leased or otherwise marketed are amortized on a straight-line basis over 3 to 10 years.
~~Accounting for computer software to be sold -~~
     ~~Sony accounts for software development costs in accordance with FAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”.~~
     In the Electronics business, costs related to establishing the technological feasibility of a software product are expensed as incurred as a part of research and development in cost of sales. Costs that are incurred to produce the finished product after technological feasibility is established are capitalized and amortized over the estimated economic life of the product, which is generally three years. Sony performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue.
In the Game business, technological feasibility of the underlying software is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established are not material, and accordingly, Sony expenses software development costs for the Game business as incurred as a part of research and development in cost of sales.
~~Deferred insurance acquisition costs -~~
Costs that vary with and are primarily related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs are being amortized mainly over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves.
~~Product warranty -~~
     Sony provides for the estimated cost of product warranties at the time revenue is recognized by either product category group or individual product. The product warranty is calculated based upon product sales, estimated probability of failure and estimated cost per claim. The variables used in the calculation of the provision are reviewed on a periodic basis.
~~F-19~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
Certain subsidiaries in the Electronics business offer extended warranty programs. The consideration received through extended warranty service is deferred and amortized on a straight-line basis over the term of the extended warranty.
~~Future insurance policy benefits -~~
~~Future insurance policy benefits are computed based on actuarial assumptions.~~
~~Accounting for the impairment of long-lived assets -~~
Sony periodically reviews the carrying value of its long-lived assets held and used, other than goodwill and intangible assets with indefinite lives, and assets to be disposed of, whenever events or changes in circumstances indicated that the carrying amount may not be recoverable. Long-lived assets to be held and used are reviewed for impairment by comparing the carrying value of the assets with their estimated future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss would be recognized during the period. The impairment loss would be calculated as the difference between asset carrying value and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance. Long-lived assets that are to be disposed of other than by sale are considered held and used until they are disposed of. Long-lived assets that are to be disposed of by sale are reported at the lower of their carrying value or fair value less cost to sell. Reductions in carrying value are recognized in the period in which the long-lived assets are classified as held for sale.
~~Derivative financial instruments -~~
     All derivatives, including certain derivative financial instruments embedded in other contracts, are recognized as either assets or liabilities in the balance sheet at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders’ equity (as a component of accumulated other comprehensive income), depending on whether the derivative financial instrument qualifies as a hedge and the derivative is being used to hedge changes in fair value or cash flows.
~~In accordance with FAS No. 133, the derivative financial instruments held by Sony are classified and accounted as below.~~
~~Fair value hedges~~
Changes in the fair value of derivatives designated and effective as fair value hedges for recognized assets or liabilities or unrecognized firm commitments are recognized in earnings as offsets to changes in the fair value of the related hedged assets or liabilities.
~~Cash flow hedges~~
Changes in the fair value of derivatives designated and effective as cash flow hedges for forecasted transactions or exposures associated with recognized assets or liabilities are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Changes in the fair value of the ineffective portion are recognized in current period earnings.
~~Derivatives not designated as hedges~~
     ~~Changes in the fair value of derivatives that are not designated as hedges under FAS No. 133 are recognized in current period earnings.~~
~~F-20~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
Sony formally documents all hedging relationships between the derivatives designated as hedges and hedged items, as well as its risk management objectives and strategies for undertaking various hedging activities. Sony links all hedges that are designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet or to the specific forecasted transaction. Sony also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are designated as hedges are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, Sony discontinues hedge accounting.
~~Stock-based compensation -~~
     Sony has elected to apply APB No. 25, “Accounting for Stock Issued to Employees”, in accounting for its stock-based compensation plans and follows the disclosure-only provisions of FAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123”. In accordance with APB No. 25, stock-based compensation cost is recognized in income based on the excess, if any, of the quoted market price of the common stock or subsidiary tracking stock of Sony Corporation at the grant date of the award or other measurement date over the stated exercise price of the award. As the exercise prices for Sony’s stock-based compensation plans are generally determined based on the prevailing market price shortly before the date of grant, the compensation expense for these plans is not significant. For awards that generate compensation expense as defined under APB No. 25, Sony calculates the amount of compensation expense and recognizes the expense over the vesting period of the award.
The following table reflects the net effect on net income and net income per share allocated to the common stock if Sony had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation”, to stock-based compensation. See Note 15 for detailed assumptions.

Year Ended March 31
2002 2003 2004
(Yen in millions)
Income before cumulative effect of accounting changes allocated to common stock:
As reported 9,381 115,648 90,756
Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects (5,395 ) (7,008 ) (6,334 )

Pro forma 3,986 108,640 84,422

Net income allocated to common stock:
As reported 15,359 115,648 88,639
Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects (5,395 ) (7,008 ) (6,334 )

Pro forma 9,964 108,640 82,305

~~F-21~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Year Ended March 31
2002 2003 2004
(Yen)
Income before cumulative effect of accounting changes allocated to common stock:
— Basic EPS:
As reported 10.21 125.74 98.26
Pro forma 4.34 118.12 91.40
— Diluted EPS:
As reported 10.18 118.21 93.00
Pro forma 4.33 111.20 86.66
Net income allocated to common stock:
— Basic EPS:
As reported 16.72 125.74 95.97
Pro forma 10.85 118.12 89.11
— Diluted EPS:
As reported 16.67 118.21 90.88
Pro forma 10.82 111.20 84.55
~~Net income and net income per share allocated to the subsidiary tracking stock for the years ended March 31, 2002, 2003 and 2004 would not be impacted.~~
~~Free distribution of common stock -~~
     On occasion, Sony Corporation may make a free distribution of common stock which is accounted for either by a transfer from additional paid-in capital to the common stock account or with no entry if free shares are distributed from the portion of previously issued shares in the common stock account.
     Under the Japanese Commercial Code, a stock dividend can be effected by an appropriation of retained earnings to the common stock account, followed by a free share distribution with respect to the amount appropriated by resolution of the Board of Directors’ meeting.
~~Free distribution of common stock is recorded in the consolidated financial statements only when it becomes effective, except for the calculation and presentation of per share amounts.~~
~~Stock issue costs -~~
Stock issue costs are directly charged to retained earnings, net of tax, in the accompanying consolidated financial statements as the Japanese Commercial Code prohibits charging such stock issue costs to capital accounts which is the prevailing practice in the United States of America.
~~Revenue recognition -~~
     Revenues from electronics, game and music sales are recognized upon delivery which is considered to have occurred when the customer has taken title to the product and the risk and rewards of ownership have been substantively transferred. If the sales contract contains a customer acceptance provision, then sales are recognized after customer acceptance occurs or the acceptance provisions lapse.
     Revenues from the theatrical exhibition of motion pictures are recognized as the customer exhibits the film. Revenues from the licensing of feature films and television programming are recorded when the material is available for telecast by the licensee and when any restrictions regarding the exhibition or
~~F-22~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~exploitation of the product lapse. Revenues from the sale of home videocassettes and DVDs are recognized upon availability of sale to the public.~~
     Traditional life insurance policies that the life insurance subsidiary writes, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. Premiums from these policies are reported as revenue when due from policyholders.
     Amounts received as payment for non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies are recognized as deposits to policyholder account balances and included in future insurance policy benefits and other. Revenues from these contracts are recognized as policy charges and fee income and included in financial service revenue.
     Property and casualty insurance policies that the non-life insurance subsidiary writes are primarily automotive insurance contracts which are categorized as short-duration contracts. Premiums from these policies are reported as revenue over the period of the contract in proportion to the amount of insurance protection provided.
Revenues from the arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets are accounted for in accordance with EITF Issue No. 00-21. Under EITF Issue No. 00-21, the components of an arrangement consisting of multiple products, services and/or rights to use assets should be accounted for separately if the fair value of delivered components have been objectively determined and the delivered components have value to the customer on a stand-alone basis. If there is objective and reliable evidence of the fair value of the undelivered element in an arrangement but no such evidence for the delivered element, Sony allocates revenue to the fair value of the undelivered element first, and allocates the residual revenues to the delivered element. If the above criteria for separate recognition are not met, then revenue is deferred until such criteria are met or until the period over which the last undelivered element is delivered.
~~Accounting for consideration given to a customer or a reseller -~~
In accordance with EITF Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products”, cash consideration given to a customer or a reseller including payments for buydowns, slotting fees and cooperative advertising programs, is accounted for as a reduction of revenue unless Sony receives an identifiable benefit (goods or services) in exchange for the consideration, can reasonably estimate the fair value of this benefit and receives documentation from the reseller to support the amounts spent. Any payments meeting these criteria are treated as selling, general and administrative expenses. For the years ended March 31, 2002, 2003 and 2004, consideration given to a reseller, primarily for cooperative advertising programs, included in selling, general and administrative expense totaled 28,683, 29,135 million yen and 30,338 million yen, respectively.
~~Cost of sales -~~
     Costs classified as cost of sales relate to the producing and manufacturing of products and include such items as material cost, subcontractor cost, depreciation of fixed assets, personnel expenses, research and development costs, and amortization of film cost related to theatrical and television products.
~~F-23~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~Research and development costs -~~
~~Research and development costs are expensed as incurred.~~
~~Selling, general and administrative -~~
     ~~Costs classified as selling expense relate to the promoting and selling of products and include such items as advertising, promotion, shipping, and warranty expenses.~~
General and administrative expenses include operating items such as officer’s salaries, personnel expenses, depreciation of fixed assets, office rental for sales, marketing and administrative divisions, a provision for doubtful accounts and amortization of intangible assets.
~~Financial service expenses -~~
Financial service expenses include a provision for policy reserves and amortization of deferred insurance acquisition cost, and all other operating costs such as personnel expenses, depreciation of fixed assets, and office rental of subsidiaries in the Financial Services segment.
~~Advertising costs -~~
Advertising costs are expensed when the advertisement or commercial appears in the selected media, except for advertising costs for acquiring new insurance policies which are deferred and amortized as part of insurance acquisition costs.
~~Shipping and handling costs -~~
The majority of shipping and handling, warehousing and internal transfer costs for finished goods are included in selling, general and administrative expenses. An exception to this is in the Pictures business where such costs are charged to cost of sales as they are integral part of producing and distributing the film under Statement of Position (“SOP”) 00-2, “Accounting by Producers or Distributors of Films”. All other costs related to Sony’s distribution network are included in cost of sales, including inbound freight charges, purchasing and receiving costs, inspection costs and warehousing costs for raw materials and in-process inventory. In addition, amounts paid by customers for shipping and handling costs are included in net sales.
~~Income taxes -~~
The provision for income taxes is computed based on the pretax income included in the consolidated statements of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
~~Net income per share -~~
     Sony calculates and presents per share data separately for Sony’s common stock and for the subsidiary tracking stock, based on FAS No. 128, “Earnings per Share”. The holders of the subsidiary tracking stock have the right to participate in earnings, together with common stockholders. Accordingly, Sony calculates per share data by the “two-class” method based on FAS No. 128. Under this method, basic net income per share (“EPS”) for each class of stock is calculated based on the earnings allocated to each class of stock for the applicable period, divided by the weighted-average number of outstanding shares in each class during the applicable period.
~~F-24~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
     The earnings allocated to the subsidiary tracking stock are determined based on the subsidiary tracking stock holders’ economic interest in the targeted subsidiary’s earnings available for dividends. As defined by Sony Corporation’s articles of incorporation, the amount distributable to the subsidiary tracking stock holders is based on the declared dividends of the targeted subsidiary, which only may be declared from the amounts available for dividends of the targeted subsidiary. The targeted subsidiary’s earnings available for dividends are, as stipulated by the Japanese Commercial Code, not including those of the targeted subsidiary’s subsidiaries. If the targeted subsidiary has accumulated losses, a change in accumulated losses is also allocated to the subsidiary tracking stock. The subsidiary tracking stock holders’ economic interest is calculated as the number of the subsidiary tracking stock outstanding (3,072,000 shares) divided by the number of the targeted subsidiary’s common stock outstanding (235,520 shares), subject to multiplying by the Standard Ratio (tracking stock: subsidiary’s common stock = 1:100, as defined in the articles of incorporation). The earnings allocated to the common stock are calculated by subtracting the earnings allocated to the subsidiary tracking stock from Sony’s net income for the period.
     ~~The computation of diluted net income per common stock reflects the maximum possible dilution from conversion, exercise, or contingent issuance of securities.~~
There are no potentially dilutive securities for net income per subsidiary tracking stock, as tracking stock shares outstanding are increased upon potential subsidiary tracking stocks’ being exercised, which results in a proportionate increase in earnings allocated to the subsidiary tracking stock. However, they could have a dilutive effect on net income per common stock, as earnings allocated to the common stock would be decreased.
~~(3)~~ ~~Recent Pronouncements:~~
~~Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts -~~
In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate accounts”. SOP 03-1 provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts. This statement shall be effective for fiscal years beginning after December 15, 2003. Sony is currently evaluating the impact of adopting this guidance.
~~(4)~~ ~~Reclassifications:~~
~~Certain reclassifications of the financial statements for the years ended March 31, 2002 and 2003 have been made to conform to the presentation for the year ended March 31, 2004.~~
3. ~~Inventories~~
~~Inventories comprise the following:~~

March 31
2003 2004
(Yen in millions)
Finished products 398,180 427,877
Work in process 110,008 98,607
Raw materials, purchased components and supplies 117,539 140,023

625,727 666,507

~~F-25~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
4. ~~Film costs~~
~~Film costs comprise the following:~~

March 31
2003 2004
(Yen in millions)
Theatrical:
Released (including acquired film libraries) 142,168 136,057
Completed not released 13,356 7,946
In production and development 91,696 79,198
Television licensing:
Released (including acquired film libraries) 40,417 33,378
In production and development 141 161

287,778 256,740

Sony estimates that approximately 88% of unamortized costs of released films (excluding amounts allocated to acquired film libraries) at March 31, 2004 will be amortized within the next three years. Approximately 83,992 million yen of released film costs are expected to be amortized during the next twelve months. As of March 31, 2004, unamortized acquired film libraries of approximately 14,833 million yen remained to be amortized on a straight-line basis over an average of the remaining life of 6 years. Approximately 83,381 million yen of accrued participation liabilities included in accounts payable, other and accrued expenses are expected to be paid during the next twelve months.
5. ~~Related party transactions~~
     Sony accounts for its investments in affiliated companies over which Sony has significant influence or ownership of 20% or more but less than or equal to 50% under the equity method. In addition, all investments in limited partnerships and general partnerships are also accounted for under the equity method. Such investments include but are not limited to Sony’s interest in Sony Ericsson Mobile Communications, AB (50%), ST Liquid Crystal Display Corporation (50%), bit Wallet, Inc (37.8%), STAR CHANNEL, INC. (17.8%), and InterTrust Technologies Corporation (49.5%).
~~Summarized combined financial information that is based on information provided by equity investees is shown below:~~

March 31
2003 2004
(Yen in millions)
Current assets 349,414 433,154
Property, plant and equipment 242,303 94,130
Other assets 43,272 57,756

Total assets 634,989 585,040

Current liabilities 374,414 397,242
Long-term liabilities 129,497 27,639
Stockholders’ equity 131,078 160,159

Total liabilities and stockholders’ equity 634,989 585,040

Number of companies at end of the fiscal year 84 66
~~F-26~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Sales and revenue 659,589 785,697 1,009,005
Gross profit 161,655 140,078 231,083
Net income (loss) (68,608 ) (81,422 ) 11,323
     ~~Sony Ericsson Mobile Communications, AB, a joint venture focused on mobile phone handsets, was established in October 2001.~~
     In April 2002, Sony completed the sale of its equity interest in the Telemundo Group which resulted in cash proceeds of 88,373 million yen and a gain of 66,502 million yen. In the year ended March, 31 2003, Sony had deferred 5,939 million yen of the gain related to the sale of Telemundo as a result of certain indemnifications provided by Sony to the acquirer, which was subsequently recognized in April 2003, as these indemnifications expired with no amounts being refunded by Sony.
     In June 2002, Sony completed the partial sale of its equity investment in the Columbia House Company (“CHC”), a 50-50 joint venture between AOL Time Warner Inc. and Sony, to Blackstone Capital Partners III LP (“Blackstone”), an affiliate of The Blackstone Group, a private investment bank. The chairman of The Blackstone Group was also a director of Sony until June 2002. Under the terms of the sale agreement, Sony received cash proceeds of 17,839 million yen and a subordinated note receivable from Columbia House Holdings, Inc., a majority owned subsidiary of Blackstone, with a face amount of 7,827 million yen. The sale resulted in a gain of 1,324 million yen. Sony still has a 7.5% ownership interest in CHC, which is no longer accounted for under the equity method but is now accounted for as a cost method investment.
     ~~In September 2002, Sony completed the sale of its equity interest in Sony Tektronix Inc., which resulted in a gain of 3,090 million yen.~~
     ~~In January 2003, Sony acquired a 49.5% interest in InterTrust Technologies Corporation for 23,076 million yen.~~
     In May 2003, Sony acquired the remaining 50% interest in American Video Glass Company (“AVGC”) that it did not own from Corning Asahi Corporation. As a result, AVGC is no longer accounted for under the equity method and is now a consolidated subsidiary. The financial position and operating results of AVGC as of and for the year ended March 31, 2004 are not included in the above summarized combined financial information.
     Effective July 1, 2003, in accordance with FIN No. 46, Sony has consolidated BE-ST Bellevuestrasse Development GmbH & Co. First Real Estate KG, Berlin (“BE-ST”). As a result, BE-ST is no longer accounted for under the equity method (Note 21). The financial position and operating results of BE-ST as of and for the year ended March 31, 2004 are not included in the above summarized combined financial information.
     In August 2003, Crosswave Communications Inc. (“CWC”), of which Sony owned approximately a 23.9% interest, commenced reorganization proceedings under the Corporate Reorganization Law of Japan. As a result, Sony no longer has a significant influence on the decision making of CWC. Therefore, CWC is no longer accounted for under the equity method. The financial position and operating results of CWC as of and for the year ended March 31, 2004 is not included in the above summarized combined financial information.
     As of April 1, 2004, Sony Corporation made Sony Computer Entertainment Inc. (“SCE”) a wholly-owned subsidiary through a stock for stock exchange pursuant to the provision of Article 358 of the Japanese Commercial Code which does not require the approval of the General Meeting of Shareholders.
~~F-27~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
The stock for stock exchange ratio is determined based on the estimated equity values of SCE and Sony on a consolidated basis. By the stock for stock exchange, Sony Corporation provided 1,000,000 shares of its common stock to a Executive Deputy President, Corporate Executive Officer of Sony Corporation who had owned 100 shares of SCE’s common stock. This transaction will not have a material impact on Sony’s results of operations and financial position for the year ending March 31, 2005.
     Affiliated companies accounted for under the equity method with an aggregate carrying amount of 6,342 million yen and 6,081 million yen at March 31, 2003 and 2004, were quoted on established markets at an aggregate value of 6,894 million yen and 37,603 million yen, respectively.
~~Account balances and transactions with affiliated companies accounted for under the equity method are presented below:~~

March 31
2003 2004
(Yen in millions)
Accounts receivable, trade 35,132 62,359

Advances 13,090 561

Accounts payable, trade 9,964 13,547

Year Ended March 31
2002 2003 2004
(Yen in millions)
Sales 72,824 161,983 258,454

Purchases 69,254 102,735 106,100

Dividends from affiliated companies accounted for under the equity method for the years ended March 31, 2002, 2003 and 2004 were 3,065 million yen, 2,002 million yen and 3,446 million yen, respectively.
6. ~~Marketable securities and securities investments and other~~
Marketable securities and securities investments and other include debt and equity securities of which the aggregate cost, gross unrealized gains and losses and fair value pertaining to available-for-sale securities and held-to-maturity securities are as follows:

March 31, 2003 March 31, 2004
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
Cost gains losses Fair Value Cost gains losses Fair Value
(Yen in millions)
Available-for-sale:
Debt securities 1,550,290 37,237 (8,430 ) 1,579,097 1,938,673 55,922 (2,072 ) 1,992,523
Equity securities 63,786 8,222 (4,330 ) 67,678 86,517 63,225 (1,886 ) 147,856
Held-to-maturity securities 18,153 672 (1 ) 18,824 26,439 381 (28 ) 26,792

Total 1,632,229 46,131 (12,761 ) 1,665,599 2,051,629 119,528 (3,986 ) 2,167,171

     At March 31, 2004, debt securities classified as available-for-sale securities and held-to-maturity securities mainly consist of Japanese government and municipal bonds and corporate debt securities due within 1 to 10 years.
~~F-28~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
     Proceeds from sales of available-for-sale securities were 193,048 million yen, 215,554 million yen and 397,817 million yen for the years ended March 31, 2002, 2003 and 2004, respectively. On those sales, gross realized gains computed on the average cost basis were 6,397 million yen, 3,570 million yen and 9,525 million yen and gross realized losses were 3,803 million yen, 3,125 million yen and 1,906 million yen, respectively.
     ~~Marketable securities as of March 31, 2003 and 2004 included short-term investments in money market funds of 123,964 million yen and 131,044 million yen, respectively.~~
     In the ordinary course of business, Sony maintains long-term investment securities, included in securities investments and other, issued by a number of non-public companies. The aggregate carrying amounts of the investments in non-public companies at March 31, 2003 and 2004, which were valued at the lower of cost or fair value, were 69,596 million yen and 51,367 million yen, respectively.
     ~~The net change in the unrealized gains or losses on trading securities that has been included in earnings during the years ended March 31, 2002, 2003 and 2004 was insignificant.~~
     Securities investments and other as of March 31, 2003 and 2004 also included separate account assets (Note 9) in the life insurance business, which were carried at fair value. Although the separate account assets consist primarily of debt and equity securities, they are excluded from the above table due to the nature of the assets. Proceeds from sales of available-for-sale securities and gross realized gains or losses described above also exclude the amounts related to the separate account assets. Separate account assets at March 31, 2003 and 2004 were 118,190 million yen and 164,461 million yen, respectively.
The following table presents the gross unrealized losses on, and fair value of, Sony’s investment securities with unrealized losses, aggregated by investment category and the length of time that individual investment securities have been in a continuous unrealized loss position, at March 31, 2004.

Less than 12 months 12 months or more Total
Unrealized Unrealized Unrealized
Fair value losses Fair value losses Fair value losses
(Yen in millions)
Available-for-sale:
Debt securities 421,650 (2,035 ) 10,370 (37 ) 432,020 (2,072 )
Equity securities 3,189 (1,533 ) 1,417 (353 ) 4,606 (1,886 )
Held-to-maturity securities 2,344 (28 ) 0 (0 ) 2,344 (28 )

Total 427,183 (3,596 ) 11,787 (390 ) 438,970 (3,986 )

     In evaluating the factors for available-for-sale securities whose fair values are readily determinable, Sony presumes a decline in value to be other-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally a period of up to six to twelve months). This criteria is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 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.
     ~~At March 31, 2004, Sony determined that the decline in value for securities with unrealized losses shown in the above table is not other-than-temporary in nature.~~
~~F-29~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
7.      ~~Leased assets~~
     ~~Sony leases certain communication and commercial equipment, plant, office space, warehouses, employees’ residential facilities and other assets.~~
~~An analysis of leased assets under capital leases is as follows:~~

March 31
Class of property 2003 2004
(Yen in millions)
Land 1,829 174
Buildings 15,937 12,421
Machinery, equipment and others 33,733 36,907
Accumulated depreciation (21,236 ) (19,385 )

30,263 30,117

~~The following is a schedule by year of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2004:~~

Yen in
millions
Year ending March 31:
2005 15,940
2006 12,100
2007 7,926
2008 6,467
2009 9,213
Later years 6,970

Total minimum lease payments 58,616
Less — Amount representing interest 15,927

Present value of net minimum lease payments 42,689
Less — Current obligations 12,667

Long-term capital lease obligations 30,022

     ~~Minimum lease payments have not been reduced by minimum sublease income of 12,780 million yen due in the future under noncancelable subleases.~~
     Minimum rentals under operating leases for the years ended March 31, 2002, 2003 and 2004 were 104,497 million yen, 94,364 million yen and 92,649 million yen, respectively. Sublease rentals under operating leases for the years ended March 31, 2002, 2003 and 2004 were 7,006 million yen, 6,240 million yen and 2,923 million yen, respectively. The total minimum rentals to be received in the future under noncancelable subleases as of March 31, 2004 were 15,497 million yen. The minimum rental payments
~~F-30~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 2004 are as follows:~~

(Yen in
millions)
Year ending March 31:
2005 42,649
2006 32,861
2007 25,864
2008 16,556
2009 12,942
Later years 56,507

Total minimum future rentals 187,379

8. ~~Goodwill and intangible assets~~
     Intangible assets acquired during the year ended March 31, 2004 totaled 35,840 million yen, which are subject to amortization and primarily consist of music catalogs of 2,526 million yen, acquired patent rights of 7,903 million yen and software to be sold, leased or otherwise marketed of 13,632 million yen. The weighted average amortization period for music catalogs, acquired patent rights and software to be sold, leased or otherwise marketed is 21 years, 8 years and 3 years, respectively.
~~Intangible assets subject to amortization comprise the following:~~

March 31
2003 2004
Gross Gross
carrying Accumulated carrying Accumulated
amount Amortization amount Amortization
Yen in millions
Artist contracts 89,078 (69,281 ) 80,675 (68,300 )
Music catalog 120,242 (48,447 ) 109,795 (47,610 )
Acquired patent rights 46,758 (18,024 ) 52,996 (23,172 )
Software to be sold, leased or otherwise marketed 17,848 (7,267 ) 31,983 (13,577 )
PlayStation format 11,873 (7,719 ) 11,873 (10,094 )
Other 45,257 (20,499 ) 43,175 (17,328 )

Total 331,056 (171,237 ) 330,497 (180,081 )

~~F-31~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
The aggregate amortization expenses for intangible assets for the years ended March 31, 2002, 2003 and 2004 were 25,554 million yen, 27,871 million yen and 28,866 million yen, respectively. The estimated aggregate amortization expense for intangible assets for the next five years is as follows:

Yen in
millions
Year ending March 31,
2005 26,863
2006 21,401
2007 13,958
2008 12,269
2009 11,705
~~Total carrying amount of intangible assets having an indefinite life comprise the following:~~

March 31
2003 2004
(Yen in millions)
Trademarks 57,410 57,384
Distribution agreement 18,834 18,834

76,244 76,218

     In addition to the amortizable and indefinite-lived intangible assets shown in the above tables, intangible assets at March 31, 2003 and 2004 also include unrecognized prior service costs totaling 22,561 million yen and 21,376 million yen, respectively, which were recorded under FAS No. 87 as discussed in Note 13.
~~The changes in the carrying amount of goodwill by operating segment for the years ended March 31, 2003 and 2004 are as follows:~~

Electronics Game Music Pictures Other Total
(Yen in millions)
Balance at March 31, 2002 56,853 111,105 58,600 89,392 1,290 317,240
Goodwill acquired during year 5,380 108 1,837 — 140 7,465
Reduction under FAS No. 109 (9,054 ) — (17,768 ) (6,703 ) — (33,525 )
Other * — (607 ) 3,352 (3,992 ) 194 (1,053 )

Balance at March 31, 2003 53,179 110,606 46,021 78,697 1,624 290,127
Goodwill acquired during year 5,634 — 76 1,666 534 7,910
Impairment losses (6,049 ) — — — — (6,049 )
Other * (528 ) (244 ) (3,771 ) (9,574 ) (1 ) (14,118 )

Balance at March 31, 2004 52,236 110,362 42,326 70,789 2,157 277,870

* ~~Other primarily consists of translation adjustments and reclassification to/from other accounts.~~
     During the year ended March 31, 2003, Sony realized tax benefits from operating loss carryforwards that were acquired in connection with Sony’s acquisition of companies within the Electronics, Music and Pictures businesses. Under FAS No. 109, “Accounting for Income Taxes”, the reversal of the valuation allowance upon the realization of tax benefits from the operating loss carryforwards was applied to reduce a portion of the goodwill relating to the acquisition of these companies.
~~F-32~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
During the year ended March 31, 2004, Sony performed the annual impairment test for goodwill and recorded an impairment loss of 6,049 million yen in the Electronics business. This impairment charge reflected the overall decline in the fair value of a subsidiary within the Electronics business. The fair value of that reporting unit was estimated principally using the expected present value of future cash flows.
9. ~~Insurance-related accounts~~
     Sony’s life and non-life insurance subsidiaries in Japan maintain their accounting records as described in Note 2 in accordance with the accounting principles and practices generally accepted in Japan, which vary in some respects from U.S. GAAP.
     Those differences are mainly that insurance acquisition costs are charged to income when incurred in Japan whereas in the United States of America those costs are deferred and amortized generally over the premium-paying period of the insurance policies, and that future policy benefits calculated locally under the authorization of the supervisory administrative agencies are comprehensively adjusted to a net level premium method with certain adjustments of actuarial assumptions for U.S. GAAP purposes. For purposes of preparing the consolidated financial statements, appropriate adjustments have been made to reflect such items in accordance with U.S. GAAP.
~~The amounts of statutory net equity of the subsidiaries as of March 31, 2003 and 2004 were 100,441 million yen and 146,540 million yen, respectively.~~
~~(1)~~ ~~Insurance policies:~~
Life insurance policies that the life insurance subsidiary writes, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. The life insurance revenues for the years ended March 31, 2002, 2003 and 2004 were 430,019 million yen, 450,363 million yen and 437,835 million yen, respectively. Property and casualty insurance policies that the non-life insurance subsidiary writes are primarily automotive insurance contracts which are categorized as short-duration contracts. The non-life insurance revenues for the years ended March 31, 2002, 2003 and 2004 were 13,164 million yen, 21,269 million yen and 28,371 million yen, respectively.
~~(2)~~ ~~Deferred insurance acquisition costs:~~
Insurance acquisition costs, such as commission expenses, medical examination and inspection report fees, etc., that vary with and are primarily related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs for traditional life insurance products are amortized mainly over the premium-paying period of the policy. The deferred insurance acquisition costs for non-traditional life insurance contracts are mainly amortized over the expected life if the contracts are in proportion to the estimated gross profits. Amortization charged to income for the years ended March 31, 2002, 2003 and 2004 amounted to 31,000 million yen, 44,578 million yen and 50,492 million yen, respectively.
~~(3)~~ ~~Future insurance policy benefits:~~
     Liabilities for future policy benefits are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities are computed by the net level premium method based upon estimates as to future investment yield, mortality and withdrawals. Future policy benefits are computed using interest rates ranging from approximately 1.00% to 5.50%. Mortality, morbidity and withdrawal assumptions for all policies are based on either the subsidiaries’ own experience or various actuarial tables. At March 31, 2003 and 2004, future insurance policy benefits amounted to 1,734,673 million yen and 1,952,686 million yen, respectively.
~~F-33~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(4)~~ ~~Separate account assets:~~
Separate account assets are funds on which investment income and gains or losses accrue directly to certain policyholders. Separate account assets are legally segregated. They are not subject to the claims that may arise out of any other business of a life insurance subsidiary. Separate account assets, which consist primarily of debt and equity securities, are carried at fair value and included in securities investments and other (Note 6). The related liabilities are recognized as separate account liabilities and included in future insurance policy benefits and other. Fees earned for administrative and contract-holder services performed for the separate accounts are recognized as financial service revenue.
~~10.~~ ~~Short-term borrowings and Long-Term Debt~~
~~Short-term borrowings comprise the following:~~

March 31
2003 2004
(Yen in millions)
Unsecured commercial paper:
with weighted-average interest rate of 0.13% 52,820 —
Unsecured loans, principally from banks:
with weighted-average interest rate of 3.55% 36,840
with weighted-average interest rate of 1.80% 26,260
Secured call money:
with weighted-average interest rate of 0.01% 34,700 65,000

124,360 91,260

     ~~At March 31, 2004, marketable securities and securities investments with a book value of 71,775 million yen were pledged as collateral for call money issued by a Japanese bank subsidiary.~~
~~F-34~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~Long-term debt comprises the following:~~

March 31
2003 2004
(Yen in millions)
Secured loans, representing obligations principally to banks:
Due 2004 to 2008 with interest ranging from 2.20% to 3.73% per annum — 58,786
Unsecured loans, representing obligations principally to banks:
Due 2003 to 2018 with interest ranging from 1.26% to 5.66% per annum 43,260
Due 2004 to 2017 with interest ranging from 1.77% to 5.89% per annum 77,646
Medium-term notes of consolidated subsidiaries:
Due 2003 to 2006 with interest ranging from 1.28% to 4.95% per annum 78,099
Due 2004 to 2006 with interest ranging from 1.09% to 4.95% per annum 60,537
Unsecured 1.4% convertible bonds, due 2003, convertible at 2,707.8 for one common share, redeemable before due date 8,058 —
Unsecured 1.4% convertible bonds, due 2005, convertible currently at 3,995.5 yen for one common share, redeemable before due date 287,762 287,753
Unsecured zero coupon convertible bonds, due 2008, convertible currently at 5,605 yen for one common share, redeemable before due date — 250,000
Unsecured 0.03% bonds, due 2004 with detachable warrants, net of unamortized discount 3,919 3,981
Unsecured 0.1% bonds, due 2005 with detachable warrants, net of unamortized discount 3,867 3,924
Unsecured 1.55% bonds, due 2006 with detachable warrants 12,000 12,000
Unsecured 0.9% bonds, due 2007 with detachable warrants 7,300 7,300
Unsecured 0.9% bonds, due 2007 with detachable warrants of subsidiary tracking stock 150 150
Unsecured 1.42% bonds, due 2005, net of unamortized discount 99,990 99,994
Unsecured 0.64% bonds, due 2006, net of unamortized discount 99,992 99,994
Unsecured 2.04% bonds, due 2010, net of unamortized discount 49,978 49,981
Unsecured 1.52% bonds, due 2011, net of unamortized discount 49,996 49,996
Unsecured 2.0% bonds, due 2005 15,000 15,000
Unsecured 1.99% bonds, due 2007 15,000 15,000
Unsecured 2.35% bonds, due 2010 4,900 4,900
Capital lease obligations:
Due 2003 to 2014 with interest ranging from 2.15% to 17.29% per annum 39,899
Due 2004 to 2014 with interest ranging from 2.15% to 22.93% per annum 42,689
Guarantee deposits received 22,654 21,775

841,824 1,161,406
Less — Portion due within one year 34,385 383,757

807,439 777,649

     At March 31, 2004, buildings with a book value of 61,912 million yen and machinery and equipment with a book value of 4,883 million yen were pledged as collateral for secured loans, representing obligations principally to banks.
~~F-35~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
     ~~There are no adverse debt covenants or cross-default provisions relating to Sony’s borrowings.~~
     In accordance with the requirements of FAS No. 133, the hedged portion of Sony’s fixed-rate debt is reflected in the consolidated balance sheet at fair value, which reflects any adjustment in the value attributable to movements in related market interest and foreign exchange rates.
~~A summary of the exercise rights of the detachable warrants as of March 31, 2004 is as follows:~~
~~Exercise~~ ~~Number of shares per~~
~~Issued on~~ ~~Exercisable during~~ ~~price~~ ~~warrant~~ ~~Status of exercise~~
~~(Yen)~~
~~August 17, 1998~~ ~~September 1, 1999 through August 16, 2004~~ ~~6,264~~ ~~319 shares of common stock of Sony Corporation~~ ~~230 warrants exercised; 1,770 warrants outstanding~~
~~August 23, 1999~~ ~~September 1, 2000 through August 22, 2005~~ ~~7,167~~ ~~279 shares of common stock of Sony Corporation~~ ~~2,000 warrants outstanding~~
~~October 19, 2000~~ ~~November 1, 2001 through October 18, 2006~~ ~~12,457~~ ~~100 shares of common stock of Sony Corporation~~ ~~9,600 warrants outstanding~~
~~December 21, 2001~~ ~~January 6, 2003 through December 20, 2007~~ ~~6,039~~ ~~100 shares of common stock of Sony Corporation~~ ~~11,534 warrants outstanding~~
~~December 21, 2001~~ ~~June 20, 2002 through June 20, 2007~~ ~~3,300~~ ~~75 shares of subsidiary tracking stock~~ ~~600 warrants outstanding~~
~~Aggregate amounts of annual maturities of long-term debt during the next five years are as follows:~~

Year ending March 31 Yen in millions
2005 383,757
2006 160,334
2007 168,878
2008 26,313
2009 284,594
     At March 31, 2004, Sony had unused committed lines of credit amounting to 817,538 million yen and can generally borrow up to 90 days from the banks with whom Sony has committed line contracts. Furthermore, Sony has Commercial Paper Programs, the size of which was 1,873,450 million yen. There was no commercial paper outstanding at March 31, 2004. Under those programs, Sony can issue commercial paper for the period generally not in excess of 270 days up to the size of the programs. In addition, Sony has Medium Term Notes programs, the size of which was 845,200 million yen. At March 31, 2004, the total outstanding balance of Medium Term Notes was 60,537 million yen.
     In the United States of America, Sony has an accounts receivable securitization program which provides for the accelerated receipt of up to 52,825 million yen of cash on eligible trade accounts receivable of Sony’s U.S. electronics subsidiary. Through this program, Sony can securitize and sell a percentage of undivided interest in that pool of receivables to several multi-seller commercial paper conduits owned and operated by a bank.
     The basic agreements with certain banks in Japan include provisions that collateral (including sums on deposit with such banks) or guarantors will be furnished upon the banks’ request and that any collateral furnished, pursuant to such agreements or otherwise, will be applicable to all present or future indebtedness to such banks.
~~F-36~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~11.~~     ~~Deposits from customers in the banking Business~~
     All deposits from customers in the banking business are interest bearing deposits, and are owned by a Japanese bank subsidiary which was established as an Online Internet bank for individuals. At March 31, 2003 and 2004, the balances of time deposits issued in amounts of 10 million yen or more were 39,620 million yen and 55,164 million yen, respectively.
     At March 31, 2004, aggregate amounts of annual maturities of time deposits with a remaining term of more than one year include 23,951 million yen and 22,284 million yen for the years ending March 31, 2006 and 2007, respectively. There are no deposits having a maturity date after March 31, 2007.
~~12.~~     ~~Financial instruments~~
~~(1)     Derivative instruments and hedging activities:~~
     Sony has certain financial instruments including financial assets and liabilities incurred in the normal course of business. Such financial instruments are exposed to market risk arising from the changes of foreign currency exchange rates and interest rates. In applying a consistent risk management strategy for the purpose of reducing such risk, Sony uses derivative financial instruments, which include foreign exchange forward contracts, foreign currency option contracts, and interest rate and currency swap agreements. Sony does not use derivative financial instruments for trading or speculative purposes. Foreign exchange forward contracts and foreign currency option contracts are utilized primarily to limit the exposure affected by changes in foreign currency exchange rates on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies. Interest rate and currency swap agreements are utilized primarily to lower funding costs, to diversify sources of funding and to limit Sony’s exposure associated with underlying debt instruments resulting from adverse fluctuations in interest rates and/or foreign currency exchange rates.
     These instruments are executed with creditworthy financial institutions, and virtually all foreign currency contracts are denominated in U.S. dollars, euros and other currencies of major countries. Although Sony may be exposed to losses in the event of nonperformance by counterparties or unfavorable interest and currency rate movements, it does not anticipate significant losses due to the nature of Sony’s counterparties or the hedging arrangements.
��    ~~Derivative financial instruments held by Sony are classified and accounted for as described below pursuant to FAS No. 133.~~
~~Fair value hedges~~
     ~~The derivatives designated as fair value hedges include interest rate and currency swap agreements.~~
     Both the derivatives designated as fair value hedge and hedged items are reflected at fair value in the consolidated balance sheet. Changes in the fair value of the derivatives designated as fair value hedge as well as offsetting changes in the carrying value of the underlying hedged items are recognized in income.
The amount of ineffectiveness of these fair value hedges, that was reflected in earnings, was not material for the years ended March 31, 2003 and 2004. In addition, there were no amounts excluded from the assessment of hedge effectiveness of fair value hedges.
~~Cash flow hedges~~
     ~~The derivatives designated as cash flow hedges include foreign exchange forward contracts, foreign currency option contracts and interest rate and currency swap agreements.~~
~~F-37~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
     Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings.
For the years ended March 31, 2003 and 2004, these cash flow hedges were fully effective. In addition, there were no amounts excluded from the assessment of hedge effectiveness of cash flow hedges. At March 31, 2004, amounts related to derivatives qualifying as cash flow hedges amounted to a net reduction of equity of 600 million yen. Within the next twelve months, 1,212 million yen is expected to be reclassified from equity into earnings as profit. For the year ended March 31, 2004, there were no forecasted transactions that failed to occur which resulted in the discontinuance of cash flow hedges.
~~Derivatives not designated as hedges~~
     The derivatives not designated as hedges under FAS No. 133 include foreign exchange forward contracts, foreign currency option contracts, interest rate and currency swap agreements, convertible rights included in convertible bonds and other.
     ~~Changes in the fair value of derivatives not designated as hedges are recognized in income.~~
~~A description of the purpose and classification of the derivative financial instruments held by Sony is as follows:~~
~~Foreign exchange forward contracts and foreign currency option contracts~~
     Sony enters into foreign exchange forward contracts and purchased and written foreign currency option contracts primarily to fix the cash flows from intercompany accounts receivable and payable and forecasted transactions denominated in functional currencies (Japanese yen, U.S. dollars and euros) of Sony’s major operating units. The majority of written foreign currency option contracts are a part of range forward contract arrangements and expire in the same month with the corresponding purchased foreign currency option contracts.
     Since July 1, 2002, certain foreign currency option contracts have been designated as hedges of forecasted intercompany transactions in line with changes in hedging schemes regarding Sony’s derivative activities, under which such derivative transactions meet the requirements for hedge accounting, including correlation, as stipulated under FAS No. 133 and FAS No. 138.
     Sony also enters into foreign exchange forward contracts, which effectively fix the cash flows from foreign currency denominated debt. Accordingly, these derivatives have been designated as cash flow hedges in accordance with FAS No. 133.
     ~~Foreign exchange forward contracts and foreign currency option contracts that do not qualify as hedges are marked-to-market with changes in value recognized in other income and expense.~~
~~These derivatives generally mature or expire within four months after the balance sheet date.~~
~~Interest rate and currency swap agreements~~
     Sony enters into interest rate and currency swap agreements, which are used for reducing the risk arising from the changes in the fair value of fixed rate debt and available-for-sale debt securities. For example, Sony enters into interest rate and currency swap agreements, which effectively swap foreign currency denominated fixed rate debt for functional currency denominated variable rate debt. These derivatives are considered to be a hedge against changes in the fair value of Sony’s foreign denominated fixed-rate obligations. Accordingly, these derivatives have been designated as fair value hedges in accordance with FAS No. 133.
~~F-38~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
     Sony also enters into interest rate and currency swap agreements that are used for reducing the risk arising from the changes in anticipated cash flow of variable rate debt and foreign currency denominated debt. For example, Sony enters into interest rate and currency swap agreements, which effectively swap foreign currency denominated variable rate debt for functional currency denominated fixed rate debt. These derivatives are considered to be a hedge against changes in the anticipated cash flow of Sony’s foreign denominated variable rate obligations. Accordingly, these derivatives have been designated as cash flow hedges in accordance with FAS No. 133.
Any other interest rate and currency swap agreements that do not qualify as hedges, which are used for reducing the risk arising from changes of variable rate and foreign currency dominated intercompany debt, are marked-to-market with changes in value recognized in other income and expense.
~~Embedded derivatives~~
     The embedded derivatives that must be separated from the host contracts and accounted for as derivative instruments under FAS No. 133 are recognized in income. For example, the convertible rights included in convertible bonds held by Sony’s life insurance subsidiary, which are classified as available-for-sale debt securities, are considered embedded derivatives and are marked-to-market with changes in value recognized in financial service revenue.
~~(2)     Fair value of financial instruments:~~
The estimated fair values of Sony’s financial instruments are summarized as follows. The following summary excludes cash and cash equivalents, time deposits, notes and accounts receivable, trade, short-term borrowings, notes and accounts payable, trade and deposits from customers in the banking business that are carried at amounts which approximate fair value. The summary also excludes debt and equity securities which are disclosed in Note 6.

March 31
2003 2004
Notional Carrying Estimated Notional Carrying Estimated
amount amount fair value amount amount fair value
(Yen in millions)
Long-term debt including the current portion — (841,824 ) (924,665 ) — (1,161,406 ) (1,235,669 )
Foreign exchange forward contracts 1,139,330 (11,753 ) (11,753 ) 1,348,157 (994 ) (994 )
Currency option contracts purchased 484,456 2,868 2,868 375,582 10,781 10,781
Currency option contracts written 238,760 (1,975 ) (1,975 ) 124,925 (1,000 ) (1,000 )
Interest rate swap agreements 181,443 (8,446 ) (8,446 ) 218,101 (4,229 ) (4,229 )
Interest rate and currency swap agreements 24,588 (1,330 ) (1,330 ) 8,574 384 384
Embedded derivatives 446,463 1,755 1,755 421,416 12,885 12,885
     ~~The following are explanatory notes regarding the estimation method of fair values in the above table.~~
~~F-39~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~Long-term debt including the current portion~~
The fair values of long-term debt, including the current portion, were estimated based on either the market value or the discounted amounts of future cash flows using Sony’s current incremental debt rates for similar liabilities.
~~Derivative financial instruments~~
     The fair values of foreign exchange forward contracts and foreign currency option contracts were estimated based on market quotations. The fair values of interest rate and currency swap agreements were estimated based on the discounted amounts of future net cash flows. The fair values of convertible rights, which were a majority of embedded derivatives, were estimated based on the market price of stock which will be acquired by the exercise.
~~13.~~     ~~Pension and severance plans~~
     Upon terminating employment, employees of Sony Corporation and its subsidiaries in Japan are entitled, under most circumstances, to lump-sum indemnities or pension payments as described below. For employees voluntarily retiring, under normal circumstances, minimum payment is an amount based on current rates of pay and lengths of service. In calculating the minimum payment for employees involuntarily retiring, including employees retiring due to meeting mandatory retirement age requirements, Sony may grant additional benefits.
     In June, 2003, Sony adopted the new corporate governance system, “Company with Committees”, based on the revised Japanese commercial Code. Under the previous corporate governance system, with respect to directors’ and statutory auditors’ resignations, lump-sum severance indemnities are calculated using a similar formula aforementioned and are normally paid subject to the approval of Sony’s shareholders. Under the “Company with Committees” system, with respect to directors’, corporate executive officers’ and executive officers’ resignations, lump-sum severance indemnities calculated based on the compensation committee’s bylaw are paid subject to the approval of compensation committee.
     Sony Corporation and most of its subsidiaries in Japan have contributory funded defined benefit pension plans, which are pursuant to the Japanese Welfare Pension Insurance Law. The contributory pension plans cover a portion of the governmental welfare pension program, under which the contributions are made by the companies and their employees, and an additional portion representing the substituted noncontributory pension plans. Under the contributory pension plans, the defined benefits representing the noncontributory portion of the plans, in general, cover 60% of the indemnities under the existing regulations to employees. The remaining indemnities are covered by severance payments by the companies. The pension benefits are determined based on years of service and the compensation amounts, as stipulated in the aforementioned regulations, are payable at the option of the retiring employee in a lump-sum amount or on a monthly pension. Contributions to the plans are funded through several financial institutions in accordance with the applicable laws and regulations.
     Many of foreign subsidiaries have defined benefit pension plans or severance indemnity plans which substantially cover all of their employees, under which the cost of benefits is currently funded or accrued. Benefits awarded under these plans are based primarily on the current rate of pay and length of service.
     ~~Sony uses a measurement date of March 31 for substantially all of its pension and severance plans.~~
~~F-40~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~The components of net pension and severance costs, which exclude employee termination benefits paid in restructuring activities, for the years ended March 31, 2002, 2003 and 2004 were as follows:~~
~~Japanese plans:~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Service cost 48,609 47,884 54,501
Interest cost 21,232 20,857 19,489
Expected return on plan assets (26,286 ) (25,726 ) (22,812 )
Amortization of net transition asset (375 ) (375 ) (375 )
Recognized actuarial loss 12,639 20,655 31,019
Amortization of prior service cost 611 (939 ) (939 )
Gains on curtailments and settlements — (1,380 ) —

Net periodic benefit cost 56,430 60,976 80,883

~~Foreign plans:~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Service cost 15,161 13,954 11,252
Interest cost 7,944 8,478 8,566
Expected return on plan assets (7,416 ) (7,319 ) (6,812 )
Amortization of net transition asset (87 ) (47 ) (27 )
Recognized actuarial (gain) loss (351 ) 1,452 1,569
Amortization of prior service cost 848 (208 ) (117 )
(Gains) losses on curtailments and settlements — (460 ) 5,574

Net periodic benefit cost 16,099 15,850 20,005

~~F-41~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~The changes in benefit obligation and plan assets, funded status and composition of amounts recognized in the consolidated balance sheets were as follows:~~

Japanese plans Foreign plans
March 31 March 31
2003 2004 2003 2004
(Yen in millions) (Yen in millions)
Change in benefit obligation:
Benefit obligation at beginning of the fiscal year 869,142 1,031,760 143,210 157,580
Service cost 47,884 54,501 13,954 11,252
Interest cost 20,857 19,489 8,478 8,566
Plan participants’ contributions 5,148 5,802 706 644
Amendments — — (23 ) 3,900
Actuarial (gain) loss 114,665 (81,873 ) 9,019 431
Foreign currency exchange rate changes — — (9,551 ) (17,082 )
Curtailments and settlements (1,010 ) — (1,092 ) (66 )
Benefits paid (24,926 ) (36,137 ) (7,121 ) (9,387 )

Benefit obligation at end of the fiscal year 1,031,760 993,542 157,580 155,838

Change in plan assets:
Fair value of plan assets at beginning of the fiscal year 456,678 405,248 82,602 67,937
Actual return (loss) on plan assets (66,682 ) 93,154 (10,466 ) 13,065
Foreign currency exchange rate changes — — (3,287 ) (3,420 )
Employer contribution 21,296 23,243 5,235 16,475
Plan participants’ contributions 5,148 5,802 706 644
Benefits paid (11,192 ) (14,352 ) (6,853 ) (9,039 )

Fair value of plan assets at end of the fiscal year 405,248 513,095 67,937 85,662

Funded status 626,512 480,447 89,643 70,176
Unrecognized actuarial loss (513,012 ) (328,467 ) (38,702 ) (27,550 )
Unrecognized net transition asset 854 479 (180 ) (211 )
Unrecognized prior service cost 21,579 20,784 1,283 748

Net amount recognized 135,933 173,243 52,044 43,163

Amounts recognized in the consolidated
balance sheet consist of:
Accrued pension and severance costs, including current portion 444,636 322,677 72,048 58,843
Intangibles (22,433 ) (21,263 ) (128 ) (113 )
Accumulated other comprehensive income (286,270 ) (128,171 ) (19,876 ) (15,567 )

Net amount recognized 135,933 173,243 52,044 43,163

~~F-42~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~The accumulated benefit obligation for all defined benefit pension plan as follows:~~

Japanese plans Foreign plans
March 31 March 31
2003 2004 2003 2004
(Yen in millions) (Yen in millions)
855,116 830,898 118,387 129,879
     Under FAS No. 87 Sony has recorded a pension liability to cover the amount of the projected benefit obligation in excess of plan assets, considering unrealized items and the minimum pension liability. The minimum pension liability represents the excess of the accumulated benefit obligation over plan assets and accrued pension and severance costs already recognized before recording the minimum pension liability. A corresponding amount was recognized as an intangible asset to the extent of the unrecognized prior service cost, and the balance was recorded as a component of accumulated other comprehensive income, net of tax.
~~The projected benefit obligations, the accumulated benefit obligations and the fair value of plan assets for the pension plans which Sony has recognized the minimum pension liability were as follows:~~

Japanese plans Foreign plans
March 31 March 31
2003 2004 2003 2004
(Yen in millions) (Yen in millions)
Projected benefit obligations 1,016,889 978,357 124,055 124,447
Accumulated benefit obligations 843,463 821,020 102,313 110,539
Fair value of plan assets 405,009 512,720 63,024 72,031
~~Weighted-average assumptions used to determine benefit obligations as of March 31, 2002, 2003 and 2004 were as follows:~~
~~Japanese plans:~~

March 31
2002 2003 2004
Discount rate 2.4 % 1.9 % 2.4 %
Rate of compensation increase 3.0 3.0 3.0
~~Foreign plans:~~

March 31
2002 2003 2004
Discount rate 6.6 % 6.3 % 5.8 %
Rate of compensation increase 4.5 4.1 4.0
~~Weighted-average assumptions used to determine net pension and severance costs for the years ended March 31, 2002, 2003 and 2004 were as follows:~~
~~Japanese plans:~~

Year Ended March 31
2002 2003 2004
Discount rate 2.7 % 2.4 % 1.9 %
Expected return on plan assets 4.0 4.0 4.0
Rate of compensation increase 3.0 3.0 3.0
~~F-43~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~Foreign plans:~~

Year Ended March 31
2002 2003 2004
Discount rate 6.8 % 6.6 % 6.3 %
Expected return on plan assets 7.7 8.1 8.3
Rate of compensation increase 4.6 4.5 4.1
     ~~As required under FAS No. 87, the assumptions are reviewed in accordance with changes in circumstances.~~
     To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as historical and expected long-term rate of returns on various categories of plan assets.
~~Weighted-average pension plan asset allocations based on the fair value of such assets as of March 31, 2003 and 2004 were as follows:~~
~~Japanese plans:~~

March 31
2003 2004
Equity securities 53.0 % 39.0 %
Debt securities 34.4 14.7
Cash 8.8 42.7
Other 3.8 3.6

Total 100 % 100 %

~~Foreign plans:~~

March 31
2003 2004
Equity securities 66.0 % 63.2 %
Debt securities 25.1 26.6
Real estate 1.6 3.2
Other 7.3 7.0

Total 100 % 100 %

     For the pension plans of Sony Corporation and most of its subsidiaries in Japan, Sony’s asset investment policy is set so as to compensate the appropriate level for employee’s benefit over the long term.
     For Sony’s principal pension plans, the target allocation as of March 31, 2004, is, as a result of our Asset Liability management, 67% of public equity and 33% of fixed income securities. However, when the performance of public equity markets is considered to be below a certain level described in our investment guidelines, the allocation of assets to public equity securities is decreased to 51% of total assets. When determining an appropriate asset allocation, diversification among assets is duly considered. The actual asset allocation as of March 31, 2004 for Sony’s principal pension plans does not meet the aforementioned target allocation. As Sony’s investment policy including target allocation is currently being reviewed and revised aiming for the revision of the pension plan scheduled in the first half of the year ending March 31,
~~F-44~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~2005, actual asset allocation to cash, for example, as of March 31, 2004 is tentatively increased for transition purpose.~~
     Sony makes contributions to its contributory funded defined benefit pension plans as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected return on plan assets and the present value of benefit obligations. Sony expects to contribute approximately 23 billion yen to the Japanese plans and approximately 17 billion yen to the foreign plans for the year ending March 31, 2005.
~~The future benefit payments for the Japanese plans are expected as follows:~~

Japanese plans
(Yen in
millions)
Year ending March 31,
2005 22,168
2006 23,864
2007 24,093
2008 25,537
2009 29,243
2010 - 2014 190,312
~~14.~~     ~~Stockholders’ equity~~
~~(1)     Subsidiary tracking stock:~~
     On June 20, 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which is intended to be linked to the economic value of Sony Communication Network Corporation (“SCN”), a directly and indirectly wholly owned subsidiary of Sony Corporation which is engaged in Internet-related services. The subsidiary tracking stock holders have no direct rights in the equity or assets of SCN or the assets of Sony Corporation. Except as summarized below, the shares of subsidiary tracking stock have the same rights and characteristics as those of shares of common stock.
     The dividend on the shares of this series of subsidiary tracking stock is payable only when the Board of Directors of SCN has resolved to pay to its common stock holders a dividend in an amount per share of the subsidiary tracking stock equal to the amount of SCN’s dividend per share of its common stock multiplied by the Standard Ratio (as defined in the articles of incorporation), subject to statutory restriction on Sony Corporation’s ability to pay dividends on its shares of capital stock and the maximum dividend amount (as defined in the articles of incorporation). If the amount of dividends paid to the subsidiary tracking stock holders is less than the amount, which should have been paid pursuant to the formula set forth above due to the statutory restriction referred to above or for any other reason, such shortfall will be accumulated and such cumulative amount will be paid to the subsidiary tracking stock holders for subsequent fiscal years. Any such dividend on the subsidiary tracking stock is payable in priority to the payment of dividends to the common stock holders. However, the subsidiary tracking stockholders have no right to participate in the dividends to common stock holders. Furthermore, even if the Board of Directors of SCN does not take a resolution for the payment of dividends to SCN’s common stock holders, Sony Corporation may decide to pay dividends to its common stock holders.
     The subsidiary tracking stockholders have the same voting rights as those of the common stock holders and, thus, are entitled to participate and vote at any General Meeting of Shareholders in the same way as the common stock holders. In addition, as each series of subsidiary tracking stock is a separate class of stock different from common stock, if any resolution of the General Meeting of Shareholders
~~F-45~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
would adversely affect the rights of the shareholders of a particular class of subsidiary tracking stock, the shareholders of each class of subsidiary tracking stock will have the right to approve or disapprove such resolution by a special resolution of the meeting of shareholders of that class of subsidiary tracking stock.
     In the event of distribution of residual assets to the shareholders of Sony Corporation where, as long as such assets include shares of common stock of SCN, the number of shares of SCN common stock obtained by multiplying the number of shares of the subsidiary tracking stock held by each holder by the Standard Ratio or the net proceeds from the sale of the shares of SCN common stock so to be distributed will be distributed to the holders of the subsidiary tracking stock.
     The shares of subsidiary tracking stock may be subject to repurchase and retirement in the same manner and under the same restriction as the shares of common stock. In addition, at any time after the passage of three years from the date of the initial issuance of shares of a series of subsidiary tracking stock, it may retire the entire amount of all outstanding shares of that series of subsidiary tracking stock upon paying to the shareholders thereof an amount equal to the current market price of the subsidiary tracking stock out of Sony Corporation’s retained earnings available for dividend payments. Sony Corporation may also retire the shares of a series of subsidiary tracking stock in their entirety pursuant to the procedures prescribed by the Japanese Commercial Code for the reduction of capital upon payment to the subsidiary tracking stock holders an amount equal to the market value thereof as set forth above.
     At any time after the passage of three years from the date of the initial issuance of shares of a series of subsidiary tracking stock, it may convert the entire amount of all outstanding shares of the subsidiary tracking stock into the shares of Sony Corporation’s common stock at the rate of the multiple of 1.1 of the market value (as defined in the articles of incorporation) of shares of the subsidiary tracking stock divided by the market value (as similarly defined) of the shares of Sony Corporation’s common stock.
     If any events (as defined in the articles of incorporation) occur, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s common stock at the price or rate set forth above.
     The number of shares of the subsidiary tracking stock issued and outstanding at March 31, 2004 was 3,072,000. At March 31, 2004, 136,454 shares of the subsidiary tracking stock would be issued upon exercise of warrants and stock acquisition rights outstanding.
~~(2)     Common stock:~~
~~Changes in the number of shares of common stock issued and outstanding during the years ended March 31, 2002, 2003 and 2004 have resulted from the following:~~
~~Number of shares~~
~~Balance at March 31, 2001~~ ~~919,617,134~~
~~Exercise of stock purchase warrants~~ ~~8,301~~
~~Conversion of convertible bonds~~ ~~118,920~~
~~Balance at March 31, 2002~~ ~~919,744,355~~
~~Conversion of convertible bonds~~ ~~138,330~~
~~Stock issued under exchange offering~~ ~~2,502,491~~
~~Balance at March 31, 2003~~ ~~922,385,176~~
~~Conversion of convertible bonds~~ ~~2,944,800~~
~~Stock issued under exchange offering~~ ~~1,088,304~~
~~Balance at March 31, 2004~~ ~~926,418,280~~
~~F-46~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
     ~~At March 31, 2004, 83,885,563 shares of common stock would be issued upon conversion or exercise of all convertible bonds, warrants and stock acquisition rights outstanding.~~
     On October 1, 2002, Sony Corporation implemented a share exchange as a result of which Aiwa Co., Ltd. became a wholly-owned subsidiary. As a result of this share exchange, Sony Corporation issued 2,502,491 new shares, the minority interest in Aiwa Co., Ltd. was eliminated from the balance sheet, and additional paid-in capital increased 15,791 million yen.
     On May 1, 2003, Sony Corporation implemented a share exchange as a result of which CIS Corporation became a wholly-owned subsidiary. As a result of this share exchange, Sony Corporation issued 1,088,304 new shares, and additional paid-in capital increased 5,409 million yen.
     On November 20, 1991, Sony Corporation made a free share distribution of 33,908,621 shares in ratios of one share for each ten shares held for which no accounting entry was required in Japan. Had the distribution been accounted for in the manner adopted by companies in the United States of America, 201,078 million yen would have been transferred from retained earnings to the appropriate capital accounts. This has been the only free distribution of common stock where no accounting entry was required in Japan.
     Conversions of convertible bonds into common stock are accounted for in accordance with the provisions of the Japanese Commercial Code by crediting approximately one-half of the conversion proceeds to the common stock account and the remainder to the additional paid-in capital account.
     The Ordinary General Meeting of Shareholders held on June 27, 1997 authorized Sony Corporation, pursuant to the Japanese regulations, to acquire and retire up to a total not exceeding 30 million outstanding shares of its common stock with its profit, whenever deemed necessary by the Board of Directors in view of general economic conditions, Sony’s business performance and financial condition and other factors. Subsequently, the Ordinary General Meeting of Shareholders held on June 29, 2000 increased the maximum number of shares of its common stock up to 90 million shares on and after June 30, 2000 and the Extraordinary General Meeting of Shareholders held on January 25, 2001 authorized Sony Corporation to acquire and retire the subsidiary tracking stock as well as its common stock on and after January 26, 2001.
     The Ordinary General Meeting of Shareholders held on June 26, 1998 approved that (a) in addition to the shares discussed in the preceding paragraph, Sony Corporation could, by a resolution of the Board of Directors, acquire and retire up to a total not exceeding 30 million outstanding shares of its common stock with its additional paid-in capital at prices in total not exceeding 400 billion yen and (b) Sony Corporation may grant share subscription rights to directors and/or employees pursuant to the Japanese regulations. Subsequently, the Extraordinary General Meeting of Shareholders held on January 25, 2001 authorized Sony Corporation to acquire and retire the subsidiary tracking stock as well as its common stock on and after January 26, 2001.
     Prior to the amendments to the Japanese Commercial Code enacted on April 1, 2002, purchase and retirement by Sony Corporation of its own shares could be made at any time by resolution of the Board of Directors. No common stock and subsidiary tracking stock had been acquired under the approval during the year ended March 31, 2002.
     Following the amendments to the Japanese Commercial Code enacted on April 1, 2002, purchase by Sony Corporation of its own shares was subject to the prior approval of shareholders at the Ordinary General Meeting of Shareholders, which included the maximum number of shares and the maximum total amount to be purchased for each class of stock. Once such approval of shareholders was obtained, Sony Corporation could purchase its own shares at any time during the period up to the conclusion of next Ordinary General Meeting of Shareholders.
~~F-47~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
     The Ordinary General Meeting of Shareholders held on June 20, 2002 approved that Sony Corporation acquire up to a total not exceeding 90 million outstanding shares of its common stock at an amount in a total not exceeding 650 billion yen and a total not exceeding 300 thousand outstanding shares of the subsidiary tracking stock at an amount in total not exceeding 1 billion yen until the conclusion of the General Meeting of Shareholders held for the year ended March 31, 2003. As a result, no common stock and subsidiary tracking stock had been acquired under this approval.
     The Ordinary General Meeting of Shareholders held on June 20, 2003 approved that Sony Corporation acquire up to a total not exceeding 90 million outstanding shares of its common stock at an amount in a total not exceeding 400 billion yen and a total not exceeding 300 thousand outstanding shares of the subsidiary tracking stock at an amount in total not exceeding 1 billion yen. As a result, Sony Corporation had acquired 2 million outstanding shares of its common stock at an amount in 8,200 million yen. No subsidiary tracking stock had been acquired under this approval.
     The Ordinary General Meeting of Shareholders held on June 22, 2004 approved to amend the articles of incorporation that Sony Corporation may purchase its own shares by a resolution of the Board of Directors, in accordance with the amendments to the Japanese Commercial code enacted on September 25, 2003. With the amendment of the articles of incorporation, Sony Corporation may purchase its own shares at any time by a resolution of the Board of Directors up to the retained earnings available for dividends to shareholders.
~~(3)     Retained earnings:~~
     The amount of statutory retained earnings of Sony Corporation available for dividends to shareholders as of March 31, 2004 was 524,111 million yen. The appropriation of retained earnings for the year ended March 31, 2004 including cash dividends for the six-month period ended March 31, 2004 has been incorporated in the accompanying consolidated financial statements. This appropriation of retained earnings was approved at the meeting of the Board of Directors of Sony Corporation held on April 26, 2004 and was then recorded in the statutory books of account, in accordance with the Japanese Commercial Code.
     Retained earnings include Sony’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of 2,967 million yen and 2,261 million yen at March 31, 2003 and 2004, respectively.
~~F-48~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(4)     Other comprehensive income:~~
~~Other comprehensive income for the years ended March 31, 2002, 2003 and 2004 were as follows:~~

Pre-tax Tax Net-of-tax
amount expense amount
(Yen in millions)
For the year ended March 31, 2002:
Unrealized gains on securities —
Unrealized holding gains or losses arising during the period (24,857 ) 4,614 (20,243 )
Less: Reclassification adjustment for gains or losses included in net income (2,594 ) 1,318 (1,276 )
Unrealized losses on derivative instruments —
Cumulative effect of an accounting change 2,040 (951 ) 1,089
Unrealized holding gains or losses arising during the period 5,470 (3,033 ) 2,437
Less: Reclassification adjustment for gains or losses included in net income (7,200 ) 2,963 (4,237 )
Minimum pension liability adjustment (38,391 ) 16,163 (22,228 )
Foreign currency translation adjustments 101,483 (4,051 ) 97,432

Other comprehensive income 35,951 17,023 52,974

For the year ended March 31, 2003:
Unrealized gains on securities —
Unrealized holding gains or losses arising during the period (18,575 ) 8,948 (9,627 )
Less: Reclassification adjustment for gains or losses included in net income 3,421 867 4,288
Unrealized losses on derivative instruments —
Unrealized holding gains or losses arising during the period (6,268 ) 1,791 (4,477 )
Less: Reclassification adjustment for gains or losses included in net income 682 (287 ) 395
Minimum pension liability adjustment (181,725 ) 71,089 (110,636 )
Foreign currency translation adjustments — Translation adjustments arising during the period (87,103 ) 3,110 (83,993 )
Less: Reclassification adjustment for losses included in net income 7,665 — 7,665

Other comprehensive income (281,903 ) 85,518 (196,385 )

~~F-49~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Pre-tax Tax Net-of-tax
amount expense amount
(Yen in millions)
For the year ended March 31, 2004:
Unrealized gains on securities —
Unrealized holding gains or losses arising during the period 89,861 (31,890 ) 57,971
Less: Reclassification adjustment for gains or losses included in net income (7,371 ) 1,692 (5,679 )
Unrealized losses on derivative instruments —
Unrealized holding gains or losses arising during the period 11,586 (4,049 ) 7,537
Less: Reclassification adjustment for gains or losses included in net income (5,961 ) 2,617 (3,344 )
Minimum pension liability adjustment 162,408 (68,993 ) 93,415
Foreign currency translation adjustments —
Translation adjustments arising during the period (134,312 ) 5,199 (129,113 )
Less: Reclassification adjustment for losses included in net income 1,232 — 1,232

Other comprehensive income 117,443 (95,424 ) 22,019

     During the years ended March 31, 2003 and 2004, 7,665 million yen and 1,232 million yen of foreign currency translation adjustments was transferred respectively from other comprehensive income and charged to income as a result of the liquidation of certain foreign subsidiaries.
~~15.~~     ~~Stock-based compensation plans~~
     ~~Sony has four types of stock-based compensation plans as incentive plans for directors, corporate executive officers and selected employees.~~
~~(1)     Warrant plan:~~
     Upon issuance of unsecured bonds with detachable warrants which are described in Note 10, Sony Corporation has purchased all of the detachable warrants and distributed them to the directors, corporate executive officers and selected employees of Sony. By exercising a warrant, directors, corporate executive officers and selected employees can purchase the common stock or subsidiary tracking stock of Sony Corporation, the number of which is designated by each plan. The warrants generally vest ratably over a period of three years, and are exercisable up to six years from the date of grant.
~~(2)     Convertible Bond plan:~~
     Sony has an equity-based compensation plan for selected executives of Sony’s United States of America subsidiaries using U.S. dollar-denominated non-interest bearing convertible bonds which have characteristics similar to that of an option plan. Each convertible bond can be converted into 100 shares of the common stock of Sony Corporation at an exercise price based on the prevailing market rate shortly before the date of grant. The convertible bonds vest ratably over a three-year period and are exercisable up to ten years from the date of grant. As the convertible bonds were issued in exchange for a non-interest bearing employee loan, no accounting recognition was given to either the convertible bonds or the employee loans in Sony’s consolidated balance sheet as a right of offset exists between the convertible bonds and the employee loans.
~~F-50~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(3)     Stock Acquisition Rights:~~
     During the year ended March 31, 2003, Sony adopted an equity-based compensation plan that issues common stock acquisition rights for the purpose of granting stock options to the directors, corporate executive officers and selected employees of Sony, and subsidiary tracking stock acquisition rights for the purpose of granting stock options to the directors and selected employees of Sony Communication Network Corporation, pursuant to the Commercial Code of Japan. The stock acquisition rights generally vest ratably over a period of three years and are exercisable up to ten years from the date of grant.
~~Presented below is a summary of the activity for common stock warrant, convertible bond and stock acquisition rights plans for the years shown:~~

Year Ended March 31
2002 2003 2004
Weighted- Weighted- Weighted-
average average average
Number of exercise Number of exercise Number of exercise
Shares price Shares price Shares price
(Yen) (Yen) (Yen)
Outstanding at beginning of the fiscal year 2,800,270 9,911 5,853,892 8,648 9,640,892 7,832
Granted 3,397,300 6,877 3,874,100 5,313 4,148,700 4,434
Exercised (8,294 ) 6,264 — — — —
Forfeited (335,384 ) 6,384 (87,100 ) 8,306 (556,700 ) 6,760

Outstanding at end of the fiscal year 5,853,892 8,648 9,640,892 7,832 13,232,892 5,831

Exercisable at end of the fiscal year 2,082,640 8,127 4,314,292 9,773 6,828,992 7,002

~~A summary of common stock warrants, convertible bond options and stock acquisition rights outstanding and exercisable at March 31, 2004 is as follows:~~

Outstanding Exercisable
Weighted- Weighted- Weighted-
Exercise price Number of average average Number of average
range Shares exercise price remaining life Shares exercise price
(Yen) (Yen) (Years) (Yen)
3,864~7,000 10,534,192 4,777 7.78 4,329,092 5,191
7,001~12,992 2,698,700 9,946 4.23 2,499,900 10,138

3,864~12,992 13,232,892 5,831 7.05 6,828,992 7,002

~~A summary of subsidiary tracking stock warrants and stock acquisition rights outstanding and exercisable at March 31, 2004 is as follows:~~

Outstanding Exercisable
Weighted- Weighted- Weighted-
Exercise price Number of average average Number of average
range Shares exercise price remaining life Shares exercise price
(Yen) (Yen) (Years) (Yen)
815~3,300 136,454 1,702 7.40 45,100 2,533
     ~~As the exercise prices for the warrant, convertible bond and stock acquisition rights plans were determined based on the prevailing market price shortly before the date of grant, the compensation~~
~~F-51~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~expense for these plans was not significant for the years ended March 31, 2002, 2003 and 2004, respectively.~~
The weighted-average fair value per share at the date of grant for common stock warrants, convertible bond options and stock acquisition rights granted during the years ended March 31, 2002, 2003 and 2004 were 2,554 yen, 1,707 yen and 1,230 yen, respectively. The fair value of common stock warrants, convertible bond options and stock acquisition rights granted on the date of grant, which is amortized to expense over the vesting period in determining the pro forma impact, is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Year Ended March 31
Weighted-average assumptions 2002 2003 2004
Risk-free interest rate 2.58% 1.73% 1.27%
Expected lives 3.28 years 3.30 years 3.56 years
Expected volatility 50.81% 44.54% 43.70%
Expected dividend 0.40% 0.49% 0.63%
~~(4)     SAR plan:~~
     Sony grants stock appreciations rights (“SARs”) in Japan, Europe and the United States of America for selected employees. Under the terms of these plans, employees on exercise receive cash equal to the amount that the market price of Sony Corporation’s common stock exceeds the strike price of the SARs. The SARs generally vest ratably over a period of three years, and are generally exercisable up to six to ten years from the date of grant. Sony holds treasury stock for the SAR plan in Japan to minimize cash flow exposure associated with the SARs. In addition, Sony uses various strategies to minimize the compensation expense associated with the SAR plans in the United States of America and Europe.
     In December 2001, Sony granted options under its convertible bond plan to certain employees in exchange for the employees agreeing to cancel an equal number of outstanding SARs. Under FASB Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation — an interpretation of APB Opinion No. 25”, no compensation charge was recorded as the number and terms of the new options under the convertible bond plan were substantially the same as the SARs that were cancelled.
~~F-52~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~The status of the SAR plans is summarized as follows:~~

Year Ended March 31
2002 2003 2004
Weighted- Weighted- Weighted-
Number of average Number of average Number of average
SARs exercise price SARs exercise price SARs exercise price
(Yen) (Yen) (Yen)
Outstanding at beginning of the fiscal year 3,565,246 6,218 2,410,394 6,644 2,343,028 6,341
Granted 141,525 7,813 28,750 6,323 — —
Exercised (91,330 ) 5,862 (11,800 ) 5,727 — —
Cancelled (1,192,672 ) 5,951 — — — —
Expired or forfeited (12,375 ) 8,520 (84,316 ) 7,274 (816,460 ) 5,494

Outstanding at end of the fiscal year 2,410,394 6,644 2,343,028 6,341 1,526,568 6,424

Exercisable at end of the fiscal year 1,864,928 6,282 2,176,319 6,211 1,462,391 6,421

~~A summary of SARs outstanding and exercisable at March 31, 2004 is as follows:~~

Outstanding Exercisable
Weighted- Weighted- Weighted-
Exercise price Number of average average Number of average
range SARs exercise price remaining life SARs exercise price
(Yen) (Yen) (Years) (Yen)
3,183~5,000 302,984 4,079 2.18 282,365 4,035
5,001~10,000 1,199,459 6,886 1.70 1,155,901 6,868
10,001~15,000 24,125 12,938 4.71 24,125 12,938

3,183~15,000 1,526,568 6,424 1.84 1,462,391 6,421

     In accordance with APB No. 25 and its related interpretations, the SARs compensation expense is measured as the excess of the quoted market price of Sony Corporation’s common stock over the SARs strike price, which is consistent with the accounting treatment prescribed for SAR plans in FAS No. 123. For the years ended March 31, 2002 and 2003, Sony recognized a reduction in SARs compensation expense of 4,748 million yen and 670 million yen, respectively, due to the decline in Sony’s stock price during the years. For the year ended March 31, 2004, Sony recognized 105 million yen of SARs compensation expense.
~~16.~~     ~~Restructuring charges and asset impairments~~
     As part of its effort to improve the performance of the various businesses, Sony has undertaken a number of restructuring initiatives within the Electronics, Music and Pictures businesses. For the years ended March 31, 2002, 2003 and 2004, Sony recorded total restructuring charges of 106,974 million yen,
~~F-53~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~106,251 million yen and 168,091 million yen, respectively. Significant restructuring charges and asset impairments include the following:~~
~~Electronics Segment~~
In an effort to improve the performance of the Electronics segment, Sony has undergone a number of restructuring efforts to reduce its operating costs. For the years ended March 31, 2002, 2003 and 2004, Sony recorded total restructuring charges of 86,852 million yen, 72,473 million yen and 143,310 million yen, respectively, within the Electronics segment. Significant restructuring activities are the following:
~~Downsizing of computer display CRT operations -~~
     In the year ended March 31, 2002, as flat panel monitors became more popular in the marketplace, the demand for computer display CRTs was drastically reduced. In this situation, Sony decided to abandon certain manufacturing equipment for computer display CRTs mainly in the U.S. in the second quarter of the year ended March 31, 2002. Restructuring charges totaling 19,639 million yen consisted of non-cash equipment write-down and other costs of 6,261 million yen, costs related to the buy-out and cancellation of operating leases totaling 11,264 million yen and other costs related to the disposal of equipment of 2,114 million yen. Of the total restructuring charges recorded, 946 million yen was recorded in cost of sales; 13,257 million yen was included in selling, general and administrative expense, and 5,436 million yen was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. The restructuring activity was completed in the year ended March 31, 2003 and no liability existed as of March 31, 2004.
In the year ended March 31, 2003, due to further market shrinkage and demand shift from CRT displays to LCDs, Sony made a decision to discontinue certain computer display CRT manufacturing operations in Japan and Southeast Asia to rationalize production facilities and downsize its business. Restructuring charges totaling 6,902 million yen consisted of personnel related costs of 1,208 million yen, non-cash equipment impairment and disposal and other costs of 4,010 million yen and contract termination and other costs of 1,684 million yen. Of the total restructuring charges, 1,264 million yen was recorded in cost of sales; 1,684 million yen was included in selling, general and administrative expense, and 3,954 million yen was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. The restructuring activity was completed in the year ended March 31, 2003 and no liability existed as of March 31, 2004.
~~Downsizing of TV display CRT operations -~~
     In the year ended March 31, 2004, due to market shrinkage and demand shift from CRT displays to plasma and LCD panel displays, Sony made a decision to discontinue certain TV display CRT manufacturing operations in Japan to rationalize production facilities and downsize its business. Restructuring charges totaling 8,478 million yen consisted of personnel related costs of 3,139 million yen and non-cash equipment impairment, disposal and other costs of 5,339 million yen. Of the total restructuring charges, 158 million yen was recorded in cost of sales; 3,139 million yen was included in selling, general and administrative expense, and 5,181 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. This restructuring activity was completed as of March 31, 2004 and no further costs are expected to be incurred for this restructuring activity. The remaining liability balance as of March 31, 2004 was 2,227 million yen and will be paid or settled through the year ending March 31, 2005.
~~F-54~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~Aiwa Co., Ltd. restructuring -~~
     In the year ended March 31, 2002, in response to a decline in performance of Aiwa Co., Ltd., and its subsidiaries (“Aiwa”), Aiwa underwent a drastic restructuring program to eliminate the causes of this downward trend and to return to profitability. Aiwa recorded restructuring charges totaling 25,484 million yen in the year ended March 31, 2002, which included a reduction of unprofitable product lines, plant closures and a reduction of the work force. These charges consisted of non-cash equipment write-down and disposal costs of 10,244 million yen, personnel related costs of 8,209 million yen, and other costs of 7,031 million yen including the devaluation of inventory. Among these charges 5,734 million yen was recorded in cost of sales; 9,506 million yen was included in selling, general and administrative expense, and 10,244 million yen was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. Aiwa eliminated its employees from various employee levels, business functions, operating units and geographic regions.
Due to the continued decline in the operating results of Aiwa, the restructuring program that was initiated in the year ended March 31, 2002 was accelerated and additional restructuring charges of 23,007 million yen were recorded in the year ended March 31, 2003. Additional restructuring included further cuts in staffing levels and shutdown of remaining production facilities. These charges consisted of non-cash equipment impairment and disposal costs of 3,504 million yen, personnel related costs of 7,647 million yen, devaluation of inventory of 6,144 million yen, operating lease termination costs of 3,823 million yen and other costs of 1,889 million yen Among these charges 13,791 million yen was recorded in cost of sales; 5,712 million yen was included in selling, general and administrative expense, and 3,504 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. The restructuring program was completed in the year ended March 31, 2003 and no reserve existed as of March 31, 2003. Aiwa Co., Ltd. was merged into Sony Corporation as of December 1, 2002.
~~Closing of a semiconductor plant in the U.S. -~~
     Due to a significant decline in the business conditions of the U.S. semiconductor industry, Sony made a decision in the fourth quarter of the year ended March 31, 2003, to close a semiconductor plant in the U.S. During the year ended March 31, 2004, the scope of the restructuring program was revised and the total restructuring costs are now estimated to be 6,984 million yen, of which 6,730 million yen has been incurred through March 31, 2004. During the year ended March 31, 2003, Sony recorded restructuring charges totaling 5,856 million yen, which consisted of the accelerated depreciation of equipment of 3,128 million yen, personnel related costs of 1,329 million yen, the devaluation of inventory and other costs of 1,399 million yen. These charges were all recorded in cost of sales in the consolidated statements of income.
     During the year ended March 31, 2004, Sony recorded net restructuring charges totaling 874 million yen which consisted of the accelerated depreciation and write-down of equipment of 1,982 million yen, gain on disposal of assets of 1,962 million yen, and 854 million yen of other costs including lease contract termination costs. Among these charges 1,760 million yen was recorded in cost of sales, while asset write-down and disposal costs of 1,076 million yen and the gain on asset disposals of 1,962 million yen were included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. This restructuring program is expected to be completed by the end of the year ending March 31, 2005. The remaining liability balance as of March 31, 2004 was 560 million yen and will be paid or settled through the year ending March 31, 2005.
~~F-55~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~Retirement Programs -~~
In addition to the restructuring efforts disclosed above, Sony has undergone several headcount reduction programs to further reduce operating costs in the Electronics segment. As a result of these programs, Sony recorded restructuring charges totaling 22,930 million yen, 17,609 million yen and 114,001 million yen for the years ended March 31, 2002, 2003 and 2004, respectively, and these charges were included in selling, general and administrative expense 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, 2004 was 18,260 million yen and will be paid through the year ending March 31, 2005. Sony will continue offering early retirement programs in order to further reduce fixed costs in the Electronics segment.
~~Music Segment~~
     Due to the continued contraction of the worldwide music market due to slow worldwide economic growth, the saturation of the CD market, the effects of piracy and other illegal duplication, parallel imports, pricing pressures and the diversification of customer preferences, Sony has been actively repositioning the Music segment for the future by looking to create a more effective and profitable business model. As a result, the Music segment has undergone a worldwide restructuring program since the year ended March 31, 2001 to reduce staffing and other costs through the consolidation and rationalization of facilities worldwide. For the years ended March 31, 2002, 2003 and 2004, Sony recorded total restructuring charges of 8,599 million yen, 22,350 million yen and 10,691 million yen, respectively, within the Music segment excluding Japan. During the year ended March 31, 2004, Sony broadened the scope of its worldwide restructuring of the Music segment and the total restructuring cost of this program is now estimated to be 55,359 million yen, of which 49,548 million yen was incurred from inception of the program through the year ended March 31, 2004. Total estimated restructuring costs do not take into account the impact of the proposed merger of the recorded music business of Sony and Bertlesmann AG. See Note 22 for more information on this proposed merger. Should this merger take place, the recorded music business may incur additional restructuring costs. At March 31, 2004, the liability balance was 6,214 million yen with most of the liabilities being paid or settled during the year ending March 31, 2005. Without taking into account the proposed merger with Bertlesmann AG, the worldwide restructuring program is expected to be completed by the year ending March 31, 2006. In addition to the above, Sony also recorded restructuring charges of 1,519 million yen and 1,291 million yen for the years ended March 31, 2003 and 2004, respectively, in Japan which were personnel related costs included in selling, general and administrative expense in the consolidated statement of income. Significant restructuring activities included the following:
     In the year ended March 31, 2002, Sony recorded restructuring charges totaling 8,599 million yen. Restructuring activities included the rationalization of digital media initiatives and portfolio investment businesses in order to focus on core music activities and staff reductions. Charges incurred in the year ended March 31, 2002 consisted of personnel related costs of 5,100 million yen, non-cash asset impairment and disposal costs of 787 million yen, and other costs of 2,712 million yen including lease termination costs. Among these charges 7,812 million yen was included in selling, general and administrative expense, and 787 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income.
     In the year ended March 31, 2003, restructuring charges related to the worldwide restructuring of the Music segment totaled 22,350 million yen. Restructuring activities included the further consolidation of operations through the shutdown of a cassette and CD manufacturing and distribution center in Holland and a CD manufacturing facility in the U.S. as well as further staff reductions in other areas. The restructuring charges consisted of personnel related costs of 14,932 million yen, non-cash asset impairment
~~F-56~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
and disposal costs of 3,256 million yen and other costs of 4,162 million yen including lease termination costs. Among these charges 19,094 million yen was recorded in selling, general and administrative expense, and 3,256 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. Employees were eliminated across various employee levels, business functions, operating units, and geographic regions during this phase of the worldwide restructuring program.
During the year ended March 31, 2004, Sony broadened the scope of its worldwide restructuring of the Music segment, which resulted in restructuring charges totaling 10,691 million yen. Restructuring activities included the continuation of the shutdown of the CD manufacturing facility in the U.S. as well as the restructuring of music label operations and the further rationalization of overhead functions through staff reductions. The restructuring charges consisted of personnel related costs of 5,137 million yen, lease abandonment costs of 1,323 million yen and other related costs of 4,231 million yen including non-cash asset impairment and disposal costs. Most of these charges are included in selling, general and administrative expense in the consolidated statements of income. Employees were eliminated across various employee levels, business functions, operating units, and geographic regions during this phase of the worldwide restructuring program.
~~Pictures Segment~~
In an effort to improve the performance of the Pictures segment, Sony has undergone a number of restructuring efforts to reduce its operating costs. For the years ended March 31, 2002, 2003 and 2004, Sony recorded total restructuring charges of 8,452 million yen, 480 million yen and 4,611 million yen, respectively, within the Pictures segment. Significant restructuring activities are the following:
~~Consolidation of Television Operations -~~
Due to changes within the television production and distribution business, the competition between network owned production companies and other production and distribution companies to license product to the major televisions networks is becoming more intense. This competitive environment has resulted in fewer opportunities to produce shows for the networks and a shorter lifespan for ordered shows that do not immediately achieve favorable ratings. This trend has resulted in an increase in the number of new programs being distributed yet canceled in their first or second season, which are generally less profitable, and a decrease in the number of network programs that are able to achieve syndication, which are generally more profitable. As a result, in the year ended March 31, 2002, Sony decided to consolidate its television operations and downsize the network television production business in the Pictures segment. Sony recorded restructuring charges totaling 8,452 million yen which consisted of personnel related costs of 1,753 million yen, non-cash asset impairment and disposal costs of 1,767 million yen, and other costs of 4,932 million yen including those relating to the buy-out of term deal commitments. These restructuring charges were all recorded in cost of sales in the consolidated statements of income. In the year ended March 31, 2003, additional restructuring charges totaling 480 million yen were recorded. These costs were included in cost of sales in the consolidated statements of income. No further costs are expected to be incurred for this restructuring activity. The remaining liability balance was 211 million yen as of March 31, 2004 and will be paid or settled through the year ending March 31, 2005. The restructuring plan is expected to be completed by the second quarter of the year ending March 31, 2005.
~~Fixed Cost Reduction Program -~~
     During the year ended March 31, 2004, the Pictures segment implemented a fixed cost reduction program to further reduce its operating costs. This restructuring program primarily related to the reduction of staffing levels and the disposal of certain long-lived assets. The total estimated cost of this restructuring
~~F-57~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
program is 4,928 million yen, of which 4,611 million yen has incurred through March 31, 2004. These restructuring charges consisted of personnel related costs of 993 million yen, non-cash asset impairment and disposal costs of 1,746 million yen, and other costs of 1,872 million yen including those relating to the buy-out of term deal commitments. Of the restructuring costs incurred, 1,525 million yen was included in cost of sales, 1,340 million yen was included in selling, general and administrative expense, and 1,746 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. This restructuring program is expected to be completed over the next year and 317 million yen is expected to be incurred in the next fiscal year. At March 31, 2004, the remaining liability balance was 216 million yen which will be paid or settled over the next year.
~~The following table displays the balance of the accrued restructuring charges recorded for the years ended March 31, 2002, 2003 and 2004.~~

Employee Non-cash
termination write-downs Other associated
benefits and disposals costs Total
(Yen in millions)
Balance at March 31, 2001 1,261 — 1,088 2,349
Restructuring costs 38,123 39,598 29,253 106,974
Non-cash charges — (39,598 ) — (39,598 )
Cash payments (33,291 ) — (16,907 ) (50,198 )
Adjustments 150 — 203 353

Balance at March 31, 2002 6,243 — 13,637 19,880
Restructuring costs 46,953 42,768 16,530 106,251
Non-cash charges — (42,240 ) — (42,240 )
Cash payments (38,548 ) — (23,172 ) (61,720 )
Adjustments 136 (528 ) (1,208 ) (1,600 )

Balance at March 31, 2003 14,784 — 5,787 20,571
Restructuring costs 133,367 19,170 15,554 168,091
Non-cash charges — (19,170 ) — (19,170 )
Cash payments (124,674 ) — (13,686 ) (138,360 )
Adjustments 1,173 0 333 1,506

Balance at March 31, 2004 24,650 — 7,988 32,638

~~17.~~ ~~Research and development costs, advertising costs and shipping and handling costs~~
~~(1)~~ ~~Research and development costs:~~
~~Research and development costs charged to cost of sales for the years ended March 31, 2002, 2003 and 2004 were 433,214 million yen, 443,128 million yen and 514,483 million yen, respectively.~~
~~(2)~~ ~~Advertising costs:~~
     Advertising costs included in selling, general and administrative expenses for the years ended March 31, 2002, 2003 and 2004 were 401,960 million yen, 442,741 million yen and 421,433 million yen, respectively.
~~F-58~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(3)~~ ~~Shipping and handling costs:~~
Shipping and handling costs for finished goods included in selling, general and administrative expenses for the years ended March 31, 2002, 2003 and 2004 were 98,800 million yen, 98,195 million yen and 106,590 million yen , respectively, which included the internal transfer costs of finished goods.
~~18.~~ ~~Gain on issuances of stock by subsidiaries and equity investees~~
     Total gains on issuances of stock by equity investees were 503 million yen for the year ended March 31, 2002. There were no gains on issuances of stock for subsidiaries and equity investees for the year ended March 31, 2003.
     In January 2004, FeliCa Networks, Inc., whose field of business is Mobile FeliCa IC chip development and production/sales licensing and operation of the Mobile FeliCa service platform, issued 115,000 shares at 100,000 yen per share valued at 11,500 million yen yen in connection with its private offering. As a result of this issuance, Sony recorded a gain of 3,364 million yen and provided deferred taxes on this gain. This issuance reduced Sony’s ownership interest from 100% to 60%.
In addition to the above transaction, for the year ended March 31, 2004, Sony recognized 1,506 million yen of other gains on issuances of stock by subsidiaries and equity investees resulting in total gains of 4,870 million yen. These transactions were not part of a broader corporate reorganization and the reacquisition of such shares was not contemplated at the time of issuance.
~~19.~~ ~~Income Taxes~~
~~Income before income taxes and income tax expense comprise the following:~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Income (loss) before income taxes:
Sony Corporation and subsidiaries in Japan (5,103 ) (7,998 ) (84,571 )
Foreign subsidiaries 97,878 255,619 228,638

92,775 247,621 144,067

Income taxes — Current:
Sony Corporation and subsidiaries in Japan 55,641 69,311 22,286
Foreign subsidiaries 59,289 109,536 64,933

114,930 178,847 87,219

Income taxes — Deferred:
Sony Corporation and subsidiaries in Japan (46,082 ) (90,016 ) (32,845 )
Foreign subsidiaries (3,637 ) (8,000 ) (1,600 )

(49,719 ) (98,016 ) (34,445 )

     Sony is subjected to a number of different income taxes. Due to changes in Japanese income tax regulations, a consolidated tax filing system was introduced on April 1, 2002. Sony applied to file its return under the consolidated tax filing system beginning with the year ended March 31, 2004. Under the Japanese consolidated tax filing system, a 2% surtax was imposed only for the year ended March 31, 2004. As a result, the statutory tax rate was 43.9% for the year ended March 31, 2004.
~~F-59~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
     For the year ending March 31, 2005, a corporation size-based enterprise tax is introduced which supersedes the current enterprise tax. As a result, the statutory tax rate for the year ending March 31, 2005 is approximately 41% effective April 1, 2004. The newly enacted rate was used in calculating the future expected tax effects of temporary differences as of March 31, 2004. The effect of the changes in the tax rates on the balance of deferred tax assets and liabilities was insignificant.
~~Reconciliation of the differences between the statutory tax rate and the effective income tax rate is as follows:~~

Year Ended March 31
2002 2003 2004
Statutory tax rate 42.0 % 42.0 % 43.9 %
Increase (reduction) in taxes resulting from:
Income tax credits (2.1 ) (1.9 ) (2.4 )
Change in valuation allowances 55.5 5.5 6.5
Decrease in deferred tax liabilities on undistributed earnings of foreign subsidiaries (21.6 ) (14.8 ) (9.2 )
Reversal of foreign tax reserves (6.5 ) — —
Other 3.0 1.8 (2.2 )

Effective income tax rate 70.3 % 32.6 % 36.6 %

~~The significant components of deferred tax assets and liabilities are as follows:~~

March 31
2003 2004
(Yen in millions)
Deferred tax assets:
Operating loss carryforwards for tax purposes 130,473 196,308
Accrued pension and severance costs 213,284 150,073
Film costs 33,907 54,194
Warranty reserve and accrued expenses 64,094 45,664
Accrued bonus 32,694 36,285
Future insurance policy benefits 34,734 35,855
Inventory — intercompany profits and write-down 34,423 30,241
Depreciations 15,724 14,108
Reserve for doubtful accounts 20,256 14,005
Tax credit carryforwards 33,762 13,740
Other 119,671 141,731

Gross deferred tax assets 733,022 732,204
Less: Valuation allowance (116,068 ) (127,577 )

Total deferred tax assets 616,954 604,627

~~F-60~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

March 31
2003 2004
(Yen in millions)
Deferred tax liabilities:
Insurance acquisition costs (118,689 ) (125,768 )
Unbilled accounts receivable in the Pictures business (68,462 ) (71,586 )
Unrealized gains on securities (15,041 ) (45,239 )
Undistributed earnings of foreign subsidiaries (46,449 ) (44,778 )
Intangible assets acquired through exchange offerings (38,882 ) (36,490 )
Gain on securities contribution to employee retirement benefit trust (17,438 ) (16,899 )
Other (9,543 ) (39,435 )

Gross deferred tax liabilities (314,504 ) (380,195 )

Net deferred tax assets 302,450 224,432

     The valuation allowance mainly relates to deferred tax assets of Sony Corporation and certain consolidated subsidiaries with operating loss carryforwards and tax credit carryforwards for tax purposes that are not expected to be realized. The net changes in the total valuation allowance were an increase of 53,595 million yen for the year ended March 31, 2002, a decrease of 136,140 million yen for the year ended March 31, 2003 and an increase of 11,509 million yen for the year ended March 31, 2004.
     As discussed in Note 8, 33,525 million yen of the decrease in the valuation allowance for the year ended March 31, 2003 relates to the realization of tax benefits from operating loss carryforwards that were acquired in connection with Sony’s acquisition of companies within the Electronics, Music and Pictures businesses. The reversal of the valuation allowance upon realization of tax benefit from operating loss carryforwards resulted in the reduction of goodwill.
     Tax benefits which have been realized through utilization of operating loss carryforwards for the years ended March 31, 2002, 2003 and 2004 were approximately 31,700 million yen, 19,000 million yen and 12,000 million yen, respectively.
~~Net deferred tax assets are included in the consolidated balance sheets as follows:~~

March 31
2003 2004
(Yen in millions)
Current assets — Deferred income taxes 143,999 125,532
Other assets — Deferred income taxes 328,091 203,203
Current liabilities — Other (10,561 ) (8,110 )
Long-term liabilities — Deferred income taxes (159,079 ) (96,193 )

Net deferred tax assets 302,450 224,432

     At March 31, 2004, no deferred income taxes have been provided on undistributed earnings of foreign subsidiaries not expected to be remitted in the foreseeable future totaling 902,567 million yen, and on the gain of 61,544 million yen on a subsidiary’s sale of stock arising from the issuance of common stock of Sony Music Entertainment (Japan) Inc. in a public offering to third parties in November 1991, as Sony does not anticipate any significant tax consequences on possible future disposition of its investment based on its tax planning strategies. The unrecognized deferred tax liabilities as of March 31, 2004 for such temporary differences amounted to 206,052 million yen.
~~F-61~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
     Operating loss carryforwards for corporate income tax and local income tax purposes of Sony Corporation and certain consolidated subsidiaries in Japan at March 31, 2004 amounted to 346,431 million yen and 512,362 million yen, respectively, which are available as an offset against future taxable income. Deferred tax asset on the operating loss carryforwards for corporate income tax and local income tax in Japan are calculated by multiplying approximately 28% and 13%, respectively.
     ~~Operating loss carryforwards for tax purposes of certain foreign consolidated subsidiaries at March 31, 2004 amounted to 85,095 million yen.~~
     ~~With the exception of 68,217 million yen with no expiration period, total available operating loss carryforwards expire at various dates primarily up to 7 years.~~
Tax credit carryforwards for tax purposes at March 31, 2004 amounted to 13,740 million yen. With the exception of 9,518 million yen with no expiration period, total available tax credit carryforwards expire at various dates primarily up to 9 years. Realization is dependent on such companies generating sufficient taxable income prior to expiration of the loss carryforwards and tax credit carryforwards. 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. The amount of such net deferred tax assets considered realizable, however, could be changed in the near term if estimates of future taxable income during the carryforward period are changed.
~~20.~~ ~~Reconciliation of the differences between basic and diluted net income per share (“EPS”)~~
~~(1)~~ ~~Income before cumulative effect of accounting changes and net income allocated to each class of stock:~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Income before cumulative effect of accounting changes allocated to the common stock 9,381 115,648 90,756
Income before cumulative effect of accounting changes allocated to the subsidiary tracking stock (49 ) (129 ) (128 )

Income before cumulative effect of accounting changes 9,332 115,519 90,628

Net income allocated to the common stock 15,359 115,648 88,639
Net income allocated to the subsidiary tracking stock (49 ) (129 ) (128 )

Net income 15,310 115,519 88,511

     ~~As discussed in Note 2, the earnings allocated to the subsidiary tracking stock are determined based on the subsidiary tracking stockholders’ economic interest.~~
     The statutory retained earnings of SCN (the subsidiary tracking stock entity as discussed in Note 14) available for dividends to the shareholders were 209 million yen as of March 31, 2002, which decreased by 374 million yen during the year ended March 31, 2002 after the date of issuance.
     ~~The accumulated losses of SCN were 779 million yen and 1,764 million yen as of March 31, 2003 and 2004, respectively.~~
~~F-62~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~(2)~~ ~~EPS attributable to common stock:~~
Reconciliation of the differences between basic and diluted ~~EPS for the years ended March 31, 2002, 2003~~net income per share (“EPS”)
F-64
22. Variable interest entities F-65
23. Commitments and ~~2004 is as follows:~~contingent liabilities F-66
24. Business segment information F-68
F-13
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of operations
      Sony Corporation and consolidated subsidiaries (hereinafter collectively referred to as “Sony”) are engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer and industrial markets. Sony also develops, produces, manufactures, and markets home-use game consoles and software. Sony’s principal manufacturing facilities are located in Japan, the United States of America, Europe, and Asia. Its electronic products are marketed throughout the world and game products are marketed mainly in Japan, the United States of America and Europe by sales subsidiaries and unaffiliated local distributors as well as direct sales via the Internet. Sony is engaged in the development, production, manufacture, marketing, distribution and broadcasting of image-based software, including film, video and television product. Sony is also engaged in the development, production, manufacture, and distribution of recorded music, in all commercial formats and music genres. Further, Sony is engaged in various financial service businesses including insurance operations through a Japanese life insurance subsidiary and non-life insurance subsidiaries, banking operations through a Japanese internet-based banking subsidiary and leasing and credit financing operations in Japan. In addition to the above, Sony is engaged in Internet-related businesses, an animation production and marketing business, an imported general merchandise retail business, an IC card business and an advertising agency business in Japan.
2. Summary of significant accounting policies
      Sony Corporation and its subsidiaries in Japan maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan while its foreign subsidiaries maintain their records and prepare their financial statements in conformity with accounting principles generally accepted in the countries of their domiciles. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These adjustments were not recorded in the statutory books of account.
(1) Newly adopted accounting pronouncements:
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts -
      In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued the Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP 03-1, Sony’s operating income decreased by 5,156 million yen for the year ended March 31, 2005. Additionally, on April 1, 2004, Sony recorded a 4,713 million yen charge (net of income taxes of 2,675 million yen) as a cumulative effect of an accounting change. In addition, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” in the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets (Note 7).
The Effect of Contingently Convertible Instruments on Diluted Earnings per Share -
      In July 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share”. In accordance with Statement of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Accounting Standards (“FAS”) No. 128, “Earnings per Share”, Sony had not previously included in the computation of diluted earnings per share (“EPS”) the number of potential common stock issuable upon the conversion of contingently convertible debt instruments (“Co-Cos”) that had not met the conditions to exercise the stock acquisition rights. EITF Issue No. 04-8 requires that the maximum number of common stock that could be issued upon the conversion of Co-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise the stock acquisition rights have been met. EITF Issue No. 04-8 is effective for reporting periods ending after December 15, 2004. Sony adopted EITF Issue No. 04-8 during the quarter ended December 31, 2004. As a result of the adoption of EITF Issue No. 04-8, Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the year ended March 31, 2004 were restated respectively. Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the year ended March 31, 2005 were decreased by 7.26 yen and 7.06 yen, respectively, compared to those before adopting EITF Issue No. 04-8.
Employers’ Disclosures about Pensions and Other Postretirement Benefits -
      In December 2003, the Financial Accounting Standards Board (“FASB”) issued FAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“FAS No. 132(R)”), which revised FAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, an amendment of FAS No. 87, “Employers’ Accounting for Pensions”, FAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and FAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. FAS No. 132(R) revised employers’ disclosures about pension plans and other postretirement benefit plans. It did not change the measurement or recognition of those plans required by FAS No. 87, 88 and 106. While retaining the disclosure requirements of FAS No. 132, FAS No. 132(R) requires additional disclosures about assets, obligations and cash flows. The provisions of FAS No. 132(R) were generally effective for financial statements with fiscal years ending after December 15, 2003, excluding the disclosure of certain information about foreign plans. The information about foreign plans is effective for fiscal years ending after June 15, 2004. In accordance with FAS No. 132(R), Note 14, Pension and severance plans, has been expanded to include the new disclosures.
Consolidation of Variable Interest Entities -
      In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51”. FIN No. 46 addresses consolidation by a primary beneficiary of a variable interest entity (“VIE”). Sony early adopted the provisions of FIN No. 46 on July 1, 2003. As a result of adopting the original FIN No. 46, Sony recognized a one-time charge with no tax effect of 2,117 million yen as a cumulative effect of accounting change in the consolidated statement of income, and Sony’s assets and liabilities increased by 95,255 million yen and 97,950 million yen, respectively. These increases were treated as non-cash transactions in the consolidated statement of cash flows. In addition, cash and cash equivalents increased by 1,521 million yen. See Note 22 for further discussion on the VIEs that are used by Sony.
      In December 2003, the FASB issued revised FIN No. 46 (“FIN No. 46R”), which replaced FIN No. 46. Sony early adopted the provisions of FIN No. 46R upon its issuance. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or impact the way Sony had previously accounted for VIEs.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(2)     Significant accounting policies:
Basis of consolidation and accounting for investments in affiliated companies -
      The consolidated financial statements include the accounts of Sony Corporation and its majority-owned subsidiary companies, general partnerships in which Sony has a controlling interest, and variable interest entities for which Sony is the primary beneficiary. All intercompany transactions and accounts are eliminated. Investments in business entities in which Sony does not have control, but has the ability to exercise significant influence over operating and financial policies generally through 20-50% ownership, are accounted for under the equity method. In addition, investments in general partnerships in which Sony does not have a controlling interest and limited partnerships are also accounted for under the equity method. Under the equity method, investments are stated at cost plus/minus Sony’s equity in undistributed earnings or losses. Consolidated net income includes Sony’s equity in current earnings or losses of such companies, after elimination of unrealized intercompany profits. If the value of an investment has declined and is judged to be other than temporary, the investment is written down to its fair value.
      On occasion, a consolidated subsidiary or an affiliated company accounted for by the equity method may issue its shares to third parties in either a public or private offering or upon conversion of convertible debt to common stock at amounts per share in excess of or less than Sony’s average per share carrying value. With respect to such transactions, where the sale of such shares is not part of a broader corporate reorganization and the reacquisition of such shares is not contemplated at the time of issuance, the resulting gains or losses arising from the change in interest are recorded in income for the year the change in interest transaction occurs. If the sale of such shares is part of a broader corporate reorganization, the reacquisition of such shares is contemplated at the time of issuance or realization of such gain is not reasonably assured (i.e., the entity is newly formed, non-operating, a research and development or start-up/development stage entity, or where the entity’s ability to continue in existence is in question), the transaction is accounted for as a capital transaction.
      The excess of the cost over the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for on an equity basis is allocated to identifiable assets and liabilities based on fair values at the date of acquisition. The unassigned residual value of the excess of the cost over the underlying net equity is recognized as goodwill.
Use of estimates -
      The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Translation of foreign currencies -
      All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen at appropriate year-end current rates and all income and expense accounts are translated at rates that approximate those rates prevailing at the time of the transactions. The resulting translation adjustments are accumulated as a component of accumulated other comprehensive income.
      Foreign currency receivables and payables are translated at appropriate year-end current rates and the resulting translation gains or losses are taken into income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash and cash equivalents -
      Cash and cash equivalents include all highly liquid investments, generally with original maturities of three months or less, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.
Marketable debt and equity securities -
      Debt and equity securities designated as available-for-sale, whose fair values are readily determinable, are carried at fair value with unrealized gains or losses included as a component of accumulated other comprehensive income, net of applicable taxes. Debt and equity securities classified as trading securities are carried at fair value with unrealized gains or losses included in income. Debt securities that are expected to be held-to-maturity are carried at amortized cost. Individual securities classified as either available-for-sale or held-to-maturity are reduced to net realizable value by a charge to income for other than temporary declines in fair value. Realized gains and losses are determined on the average cost method and are reflected in income.
Equity securities in non-public companies -
      Equity securities in non-public companies are carried at cost as fair value is not readily determinable. If the value of a non-public equity investment is estimated to have declined and such decline is judged to be other than temporary, Sony recognizes the impairment of the investment and the carrying value is reduced to its fair value. Determination of impairment is based on the consideration of such factors as operating results, business plans and estimated future cash flows. Fair value is determined through the use of such methodologies as discounted cash flows, valuation of recent financings and comparable valuations of similar companies.
Inventories -
      Inventories in electronics, game and music as well as non-film inventories for pictures are valued at cost, not in excess of market, cost being determined on the “average cost” basis except for the cost of finished products carried by certain subsidiary companies in electronics which is determined on the “first-in, first-out” basis.
Film costs -
      Film costs related to theatrical and television product (which includes direct production costs, production overhead and acquisition costs) are stated at the lower of unamortized cost or estimated fair value and classified as non-current assets. Film costs are amortized, and the estimated liabilities for residuals and participations are accrued, for an individual product based on the proportion that current period actual revenues bear to the estimated remaining total lifetime revenues. These estimates are reviewed on a periodic basis.
Property, plant and equipment and depreciation -
      Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is primarily computed on the declining-balance method for Sony Corporation and its Japanese subsidiaries, except for certain semiconductor manufacturing facilities whose depreciation is computed on the straight-line method, and on the straight-line method for its foreign subsidiaries at rates based on estimated useful lives of the assets, principally, ranging from 15 years up to 50 years for buildings and from 2 years up to 10 years for machinery and equipment. Significant renewals and additions are capitalized at cost. Maintenance and repairs, and minor renewals and betterments are charged to income as incurred.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill and other intangible assets -
      Goodwill and certain other intangible assets that are determined to have an indefinite life are not amortized and are tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Fair value for those assets is generally determined using a discounted cash flow analysis.
      Intangible assets that are determined not to have an indefinite life mainly consist of artist contracts, music catalogs, acquired patent rights and software to be sold, leased or otherwise marketed. Artist contracts and music catalogs are amortized on a straight-line basis over a period of up to 40 years. Acquired patent rights and software to be sold, leased or otherwise marketed are amortized on a straight-line basis over 3 to 10 years.
Accounting for computer software to be sold -
      Sony accounts for software development costs in accordance with FAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”.
      In the Electronics segment, costs related to establishing the technological feasibility of a software product are expensed as incurred as a part of research and development in cost of sales. Costs that are incurred to produce the finished product after technological feasibility is established are capitalized and amortized over the estimated economic life of the product, which is generally three years. Sony performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue.
      In the Game segment, technological feasibility of the underlying software is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established are not material, and accordingly, Sony expenses software development costs for the Game segment as incurred as a part of research and development in cost of sales.
Deferred insurance acquisition costs -
      Costs that vary with and are primarily related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs include such items as commission, medical examination and inspection report fees. The deferred insurance acquisition costs for traditional life insurance contracts are amortized over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves. The deferred insurance acquisition costs for non-traditional life insurance contracts are amortized over the expected life in proportion to the estimated gross profits.
Product warranty -
      Sony provides for the estimated cost of product warranties at the time revenue is recognized by either product category group or individual product. The product warranty is calculated based upon product sales, estimated probability of failure and estimated cost per claim. The variables used in the calculation of the provision are reviewed on a periodic basis.
      Certain subsidiaries in the Electronics segment offer extended warranty programs. The consideration received through extended warranty service is deferred and amortized on a straight-line basis over the term of the extended warranty.
Future insurance policy benefits -
      Liabilities for future insurance policy benefits are primarily comprised of the present value of estimated future payments to policyholders. These liabilities are computed by the net level premium method based upon
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the assumptions such as future investment yield, morbidity, mortality and withdrawals. These assumptions are reviewed on a periodic basis. Liabilities for future insurance policy benefits also include liabilities for guaranteed benefits related to certain non-traditional long-duration life and annuity contracts.
Accounting for the impairment of long-lived assets - -
      Sony periodically reviews the carrying value of its long-lived assets held and used, other than goodwill and intangible assets with indefinite lives, and assets to be disposed of, whenever events or changes in circumstances indicated that the carrying amount may not be recoverable. Long-lived assets to be held and used are reviewed for impairment by comparing the carrying value of the assets with their estimated undiscounted future cash flows. If it is determined that an impairment loss has occurred, the loss would be recognized during the period. The impairment loss would be calculated as the difference between asset carrying value and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance. Long-lived assets that are to be disposed of other than by sale are considered held and used until they are disposed of. Long-lived assets that are to be disposed of by sale are reported at the lower of their carrying value or fair value less cost to sell. Reductions in carrying value are recognized in the period in which the long-lived assets are classified as held for sale.
Derivative financial instruments -
      All derivatives, including certain derivative financial instruments embedded in other contracts, are recognized as either assets or liabilities in the balance sheet at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders’ equity (as a component of accumulated other comprehensive income), depending on whether the derivative financial instrument qualifies as a hedge and the derivative is being used to hedge changes in fair value or cash flows.
      In accordance with FAS No. 133, the derivative financial instruments held by Sony are classified and accounted as below.
Fair value hedges
      Changes in the fair value of derivatives designated and effective as fair value hedges for recognized assets or liabilities or unrecognized firm commitments are recognized in earnings as offsets to changes in the fair value of the related hedged assets or liabilities.
Cash flow hedges
      Changes in the fair value of derivatives designated and effective as cash flow hedges for forecasted transactions or exposures associated with recognized assets or liabilities are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Changes in the fair value of the ineffective portion are recognized in current period earnings.
Derivatives not designated as hedges
      Changes in the fair value of derivatives that are not designated as hedges under FAS No. 133 are recognized in current period earnings.
      Sony formally documents all hedging relationships between the derivatives designated as hedges and hedged items, as well as its risk management objectives and strategies for undertaking various hedging activities. Sony links all hedges that are designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet or to the specific forecasted transaction. Sony also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are designated as hedges are
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, Sony discontinues hedge accounting.
Stock-based compensation -
      Sony applies Accounting Principle Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and its related interpretations in accounting for its stock-based compensation plans and follows the disclosure-only provisions of FAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123”. In accordance with APB No. 25, stock-based compensation cost is recognized in income based on the excess, if any, of the quoted market price of the common stock or subsidiary tracking stock of Sony Corporation at the grant date of the award or other measurement date over the stated exercise price of the award. As the exercise prices for Sony’s stock-based compensation plans are generally determined based on the prevailing market price shortly before the date of grant, the compensation expense for these plans is not significant. For awards that generate compensation expense as defined under APB No. 25, Sony calculates the amount of compensation expense and recognizes the expense over the vesting period of the award.
      The following table reflects the net effect on net income and net income per share allocated to the common stock if Sony had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation”, to its stock-based compensation. See Note 16 for detailed assumptions.

Year Ended March 31

2003 2004 2005

(Yen in millions)
Income before cumulative effect of an accounting change allocated to common stock:
As reported 115,648 90,756 168,498
Deduct: Total stock-based compensation expense determined under the fair value based method, net of related tax effects (7,008 ) (6,334 ) (4,690 )

Pro forma 108,640 84,422 163,808

Net income allocated to common stock:
As reported 115,648 88,639 163,785
Deduct: Total stock-based compensation expense determined under the fair value based method, net of related tax effects (7,008 ) (6,334 ) (4,690 )

Pro forma 108,640 82,305 159,095

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Year Ended March 31

2003 2004 2005

(Yen)
Income before cumulative effect of an accounting change allocated to common stock:
— Basic EPS:
As reported 125.74 98.26 180.96
Pro forma 118.12 91.40 175.92
— Diluted EPS:
As reported 118.21 89.03 162.59
Pro forma 111.20 82.96 158.10

Net income allocated to common stock:
— Basic EPS:
As reported 125.74 95.97 175.90
Pro forma 118.12 89.11 170.86
— Diluted EPS:
As reported 118.21 87.00 158.07
Pro forma 111.20 80.94 153.58
      Net income and net income per share allocated to the subsidiary tracking stock would not be impacted if Sony had applied the fair value recognition provisions of FAS No. 123.
      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 year ended March 31, 2004 were restated in the above table.
Free distribution of common stock -
      On occasion, Sony Corporation may make a free distribution of common stock which is accounted for either by a transfer from additional paid-in capital to the common stock account or with no entry if free shares are distributed from the portion of previously issued shares in the common stock account.
      Under the Japanese Commercial Code, a stock dividend can be effected by an appropriation of retained earnings to the common stock account, followed by a free share distribution with respect to the amount appropriated by resolution of the Board of Directors’ meeting.
      Free distribution of common stock is recorded in the consolidated financial statements only when it becomes effective, except for the calculation and presentation of per share amounts.
Stock issue costs -
      Stock issue costs are directly charged to retained earnings, net of tax, in the accompanying consolidated financial statements as the Japanese Commercial Code prohibits charging such stock issue costs to capital accounts which is the prevailing practice in the United States of America.
Revenue recognition -
      Revenues from electronics, game and music sales are recognized upon delivery which is considered to have occurred when the customer has taken title to the product and the risk and rewards of ownership have
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
been substantively transferred. If the sales contract contains a customer acceptance provision, then sales are recognized after customer acceptance occurs or the acceptance provisions lapse.
      Revenues from the theatrical exhibition of motion pictures are recognized as the customer exhibits the film. Revenues from the licensing of feature films and television programming are recorded when the material is available for telecast by the licensee and when any restrictions regarding the exhibition or exploitation of the product lapse. Revenues from the sale of home videocassettes and DVDs are recognized upon availability of sale to the public.
      Traditional life insurance policies that the life insurance subsidiary writes, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. Premiums from these policies are reported as revenue when due from policyholders.
      Amounts received as payment for non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies are recognized as deposits to policyholder account balances and included in future insurance policy benefits and other. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services, which are recognized over the period of the contracts, and included in financial service revenue. Property and casualty insurance policies that the non-life insurance subsidiary writes are primarily automotive insurance contracts which are categorized as short-duration contracts. Premiums from these policies are reported as revenue over the period of the contract in proportion to the amount of insurance protection provided.
Accounting for consideration given to a customer or a reseller -
      In accordance with EITF Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products”, cash consideration given to a customer or a reseller including payments for buydowns, slotting fees and cooperative advertising programs, is accounted for as a reduction of revenue unless Sony receives an identifiable benefit (goods or services) in exchange for the consideration, can reasonably estimate the fair value of this benefit and receives documentation from the reseller to support the amounts spent. Any payments meeting these criteria are treated as selling, general and administrative expenses. For the years ended March 31, 2003, 2004 and 2005, consideration given to a reseller, primarily for free promotional shipping and cooperative advertising programs included in selling, general and administrative expense totaled 29,135 million yen, 30,338 million yen and 27,946 million yen, respectively.
Cost of sales -
      Costs classified as cost of sales relate to the producing and manufacturing of products and include such items as material cost, subcontractor cost, depreciation of fixed assets, personnel expenses, research and development costs, and amortization of film cost related to theatrical and television products.
Research and development costs -
      Research and development costs are expensed as incurred.
Selling, general and administrative -
      Costs classified as selling expense relate to the promoting and selling of products and include such items as advertising, promotion, shipping, and warranty expenses.
      General and administrative expenses include operating items such as officer’s salaries, personnel expenses, depreciation of fixed assets, office rental for sales, marketing and administrative divisions, a provision for doubtful accounts and amortization of intangible assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Selling, general and administrative expenses are expensed as incurred.
Financial service expenses -
      Financial service expenses include a provision for policy reserves and amortization of deferred insurance acquisition cost, and all other operating costs such as personnel expenses, depreciation of fixed assets, and office rental of subsidiaries in the Financial Services segment.
Advertising costs -
      Advertising costs are expensed when the advertisement or commercial appears in the selected media, except for advertising costs for acquiring new insurance policies which are deferred and amortized as part of insurance acquisition costs.
Shipping and handling costs -
      The majority of shipping and handling, warehousing and internal transfer costs for finished goods are included in selling, general and administrative expenses. An exception to this is in the Pictures segment where such costs are charged to cost of sales as they are integral part of producing and distributing the film under SOP 00-2, “Accounting by Producers or Distributors of Films”. All other costs related to Sony’s distribution network are included in cost of sales, including inbound freight charges, purchasing and receiving costs, inspection costs and warehousing costs for raw materials and in-process inventory. In addition, amounts paid by customers for shipping and handling costs are included in net sales.
Income taxes -
      The provision for income taxes is computed based on the pretax income included in the consolidated statements of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Sony records a valuation allowances to reduce deferred tax assets to the amount that management believes is more likely than not to be realized. In assessing the likelihood of realization, Sony considers all currently available evidence for future years, both positive and negative, supplemented by information of historical results for each tax filling unit.
Net income per share -
      Sony calculates and presents per share data separately for Sony’s common stock and for the subsidiary tracking stock, based on FAS No. 128. The holders of the subsidiary tracking stock have the right to participate in earnings, together with common stockholders. Accordingly, Sony calculates per share data by the “two-class” method based on FAS No. 128. Under this method, basic net income per share (“EPS”) for each class of stock is calculated based on the earnings allocated to each class of stock for the applicable period, divided by the weighted-average number of outstanding shares in each class during the applicable period.
      The earnings allocated to the subsidiary tracking stock are determined based on the subsidiary tracking stock holders’ economic interest in the targeted subsidiary’s earnings available for dividends. As defined by Sony Corporation’s articles of incorporation, the amount distributable to the subsidiary tracking stock holders is based on the declared dividends of the targeted subsidiary, which may only be declared from the amounts available for dividends of the targeted subsidiary. The targeted subsidiary’s earnings available for dividends are, as stipulated by the Japanese Commercial Code, not including those of the targeted subsidiary’s subsidiaries. If the targeted subsidiary has accumulated losses, a change in accumulated losses is also allocated to the subsidiary tracking stock. The subsidiary tracking stock holders’ economic interest is calculated as the number of the subsidiary tracking stock outstanding (3,072,000 shares as of March 31, 2005) divided by the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
number of the targeted subsidiary’s common stock outstanding (235,520 shares as of March 31, 2005), subject to multiplying by the Standard Ratio (tracking stock: subsidiary’s common stock = 1:100, as defined in the articles of incorporation). The earnings allocated to the common stock are calculated by subtracting the earnings allocated to the subsidiary tracking stock from Sony’s net income for the period.
      The computation of diluted net income per common stock reflects the maximum possible dilution from conversion, exercise, or contingent issuance of securities including the conversion of Co-Cos regardless of whether the conditions to exercise the conversion rights have been met.
      There are no potentially dilutive securities for net income per subsidiary tracking stock, as tracking stock shares outstanding are increased upon potential subsidiary tracking stocks’ being exercised, which results in a proportionate increase in earnings allocated to the subsidiary tracking stock. However, they could have a dilutive effect on net income per common stock, as earnings allocated to the common stock would be decreased.
(3) Recent Pronouncements:
Accounting for Stock-Based Compensation -
      In December 2004, the FASB issued FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123(R)”). This statement requires the use of the fair value based method of accounting for employee stock-based compensation and eliminates the alternative use of the intrinsic value method prescribed by 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 has accounted for its employee stock-based compensation in accordance with the provisions prescribed by APB No. 25 and its related interpretations and has disclosed the net effect on net income and net income per share allocated to the common stock if Sony had applied the fair value recognition provisions of FAS No. 123 to stock-based compensation as described above in (2) Significant accounting policies — Stock-based compensation. This statement shall be effective for fiscal years beginning after June 15, 2005, with early adoption during the fiscal years beginning after the date this statement is issued encouraged. The options for transition methods prescribed in FAS No. 123(R) include either the modified prospective or the modified retrospective methods. Sony intends to adopt the modified prospective method of transition, which requires that compensation expense be recorded for all unvested stock acquisition rights as the requisite service is rendered beginning with the first period of adoption. Sony is currently evaluating the impact of adopting this new pronouncement. However, Sony expects that the total expenses to be recorded in the future periods will be consistent with the pro forma information above in (2) Significant accounting policies — Stock-based compensation.
Inventory Costs -
      In November 2004, the FASB issued FAS No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4”. This statement requires certain abnormal expenditures to be recognized as expenses in the current period. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities. This statement shall be effective for fiscal years beginning after June 15, 2005, with early adoption during the fiscal years beginning after the date this statement is issued encouraged. The adoption of FAS No. 151 is not expected to have a material impact on Sony’s results of operations and financial position.
Exchanges of Nonmonetary Assets -
      In December 2004, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29”. This statement requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. This
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
statement shall be effective for nonmonetary asset exchanges occurring in the fiscal periods beginning after June 15, 2005, with early adoption during the fiscal periods beginning after the date this statement is issued encouraged. Sony is currently evaluating the impact of adopting this new pronouncement.
(4) Reclassifications:
      Certain reclassifications of the financial statements for the years ended March 31, 2003 and 2004 have been made to conform to the presentation for the year ended March 31, 2005.
3. Inventories
      Inventories comprise the following:

March 31

2004 2005

(Yen in millions)
Finished products 427,877 405,616
Work in process 98,607 93,181
Raw materials, purchased components and supplies 140,023 132,552

666,507 631,349

4. Film costs
      Film costs comprise the following:

March 31

2004 2005

(Yen in millions)
Theatrical:
Released (including acquired film libraries) 136,057 119,438
Completed not released 7,946 11,358
In production and development 79,198 118,271
Television licensing:
Released (including acquired film libraries) 33,378 29,894
In production and development 161 0

256,740 278,961

      Sony estimates that approximately 88% of unamortized costs of released films (excluding amounts allocated to acquired film libraries) at March 31, 2005 will be amortized within the next three years. Approximately 94,790 million yen of released film costs are expected to be amortized during the next twelve months. As of March 31, 2005, unamortized acquired film libraries of approximately 12,371 million yen remained to be amortized on a straight-line basis over an average of the remaining life of 5 years. Approximately 108,833 million yen of accrued participation liabilities included in accounts payable, other and accrued expenses are expected to be paid during the next twelve months.
5. Related party transactions
      Sony accounts for its investments in affiliated companies over which Sony has significant influence or ownership of 20% or more but less than or equal to 50% under the equity method. In addition, investments in general partnerships in which Sony does not have a controlling interest and limited partnerships are also
F-25
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accounted for under the equity method. Such investments include but are not limited to Sony’s interest in Sony Ericsson Mobile Communications, AB (50%), SONY BMG Music Entertainment (“SONY BMG”) (50%), S-LCD Corporation (“S-LCD”) (50% minus 1 share), ST Liquid Crystal Display Corporation (50%), bit Wallet, Inc (34.6%), STAR CHANNEL, INC. (17.8%), and InterTrust Technologies Corporation (49.5%).
      Summarized combined financial information that is based on information provided by equity investees is shown below:

March 31

2004 2005

(Yen in millions)
Current assets 433,154 942,328
Property, plant and equipment 94,130 361,406
Other assets 57,756 250,245

Total assets 585,040 1,553,979

Current liabilities 397,242 876,430
Long-term liabilities 27,639 115,999
Stockholders’ equity 160,159 561,550

Total liabilities and stockholders’ equity 585,040 1,553,979

Number of companies at end of the fiscal year 66 56

Year Ended March 31

2003 2004 2005

(Yen in millions)
Sales and revenue 785,697 1,009,005 1,473,273
Gross profit 140,078 231,083 477,796
Net income (loss) (81,422 ) 11,323 63,404
      In April 2002, Sony completed the sale of its equity interest in the Telemundo Group which resulted in cash proceeds of 88,373 million yen and a gain of 66,502 million yen. In the year ended March, 31 2003, Sony had deferred 5,939 million yen of the gain related to the sale of Telemundo as a result of certain indemnifications provided by Sony to the acquirer, which was subsequently recognized in April 2003, as these indemnifications expired with no amounts being refunded by Sony.
      In June 2002, Sony completed the partial sale of its equity investment in the Columbia House Company (“CHC”), a 50-50 joint venture between AOL Time Warner Inc. and Sony, to Blackstone Capital Partners III LP (“Blackstone”), an affiliate of The Blackstone Group, a private investment bank. The chairman of The Blackstone Group was also a director of Sony until June 2002. Under the terms of the sale agreement, Sony received cash proceeds of 17,839 million yen and a subordinated note receivable from Columbia House Holdings, Inc., a majority owned subsidiary of Blackstone, with a face amount of 7,827 million yen. The sale resulted in a gain of 1,324 million yen. As of March 31, 2005, Sony still had a 7.5% ownership interest in CHC, which was accounted for as a cost method investment as a result of the partial sale of this investment. In May 2005, an agreement was reached between Blackstone and a third party for the sale of CHC to the third party. As part of this transaction, Sony has also agreed to sell its remaining ownership interest in CHC and settle the outstanding subordinated note receivable.
      In September 2002, Sony completed the sale of its equity interest in Sony Tektronix Inc., which resulted in a gain of 3,090 million yen.
F-26
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      In January 2003, Sony acquired a 49.5% interest in InterTrust Technologies Corporation for 23,076 million yen.
      In May 2003, Sony acquired the remaining 50% interest in American Video Glass Company (“AVGC”) that it did not own from Corning Asahi Corporation. As a result, AVGC is no longer accounted for under the equity method and is now a consolidated subsidiary. The financial position and operating results of AVGC as of and for the years ended March 31, 2004 and 2005 are not included in the above summarized combined financial information.
      Effective July 1, 2003, in accordance with FIN No. 46, Sony consolidated BE-ST Bellevuestrasse Development GmbH & Co. First Real Estate KG, Berlin (“BE-ST”). As a result, BE-ST is no longer accounted for under the equity method (Note 22). The financial position and operating results of BE-ST as of and for the years ended March 31, 2004 and 2005 are not included in the above summarized combined financial information.
      In August 2003, Crosswave Communications Inc. (“CWC”), of which Sony owned approximately a 23.9% interest, commenced reorganization proceedings under the Corporate Reorganization Law of Japan. As a result, Sony no longer has a significant influence on the decision making of CWC. Therefore, CWC is no longer accounted for under the equity method. The financial position and operating results of CWC as of and for the years ended March 31, 2004 and 2005 are not included in the above summarized combined financial information.
      S-LCD, a joint venture with Samsung Electronics Co., LTD focused on manufacturing amorphous TFT panel, was established in April 2004 as a joint venture in which Sony has an ownership interest of 50% minus 1 share. Sony invested 100,073 million yen in S-LCD during the year ended March 31, 2005.
      As of August 1, 2004, Sony combined its recorded music business, except for the operations of its recorded music business in Japan, with the recorded music business of Bertelsmann AG in a joint venture. The newly formed company, known as SONY BMG, is 50% owned by each parent company. As a result, the results of the recorded music business, except for the recorded music business in Japan, are no longer consolidated but are accounted for under the equity method.
      On April 8, 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”). Under the terms of the acquisition agreement, the aforementioned investor group acquired MGM for $12.00 in cash per MGM share, for a total purchase price of approximately $5.0 billion. As part of this transaction, Sony Pictures Entertainment (“SPE”) will co-finance and produce new motion pictures with MGM as well as distribute MGM’s existing film and television contents through SPE’s global distribution channels. MGM will continue to operate under the Metro-Goldwyn-Mayer name as a private company headquartered in Los Angeles. As part of the acquisition, SCA invested $257 million for 20% of the total equity capital. However, based on the percentage of common stock owned, Sony will record 45% of MGM’s net income (loss) as equity in net income of affiliated companies.
      Affiliated companies accounted for under the equity method with an aggregate carrying amount of 6,081 million yen and 17,676 million yen at March 31, 2004 and 2005, were quoted on established markets at an aggregate value of 37,603 million yen and 95,246 million yen, respectively.
F-27
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Account balances and transactions with affiliated companies accounted for under the equity method are presented below:

March 31

2004 2005

(Yen in millions)
Accounts receivable, trade 62,359 50,062

Advances 561 16,756

Accounts payable, trade 13,547 15,225

Year Ended March 31

2003 2004 2005

(Yen in millions)
Sales 161,983 258,454 256,799

Purchases 102,735 106,100 101,976

      As of April 1, 2004, Sony Corporation made Sony Computer Entertainment Inc. (“SCE”) a wholly-owned subsidiary through a stock for stock exchange pursuant to the provision of Article 358 of the Japanese Commercial Code which does not require the approval of the General Meeting of Shareholders. The stock for stock exchange ratio was determined based on the estimated equity values of SCE and Sony on a consolidated basis. Through the stock for stock exchange, Sony Corporation provided 1,000,000 shares of its common stock to an Executive Deputy President, Corporate Executive Officer of Sony Corporation who had owned 100 shares of SCE’s common stock. This transaction did not have a material impact on Sony’s results of operations and financial position for the year ended March 31, 2005.
      Dividends from affiliated companies accounted for under the equity method for the years ended March 31, 2003, 2004 and 2005 were 2,002 million yen, 3,446 million yen and 13,391 million yen, respectively.
6. Accounts receivable securitization programs
      In the United States of America, Sony has set up an accounts receivable securitization program whereby Sony can sell interests in up to 53,500 million yen of eligible trade accounts receivable, as defined. Through this program, Sony can securitize and sell a percentage of an undivided interest in that pool of receivables to several multi-seller commercial paper conduits owned and operated by a bank. Sony can sell receivables in which the agreed upon original due dates are no more than 90 days after the invoice dates. The value assigned to undivided interests retained in securitized trade receivables is based on the relative fair values of the interest retained and sold in the securitization. Sony has assumed that the fair value of the retained interest is equivalent to its carrying value as the receivables are short-term in nature, high quality and have appropriate reserves for bad debt incidence. These securitization transactions are accounted for as a sale in accordance with FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, because Sony has relinquished control of the receivables. During the period from April 2004 to January 2005, Sony sold a total of 80,250 million yen of accounts receivable under this program. There were no outstanding amounts due at March 31, 2005 relating to the existing undivided interests in the pool of receivables that had been sold. Losses from these transactions were insignificant. This program was terminated in May 2005.
      In Japan, Sony set up several accounts receivable sales programs whereby Sony can sell up to 47,500 million yen of eligible trade accounts receivable. Through these programs, Sony can sell receivables to special purpose entities owned and operated by banks. Sony can sell receivables in which the agreed upon original due dates are no more than 190 days after the sales of receivables. These transactions are accounted
F-28
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for as sales in accordance with FAS No. 140, because Sony has relinquished control of the receivables. The initial sale of the receivables was in March 2005 in which Sony sold a total of 10,041 million yen. Losses from these transactions were insignificant. Although Sony continues servicing the sold receivables, no servicing liabilities are recorded because costs for collection of the sold receivables are insignificant.
7. Marketable securities and securities investments and other
      Marketable securities and securities investments and other include debt and equity securities of which the aggregate cost, gross unrealized gains and losses and fair value pertaining to available-for-sale securities and held-to-maturity securities are as follows:

March 31, 2004 March 31, 2005

Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
Cost gains losses Fair value Cost gains losses Fair value

(Yen in millions)
Available-for-sale:
Debt securities 1,938,673 55,922 (2,072 ) 1,992,523 2,090,605 58,161 (2,464 ) 2,146,302
Equity securities 86,517 63,225 (1,886 ) 147,856 107,126 49,350 (814 ) 155,662
Held-to-maturity securities 26,439 381 (28 ) 26,792 27,431 530 (13 ) 27,948

Total 2,051,629 119,528 (3,986 ) 2,167,171 2,225,162 108,041 (3,291 ) 2,329,912

      At March 31, 2005, debt securities classified as available-for-sale securities and held-to-maturity securities mainly consist of Japanese government and municipal bonds and corporate debt securities with maturities of one to ten years.
      Proceeds from sales of available-for-sale securities were 215,554 million yen, 397,817 million yen and 613,035 million yen for the years ended March 31, 2003, 2004 and 2005, respectively. On those sales, gross realized gains computed on the average cost basis were 3,570 million yen, 9,525 million yen and 24,080 million yen and gross realized losses were 3,125 million yen, 1,906 million yen and 5,940 million yen, respectively.
      Marketable securities classified as trading securities at March 31, 2004 and 2005 were 131,044 million yen and 315,946 million yen, respectively, which consist of debt and equity securities including short-term investments in money market funds.
      In the ordinary course of business, Sony maintains long-term investment securities, included in securities investments and other, issued by a number of non-public companies. The aggregate carrying amounts of the investments in non-public companies at March 31, 2004 and 2005, were 51,367 million yen and 48,877 million yen, respectively. 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.
      Securities investments and other as of March 31, 2004 also included separate account assets (Note 10) in the life insurance business, which were carried at fair value and excluded from the above table as gains or losses accrue directly to policyholders. As a result of the adoption of SOP 03-1, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” on the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets. On April 1, 2004, assets of 164,461 million yen were reclassified from “Securities investments and other” to each respective account by nature including “Marketable securities”
F-29
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and “Cash and cash equivalents”. Of the total, 154,528 million yen was reclassified to “Marketable securities”.
      The net change in the unrealized gains or losses on trading securities that has been included in earnings during the years ended March 31, 2003 and 2004 was insignificant. For the year ended March 31, 2005, Sony booked 12,631 million yen of net unrealized gain on trading securities which is mainly derived from the general accounts in the life insurance business reclassified from the separate accounts as explained above.
      The following table presents the gross unrealized losses on, and fair value of, Sony’s investment securities with unrealized losses, aggregated by investment category and the length of time that individual investment securities have been in a continuous unrealized loss position, at March 31, 2005.

Less than 12 Months 12 months or more Total

Unrealized Unrealized Unrealized
Fair value losses Fair value losses Fair value losses

(Yen in millions)
Available-for-sale:
Debt securities 242,388 (2,044 ) 41,523 (420 ) 283,911 (2,464 )
Equity securities 11,010 (457 ) 1,225 (357 ) 12,235 (814 )
Held-to-maturity securities 239 (0 ) 660 (13 ) 899 (13 )

Total 253,637 (2,501 ) 43,408 (790 ) 297,045 (3,291 )

      In evaluating the factors for available-for-sale securities whose fair values are readily determinable, Sony presumes a decline in value to be other-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally a period of up to six to twelve months). This criteria is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 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.
      At March 31, 2005, Sony determined that the decline in value for securities with unrealized losses shown in the above table is not other-than-temporary in nature.
8. Leased assets
      Sony leases certain communication and commercial equipment, plant, office space, warehouses, employees’ residential facilities and other assets.
      An analysis of leased assets under capital leases is as follows:

March 31

Class of property 2004 2005

(Yen in millions)
Land 174 181
Buildings 12,421 11,089
Machinery, equipment and others 36,907 33,747
Accumulated depreciation (19,385 ) (18,509 )

30,117 26,508

F-30
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The following is a schedule by year of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2005:

Yen in
millions

Year ending March 31:
2006 15,211
2007 11,062
2008 8,895
2009 10,873
2010 3,001
Later years 5,428

Total minimum lease payments 54,470
Less — Amount representing interest 14,169

Present value of net minimum lease payments 40,301
Less — Current obligations 11,713

Long-term capital lease obligations 28,588

      Minimum lease payments have not been reduced by minimum sublease income of 11,480 million yen due in the future under noncancelable subleases.
      Minimum rental expenses under operating leases for the years ended March 31, 2003, 2004 and 2005 were 94,364 million yen, 92,649 million yen and 81,391 million yen, respectively. Sublease rentals received under operating leases for the years ended March 31, 2003, 2004 and 2005 were 6,240 million yen, 2,923 million yen and 1,933 million yen, respectively. The total minimum rentals to be received in the future under noncancelable subleases as of March 31, 2005 were 14,954 million yen. The minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 2005 are as follows:

Yen in
millions

Year ending March 31:
2006 38,182
2007 30,568
2008 22,993
2009 14,060
2010 10,496
Later years 53,652

Total minimum future rentals 169,951

9. Goodwill and intangible assets
      Intangible assets acquired during the year ended March 31, 2005 totaled 22,844 million yen, which are subject to amortization and primarily consist of acquired patent rights of 6,673 million yen and software to be sold, leased or otherwise marketed of 11,546 million yen. The weighted average amortization period for acquired patent rights and software to be sold, leased or otherwise marketed is 8 years and 3 years, respectively.
F-31
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Intangible assets subject to amortization comprise the following:

March 31

2004 2005

Gross Gross
carrying Accumulated carrying Accumulated
amount amortization amount amortization

(Yen in millions)
Artist contracts 80,675 (68,300 ) 15,218 (11,094 )
Music catalog 109,795 (47,610 ) 65,674 (19,641 )
Acquired patent rights 52,996 (23,172 ) 55,173 (26,139 )
Software to be sold, leased or otherwise marketed 31,983 (13,577 ) 31,907 (16,181 )
Other 55,048 (27,422 ) 27,648 (11,625 )

Total 330,497 (180,081 ) 195,620 (84,680 )

      The aggregate amortization expenses for intangible assets for the years ended March 31, 2003, 2004 and 2005 was 27,871 million yen, 28,866 million yen and 24,993 million yen, respectively. The estimated aggregate amortization expense for intangible assets for the next five years is as follows:

Yen in
millions

Year ending March 31,
2006 22,650
2007 18,287
2008 12,202
2009 10,623
2010 8,874
      Total carrying amount of intangible assets having an indefinite life comprise the following:

March 31

2004 2005

(Yen in millions)
Trademarks 57,384 57,195
Distribution agreement 18,834 18,848

76,218 76,043

      In addition to the amortizable and indefinite-lived intangible assets shown in the above tables, intangible assets at March 31, 2004 and 2005 also include unrecognized prior service costs totaling 21,376 million yen and 41 million yen, respectively, which were recorded under FAS No. 87 as discussed in Note 14.
F-32
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The changes in the carrying amount of goodwill by operating segment for the years ended March 31, 2004 and 2005 are as follows:

Financial
Electronics Game Music Pictures Services Other Total

(Yen in millions)
Balance at March 31, 2003 53,179 110,606 46,021 78,697 — 1,624 290,127
Goodwill acquired during year 5,634 — 76 1,666 — 534 7,910
Impairment losses (6,049 ) — — — — — (6,049 )
Other * (528 ) (244 ) (3,771 ) (9,574 ) — (1 ) (14,118 )

Balance at March 31, 2004 52,236 110,362 42,326 70,789 — 2,157 277,870
Reallocated from Music segment to Electronics segment 12,329 — (12,329 ) — — — —
Goodwill acquired during year 5,872 4,349 52 5,868 441 2,069 18,651
Goodwill contributed to the Joint Venture with Bertelsmann AG — — (15,626 ) — — — (15,626 )
Other * 378 29 1,281 1,277 — 63 3,028

Balance at March 31, 2005 70,815 114,740 15,704 77,934 441 4,289 283,923

* Other consists of translation adjustments and reclassification to/from other accounts.
      During the year ended March 31, 2004, Sony performed the annual impairment test for goodwill and recorded an impairment loss of 6,049 million yen in the Electronics segment. This impairment charge reflected the overall decline in the fair value of a subsidiary within the Electronics segment. The fair value of that reporting unit was estimated principally using the expected present value of future cash flows.
      As discussed in Notes 5 and 24, as of August 1, 2004, Sony and Bertelsmann AG combined their recorded music business in a joint venture. In connection with the establishment of the joint venture, assets contributed by Sony included 15,626 million yen of goodwill. In addition, the non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment, have been reclassified to the Electronics segment and accordingly, Sony reallocated 12,329 million yen of goodwill relating to the non-Japan based disc manufacturing and physical distribution business from the Music segment to the Electronics segment.
10. Insurance-related accounts
      Sony’s life and non-life insurance subsidiaries in Japan maintain their accounting records as described in Note 2 in accordance with the accounting principles and practices generally accepted in Japan, which vary in some respects from U.S. GAAP.
      Those differences are mainly that insurance acquisition costs for life and non-life insurance are charged to income when incurred in Japan whereas in the United States of America those costs are deferred and amortized generally over the premium-paying period of the related insurance policies, and that future policy benefits for life insurance calculated locally under the authorization of the supervisory administrative agencies are comprehensively adjusted to a net level premium method with certain adjustments of actuarial assumptions for U.S. GAAP purposes. For purposes of preparing the consolidated financial statements, appropriate adjustments have been made to reflect such items in accordance with U.S. GAAP.
      The amounts of statutory net equity of the subsidiaries as of March 31, 2004 and 2005 were 146,540 million yen and 153,228 million yen, respectively.
F-33
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(1) Insurance policies:
      Life insurance policies that the life insurance subsidiary writes, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. The life insurance revenues for the years ended March 31, 2003, 2004 and 2005 were 450,363 million yen, 437,835 million yen and 426,774 million yen, respectively. Property and casualty insurance policies that the non-life insurance subsidiary writes are primarily automotive insurance contracts which are categorized as short-duration contracts. The non-life insurance revenues for the years ended March 31, 2003, 2004 and 2005 were 21,269 million yen, 28,371 million yen and 35,454 million yen, respectively.
(2) Deferred insurance acquisition costs:
      Insurance acquisition costs, including such items as commission, medical examination and inspection report fees, that vary with and are primarily related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs for traditional life insurance contracts are amortized over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves. The deferred insurance acquisition costs for non-traditional life insurance contracts are amortized over the expected life in proportion to the estimated gross profits. Amortization charged to income for the years ended March 31, 2003, 2004 and 2005 amounted to 44,578 million yen, 50,492 million yen and 47,120 million yen, respectively.
(3) Future insurance policy benefits:
      Liabilities for future policy benefits are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities are computed by the net level premium method based upon estimates as to future investment yield, morbidity, mortality and withdrawals. Future policy benefits are computed using interest rates ranging from approximately 1.30% to 5.20%. Mortality, morbidity and withdrawal assumptions for all policies are based on either the subsidiary’s own experience or various actuarial tables. At March 31, 2004 and 2005, future insurance policy benefits amounted to 1,605,178 million yen and 1,782,850 million yen, respectively.
(4) Separate account assets:
      Separate account assets are funds on which investment income and gains or losses accrue directly to policyholders. Separate account assets are legally segregated. They are not subject to the claims that may arise out of any other business of a life insurance subsidiary. As described in Note 2, the AcSEC issued SOP 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. As a result of the adoption of SOP 03-1 on April 1, 2004, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” (Note 7) in the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets. The related liabilities are treated as policyholders’ account and included in future insurance policy benefits and other in the consolidated balance sheet. Fees earned for administrative and contract-holder services performed for the separate accounts are recognized as financial service revenue.
F-34
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. Short-term borrowings and long-term debt
      Short-term borrowings comprise the following:

March 31

2004 2005

(Yen in millions)
Unsecured loans, principally from banks:
with weighted-average interest rate of 1.80% 26,260
with weighted-average interest rate of 2.79% 38,796
Secured call money:
with weighted-average interest rate of 0.01% 65,000 —
Secured bills sold:
with weighted-average interest rate of 0.00% — 24,600

91,260 63,396

      At March 31, 2005, marketable securities and securities investments with a book value of 27,433 million yen were pledged as collateral for bills sold by a Japanese bank subsidiary.
F-35
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-term debt comprises the following:

March 31

2004 2005

(Yen in millions)
Secured loans, representing obligations to banks:
Due 2004 to 2008 with interest ranging from 2.20% to 3.73% per annum 58,786
Due 2005 to 2008 with interest of 2.20% per annum 1,122
Unsecured loans, representing obligations principally to banks:
Due 2004 to 2017 with interest ranging from 1.77% to 5.89% per annum 77,646
Due 2005 to 2017 with interest ranging from 0.23% to 5.89% per annum 113,436
Medium-term notes of consolidated subsidiaries:
Due 2004 to 2006 with interest ranging from 1.09% to 4.95% per annum 60,537
Due 2006 with interest ranging from 2.78% to 4.95% per annum 58,755
Unsecured 1.4% convertible bonds, due 2005, convertible at 3,995.5 yen for one common share, redeemable before due date 287,753 —
Unsecured zero coupon convertible bonds, due 2008, convertible currently at 5,605 yen for one common share, redeemable before due date 250,000 250,000
Unsecured 0.03% bonds, due 2004 with detachable warrants, net of unamortized discount 3,981 —
Unsecured 0.1% bonds, due 2005 with detachable warrants, net of unamortized discount 3,924 3,981
Unsecured 1.55% bonds, due 2006 with detachable warrants 12,000 12,000
Unsecured 0.9% bonds, due 2007 with detachable warrants 7,300 7,300
Unsecured 0.9% bonds, due 2007 with detachable warrants of subsidiary tracking stock 150 150
Unsecured 1.42% bonds, due 2005, net of unamortized discount 99,994 99,998
Unsecured 0.64% bonds, due 2006, net of unamortized discount 99,994 99,996
Unsecured 2.04% bonds, due 2010, net of unamortized discount 49,981 49,984
Unsecured 1.52% bonds, due 2011, net of unamortized discount 49,996 49,997
Unsecured 2.0% bonds, due 2005 15,000 15,000
Unsecured 1.99% bonds, due 2007 15,000 15,000
Unsecured 2.35% bonds, due 2010 4,900 4,900
Capital lease obligations:
Due 2004 to 2014 with interest ranging from 2.15% to 30.00% per annum 42,689
Due 2005 to 2019 with interest ranging from 1.55% to 30.00% per annum 40,301
Guarantee deposits received 21,775 23,942

1,161,406 845,862
Less — Portion due within one year 383,757 166,870

777,649 678,992

      At March 31, 2005, machinery and equipment with a book value of 4,502 million yen were pledged as collateral for secured loans, representing obligations to banks.
      There are no adverse debt covenants or cross-default provisions relating to Sony’s borrowings.
F-36
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      A summary of the exercise rights of the detachable warrants as of March 31, 2005 is as follows:

Year Ended March 31
2002 2003 2004
(Yen in millions)
Income before cumulative effect of accounting changes allocated to the common stock 9,381 115,648 90,756
Effect of dilutive securities:
Convertible bonds — 2,398 2,260

Income before cumulative effect of accounting changes allocated to the common stock for diluted EPS computation 9,381 118,046 93,016

Thousands of shares
Weighted-average shares 918,462 919,706 923,650
Effect of dilutive securities:
Warrants 108 12 48
Convertible bonds 2,664 78,873 76,517

Weighted-average shares for diluted EPS computation 921,234 998,591 1,000,215

Yen
Basic EPS 10.21 125.74 98.26

Diluted EPS 10.18 118.21 93.00

     ~~For the year ended March 31, 2002, 75,201 thousand~~
Exercise Number of shares per
Issued on Exercisable during price warrant Status of exercise
(Yen)
August 23, 1999 September 1, 2000 through August 22, 2005 7,167 279 shares of ~~potential~~ common stock ~~upon the conversion~~ of ~~convertible bonds were excluded from the computation of diluted EPS due to their antidilutive effect.~~
     ~~44,603 thousand~~Sony Corporation
2,000 warrants outstanding
October 19, 2000 November 1, 2001 through October 18, 2006 12,457 100 shares of ~~potential~~ common stock ~~upon the conversion~~ of ~~250,000 million yen convertible bond issued dated~~ Sony Corporation 9,600 warrants outstanding
December ~~18,~~21, 2001 January 6, 2003 ~~were excluded from the computation~~through December 20, 2007 6,039 100 shares of ~~the number of weighted-average shares for diluted EPS since the conditions to exercise the stock acquisition rights were not met during the year ended March 31, 2004 after the date of issuance.~~
     ~~Potential~~ common stock ~~upon the exercise~~ of Sony Corporation
11,534 warrants and stock acquisition rights, which were excluded from the computation of diluted EPS since they have an exercise price in excess of the average market value of Sony’s common stock during the fiscal year, were 2,665 thousandoutstanding
December 21, 2001 June 20, 2002 through June 20, 2007 3,300 75 shares ~~4,141 thousand shares, and 6,796 thousand shares for the years ended March 31, 2002, 2003 and 2004, respectively.~~
     ~~Warrants and stock acquisition rights~~ of subsidiary tracking stock
600 warrants outstanding
      Aggregate amounts of annual maturities of long-term debt during the next five years are as follows:

Year ending March 31 Yen in millions

2006 166,870
2007 178,117
2008 32,059
2009 282,430
2010 2,909
At March 31, 2005, Sony had unused committed lines of credit amounting to 863,956 million yen and can generally borrow up to 90 days from the banks with whom Sony has committed line contracts. Furthermore, Sony has Commercial Paper Programs, the size of which was 1,251,450 million yen. There was no commercial paper outstanding at March 31, 2005. Under those programs, Sony can issue commercial paper for the period generally not in excess of 270 days up to the size of the programs. In addition, Sony has Medium Term Notes programs, the size of which was 536,750 million yen. At March 31, 2005, the total outstanding balance of Medium Term Notes was 58,755 million yen.
12. Deposits from customers in the banking business
      All deposits from customers in the banking business are interest bearing deposits and are owned by a Japanese bank subsidiary which was established as an Online Internet bank for individuals. At March 31, 2004 and 2005, the balance of time deposits issued in amounts of 10 million yen or more were 55,164 million yen and 67,387 million yen, respectively.
      At March 31, 2005, aggregate amounts of annual maturities of time deposits with a remaining term of more than one year include 25,697 million yen and 23,910 million yen for the years ending March 31, 2007 and 2008, respectively. There are no deposits having a maturity date after March 31, 2008.
13. Financial instruments
(1) Derivative instruments and hedging activities:
      Sony has certain financial instruments including financial assets and liabilities incurred in the normal course of business. Such financial instruments are exposed to market risk arising from the changes of foreign currency exchange rates and interest rates. In applying a consistent risk management strategy for the purpose
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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of reducing such risk, Sony uses derivative financial instruments, which include foreign exchange forward contracts, foreign currency option contracts, and interest rate and currency swap agreements. Foreign exchange forward contracts and foreign currency option contracts are utilized primarily to limit the exposure affected by changes in foreign currency exchange rates on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies. Interest rate and currency swap agreements are utilized primarily to lower funding costs, to diversify sources of funding and to limit Sony’s exposure associated with underlying debt instruments and available-for-sale debt securities resulting from adverse fluctuations in interest rates, foreign currency exchange rates and changes in the fair value. These instruments are executed with creditworthy financial institutions, and virtually all foreign currency contracts are denominated in U.S. dollars, euros and other currencies of major countries. Although Sony may be exposed to losses in the event of nonperformance by counterparties or unfavorable interest and currency rate movements, it does not anticipate significant losses due to the nature of Sony’s counterparties or the hedging arrangements. These derivatives generally mature or expire within 5 months after the balance sheet date. Sony does not use these derivative financial instruments for trading or speculative purposes except for certain derivatives utilized for portfolio investments such as interest rate swap agreements and interest rate future contracts in the Financial Services segment. These derivative transactions utilized for portfolio investments in the Financial Services segment are executed within a certain limit in accordance with an internal risk management policy.
      Derivative financial instruments held by Sony are classified and accounted for as described below pursuant to FAS No. 133.
Fair value hedges
      The derivatives designated as fair value hedges include interest rate and currency swap agreements.
      Both the derivatives designated as fair value hedges and hedged items are reflected at fair value in the consolidated balance sheet. Changes in the fair value of the derivatives designated as fair value hedges as well as offsetting changes in the carrying value of the underlying hedged items are recognized in income.
      The amount of ineffectiveness of these fair value hedges, that was reflected in earnings, was not material for the years ended March 31, 2003, 2004 and 2005. In addition, there were no amounts excluded from the assessment of hedge effectiveness of fair value hedges.
Cash flow hedges
      The derivatives designated as cash flow hedges include foreign exchange forward contracts, foreign currency option contracts and interest rate and currency swap agreements.
      Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. For the years ended March 31, 2003 and 2004, these cash flow hedges were fully effective. For the year ended March 31, 2005, the amount of ineffectiveness of these cash flow hedges that was reflected in earnings was not material. In addition, there were no amounts excluded from the assessment of hedge effectiveness of cash flow hedges. At March 31, 2005, amounts related to derivatives qualifying as cash flow hedges amounted to a net reduction of equity of 2,490 million yen. Within the next twelve months, 1,615 million yen is expected to be reclassified from equity into earnings as loss. For the year ended March 31, 2005, there were no forecasted transactions that failed to occur which resulted in the discontinuance of cash flow hedges.
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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivatives not designated as hedges
      The derivatives not designated as hedges under FAS No. 133 include foreign exchange forward contracts, foreign currency option contracts, interest rate and currency swap agreements, convertible rights included in convertible bonds and other. Changes in the fair value of derivatives not designated as hedges are recognized in income.
      A description of the purpose and classification of the derivative financial instruments held by Sony is as follows:
Foreign exchange forward contracts and foreign currency option contracts
      Sony enters into foreign exchange forward contracts and purchased and written foreign currency option contracts primarily to fix the cash flows from intercompany accounts receivable and payable and forecasted transactions denominated in functional currencies (Japanese yen, U.S. dollars and euros) of Sony’s major operating units. The majority of written foreign currency option contracts are a part of range forward contract arrangements and expire in the same month with the corresponding purchased foreign currency option contracts.
      Sony also enters into foreign exchange forward contracts, which effectively fix the cash flows from foreign currency denominated debt. Accordingly, these derivatives have been designated as cash flow hedges in accordance with FAS No. 133.
      Foreign exchange forward contracts and foreign currency option contracts that do not qualify as hedges are marked-to-market with changes in value recognized in other income and expenses.
Interest rate and currency swap agreements
      Sony enters into interest rate and currency swap agreements, which are used for reducing the risk arising from the changes in the fair value of fixed rate debt and available-for-sale debt securities. For example, Sony enters into interest rate and currency swap agreements, which effectively swap foreign currency denominated fixed rate debt for functional currency denominated variable rate debt. These derivatives are considered to be a hedge against changes in the fair value of Sony’s foreign denominated fixed-rate obligations. Accordingly, these derivatives have been designated as fair value hedges in accordance with FAS No. 133.
      Sony also enters into interest rate and currency swap agreements that are used for reducing the risk arising from the changes in anticipated cash flow of variable rate debt and foreign currency denominated debt. For example, Sony enters into interest rate and currency swap agreements, which effectively swap foreign currency denominated variable rate debt for functional currency denominated fixed rate debt. These derivatives are considered to be a hedge against changes in the anticipated cash flow of Sony’s foreign denominated variable rate obligations. Accordingly, these derivatives have been designated as cash flow hedges in accordance with FAS No. 133.
      Certain subsidiaries in the Financial Services segment have interest rate swap agreements as part of portfolio investments, which are marked-to-market with changes in value recognized in financial service revenue.
      Any other interest rate and currency swap agreements that do not qualify as hedges, which are used for reducing the risk arising from changes of variable rate and foreign currency dominated intercompany debt, are marked-to-market with changes in value recognized in other income and expenses.
F-39
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest rate future contracts
      Certain subsidiaries in the Financial Services segment have interest rate future contracts as part of portfolio investments, which are marked-to-market with changes in value recognized in financial service revenue.
Embedded derivatives
      Changes in the fair value of embedded derivatives that must be separated from the host contracts and accounted for as derivative instruments under FAS No. 133 are recognized in income. For example, the convertible rights included in convertible bonds held by Sony’s life insurance subsidiary, which are classified as available-for-sale debt securities, are considered embedded derivatives and are marked-to-market with changes in value recognized in financial service revenue.
(2) Fair value of financial instruments:
      The estimated fair values of Sony’s financial instruments are summarized as follows. The following summary excludes cash and cash equivalents, time deposits, notes and accounts receivable, trade, short-term borrowings, notes and accounts payable, trade and deposits from customers in the banking business that are carried at amounts which approximate fair value. The summary also excludes debt and equity securities which are disclosed in Note 7.

March 31

2004 2005

Notional Carrying Estimated Notional Carrying Estimated
amount amount fair value amount amount fair value

(Yen in millions)
Long-term debt including the current portion — (1,161,406 ) (1,235,669 ) — (845,862 ) (856,321 )
Foreign exchange forward contracts 1,348,157 (994 ) (994 ) 1,545,814 (55 ) (55 )
Currency option contracts purchased 375,582 10,781 10,781 428,261 1,646 1,646
Currency option contracts written 124,925 (1,000 ) (1,000 ) 146,506 (3,390 ) (3,390 )
Interest rate swap agreements 218,101 (4,229 ) (4,229 ) 171,133 (4,417 ) (4,417 )
Interest rate and currency swap agreements 8,574 384 384 5,734 131 131
Interest rate future contracts 17,007 (9 ) (9 ) 136,470 (92 ) (92 )
Embedded derivatives 421,416 12,885 12,885 405,756 11,894 11,894
      The following are explanatory notes regarding the estimation method of fair values in the above table.
Long-term debt including the current portion
      The fair values of long-term debt, including the current portion, were estimated based on either the market value or the discounted amounts of future cash flows using Sony’s current incremental debt rates for similar liabilities.
F-40
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivative financial instruments
      The fair values of foreign exchange forward contracts and foreign currency option contracts were estimated based on market quotations. The fair values of interest rate and currency swap agreements were estimated based on the discounted amounts of future net cash flows. The fair values of convertible rights, which were a majority of embedded derivatives, were estimated based on the market price of stock which will be acquired by the exercise of these rights.
14. Pension and severance plans
      Upon terminating employment, employees of Sony Corporation and its subsidiaries in Japan are entitled, under most circumstances, to lump-sum indemnities or pension payments as described below. For employees voluntarily retiring, payments are determined based on current rates of pay and lengths of service. In calculating the payments for employees involuntarily retiring, including employees retiring due to meeting mandatory retirement age requirements, Sony may grant additional benefits.
      In July, 2004, Sony Corporation and certain of its subsidiaries amended their pension plans and introduced a point-based plan under which a point is added every year reflecting the individual employee’s performance over that year. Under the point-based plan the amount of payment is determined based on sum of cumulative points from past services and interest points earned on the cumulative points regardless of whether or not the employee is voluntarily retiring. As a result of the plan amendment, the projected benefit obligation was decreased by 120,873 million yen.
      Sony Corporation and most of its subsidiaries in Japan have contributory funded defined benefit pension plans, which are pursuant to the Japanese Welfare Pension Insurance Law. The contributory pension plans cover a substitutional portion of the governmental welfare pension program, under which the contributions are made by the companies and their employees, and an additional portion representing the substituted noncontributory pension plans. Under the contributory pension plans, the defined benefits representing the noncontributory portion of the plans, in general, cover 65% of the indemnities under existing regulations to employees. The remaining indemnities are covered by severance payments by the companies. The pension benefits are payable at the option of the retiring employee either in a lump-sum amount or monthly pension payments. Contributions to the plans are funded through several financial institutions in accordance with the applicable laws and regulations.
      In June 2001, the Japanese Government issued the Defined Benefit Corporate Pension Plan Act which permits each employer and employees’ pension fund plan to separate the substitutional portion from its employees’ pension fund and transfer the obligation and related assets to the government. In July, 2004, in accordance with the law, the Japanese Government approved applications submitted by Sony Corporation and most of its subsidiaries in Japan for an exemption from the obligation to pay benefits for future employee services related to the substitutional portion of the governmental welfare pension program. In January 2005, the government also approved applications for an exemption from the obligation to pay benefits for past employee services related to the substitutional portion. As of March 31, 2005 the benefit obligation for past employee services related to the substitutional portion and the related government-specified portion of the plan assets have not been transferred to the government.
      EITF Issue No. 03-2, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities”, requires employers to account for the entire separation process of a substitutional portion from an entire plan upon completion of the transfer of the substitutional portion of the benefit obligation and related plan assets to the government as the culmination of a series of steps in a single settlement transaction. In accordance with EITF Issue No. 03-2, no accounting for the transfer was recorded for the year ended March 31, 2005.
F-41
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Many of foreign subsidiaries have defined benefit pension plans or severance indemnity plans, which substantially cover all of their employees. Under such plans, the related cost of benefits is currently funded or accrued. Benefits awarded under these plans are based primarily on the current rate of pay and length of service.
      Sony uses a measurement date of March 31 for substantially all of its pension and severance plans.
      The components of net pension and severance costs, which exclude employee termination benefits paid in restructuring activities, for the years ended March 31, 2003, 2004 and 2005 were as follows:
Japanese plans:

Year Ended March 31

2003 2004 2005

(Yen in millions)
Service cost 47,884 54,501 31,971
Interest cost 20,857 19,489 21,364
Expected return on plan assets (25,726 ) (22,812 ) (16,120 )
Amortization of net transition asset (375 ) (375 ) (375 )
Recognized actuarial loss 20,655 31,019 20,236
Amortization of prior service cost (939 ) (939 ) (7,216 )
Gains on curtailments and settlements (1,380 ) — (876 )

Net periodic benefit cost 60,976 80,883 48,984

Foreign plans:

Year Ended March 31

2003 2004 2005

(Yen in millions)
Service cost 13,954 11,252 6,419
Interest cost 8,478 8,566 8,091
Expected return on plan assets (7,319 ) (6,812 ) (6,712 )
Amortization of net transition asset (47 ) (27 ) (18 )
Recognized actuarial loss 1,452 1,569 1,637
Amortization of prior service cost (208 ) (117 ) (114 )
(Gains) losses on curtailments and settlements (460 ) 5,574 1,713

Net periodic benefit cost 15,850 20,005 11,016

F-42
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The changes in benefit obligation and plan assets, funded status and composition of amounts recognized in the consolidated balance sheets were as follows:

Japanese plans Foreign plans

March 31 March 31

2004 2005 2004 2005

(Yen in millions) (Yen in millions)
Change in benefit obligation:
Benefit obligation at beginning of the fiscal year 1,031,760 993,542 157,580 155,838
Service cost 54,501 31,971 11,252 6,419
Interest cost 19,489 21,364 8,566 8,091
Plan participants’ contributions 5,802 2,111 644 873
Amendments — (120,873 ) 3,900 286
Actuarial (gain) loss (81,873 ) 1,641 431 12,210
Foreign currency exchange rate changes — — (17,082 ) 14,288
Curtailments and settlements — (2,988 ) (66 ) (628 )
Benefits paid (36,137 ) (25,042 ) (9,387 ) (11,639 )
Divestiture — — — (32,140 )

Benefit obligation at end of the fiscal year 993,542 901,726 155,838 153,598

Change in plan assets:
Fair value of plan assets at beginning of the fiscal year 405,248 513,095 67,937 85,662
Actual return (loss) on plan assets 93,154 (354 ) 13,065 7,513
Foreign currency exchange rate changes — — (3,420 ) 3,517
Employer contribution 23,243 34,581 16,475 18,406
Plan participants’ contributions 5,802 2,111 644 873
Curtailments and settlements — — — (112 )
Benefits paid (14,352 ) (14,982 ) (9,039 ) (11,168 )
Divestiture — — — (12,666 )

Fair value of plan assets at end of the fiscal year 513,095 534,451 85,662 92,025

      In connection with the establishment of the SONY BMG joint venture with Bertelsmann AG as discussed in Note 5, Sony transferred 32,140 million yen of its benefit obligation and 12,666 million yen of its plan assets which were included in Sony’s foreign plans to the joint venture.
F-43
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Japanese plans Foreign plans

March 31 March 31

2004 2005 2004 2005

(Yen in millions) (Yen in millions)
Funded status (480,447 ) (367,275 ) (70,176 ) (61,573 )
Unrecognized actuarial loss 328,467 322,237 27,550 37,383
Unrecognized net transition asset (479 ) (104 ) 211 7
Unrecognized prior service cost (20,784 ) (134,440 ) (748 ) (501 )

Net amount recognized (173,243 ) (179,582 ) (43,163 ) (24,684 )

Amounts recognized in the consolidated balance sheet consist of:
Prepaid benefit cost — 1,795 2,609 1,351
Accrued pension and severance costs, including current portion (322,677 ) (309,957 ) (61,452 ) (42,934 )
Intangibles 21,263 — 113 41
Accumulated other comprehensive income 128,171 128,580 15,567 16,858

Net amount recognized (173,243 ) (179,582 ) (43,163 ) (24,684 )

The accumulated benefit obligation for all defined benefit pension plan as follows:

Japanese plans Foreign plans

March 31 March 31

2004 2005 2004 2005

(Yen in millions) (Yen in millions)
Accumulated benefit obligation 830,898 835,420 129,879 121,176
      The projected benefit obligations, the accumulated benefit obligations and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were as follows:

Japanese plans Foreign plans

March 31 March 31

2004 2005 2004 2005

(Yen in millions) (Yen in millions)
Projected benefit obligations 991,030 898,985 135,459 132,556
Accumulated benefit obligations 830,362 �� 835,420 113,020 115,147
Fair value of plan assets 512,720 533,926 74,167 86,070
      Weighted-average assumptions used to determine benefit obligations as of March 31, 2003, 2004 and 2005 were as follows:
Japanese plans:

March 31

2003 2004 2005

Discount rate 1.9 % 2.4 % 2.3 %
Rate of compensation increase 3.0 3.0 3.3
F-44
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign plans:

March 31

2003 2004 2005

Discount rate 6.3 % 5.8 % 5.5 %
Rate of compensation increase 4.1 4.0 3.3
      Weighted-average assumptions used to determine net pension and severance costs for the years ended March 31, 2003, 2004 and 2005 were as follows:
Japanese plans:

Year Ended March 31

2003 2004 2005

Discount rate 2.4 % 1.9 % 2.4 %
Expected return on plan assets 4.0 4.0 3.2
Rate of compensation increase 3.0 3.0 3.3
Foreign plans:

Year Ended March 31

2003 2004 2005

Discount rate 6.6 % 6.3 % 5.8 %
Expected return on plan assets 8.1 8.3 7.8
Rate of compensation increase 4.5 4.1 4.0
      As required under FAS No. 87, the assumptions are reviewed in accordance with changes in circumstances.
      To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as historical and expected long-term rate of returns on various categories of plan assets.
      Following FAS132(R), the weighted-average rate of compensation increase is calculated based on the pay-related plans only. The point-based plan discussed above is excluded from the calculation because payments made under the plan are not based on employee compensation.
      Weighted-average pension plan asset allocations based on the fair value of such assets as of March 31, 2004 and 2005 were as follows:
Japanese plans:

March 31,

2004 2005

Equity securities 39.0 % 28.0 %
Debt securities 14.7 34.7
Cash 42.7 33.7
Other 3.6 3.6

Total 100 % 100 %

F-45
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign plans:

March 31,

2004 2005

Equity securities 63.2 % 68.3 %
Debt securities 26.6 23.4
Real estate 3.2 4.0
Other 7.0 4.3

Total 100 % 100 %

      For the pension plans of Sony Corporation and most of its subsidiaries, Sony’s asset investment policy is set so as to compensate the appropriate level for employee’s benefit over the long term.
      For the pension plans of Sony Corporation and most of its subsidiaries in Japan, the target allocation as of March 31, 2005, is, as a result of our Asset Liability management, 34% of public equity, 56% of fixed income securities and 10% of other. When determining an appropriate asset allocation, diversification among assets is duly considered. The actual asset allocation as of March 31, 2005 for Sony’s principal pension plans did not meet the aforementioned target allocation as the Sony Employees’ Pension Fund tentatively held cash to be paid to the Japanese government in relation to the transfer of the substitutional portion of the benefit obligation and the related government-specified portion of the plan assets discussed above. Such transfer is expected to occur in the year ending March 31, 2006.
      Sony makes contributions to its contributory funded defined benefit pension plans as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected return on plan assets and the present value of benefit obligations. Sony expects to contribute approximately 35 billion yen to the Japanese plans and approximately 6 billion yen to the foreign plans for the year ending March 31, 2006.
      The future benefit payments are expected as follows:

Japanese plans Foreign plans

(Yen in millions) (Yen in millions)
Year ending March 31,
2006 18,281 5,625
2007 19,734 5,977
2008 22,075 6,308
2009 24,600 6,860
2010 29,475 7,912
2011 — 2015 181,527 51,919
15. Stockholders’ equity
     (1)     Subsidiary tracking stock:
      On June 20, 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which is intended to be linked to the economic value of Sony Communication Network Corporation (“SCN”), a directly and indirectly wholly owned subsidiary of Sony Corporation which is engaged in Internet-related services. The subsidiary tracking stock holders have no direct rights in the equity or assets of SCN or the assets of Sony Corporation. Except as summarized below, the shares of subsidiary tracking stock have the same rights and characteristics as those of shares of common stock.
F-46
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The dividend on the shares of this series of subsidiary tracking stock is payable only when the Board of Directors of SCN has resolved to pay to its common stock holders a dividend in an amount per share of the subsidiary tracking stock equal to the amount of SCN’s dividend per share of its common stock multiplied by the Standard Ratio (as defined in the articles of incorporation), subject to statutory restriction on Sony Corporation’s ability to pay dividends on its shares of capital stock and the maximum dividend amount (as defined in the articles of incorporation). If the amount of dividends paid to the subsidiary tracking stock holders is less than the amount, which should have been paid pursuant to the formula set forth above due to the statutory restriction referred to above or for any other reason, such shortfall will be accumulated and such cumulative amount will be paid to the subsidiary tracking stock holders for subsequent fiscal years. Any such dividend on the subsidiary tracking stock is payable in priority to the payment of dividends to the common stock holders. However, the subsidiary tracking stockholders have no right to participate in the dividends to common stock holders. Furthermore, even if the Board of Directors of SCN does not take a resolution for the payment of dividends to SCN’s common stock holders, Sony Corporation may decide to pay dividends to its common stock holders.
      The subsidiary tracking stockholders have the same voting rights as those of the common stock holders and, thus, are entitled to participate and vote at any General Meeting of Shareholders in the same way as the common stock holders. In addition, as each series of subsidiary tracking stock is a separate class of stock different from common stock, if any resolution of the General Meeting of Shareholders would adversely affect the rights of the shareholders of a particular class of subsidiary tracking stock, the shareholders of each class of subsidiary tracking stock will have the right to approve or disapprove such resolution by a special resolution of the meeting of shareholders of that class of subsidiary tracking stock.
      In the event of distribution of residual assets to the shareholders of Sony Corporation where, as long as such assets include shares of common stock of SCN, the number of shares of SCN common stock obtained by multiplying the number of shares of the subsidiary tracking stock held by each holder by the Standard Ratio or the net proceeds from the sale of the shares of SCN common stock so to be distributed will be distributed to the holders of the subsidiary tracking stock.
      The shares of subsidiary tracking stock may be subject to repurchase and retirement in the same manner and under the same restriction as the shares of common stock. In addition, at any time after the passage of three years from the date of the initial issuance of shares of a series of subsidiary tracking stock, it may retire the entire amount of all outstanding shares of that series of subsidiary tracking stock upon paying to the shareholders thereof an amount equal to the current market price of the subsidiary tracking stock out of Sony Corporation’s retained earnings available for dividend payments. Sony Corporation may also retire the shares of a series of subsidiary tracking stock in their entirety pursuant to the procedures prescribed by the Japanese Commercial Code for the reduction of capital upon payment to the subsidiary tracking stock holders an amount equal to the market value thereof as set forth above.
      At any time after the passage of three years from the date of the initial issuance of shares of a series of subsidiary tracking stock, it may convert the entire amount of all outstanding shares of the subsidiary tracking stock into the shares of Sony Corporation’s common stock at the rate of the multiple of 1.1 of the market value (as defined in the articles of incorporation) of shares of the subsidiary tracking stock divided by the market value (as similarly defined) of the shares of Sony Corporation’s common stock.
      If any events (as defined in the articles of incorporation) occur, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s common stock at the price or rate set forth above. On April 26, 2005, Sony Corporation decided at the Board of Directors to go through procedures for the initial public offering of SCN. If the listing of SCN common stock is approved by the stock exchange, subject to required procedures, all of the subsidiary tracking stock will be compulsorily terminated pursuant to the articles of incorporation. The method of such termination will
F-47
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
be one of the following: 1) compulsory retirement in cash, 2) compulsory conversion to common stock of Sony Corporation, or 3) compulsory exchange with common stock of SCN.
      The number of shares of the subsidiary tracking stock issued and outstanding at March 31, 2005 was 3,072,000. At March 31, 2005, 136,454 shares of the subsidiary tracking stock would be issued upon exercise of warrants and stock acquisition rights outstanding.
(2) Common stock:
      Changes in the number of shares of common stock issued and outstanding during the years ended March 31, 2003, 2004 and 2005 have resulted from the following:
Number of shares
Balance at March 31, 2002 919,744,355
Conversion of convertible bonds 138,330
Stock issued under exchange offering 2,502,491
Balance at March 31, 2003 922,385,176
Conversion of convertible bonds 2,944,800
Stock issued under exchange offering 1,088,304
Balance at March 31, 2004 926,418,280
Conversion of convertible bonds 70,765,533
Exercise of stock acquisition rights 27,400
Balance at March 31, 2005 997,211,213
      At March 31, 2005, 55,609,085 shares of common stock would be issued upon conversion or exercise of all convertible bonds, warrants and stock acquisition rights outstanding.
      On October 1, 2002, Sony Corporation implemented a share exchange as a result of which Aiwa Co., Ltd. became a wholly-owned subsidiary. As a result of this share exchange, Sony Corporation issued 2,502,491 new shares, the minority interest in Aiwa Co., Ltd. was eliminated from the balance sheet, and additional paid-in capital increased 15,791 million yen.
      On May 1, 2003, Sony Corporation implemented a share exchange as a result of which CIS Corporation became a wholly-owned subsidiary. As a result of this share exchange, Sony Corporation issued 1,088,304 new shares, and additional paid-in capital increased 5,409 million yen.
      On November 20, 1991, Sony Corporation made a free share distribution of 33,908,621 shares in ratios of one share for each ten shares held for which no accounting entry was required in Japan. Had the distribution been accounted for in the manner adopted by companies in the United States of America, 201,078 million yen would have been transferred from retained earnings to the appropriate capital accounts. This has been the only free distribution of common stock where no accounting entry was required in Japan.
      Conversions of convertible bonds into common stock are accounted for in accordance with the provisions of the Japanese Commercial Code by crediting approximately one-half of the conversion proceeds to the common stock account and the remainder to the additional paid-in capital account.
      Prior to the amendments to the Japanese Commercial Code enacted on April 1, 2002, purchase and retirement by Sony Corporation of its own shares could be made at any time by resolution of the Board of Directors. No common stock and subsidiary tracking stock had been acquired under the approval during the year ended March 31, 2002.
F-48
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Following the amendments to the Japanese Commercial Code enacted on April 1, 2002, purchase by Sony Corporation of its own shares was subject to the prior approval of shareholders at the Ordinary General Meeting of Shareholders, which included the maximum number of shares and the maximum total amount to be purchased for each class of stock. Once such approval of shareholders was obtained, Sony Corporation could purchase its own shares at any time during the period up to the conclusion of the next Ordinary General Meeting of Shareholders.
      The Ordinary General Meeting of Shareholders held on June 20, 2002 approved that Sony Corporation acquire up to a total not exceeding 90 million yen outstanding shares of its common stock at an amount in total not exceeding 650 billion yen and a total not exceeding 300 thousand outstanding shares of the subsidiary tracking stock at an amount in total not exceeding 1 billion yen until the conclusion of the General Meeting of Shareholders held for the year ended March 31, 2003. As a result, no common stock and subsidiary tracking stock had been acquired under this approval.
      The Ordinary General Meeting of Shareholders held on June 20, 2003 approved that Sony Corporation acquire up to a total not exceeding 90 million yen outstanding shares of its common stock at an amount in total not exceeding 400 billion yen and a total not exceeding 300 thousand outstanding shares of the subsidiary tracking stock at an amount in total not exceeding 1 billion yen. As a result, Sony Corporation had acquired 2 million outstanding shares of its common stock at an amount in 8,200 million yen. No subsidiary tracking stock had been acquired under this approval.
      The Ordinary General Meeting of Shareholders held on June 22, 2004 approved to amend the articles of incorporation that Sony Corporation may purchase its own shares by a resolution of the Board of Directors, in accordance with the amendments to the Japanese Commercial Code enacted on September 25, 2003. With the amendment of the articles of incorporation, Sony Corporation may purchase its own shares at any time by a resolution of the Board of Directors up to the retained earnings available for dividends to shareholders. No common stock and subsidiary tracking stock had been acquired by the resolution of the Board of Directors during the year ended March 31, 2005.
(3) Retained earnings:
      The amount of statutory retained earnings of Sony Corporation available for dividends to shareholders as of March 31, 2005 was 557,856 million yen. The appropriation of retained earnings for the year ended March 31, 2005 including cash dividends for the six-month period ended March 31, 2005 has been incorporated in the accompanying consolidated financial statements. This appropriation of retained earnings was approved at the meeting of the Board of Directors of Sony Corporation held on May 16, 2005 and was then recorded in the statutory books of account, in accordance with the Japanese Commercial Code.
      Retained earnings include Sony’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of 2,261 million yen and 2,724 million yen at March 31, 2004 and 2005, respectively.
F-49
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(4) Other comprehensive income:
      Other comprehensive income for the years ended March 31, 2003, 2004 and 2005 were as follows:

Pre-tax Tax Net-of-tax
amount expense amount

(Yen in millions)
For the year ended March 31, 2003:
Unrealized gains on securities —
Unrealized holding gains (losses) arising during the period (18,575 ) 8,948 (9,627 )
Less: Reclassification adjustment for gains (losses) included in net income 3,421 867 4,288
Unrealized losses on derivative instruments —
Unrealized holding gains (losses) arising during the period (6,268 ) 1,791 (4,477 )
Less: Reclassification adjustment for gains (losses) included in net income 682 (287 ) 395
Minimum pension liability adjustment (181,725 ) 71,089 (110,636 )
Foreign currency translation adjustments —
Translation adjustments arising during the period (87,103 ) 3,110 (83,993 )
Less: Reclassification adjustment for losses included in net income 7,665 — 7,665

Other comprehensive income (281,903 ) 85,518 (196,385 )

For the year ended March 31, 2004:
Unrealized gains on securities —
Unrealized holding gains (losses) arising during the period 89,861 (31,890 ) 57,971
Less: Reclassification adjustment for gains (losses) included in net income (7,371 ) 1,692 (5,679 )
Unrealized losses on derivative instruments —
Unrealized holding gains (losses) arising during the period 11,586 (4,049 ) 7,537
Less: Reclassification adjustment for gains (losses) included in net income (5,961 ) 2,617 (3,344 )
Minimum pension liability adjustment 162,408 (68,993 ) 93,415
Foreign currency translation adjustments —
Translation adjustments arising during the period (134,312 ) 5,199 (129,113 )
Less: Reclassification adjustment for losses included in net income 1,232 — 1,232

Other comprehensive income 117,443 (95,424 ) 22,019

F-50
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pre-tax Tax Net-of-tax
amount expense amount

(Yen in millions)
For the year ended March 31, 2005:
Unrealized gains on securities —
Unrealized holding gains (losses) arising during the period 7,184 (1,541 ) 5,643
Less: Reclassification adjustment for gains (losses) included in net income (18,140 ) 5,216 (12,924 )
Unrealized losses on derivative instruments —
Unrealized holding gains (losses) arising during the period (2,015 ) 1,806 (209 )
Less: Reclassification adjustment for gains (losses) included in net income (2,848 ) 1,167 (1,681 )
Minimum pension liability adjustment (1,700 ) 931 (769 )
Foreign currency translation adjustments —
Translation adjustments arising during the period 76,585 (2,361 ) 74,224

Other comprehensive income 59,066 5,218 64,284

      During the years ended March 31, 2003 and 2004, 7,665 million yen and 1,232 million yen of foreign currency translation adjustments were transferred respectively from other comprehensive income and charged to income as a result of the liquidation of certain foreign subsidiaries.
      As discussed in Note 5, as of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses in a joint venture. In connection with the establishment of the joint venture, the minimum pension liability attributable to employees who were transferred to SONY BMG totaling 6,053 million yen was transferred from other comprehensive income to the carrying value of Sony’s investment in SONY BMG.
16. Stock-based compensation plans
      Sony has four types of stock-based compensation plans as incentive plans for directors, corporate executive officers and selected employees.
(1) Warrant plan:
      Upon issuance of unsecured bonds with detachable warrants which are described in Note 11, Sony Corporation has purchased all of the detachable warrants and distributed them to the directors, corporate executive officers and selected employees of Sony. By exercising a warrant, directors, corporate executive officers and selected employees can purchase the common stock or subsidiary tracking stock of Sony Corporation, the number of which is designated by each plan. The warrants generally vest ratably over a period of three years, and are exercisable up to six years from the date of grant.
(2) Convertible Bond plan:
      Sony has an equity-based compensation plan for selected executives of Sony’s United States of America subsidiaries using U.S. dollar-denominated non-interest bearing convertible bonds which have characteristics similar to that of an option plan. Each convertible bond can be converted into 100 shares of the common stock of Sony Corporation at an exercise price based on the prevailing market rate shortly before the date of grant. The convertible bonds vest ratably over a three-year period and are exercisable up to ten years from the date of grant. As the convertible bonds were issued in exchange for a non-interest bearing employee loan and a right
F-51
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of offset exists between the convertible bonds and the employee loans, no accounting recognition was given to either the convertible bonds or the employee loans in Sony’s consolidated balance sheet.
(3) Stock Acquisition Rights:
      During the year ended March 31, 2003, Sony adopted an equity-based compensation plan that issues common stock acquisition rights for the purpose of granting stock options to the directors, corporate executive officers and selected employees of Sony, and subsidiary tracking stock acquisition rights for the purpose of granting stock options to the directors and selected employees of Sony Communication Network Corporation, pursuant to the Commercial Code of Japan. The stock acquisition rights generally vest ratably over a period of three years and are exercisable up to ten years from the date of grant.
      Presented below is a summary of the activities regarding common stock warrant, convertible bond and stock acquisition rights plans for the years shown:

Year Ended March 31

2003 2004 2005

Weighted- Weighted- Weighted-
average average average
Number of exercise Number of exercise Number of exercise
Shares price Shares price Shares price

(Yen) (Yen) (Yen)
Outstanding at beginning of the fiscal year 5,853,892 8,648 9,640,892 7,832 11,705,592 6,082
Granted 3,874,100 5,313 2,621,400 5,017 2,433,600 3,996
Exercised — — — — (27,400 ) 3,896
Forfeited (87,100 ) 8,306 (556,700 ) 6,760 (998,592 ) 5,923

Outstanding at end of the fiscal year 9,640,892 7,832 11,705,592 6,082 13,113,200 5,754

Exercisable at end of the fiscal year 4,314,292 9,773 5,853,892 7,522 7,223,600 6,994

      A summary of common stock warrants, convertible bond options and stock acquisition rights outstanding and exercisable at March 31, 2005 is as follows:

Outstanding Exercisable

Weighted- Weighted- Weighted-
Exercise price Number of average average Number of average
range Shares exercise price remaining life Shares exercise price

(Yen) (Yen) (Years) (Yen)
3,782~7,000 10,497,600 4,680 8.24 4,608,000 5,250
7,001~13,202 2,615,600 10,065 3.14 2,615,600 10,065

3,782~13,202 13,113,200 5,754 7.22 7,223,600 6,994

F-52
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      A summary of subsidiary tracking stock warrants and stock acquisition rights outstanding and exercisable at March 31, 2005 is as follows:

Outstanding Exercisable

Weighted- Weighted- Weighted-
Exercise price Number of average average Number of average
range Shares exercise price remaining life Shares exercise price

(Yen) (Yen) (Years) (Yen)
815~3,300 181,500 1,591 7.22 90,300 2,118
      As the exercise prices for the warrant, convertible bond and stock acquisition rights plans were determined based on the prevailing market price shortly before the date of grant, the compensation expense for these plans was not significant for the years ended March 31, 2003, 2004 and 2005.
      As a result of the establishment of the joint venture between Sony’s recorded music business with the recorded music business of Bertelsmann AG (Note 5), employees of Sony’s recorded music business who were granted options under the convertible bond and stock acquisition rights plans prior to the establishment of the joint venture are no longer considered employees of Sony under FAS No. 123 as these individual are now employees of SONY BMG which is accounted for under the equity method. As a result, a compensation charge of 340 million yen was recorded based on the fair value method of accounting for stock-based compensation using the Black-Scholes model. The fair value of the options as of August 1, 2004, the date on which the joint venture was established, was 538 million yen and is being recognized into income over the remaining vesting period of the options.
      The weighted-average fair value per share at the date of grant of common stock warrants, convertible bond options and stock acquisition rights granted during the years ended March 31, 2003, 2004 and 2005 were 2,063, 1,413 and 1,085, respectively. The fair value of common stock warrants, convertible bond options and stock acquisition rights granted on the date of grant, which is amortized to expense over the vesting period in determining the pro forma impact, is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Year Ended March 31

Weighted-average assumptions 2003 2004 2005

Risk-free interest rate 2.76% 2.18% 2.04%
Expected lives 4.23 years 3.67 years 3.54 years
Expected volatility 47.33% 42.83% 35.56%
Expected dividend 0.47% 0.57% 0.62%
(4) SAR plan:
      Sony granted stock appreciation rights (“SARs”) in Japan, Europe and the United States of America for selected employees. Under the terms of these plans, employees on exercise receive cash equal to the amount that the market price of Sony Corporation’s common stock exceeds the strike price of the SARs. The SARs generally vest ratably over a period of three years, and are generally exercisable up to six to ten years from the date of grant. Sony holds treasury stock for the SAR plan in Japan to minimize cash flow exposure associated with the SARs. In addition, Sony uses various strategies to minimize the compensation expense associated with the SAR plans in the United States of America and Europe.
F-53
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The status of the SAR plans is summarized as follows:

Year Ended March 31

2003 2004 2005

Weighted- Weighted- Weighted-
Number of average Number of average Number of average
SARs exercise price SARs exercise price SARs exercise price

(Yen) (Yen) (Yen)
Outstanding at beginning of the fiscal year 2,410,394 6,644 2,343,028 6,341 1,526,568 6,424
Granted 28,750 6,323 — — — —
Exercised (11,800 ) 5,727 — — (241,134 ) 3,955
Expired or forfeited (84,316 ) 7,274 (816,460 ) 5,494 (420,350 ) 5,855

Outstanding at end of the fiscal year 2,343,028 6,341 1,526,568 6,424 865,084 7,436

Exercisable at end of the fiscal year 2,176,319 6,211 1,462,391 6,421 856,156 7,455

      A summary of SARs outstanding and exercisable at March 31, 2005 is as follows:

Outstanding Exercisable

Weighted- Weighted- Weighted-
Exercise price Number of average average Number of average
range SARs exercise price remaining life SARs exercise price

(Yen) (Yen) (Years) (Yen)
3,234~5,000 61,850 4,767 6.77 61,850 4,767
5,001~10,000 749,109 7,365 1.08 740,181 7,386
10,001~13,419 54,125 11,471 4.56 54,125 11,471

3,234~13,419 865,084 7,436 1.70 856,156 7,455

      In accordance with APB No. 25 and its related interpretations, the SARs compensation expense is measured as the excess of the quoted market price of Sony Corporation’s common stock over the SARs strike price, which is consistent with the accounting treatment prescribed for SAR plans in FAS No. 123. For the year ended March 31, 2003, Sony recognized a reduction in SARs compensation expense of 670 million yen due to the decline in Sony’s stock price during the year. For the year ended March 31, 2004, Sony recognized 105 million yen of SARs compensation expense. For the year ended March 31, 2005, Sony recognized a reduction in SARs compensation expense of 74 million yen.
17. Restructuring charges and asset impairments
      As part of its effort to improve the performance of the various businesses, Sony has undertaken a number of restructuring initiatives within the Electronics, Music and Pictures segments. For the years ended March 31, 2003, 2004 and 2005, Sony recorded total restructuring charges of 106,251 million yen, 168,091 million yen and 89,963 million yen, respectively. Significant restructuring charges and asset impairments include the following:
Electronics Segment
      In an effort to improve the performance of the Electronics segment, Sony has undergone a number of restructuring efforts to reduce its operating costs. For the years ended March 31, 2003, 2004 and 2005, Sony recorded total restructuring charges of 72,473 million yen, 143,310 million yen and 81,768 million yen, respectively, within the Electronics segment. In addition to the above charges, the Electronics segment also reflects restructuring of 7,950 million yen and 2,122 million yen for the years ended March 31, 2003 and 2004,
F-54
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
respectively, that relate to the non-Japan based disc manufacturing and physical distribution businesses that were part of the restructuring charges of the Music segment which is discussed below. These restructuring charges were formerly included within the Music segment but were reclassified to the Electronics segment. See Notes 5 and 24 for more information on this reclassification. Significant restructuring activities are the following:
Downsizing of computer display CRT operations -
      In the year ended March 31, 2003, due to the market shrinkage and demand shift from CRT displays to LCDs, Sony made a decision to discontinue certain computer display CRT manufacturing operations in Japan and Southeast Asia to rationalize production facilities and downsize its business. Restructuring charges totaling 6,902 million yen consisted of personnel related costs of 1,208 million yen, non-cash equipment impairment and disposal costs of 4,010 million yen and contract termination and other costs of 1,684 million yen. Of the total restructuring charges, 1,264 million yen was recorded in cost of sales; 1,684 million yen was included in selling, general and administrative expenses, and 3,954 million yen was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. The restructuring activity was completed in the year ended March 31, 2003 and no liability existed as of March 31, 2004.
Downsizing of CRT TV display operations -
      Due to the worldwide market shrinkage and demand shift from CRT displays to plasma and LCD panel displays, Sony has begun to implement a worldwide plan to rationalize production facilities of CRT TV display and downsize its business over the next several years. The overall restructuring plan is still being formulated as Sony is carefully monitoring the market situation in each area. As a result, the expected completion date and total estimated cost of this program cannot be determined at this time.
      As part of its worldwide plan, Sony made a decision in the year ended March 31, 2004 to discontinue certain CRT TV display manufacturing operations in Japan. Restructuring charges totaling 8,478 million yen consisted of personnel related costs of 3,139 million yen and non-cash equipment impairment, disposal and other costs of 5,339 million yen. Of the total restructuring charges, 158 million yen was recorded in cost of sales, 3,139 million yen was included in selling, general and administrative expenses, and 5,181 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. This phase of the restructuring program was completed in the year ended March 31, 2004 and no liability existed as of March 31, 2005.
      In the year ended March 31, 2005, as part of this restructuring program, Sony recorded a non-cash impairment charge of 7,479 million yen for the CRT TV display manufacturing facilities located in Europe. The impairment charge was calculated as the difference between the carrying value of the asset group and the present value of estimated future cash flows. The charge was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. This phase of the restructuring program was completed in the year ended March 31, 2005 and no liability existed as of March 31, 2005.
Aiwa Co., Ltd. restructuring -
      Due to the continued decline in the operating results of Aiwa, the restructuring program that was initiated in the year ended March 31, 2002 was accelerated and additional restructuring charges of 23,007 million yen were recorded in the year ended March 31, 2003. Additional restructuring included further cuts in staffing levels and the shutdown of remaining production facilities. These charges consisted of non-cash equipment impairment and disposal costs of 3,504 million yen, personnel related costs of 7,647 million yen, devaluation of inventory of 6,144 million yen, operating lease termination costs of 3,823 million yen and other costs of 1,889 million yen. Among these charges 13,791 million yen was recorded in cost of sales, 5,712 million yen
F-55
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
was included in selling, general and administrative expenses, and 3,504 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. The restructuring program was completed in the year ended March 31, 2003 and no liability existed as of March 31, 2003. Aiwa Co., Ltd. was merged into Sony Corporation as of December 1, 2002.
Closing of a semiconductor plant in the U.S. -
      Due to a significant decline in the business conditions of the U.S. semiconductor industry, Sony made a decision in the fourth quarter of the year ended March 31, 2003, to close a semiconductor plant in the U.S. This restructuring activity was substantially completed in the year ended March 31, 2005 and total restructuring charges of 4,936 million yen have been incurred through March 31, 2005. The remaining liability balance as of March 31, 2005 was 161 million yen and will be paid or settled through the year ended March 31, 2006.
      During the year ended March 31, 2003, Sony recorded restructuring charges totaling 5,856 million yen, which consisted of the accelerated depreciation of equipment of 3,128 million yen, personnel related costs of 1,329 million yen and the devaluation of inventory and other costs of 1,399 million yen. These charges were all recorded in cost of sales in the consolidated statements of income.
      During the year ended March 31, 2004, Sony recorded net restructuring charges totaling 874 million yen which consisted of the accelerated depreciation and write-down of equipment of 1,982 million yen, gain on disposal of assets of 1,962 million yen, and 854 million yen of other costs including lease contract termination costs. Among these charges 1,760 million yen was recorded in cost of sales, while asset write-down and disposal costs of 1,076 million yen and the gain on asset disposals of 1,962 million yen were included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income.
      During the year ended March 31, 2005, Sony sold the facilities and recorded a gain on disposal of 1,794 million yen. The gain was included in loss (gain) on disposal or impairment of assets, net in the consolidated statements of income.
Retirement Programs -
      In addition to the restructuring efforts disclosed above, Sony has undergone several headcount reduction programs to further reduce operating costs in the Electronics segment. As a result of these programs, Sony recorded restructuring charges totaling 22,236 million yen, 114,870 million yen and 50,276 million yen for the years ended March 31, 2003, 2004 and 2005, respectively, and these charges were included in selling, general and administrative expenses in the consolidated statements of income. These staff reductions were achieved worldwide mostly through the implementation of early retirement programs. The remaining liability balance as of March 31, 2005 was 14,011 million yen and will be paid through the year ending March 31, 2006. Sony will continue seeking the appropriate level of headcount to optimize the workforce in the Electronics segment.
Music Segment
      Due to the continued contraction of the worldwide music market due to slow worldwide economic growth, the saturation of the CD market, the effects of piracy and other illegal duplication, parallel imports, pricing pressures and the diversification of customer preferences, Sony has been actively repositioning the Music segment for the future by looking to create a more effective and profitable business model. As a result, the Music segment has undergone a worldwide restructuring program since the year ended March 31, 2001 to reduce staffing and other costs through the consolidation and rationalization of facilities worldwide excluding Japan. As part of this restructuring program, Sony combined its recorded music business with the recorded music business of Bertelsmann AG to form SONY BMG, a joint venture that is accounted for under the equity method. See Note 5 for more information on this transaction. For the years ended March 31, 2003,
F-56
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2004 and 2005, Sony recorded total restructuring charges of 22,350 million yen, 10,691 million yen and 3,025 million yen, respectively, related to the restructuring of the Music segment excluding Japan. Of these restructuring charges, 7,950 million yen and 2,122 million yen for the years ended March 31, 2003 and 2004, respectively, were recorded in the non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment but reclassified to the Electronics segment. See Notes 5 and 24 for more information on this reclassification. This worldwide restructuring of the Music segment is expected to be completed during the year ended March 31, 2006, and the total cost of the program is estimated to be 53,106 million yen, of which 52,573 million yen was incurred from the inception of the program through the year ended March 31, 2005. The restructuring costs within the Music segment do not include the restructuring costs of SONY BMG since the establishment of the joint venture. At March 31, 2005, the liability balance was 1,856 million yen with most of the liabilities to be paid or settled during the year ending March 31, 2006.
      In addition to the above, Sony also recorded restructuring charges of 1,519 million yen, 1,291 million yen and 803 million yen for the years ended March 31, 2003, 2004 and 2005, respectively, in Japan, which were primarily personnel related costs included in selling, general and administrative expenses in the consolidated statement of income.
      Significant restructuring activities included the following:
      In the year ended March 31, 2003, restructuring charges related to the worldwide restructuring of the Music segment totaled 22,350 million yen. Restructuring activities included the further consolidation of operations through the shutdown of a cassette and CD manufacturing and distribution center in Holland and a CD manufacturing facility in the U.S. as well as further staff reductions in other areas. The restructuring charges consisted of personnel related costs of 14,932 million yen, non-cash asset impairment and disposal costs of 3,256 million yen and other costs of 4,162 million yen including lease termination costs. Among these charges 19,094 million yen was recorded in selling, general and administrative expenses, and 3,256 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. Employees were eliminated across various employee levels, business functions, operating units, and geographic regions during this phase of the worldwide restructuring program.
      During the year ended March 31, 2004, Sony broadened the scope of its worldwide restructuring of the Music segment, which resulted in restructuring charges totaling 10,691 million yen. Restructuring activities included the continuation of the shutdown of the CD manufacturing facility in the U.S. as well as the restructuring of music label operations and the further rationalization of overhead functions through staff reductions. The restructuring charges consisted of personnel related costs of 5,137 million yen, lease abandonment costs of 1,323 million yen and other related costs of 4,231 million yen including non-cash asset impairment and disposal costs. Most of these charges are included in selling, general and administrative expenses in the consolidated statements of income. Employees were eliminated across various employee levels, business functions, operating units, and geographic regions during this phase of the worldwide restructuring program.
      During the year ended March 31, 2005, in continuation of the worldwide restructuring program and in connection with the establishment of the joint venture with Bertelsmann AG (Note 5), Sony recorded restructuring charges totaling 3,025 million yen within the Music segment. Restructuring activities included the shutdown of certain distribution operations that were no longer required as a result of the recorded music joint venture with Bertelsmann AG as well as the further rationalization of overhead functions through staff reductions. The restructuring charges consisted of personnel related costs of 883 million yen and other related costs of 2,142 million yen. These charges are included in selling, general and administrative expenses in the consolidated statements of income. Employees were eliminated across various employee levels, business functions, operating units, and geographic regions during this phase of the worldwide restructuring program.
F-57
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pictures Segment
      In an effort to improve the performance of the Pictures segment, Sony has undergone a number of restructuring efforts to reduce its operating costs. For the years ended March 31, 2003, 2004 and 2005, Sony recorded total restructuring charges of 480 million yen, 4,611 million yen and 385 million yen, respectively, within the Pictures segment. Significant restructuring activities are the following:
Consolidation of Television Operations -
      Due to changes within the television production and distribution business, the competition between network owned production companies and other production and distribution companies to license product to the major televisions networks is becoming more intense. This competitive environment has resulted in fewer opportunities to produce shows for the networks and a shorter lifespan for ordered shows that do not immediately achieve favorable ratings. This trend has resulted in an increase in the number of new programs being distributed yet canceled in their first or second season, which are generally less profitable, and a decrease in the number of network programs that are able to achieve syndication, which are generally more profitable. As a result, in the year ended March 31, 2002, Sony decided to consolidate its television operations and downsize the network television production business in the Pictures segment. In the year ended March 31, 2003, Sony recorded restructuring charges totaling 480 million yen. These costs were included in cost of sales in the consolidated statements of income. This restructuring program was completed in the year ending March 31, 2005, and the total cost of the program from the inception was 8,932 million yen. No liability existed as of March 31, 2005.
Fixed Cost Reduction Program -
      During the year ended March 31, 2004, the Pictures segment implemented a fixed cost reduction program to further reduce its operating costs. This restructuring program primarily related to the reduction of staffing levels and the disposal of certain long-lived assets. This restructuring program was substantially completed during the year ended March 31, 2005 and the total cost of this restructuring program was 4,996 million yen.
      The Pictures segment recorded 4,611 million yen of these costs during the year ended March 31, 2004. These restructuring charges consisted of personnel related costs of 993 million yen, non-cash asset impairment and disposal costs of 1,746 million yen, and other costs of 1,872 million yen including those relating to the buy-out of term deal commitments. Of the restructuring costs incurred, 1,525 million yen was included in cost of sales, 1,340 million yen was included in selling, general and administrative expenses, and 1,746 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income.
      During the year ended March 31, 2005, the Pictures segment substantially completed the fixed cost reduction program and recorded 385 million yen of additional restructuring costs. These restructuring charges consisted primarily of personnel related costs of 292 million yen which were included in selling, general and administrative expenses in the consolidated statements of income. At March 31, 2005, the remaining liability balance was 207 million yen, which will be paid or settled over the next year.
F-58
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The changes in the accrued restructuring charges for the years ended March 31, 2003, 2004 and 2005 are as follows:

Employee Non-cash
termination write-downs Other associated
benefits and disposals costs Total

(Yen in millions)
Balance at March 31, 2002 6,243 — 13,637 19,880
Restructuring costs 46,953 42,768 16,530 106,251
Non-cash charges — (42,240 ) — (42,240 )
Cash payments (38,548 ) — (23,172 ) (61,720 )
Adjustments 136 (528 ) (1,208 ) (1,600 )

Balance at March 31, 2003 14,784 — 5,787 20,571
Restructuring costs 133,367 19,170 15,554 168,091
Non-cash charges — (19,170 ) — (19,170 )
Cash payments (124,674 ) — (13,686 ) (138,360 )
Adjustments 1,173 0 333 1,506

Balance at March 31, 2004 24,650 — 7,988 32,638
Restructuring costs 53,563 25,564 10,836 89,963
Non-cash charges — (25,564 ) — (25,564 )
Cash payments (61,523 ) — (10,427 ) (71,950 )
Adjustments* (1,705 ) — (3,096 ) (4,801 )

Balance at March 31, 2005 14,985 — 5,301 20,286

* Adjustments primarily consist of the transfer of the accrued restructuring charges to SONY BMG, a ~~potentially dilutive~~joint venture with Bertelsmann AG (Note 5).
18. Research and development costs, advertising costs and shipping and handling costs
     (1)     Research and development costs:
      Research and development costs charged to cost of sales for the years ended March 31, 2003, 2004 and 2005 were 443,128 million yen, 514,483 million yen and 502,008 million yen, respectively.
     (2) Advertising costs:
      Advertising costs included in selling, general and administrative expenses for the years ended March 31, 2003, 2004 and 2005 were 442,741 million yen, 421,433 million yen and 359,661 million yen, respectively.
     (3) Shipping and handling costs:
      Shipping and handling costs for finished goods included in selling, general and administrative expenses for the years ended March 31, 2003, 2004 and 2005 were 98,195 million yen, 106,590 million yen and 107,983 million yen, respectively, which included the internal transportation costs of finished goods.
19. Gain on change in interest in subsidiaries and equity investees
      In January 2004, FeliCa Networks, Inc., whose field of business is Mobile FeliCa IC chip development and production/sales licensing and operation of the Mobile FeliCa service platform, issued 115,000 shares at
F-59
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
100,000 per share with a total value of 11,500 million yen in connection with its private offering. As a result of this issuance, Sony recorded a gain of 3,364 million yen and provided deferred taxes on this gain. This issuance reduced Sony’s ownership interest from 100% to 60%.
      In addition to the above transaction, for the year ended March 31, 2004, Sony recognized 1,506 million yen of other gains on change in interest in subsidiaries and equity investees resulting in total gains of 4,870 million yen.
      In August 2, 2004, Monex Inc., which provides on-line security trading services in Japan, and Nikko Beans, Inc. established Monex Beans Holdings, Inc. by way of share transfer of the existing shares of Monex Inc. and Nikko Beans, Inc.. At this establishment, 1 share of Monex Beans Holdings, Inc. was allotted to each share of Monex Inc. and 3.4 shares of Monex Beans Holdings, Inc. were allotted to each share of Nikko Beans, Inc.. As a result of this share transfer, Monex Beans Holdings, Inc. issued 2,341,287 shares and Sony recorded a gain of 8,951 million yen and provided deferred taxes on this gain. This issuance reduced Sony’s ownership interest from 29.9% to 20.1%.
      In September 2004, So-net M3 Inc., which provides medical services via the Internet in Japan, issued 2,800 shares at 850,000 yen per share with a total value of 2,380 million yen in connection with its initial public offering. Sony Communication Network Corporation, a parent company of So-net M3 Inc., sold 3,260 shares of So-net M3 Inc., at 790,500 yen per share with a total value of 2,577 million yen. In October 2004, Sony Communication Network Corporation sold 740 shares of So-net M3 Inc., at 790,500 yen per share with a total value of 585 million yen. As a result of these transactions, Sony recorded a 1,823 million yen gain on issuance of stock by So-net M3 Inc. and provided deferred taxes on this gain. In addition, Sony recorded a 2,876 million yen gain on the sale of its stock. These transactions reduced Sony’s ownership interest from 90.0% to 74.8%.
      In June 6, 2005, Sony Communication Network Corporation sold 17,935 shares of So-net M3 Inc., at 694,600 yen per share with a total value of 12,458 million yen. As a result of this sale, Sony records 11,979 million yen gain on the sale of its stock for the year ending March 31, 2006, and Sony’s ownership interest has been reduced from 74.8% to 60.8%.
      In January 2005, DeNA Co., Ltd., whose field of business is operation of on-line auction websites in Japan, issued 14,000 shares at 204,600 yen per share with a total value of 2,864 million yen in connection with its initial public offering. In March 2005, Sony Communication Network Corporation, which had owned 27.7% interest in DeNA Co., Ltd., sold 2,000 shares of DeNA Co., Ltd. at 204,600 yen per share with a total value of 409 million yen. As a result of these transactions, Sony recorded a 686 million yen gain on issuance of stock by DeNA Co., Ltd. and provided deferred taxes on this gain. In addition, Sony recorded a 76 million yen gain on the sale of its stock. These transactions reduced Sony’s ownership interest from 27.7% to 24.8%.
      In addition to the above transactions, for the year ended March 31, 2005, Sony recognized 1,911 million yen of other gains on change in interest in subsidiaries and equity investees resulting in total gains of 16,322 million yen. These transactions were not part of a broader corporate reorganization and the reacquisition of such shares was not contemplated at the time of issuance.
F-60
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
20. Income taxes
      Income before income taxes and income tax expense comprise the following:

Year Ended March 31

2003 2004 2005

(Yen in millions)
Income (loss) before income taxes:
Sony Corporation and subsidiaries in Japan (7,998 ) (84,571 ) 5,005
Foreign subsidiaries 255,619 228,638 152,202

247,621 144,067 157,207

Income taxes — Current:
Sony Corporation and subsidiaries in Japan 69,311 22,286 23,497
Foreign subsidiaries 109,536 64,933 62,013

178,847 87,219 85,510

Income taxes — Deferred:
Sony Corporation and subsidiaries in Japan (90,016 ) (32,845 ) 4,976
Foreign subsidiaries (8,000 ) (1,600 ) (74,442 )

(98,016 ) (34,445 ) (69,466 )

      Sony is subjected to a number of different income taxes. Due to changes in Japanese income tax regulations, a consolidated tax filing system was introduced on April 1, 2002. Sony applied to file its return under the consolidated tax filing system beginning with the year ended March 31, 2004. Under the Japanese consolidated tax filing system, a 2% surtax was imposed only for the year ended March 31, 2004. As a result, the statutory tax rate was 43.9% for the year ended March 31, 2004.
      During the year ended March 31, 2005, a corporation size-based enterprise tax was introduced in Japan and the portion of enterprise tax subject to income was reduced. As a result, the statutory tax rate for the year ended March 31, 2005 was approximately 41% effective April 1, 2004. The effect of the change in the tax rate on the balance of deferred tax assets and liabilities was insignificant.
      Reconciliation of the differences between the statutory tax rate and the effective income tax rate is as follows:

Year Ended March 31

2003 2004 2005

Statutory tax rate 42.0 % 43.9 % 41.0 %
Increase (reduction) in taxes resulting from:
Income tax credits (1.9 ) (2.4 ) (0.1 )
Change in valuation allowances 5.5 6.5 (22.7 )
Decrease in deferred tax liabilities on undistributed earnings of foreign subsidiaries (14.8 ) (9.2 ) (4.0 )
Lower tax rate applied to life and non-life insurance business in Japan (0.6 ) (2.6 ) (1.9 )
Other 2.4 0.4 (2.1 )

Effective income tax rate 32.6 % 36.6 % 10.2 %

F-61
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The significant components of deferred tax assets and liabilities are as follows:

March 31

2004 2005

(Yen in millions)
Deferred tax assets:
Operating loss carryforwards for tax purposes 196,308 193,212
Accrued pension and severance costs 150,073 159,610
Film costs 54,194 56,746
Warranty reserve and accrued expenses 45,664 56,551
Future insurance policy benefits 35,855 36,654
Accrued bonus 36,285 34,536
Inventory — intercompany profits and write-down 30,241 30,270
Depreciations 14,108 15,320
Tax credit carryforwards 13,740 8,552
Reserve for doubtful accounts 14,005 6,574
Other 141,731 153,525

Gross deferred tax assets 732,204 751,550
Less: Valuation allowance (127,577 ) (89,110 )

Total deferred tax assets 604,627 662,440

Deferred tax liabilities:
Insurance acquisition costs (125,768 ) (135,083 )
Unbilled accounts receivable in the Pictures business (71,586 ) (57,314 )
Unrealized gains on securities (45,239 ) (41,564 )
Intangible assets acquired through exchange offerings (36,490 ) (35,418 )
Undistributed earnings of foreign subsidiaries (44,778 ) (30,865 )
Gain on securities contribution to employee retirement benefit trust (16,899 ) (6,184 )
Other (39,435 ) (58,714 )

Gross deferred tax liabilities (380,195 ) (365,142 )

Net deferred tax assets 224,432 297,298

      The valuation allowance mainly relates to deferred tax assets of Sony Corporation and certain consolidated subsidiaries with operating loss carryforwards and tax credit carryforwards for tax purposes that are not expected to be realized. The net changes in the total valuation allowance were a decrease of 136,140 million yen for the year ended March 31, 2003, an increase of 11,509 million yen for the year ended March 31, 2004 and a decrease of 38,467 million yen for the year ended March 31, 2005.
      As a result of recording of operating losses in the past, the U.S. subsidiaries of Sony have had valuation allowances against deferred tax assets for U.S. federal and certain state taxes. However, based on both improved operating results in recent years and a sound outlook for the future operating performance of Sony’s U.S. subsidiaries, Sony reversed 67,892 million yen of valuation allowance, resulting in a reduction of income tax expenses for the year ended March 31, 2005.
      For the year ended March 31, 2003, 33,525 million yen of the decrease in the valuation allowance relates to the realization of tax benefits from operating loss carryforwards that were acquired in connection with
F-62
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sony’s acquisition of companies within the Electronics, Music and Pictures segments The reversal of the valuation allowance upon realization of tax benefit from operating loss carryforwards resulted in the reduction of goodwill.
      Tax benefits which have been realized through utilization of operating loss carryforwards for the years ended March 31, 2003, 2004 and 2005 were approximately 19,000 million yen, 12,000 million yen and 30,000 million yen, respectively.
      Net deferred tax assets are included in the consolidated balance sheets as follows:

March 31

2004 2005

(Yen in millions)
Current assets — Deferred income taxes 125,532 141,154
Other assets — Deferred income taxes 203,203 240,396
Current liabilities — Other (8,110 ) (12,025 )
Long-term liabilities — Deferred income taxes (96,193 ) (72,227 )

Net deferred tax assets 224,432 297,298

      At March 31, 2005, no deferred income taxes have been provided on undistributed earnings of foreign subsidiaries not expected to be remitted in the foreseeable future totaling 988,515 million yen, and on the gain of 61,544 million yen on a subsidiary’s sale of stock arising from the issuance of common stock of Sony Music Entertainment (Japan) Inc. in a public offering to third parties in November 1991, as Sony does not anticipate any significant tax consequences on possible future disposition of its investment based on its tax planning strategies. The unrecognized deferred tax liabilities as of March 31, 2005 for such temporary differences amounted to 217,792 million yen.
      Operating loss carryforwards for corporate income tax and local income tax purposes of Sony Corporation and certain consolidated subsidiaries in Japan at March 31, 2005 amounted to 266,763 million yen and 520,556 million yen, respectively, which are available as an offset against future taxable income. Deferred tax asset on the operating loss carryforwards for corporate income tax and local income tax in Japan are calculated by multiplying approximately 28% and 13%, respectively.
      Operating loss carryforwards for tax purposes of certain foreign consolidated subsidiaries at March 31, 2005 amounted to 139,100 million yen.
      With the exception of 115,714 million yen with no expiration period, total available operating loss carryforwards expire at various dates primarily up to 7 years.
      Tax credit carryforwards for tax purposes at March 31, 2005 amounted to 8,552 million yen. With the exception of 6,995 million yen with no expiration period, total available tax credit carryforwards expire at various dates primarily up to 9 years. Realization is dependent on whether such companies will be able to generate sufficient taxable income prior to expiration of the loss carryforwards and tax credit carryforwards. 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. The amount of such net deferred tax assets considered realizable, however, could be changed in the near term if estimates of future taxable income during the carryforward period are changed.
F-63
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
21. Reconciliation of the differences between basic and diluted net income per share (“EPS”)
          (1) Income before cumulative effect ~~by decreasing~~of accounting changes and net income allocated to ~~common stock, were excluded from the computation~~each class of ~~diluted EPS since they did not have a dilutive effect.~~
     Stock options issued by affiliated companies accounted for under the equity method for the years ended March 31, 2002, 2003 and 2004, which have a potentially dilutive effect by decreasing net income allocated to common stock, were excluded from the computation of diluted EPS since such stock options did not have a dilutive effect.
~~F-63~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
On October 1, 2002, Sony implemented a share exchange as a result of which Aiwa became a wholly-owned subsidiary. As a result of this share exchange, Sony issued 2,502 thousand shares. The shares were included in the computation of basic and diluted EPS.
stock:
~~(3)~~ ~~EPS attributable to subsidiary tracking stock:~~
~~Weighted-average shares~~

Year Ended March 31

2003 2004 2005

(Yen in millions)
Income before cumulative effect of an accounting change allocated to the common stock 115,648 90,756 168,498
Income before cumulative effect of an accounting change allocated to the subsidiary tracking stock (129 ) (128 ) 53

Income before cumulative effect of an accounting change 115,519 90,628 168,551

Net income allocated to the Common stock 115,648 88,639 163,785
Net income allocated to the subsidiary tracking stock (129 ) (128 ) 53

Net income 115,519 88,511 163,838

      As discussed in Note 2, the earnings allocated to the subsidiary tracking stock are determined based on the subsidiary tracking stockholders’ economic interest. The accumulated losses of SCN (the subsidiary tracking stock entity as discussed in Note 15) used for computation of earnings per share attributable to subsidiary tracking stock were 779 million yen, 1,764 million yen and 1,358 million yen as of March 31, 2003, 2004 and 2005, respectively.
          (2) EPS attributable to common stock:
      Reconciliation of the differences between basic and diluted EPS for the years ended March 31, 2003, 2004 and 2005 is as follows:

Year Ended March 31

2003 2004 2005

(Yen in millions)
Income before cumulative effect of an accounting change allocated to the common stock 115,648 90,756 168,498
Effect of dilutive securities:
Convertible bonds 2,398 2,260 1,209
Subsidiary tracking stock — — (0 )

Income before cumulative effect of an accounting change allocated to the common stock for diluted EPS computation 118,046 93,016 169,707

Thousands of shares

Weighted-average shares 919,706 923,650 931,125
Effect of dilutive securities:
Warrants and stock acquisition rights 12 48 61
Convertible bonds 78,873 121,120 112,589

Weighted-average shares for diluted EPS computation 998,591 1,044,818 1,043,775

Yen

Basic EPS 125.74 98.26 180.96

Diluted EPS 118.21 89.03 162.59

F-64
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Potential common stock upon the exercise of warrants and stock acquisition rights, which were excluded from the computation of diluted EPS since they have an exercise price in excess of the average market value of Sony’s common stock during the fiscal year, were 4,141 thousand shares, 6,796 thousand shares, and 7,987 thousand shares for the years ended March 31, 2003, 2004 and 2005, respectively.
      Warrants and stock acquisition rights of subsidiary tracking stock for the years ended March 31, 2003 and 2004, which have a potentially dilutive effect by decreasing net income allocated to common stock, were excluded from the computation of diluted EPS since they did not have a dilutive effect.
      Stock options issued by affiliated companies accounted for under the equity method for the years ended March 31, 2003, 2004 and 2005, which have a potentially dilutive effect by decreasing net income allocated to common stock, were excluded from the computation of diluted EPS since such stock options did not have a dilutive effect.
      On October 1, 2002, Sony implemented a share exchange as a result of which Aiwa Co.,Ltd. became a wholly-owned subsidiary. As a result of this share exchange, Sony issued 2,502 thousand shares. The shares were included in the computation of basic and diluted EPS.
      On May 1, 2003, Sony implemented a share exchange as a result of which CIS Corporation became a wholly-owned subsidiary. As a result of this share exchange, Sony issued 1,088 thousand shares. The shares were included in the computation of basic and diluted EPS.
      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 for the year ended March 31, 2004 was restated in the above table (Note 2).
          (3) EPS attributable to subsidiary tracking stock:
      Weighted-average shares used for computation of EPS attributable to subsidiary tracking stock for the years ended March 31, ~~2002,~~ 2003, 2004 and 2005 were 3,072 thousand shares. As discussed in Note 2, there were no potentially dilutive securities for EPS of subsidiary tracking stock outstanding at March 31, 2003, 2004 and 2005.
22.      Variable interest entities
      Sony has, from time to time, entered into various arrangements with VIEs. These arrangements consist of facilities which provide for the leasing of certain property, the financing of film production, the development and operation of a multi-use real estate complex and the implementation of a stock option plan for Japanese employees. As described in Note 2, the FASB issued FIN No. 46, which requires the consolidation or disclosure of VIEs. The VIEs that have been consolidated by Sony are described as follows:
      Sony leases the headquarters of its U.S. subsidiary from a VIE, which has been consolidated by Sony since July 1, 2003. Upon consolidation of the VIE, assets and liabilities increased by 25,277 million yen and 27,035 million yen, respectively, and a cumulative effect of accounting change of 1,729 million yen was charged to net income with no tax effect. Sony has the option to purchase the building at any time during the lease term which expires in December 2008 for 27,374 million yen. The debt held by the VIE is unsecured. At the end of the lease term, Sony has agreed to either renew the lease, purchase the building or remarket it to a third party on behalf of the owner. If the sales price is less than 27,374 million yen, Sony is obligated to make up the lesser of the shortfall or 22,973 million yen.
F-65
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      A subsidiary in the Pictures segment entered into a joint venture agreement with a VIE for the purpose of funding the acquisition of certain international film rights. The subsidiary is required to distribute the product internationally, for contractually defined fees determined as percentages of gross receipts, as defined, and is responsible for all distribution and marketing expenses, which are recouped from such distribution fees. The VIE was capitalized with total financing of 43,584 million yen. Of this amount, 1,181 million yen was contributed by the subsidiary, 10,198 million yen was provided by unrelated third party investors and the remaining funding is provided through a 32,205 million yen bank credit facility. On July 1, 2003, Sony consolidated this entity. Upon consolidation of the VIE, assets and liabilities increased by 10,179 million yen and 10,586 million yen, respectively, and a cumulative effect of accounting change of 388 million yen was charged to net income with no tax effect. As of March 31, 2005, the total outstanding under the bank credit facility was 6,441 million yen. Under the agreement, the subsidiary’s 1,181 million yen equity investment is the last equity to be repaid. Additionally, it must pay to the third party investors up to 2,040 million yen of any losses out of a portion of its distribution fees. Any losses incurred by the VIE over and above 3,221 million yen will be shared by the other investors. The subsidiary acquired the international distribution rights, as defined, to twelve pictures meeting certain minimum requirements within the time period provided in the agreement.
      Sony had utilized a VIE to erect and operate a multi-use real estate complex in Berlin, Germany, which had been accounted for under the equity method by Sony until June 30, 2003. On July 1, 2003, Sony consolidated this entity. Upon consolidation of the VIE, assets and liabilities increased by 61,320 million yen and 60,329 million yen, respectively. However, there was no impact to Sony’s net income. On November 4, 2004, Sony purchased the remaining shares of the VIE from other partners. As a result, it is now a 100% owned subsidiary and no longer a VIE.
      Sony has utilized a VIE to implement a stock option plan for selected Japanese employees. The VIE has been consolidated by Sony since its establishment. With respect to this entity, there was no impact to Sony’s results of operations and financial position upon the adoption of FIN No. 46. Under the terms of the stock option plan, upon exercise, Japanese employees receive cash equal to the amount that the market price of Sony Corporation’s common stock exceeds the strike price of the plan. In order to minimize cash flow exposure associated with the plan, Sony holds treasury stock through the VIE. The VIE purchased the common stock with funding provided by the employee’s cash contribution and a bank loan. At March 31, 2005, the balance of the bank loan was 3,034 million yen.
      As of March 31, 2005, there is no VIE in which Sony holds a significant variable interest that Sony is not the primary beneficiary.
      As described in Note 5, on April 8, 2005, a consortium led by SCA and its equity partners completed the acquisition of MGM. Sony has reviewed the investment and determined that MGM is a VIE. However, MGM will not be consolidated but accounted for under the equity method as Sony is not the primary beneficiary of this VIE.
23.      Commitments and ~~2004 were 3,072 thousand shares. As discussed in Note 2, there were no potentially dilutive securities for EPS of subsidiary tracking stock outstanding at March 31, 2002, 2003 and 2004.~~contingent liabilities
          (1)     Commitments:
A. Purchase Commitments
~~21.~~ ~~Variable interest entities~~
     Sony has, from time to time, entered into various arrangements with VIEs. These arrangements consist of facilities which provide for the leasing of certain property, the financing of film production, the development and operation of a multi-use real estate complex and the implementation of a stock option plan for Japanese employees. As described in Note 2, the FASB issued FIN No. 46, which requires the consolidation or disclosure of VIEs. The VIEs that have been consolidated by Sony are described as follows:
     Sony leases the headquarters of its U.S. subsidiary from a VIE, which has been consolidated by Sony since July 1, 2003. Upon consolidation of the VIE, assets and liabilities increased by 25,277 million yen and 27,035 million yen, respectively, and a cumulative effect of accounting change of 1,729 million yen was charged to net income with no tax effect. Sony has the option to purchase the building at any time during the lease term which expires in December 2008 for 26,941 million yen. The debt held by the VIE is unsecured. At the end of the lease term, Sony has agreed to either renew the lease, purchase the building or remarket it to a third party on behalf of the owner. If the sales price is less than 26,941 million yen, Sony is obligated to make up the lesser of the shortfall or 22,609 million yen.
     A subsidiary in the Pictures business entered into a joint venture agreement with a VIE for the purpose of funding the acquisition of certain international film rights. The subsidiary is required to distribute the product internationally, for contractually defined fees determined as percentages of gross receipts, as defined, and is responsible for all distribution and marketing expenses, which are recouped from such distribution fees. The VIE was capitalized with total financing of 42,894 million yen. Of this amount, 1,162 million yen was contributed by the subsidiary, 10,037 million yen was provided by unrelated third party investors and the remaining funding is provided through a 31,695 million yen bank credit facility. On July 1, 2003, Sony consolidated this entity. Upon consolidation of the VIE, assets and liabilities increased by 10,179 million yen and 10,586 million yen, respectively, and a cumulative effect of accounting change of 388 million yen was charged to net income with no tax effect. As of March 31, 2004, the total outstanding under the bank credit facility was 15,251 million yen. Under the agreement, the subsidiary’s 1,162 million yen equity investment is the last equity to be repaid. Additionally, it must pay to the third party investors up to 2,007 million yen of any losses out of a portion of its distribution fees. Any losses incurred by the VIE over and above 3,170 million yen will be shared by the other investors. The subsidiary is obligated to acquire the international distribution rights, as defined, for twelve pictures meeting certain minimum requirements within a 3.5 to 4.5 year period and transfer those rights to the VIE at cost plus a 5 percent fee. Sony has certain limited obligations to repay any outstanding balance under the bank credit facility up to certain amounts as defined in the agreement. Separately, if the subsidiary is unable to deliver twelve pictures to the VIE and the bank credit facility or the third party equity investors are not paid in full by March 10, 2008 (or earlier upon the occurrence of certain events), the subsidiary is required to reimburse the VIE to the extent necessary to repay the bank credit facility in full and pay
~~F-64~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~certain minimum returns to the third party equity investors. See Note 22 for more information on the contingent liability on this agreement.~~
     Sony has utilized a VIE to erect and operate a multi-use real estate complex in Berlin, Germany, which had been accounted for under the equity method by Sony until June 30, 2003. On July 1, 2003, Sony consolidated this entity. Upon consolidation of the VIE, assets and liabilities increased by 61,320 million yen and 60,329 million yen, respectively. However, there was no impact to Sony’s net income. The VIE was capitalized with 89,650 million yen of total funding, 32,343 million yen was provided by equity investors with the remaining funding of 57,307 million yen being provided through a syndicated bank loan which matures in November 2004. The syndicated bank loan is secured by the multi-use real estate complex, of which book value was 61,912 million yen at March 31, 2004. Creditors of the VIE have no recourse to the general credit of Sony.
     Sony has utilized a VIE to implement a stock option plan for selected Japanese employees. The VIE has been consolidated by Sony since its establishment. With respect to this entity, there was no impact to Sony’s results of operations and financial position upon the adoption of FIN No. 46. Under the terms of the stock option plan, upon exercise, Japanese employees receive cash equal to the amount that the market price of Sony Corporation’s common stock exceeds the strike price of the plan. In order to minimize cash flow exposure associated with the plan, Sony holds treasury stock through the VIE. The VIE purchased the common stock with funding provided by the employee’s cash contribution and a bank loan. At March 31, 2004, the balance of the bank loan was 5,046 million yen.
~~There is no VIE in which Sony holds a significant variable interest that Sony is not the primary beneficiary.~~
~~22.~~ ~~Commitments and contingent liabilities~~
~~(1)~~ ~~Commitments:~~
      Commitments outstanding at March 31, ~~2004~~2005 amounted to ~~316,066~~240,729 million yen. The major components of these commitments are as follows:
      In the ordinary course of business, Sony makes commitments for the purchase of property, plant and equipment. As of March 31, ~~2004,~~2005, such commitments outstanding were ~~20,796~~83,683 million yen.
     Certain subsidiaries in the Music business have entered into long-term contracts with recording artists and companies for the production and/or distribution of prerecorded music and videos. These contracts cover various periods mainly through March 31, 2007. As of March 31, 2004, these subsidiaries were committed to make payments under such long-term contracts of 39,073 million yen.
F-66
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Certain subsidiaries in the Pictures ~~business~~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. These agreements cover various periods ~~mainly~~ through March 31, ~~2006.~~2008. As of March 31, ~~2004,~~2005, these subsidiaries were committed to make payments under such contracts of ~~32,212~~51,625 million yen.
      A subsidiary in the Pictures ~~business~~segment has also entered into a distribution agreement with a third party to distribute, in certain markets and territories, all feature length films produced or acquired by the third party during the term of the agreement. The distribution agreement expires on December 31, 2006 if a minimum of 36 films have been delivered as of that date. If 36 films have not been delivered by December 31, 2006, the distribution agreement expires on the earlier of the delivery of the 36th film or May 25, 2007. It is estimated that the third party will produce or acquire a total of 4339 films under the distribution agreement. The subsidiary has the right to distribute the films for 15 years from the initial theatrical release of the film. Under the terms of the distribution agreement, the subsidiary must fund a
~~F-65~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
portion of the production cost and is responsible for all distribution and marketing expenses. As of March 31, ~~2004, 26~~2005, 29 films have been released or funded by the subsidiary. The subsidiary’s estimated commitment to fund the production of the remaining films under this agreement is ~~63,020~~30,455 million yen.
     On March 8, 2004, Sony Corporation signed an agreement with Samsung Electronics Co., Ltd. (“Samsung”) to establish a joint venture, named S-LCD Corporation (“S-LCD”), for the production of amorphous TFT LCD products. In April 2004, S-LCD was formally established through the joint venture investments of Sony and Samsung. Sony’s ownership interest in the joint venture will be 50% less one share of the issued and outstanding shares of S-LCD. S-LCD will be accounted for by Sony under the equity method. Under the joint venture agreement, Sony is committed to fund a total of 96,285 million yen during the year ending March 31, 2005.
The schedule of the aggregate amounts of year-by-year payment of purchase commitments during the next five years and thereafter is as follows:
Year ending March 31, Yen in millions
2005 184,734
2006 65,890
2007 36,175
2008 8,930
2009 1,661
Thereafter 18,676

Total 316,066

~~In December 2003,~~

Year Ending March 31, Yen in millions

2006 145,111
2007 53,753
2008 16,412
2009 1,632
2010 712
Thereafter 23,109

Total 240,729

B. Loan Commitments
      Subsidiaries in the Financial Services segment have entered into loan agreements with their customers in accordance with the condition of the contracts. As of March 31, 2005, the total unused portion of the line of credit extended under these contracts was 199,878 million yen.
      At August 2004, Sony and ~~Bertlesmann~~Bertelsmann AG ~~signed a binding agreement to combine~~(“Bertelsmann”) combined their recorded music businesses in a joint venture. In connection with the establishment of the SONY BMG joint venture, Sony and Bertelsmann have entered into a 5 year Revolving Credit Agreement with the joint venture. Under the terms of the Credit Agreement, Sony and Bertelsmann have each agreed to provide one-half of the funding. The ~~newly formed company will be 50% owned by each parent company. The merger is subject~~Credit Agreement, which matures on August 5, 2009, provides for a base commitment of $300 million and additional incremental borrowings of up to ~~regulatory approvals in the U.S. and European Union.~~
~~(2)~~ ~~Contingent liabilities:~~
     ~~Sony had contingent liabilities including guarantees given in the ordinary course~~$150 million. As of ~~business, which amounted to 59,862 million yen at~~ March 31, ~~2004. The major components of~~2005, the ~~contingent liabilities are as follows:~~
     ~~Sony has issued loan guarantees to related parties comprised of affiliated companies accounted for~~joint venture had no borrowings outstanding under the ~~equity method and unconsolidated subsidiaries. The terms of these guarantees are mainly up to 3 years. Sony would be required to perform~~Credit Agreement. Accordingly, Sony’s outstanding commitment under ~~these guarantees upon non-performance of~~ the ~~primary borrowers. The contingent liability related to these guarantees was 19,903 million yen and was not recorded on the consolidated balance sheet~~Credit Agreement as of March 31, ~~2004.~~
     ~~As discussed in Note 21, a subsidiary in the Pictures business entered into a joint venture agreement with a VIE. At March 31, 2004, the maximum amount~~2005 was 24,075 million yen.
      The aggregate amounts of ~~potential~~ future year-by-year payments associated with this agreement was 38,153 million yen. Of this amount, 20,198 million yen was recorded on the consolidated balance sheet and the contingent liability was 17,955 million yen as of March 31, 2004.for these loan commitments cannot be determined.
F-67
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          (2) Contingent liabilities:
      Sony had contingent liabilities including guarantees given in the ordinary course of business, which amounted to 26,049 million yen at March 31, 2005. The major components of the contingent liabilities are as follows:
      Sony has issued loan guarantees to related parties comprised of affiliated companies accounted for under the equity method and unconsolidated subsidiaries. The terms of these guarantees are mainly within 1 year. Sony would be required to perform under these guarantees upon non-performance of the primary borrowers. The contingent liability related to these guarantees was 7,642 million yen and was not recorded on the consolidated balance sheet as of March 31, 2005.
      The European Commission (“EC”) has issued the Waste Electrical and Electronic Equipment (“WEEE”) directive in February 2003. The WEEE directive will require electronics producers after August 2005 to be responsible for organizing a scheme, and possibly financing the cost, for collection, treatment, recovery and safe disposal of waste products. While the cost of this directive to Sony cannot be determined before regulation is adopted in individual member states, Sony continues to evaluate the impact of adopting this regulation.
      Sony has agreed to indemnify certain third parties against tax losses resulting from transactions entered into in the normal course of business. The maximum amount of potential future payments under these guarantees cannot be estimated at this time. These guarantees were not recorded on the consolidated balance sheet as of March 31, 2005.
      Sony Corporation and certain of its subsidiaries are defendants in several pending lawsuits. However, based upon the information currently available to both Sony and its legal counsel, management of Sony believes that damages from such lawsuits, if any, would not have a material effect on Sony’s consolidated financial statements.
      The changes in product warranty liability for the years ended March 31, 2004 and 2005 are as follows:

Year Ended March 31,

2004 2005

(Yen in millions)
Balance at beginning of the fiscal year 51,892 50,670
Provision for warranty reserve 51,569 33,493
Settlements (in cash or in kind) (46,971 ) (40,358 )
Changes in estimate for pre-existing warranty reserve (2,970 ) (751 )
Translation adjustment (2,850 ) 1,865

Balance at end of the fiscal year 50,670 44,919

24. Business segment information
      Effective for the year ended March 31, 2005, Sony has partly changed its business segment configuration as described below.
      As of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses in a joint venture. In connection with the establishment of this joint venture, the non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment, have been reclassified to the “Other” category in the Electronics segment. Results for the year ended March 31, 2003 and 2004 in the Electronics and Music segments have been restated to conform to the presentation for the year ended March 31, 2005.
F-68
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      In July 2004, in order to establish a more efficient and coordinated semiconductor supply structure, the Sony group has integrated its semiconductor manufacturing business by transferring Sony Computer Entertainment’s semiconductor manufacturing operation from the Game segment to the Electronics segment. As a result of this transfer, sales revenue and expenditures associated with this operation are now recorded within the “Semiconductor” category in the Electronics segment. The results for the year ended March 31, 2003 and 2004 have not been restated as such comparable figures cannot be practically obtained given that it was not operated as a separate line business within the Game segment. This integration of the semiconductor manufacturing businesses is a part of Sony’s semiconductor strategy of utilizing semiconductor technologies and manufacturing equipment originally developed or designed for the Game segment within the Sony group as a whole.
      The Electronics segment designs, develops, manufactures and distributes audio-visual, informational and communicative equipment, instruments and devices throughout the world. The Game segment designs, develops and sells PlayStation, PlayStation 2 and PlayStation Portable game consoles and related software mainly in Japan, the United States of America and Europe, and licenses to third party software developers. The Music segment is mainly engaged in the development, production, manufacture, and distribution of recorded music in all commercial formats and musical genres. As discussed above, due to the establishment of the joint venture with Bertelsmann AG, the results for the year ended March 31, 2005 only include the results of Sony Music Entertainment Inc.’s (“SMEI”) recorded music business for the months of April through July 2004 and the results of SMEI’s music publishing business and Sony Music Entertainment (Japan) Inc. (“SMEJ”) for the full fiscal year. Results for the year ended March 31, 2003 and 2004 in the Music segment include the consolidated results of SMEI’s recorded music business for the full fiscal year, as well as the results of SMEI’s publishing business and SMEJ for the full fiscal year. The Pictures segment develops, produces and manufactures image-based software, including film, video, and television mainly in the United States of America, and markets, distributes and broadcasts in the worldwide market. The Financial Services segment represents primarily individual life insurance and non-life insurance businesses in the Japanese market, leasing and credit financing businesses and bank business in Japan. The Other segment consists of various operating activities, primarily including a business focused on network service business including Internet-related services, an animation production and marketing business, an imported general merchandise retail business, an IC card business, and an advertising agency business in Japan. Sony’s products and services are generally unique to a single operating segment.
      The operating segments reported below are the segments of Sony for which separate financial information is available and for which operating profit or loss amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.
F-69
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Business segments -
Sales and operating revenue:

Year Ended March 31

2003 2004 2005

(Yen in millions)
Sales and operating revenue:
Electronics —
Customers 4,624,181 4,838,268 4,786,236
Intersegment 471,798 204,051 235,411

Total 5,095,979 5,042,319 5,021,647
Game —
Customers �� 936,274 753,732 702,524
Intersegment 18,757 26,488 27,230

Total 955,031 780,220 729,754
Music —
Customers 433,147 409,487 216,779
Intersegment 33,191 30,819 32,326

Total 466,338 440,306 249,105
Pictures —
Customers 802,770 756,370 733,677
Intersegment 0 0 0

Total 802,770 756,370 733,677
Financial Services —
Customers 509,398 565,752 537,715
Intersegment 27,878 27,792 22,842

Total 537,276 593,544 560,557
Other —
Customers 167,863 172,782 182,685
Intersegment 93,282 95,535 71,742

Total 261,145 268,317 254,427
Elimination (644,906 ) (384,685 ) (389,551 )

Consolidated total 7,473,633 7,496,391 7,159,616

      Electronics intersegment amounts primarily consist of transactions with the Game and Pictures segments.
      Game intersegment amounts primarily consist of transactions with the Electronics segment.
      Music intersegment amounts primarily consist of transactions with the Game segment.
      Other intersegment amounts primarily consist of transactions with the Electronics segment.
F-70
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segment profit or loss:

Year Ended March 31

2003 2004 2005

(Yen in millions)
Operating income (loss):
Electronics 65,939 (6,824 ) (34,305 )
Game 112,653 67,578 43,170
Music (28,261 ) (5,997 ) 8,783
Pictures 58,971 35,230 63,899
Financial Services 22,758 55,161 55,490
Other (28,316 ) (12,054 ) (4,077 )

Total 203,744 133,094 132,960
Elimination 15,065 13,226 13,530
Unallocated amounts:
Corporate expenses (33,369 ) (47,418 ) (32,571 )

Consolidated operating income 185,440 98,902 113,919
Other income 157,528 122,290 97,623
Other expenses (95,347 ) (77,125 ) (54,335 )

Consolidated income before income taxes 247,621 144,067 157,207

      Operating income is sales and operating revenue less costs and operating expenses.
      In the quarter beginning October 1, 2003, the recognition method for insurance premiums received on certain products by Sony Life was changed from being recorded as revenues to being offset against the related provision for future insurance policy benefits, reducing revenue in the Financial Services segment in the year ended March 31, 2004 and 2005, by approximately 30.8 billion yen and 32.5 billion yen, respectively. This change did not have a material effect on operating income.
Assets:

March 31

2003 2004 2005

(Yen in millions)
Total assets:
Electronics 2,973,972 2,995,306 3,434,138
Game 673,208 684,226 482,037
Music 500,627 483,990 325,928
Pictures 868,395 856,517 863,056
Financial Services 2,897,119 3,475,039 3,885,517
Other 333,485 371,720 347,885

Total 8,246,806 8,866,798 9,338,561
Elimination (266,167 ) (319,204 ) (439,489 )
Corporate assets 389,906 543,068 600,028

Consolidated total 8,370,545 9,090,662 9,499,100

F-71
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Unallocated corporate assets consist primarily of cash and cash equivalents, securities investments and property, plant and equipment maintained for general corporate purposes.
Other significant items:

Year Ended March 31

2003 2004 2005

(Yen in millions)
Depreciation and amortization:
Electronics 203,433 210,888 275,701
Game 53,496 57,256 16,504
Music 20,008 16,123 9,451
Pictures 8,552 7,844 5,598
Financial Services, including deferred insurance acquisition costs 52,041 56,586 52,788
Other 10,157 13,455 8,564

Total 347,687 362,152 368,606
Corporate 4,238 4,117 4,259

Consolidated total 351,925 366,269 372,865

Capital expenditures for segment assets:
Electronics 181,316 251,980 311,101
Game 40,986 100,360 18,824
Music 9,291 3,651 2,894
Pictures 7,138 6,013 5,808
Financial Services 3,655 4,618 3,845
Other 16,993 10,124 6,149

Total 259,379 376,746 348,621
Corporate 1,862 1,518 8,197

Consolidated total 261,241 378,264 356,818

      The capital expenditures in the above table represent the additions to fixed assets of each segment.
      The following table is a breakdown of Electronics sales and operating revenue to external customers by product category. The Electronics segment is managed as a single operating segment by Sony’s management. Effective for the year ended March 31, 2005, Sony has partly changed its product category configuration. The main changes are that AIWA product group has been moved from “Other” to “Audio” or “Video” or “Televisions”, and the set-top box product group has been moved from “Video” to “Televisions”. Accordingly,
F-72
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
sales and operating revenue for the years ended March 31, 2003 and 2004 have been restated to conform to the presentation for the year ended March 31, 2005.

Year Ended March 31

2003 2004 2005

(Yen in millions)
Audio 784,114 675,496 571,864
Video 828,308 949,261 1,034,736
Televisions 981,655 925,501 957,122
Information and Communications 836,724 834,757 778,374
Semiconductors 204,710 253,237 246,314
Components 527,782 623,799 619,477
Other 460,888 576,217 578,349

Total 4,624,181 4,838,268 4,786,236

Geographic information -
      Sales and operating revenue which are attributed to countries based on location of customers for the years ended March 31, 2003, 2004 and 2005 and long-lived assets as of March 31, 2003, 2004 and 2005 are as follows:

Year Ended March 31

2003 2004 2005

(Yen in millions)
Sales and operating revenue:
Japan 2,093,880 2,220,747 2,100,793
U.S.A. 2,403,946 2,121,110 1,977,310
Europe 1,665,976 1,765,053 1,612,536
Other 1,309,831 1,389,481 1,468,977

Total 7,473,633 7,496,391 7,159,616

March 31

2003 2004 2005

(Yen in millions)
Long-lived assets:
Japan 1,365,160 1,430,443 1,414,632
U.S.A. 713,524 671,534 662,120
Europe 164,459 211,147 183,620
Other 148,616 133,640 144,896

Total 2,391,759 2,446,764 2,405,268

      There are not any individually material countries with respect to the sales and operating revenue and long-lived assets included in Europe and Other areas.
      Transfers between reportable business or geographic segments are made at arms-length prices.
      There are no sales and operating revenue with a single major external customer for the years ended March 31, 2003, 2004 and 2005.
F-73
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The following information shows sales and operating revenue and operating income by geographic origin for the years ended March 31, 2003, 2004 and 2005. In addition to the disclosure requirements under FAS No. 131, Sony discloses this supplemental information in accordance with disclosure requirements of the Japanese Securities and Exchange Law, to which Sony, as a Japanese public company, is subject.

Year Ended March 31

2003 2004 2005

(Yen in millions)
Sales and operating revenue:
Japan —
Customers 2,247,030 2,352,923 2,249,548
Intersegment 2,433,998 2,514,698 2,575,093

Total 4,681,028 4,867,621 4,824,641
U.S.A. —
Customers 2,632,176 2,341,304 2,166,323
Intersegment 189,502 198,450 235,362

Total 2,821,678 2,539,754 2,401,685
Europe —
Customers 1,520,930 1,647,694 1,524,182
Intersegment 121,598 66,950 52,417

Total 1,642,528 1,714,644 1,576,599
Other —
Customers 1,073,497 1,154,470 1,219,563
Intersegment 789,444 813,798 804,721

Total 1,862,941 1,968,268 2,024,284
Elimination (3,534,542 ) (3,593,896 ) (3,667,593 )

Consolidated total 7,473,633 7,496,391 7,159,616

Operating income:
Japan 11,444 (69,875 ) (765 )
U.S.A. 98,762 85,290 72,414
Europe 62,206 78,822 12,186
Other 63,773 70,543 58,554
Corporate and elimination (50,745 ) (65,878 ) (28,470 )

Consolidated total 185,440 98,902 113,919

F-74
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES

Additions
Balance at charged to Balance
beginning costs and Deductions Other at end of
of period expenses (Note 1) (Note 2) period

(Yen in millions)
Year ended March 31, 2003:
Allowance for doubtful accounts and sales returns 120,826 87,330 (89,284 ) (8,378 ) 110,494

Year ended March 31, 2004:
Allowance for doubtful accounts and sales returns 110,494 78,323 (65,281 ) (10,862 ) 112,674

Year ended March 31, 2005:
Allowance for doubtful accounts and sales returns 112,674 56,863 (84,507 ) 2,679 87,709

Notes:
1. Amounts written off.
2. Translation adjustment.

Balance at Balance
beginning Deductions Other at end of
of period Additions (Note 1) (Note 2) period

(Yen in millions)
Year ended March 31, 2003:
Valuation allowance — Deferred tax assets 252,208 72,303 (189,843 ) (18,600 ) 116,068

Year ended March 31, 2004:
Valuation allowance — Deferred tax assets 116,068 63,936 (39,199 ) (13,228 ) 127,577

Year ended March 31, 2005:
Valuation allowance — Deferred tax assets 127,577 67,889 (104,670 ) (1,686 ) 89,110

Note:
1. Decrease resulting from ~~transactions entered into in~~ the ~~normal course~~reversal of ~~business. The maximum amount~~valuation allowances (see Note 20 of ~~potential future payments under these guarantees cannot be estimated at this time. These guarantees were not recorded on the consolidated balance sheet as~~Notes to Consolidated Financial Statements) or utilization of ~~March 31, 2004.~~
     Sony Corporation and certain of its subsidiaries are defendants in several pending lawsuits. However, based upon the information currently available to both Sony and its legal counsel, management of Sony
~~F-66~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~believes that damages from such lawsuits, if any, would not have a material effect on Sony’s consolidated financial statements.~~
~~The changes in product warranty liability for the years ended March 31, 2003 and 2004 are as follows:~~

Year Ended March 31,
2003 2004
(Yen in millions)
Balance at beginning of the fiscal year 53,671 51,892
Provision for warranty reserve 47,260 51,569
Settlements (in cash or in kind) (46,628 ) (46,971 )
Changes in estimate for pre-existing warranty reserve (2,032 ) (2,970 )
Translation adjustment (379 ) (2,850 )

Balance at end of the fiscal year 51,892 50,670

deferred tax assets.
2. Translation adjustment.
~~23.~~ ~~Business Segment Information~~
     ~~Effective for the year ended March 31, 2004, Sony has partly changed its business segment configuration as described below.~~
     Expenses incurred in connection with the creation of a network platform business have been transferred out of the Other segment and reclassified as unallocated corporate expenses, because the expected future benefits of this business will be spread across the Sony Group. Sony Music Entertainment, (Japan), Inc. (“SMEJ”), which is a subsidiary focused on Music business in Japan, has transferred those business operations not part of its core Music business to Sony Culture Entertainment, Inc. (“SCU”) The separation of these business operation which include such businesses as media, animation, character, cosmetics etc., will allow the management of SMEJ to focus on its core Music business and more quickly react to the changes in the Music industry on a worldwide level. The businesses now integrated under SCU have been moved from the Music segment to the Other segment.
     ~~In accordance with these realignments, business segment information for the years ended March 31, 2002 and 2003 have been restated to conform to the presentation for the year ended March 31, 2004.~~
     The Electronics segment designs, develops, manufactures and distributes audio-visual, informational and communicative equipment, instruments and devices throughout the world. The Game segment designs, develops and sells PlayStation and PlayStation 2 game consoles and related software mainly in Japan, the United States of America and Europe, manufactures semiconductors used in the game consoles in Japan, and licenses to third party software developers. The Music segment is mainly engaged worldwide in the development, production, manufacture, and distribution of recorded music, in all commercial formats and musical genres. The Pictures segment develops, produces and manufactures image-based software, including film, video, and television mainly in the United States of America, and markets, distributes and broadcasts in the worldwide market. The Financial Services segment represents primarily individual life insurance and non-life insurance businesses in the Japanese market, leasing and credit financing businesses and bank business in Japan. The Other segment consists of various operating activities, primarily including a business focused on network service business including Internet-related services, an in-house oriented information system service business and an IC card business, and an advertising agency business in Japan. Sony’s products and services are generally unique to a single operating segment.
~~F-67~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
The operating segments reported below are the segments of Sony for which separate financial information is available and for which operating profit or loss amounts are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.
~~Business segments -~~
~~Sales and operating revenue:~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Sales and operating revenue:
Electronics —
Customers 4,772,550 4,543,313 4,758,400
Intersegment 513,631 397,137 138,995

Total 5,286,181 4,940,450 4,897,395
Game —
Customers 986,529 936,274 753,732
Intersegment 17,185 18,757 26,488

Total 1,003,714 955,031 780,220
Music —
Customers 541,418 512,908 487,457
Intersegment 58,633 84,598 72,431

Total 600,051 597,506 559,888
Pictures —
Customers 635,841 802,770 756,370
Intersegment 0 0 0

Total 635,841 802,770 756,370
Financial Services —
Customers 480,190 509,398 565,752
Intersegment 28,932 27,878 27,792

Total 509,122 537,276 593,544
Other —
Customers 161,730 168,970 174,680
Intersegment 99,733 137,323 155,712

Total 261,463 306,293 330,392
Elimination (718,114 ) (665,693 ) (421,418 )

Consolidated total 7,578,258 7,473,633 7,496,391

     ~~Electronics intersegment amounts primarily consist of transactions with the Game business.~~
     ~~Music intersegment amounts primarily consist of transactions with the Game and Pictures businesses.~~
     ~~Other intersegment amounts primarily consist of transactions with the Electronics business.~~
~~F-68~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~Segment profit or loss:~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Operating income (loss):
Electronics (1,158 ) 41,380 (35,298 )
Game 82,915 112,653 67,578
Music 22,132 (7,867 ) 18,995
Pictures 31,266 58,971 35,230
Financial Services 21,822 22,758 55,161
Other (18,249 ) (24,983 ) (10,030 )

Total 138,728 202,912 131,636
Elimination 17,148 15,897 14,530
Unallocated amounts:
Corporate expenses (21,245 ) (33,369 ) (47,264 )

Consolidated operating income 134,631 185,440 98,902
Other income 96,328 157,528 122,290
Other expenses (138,184 ) (95,347 ) (77,125 )

Consolidated income before income taxes 92,775 247,621 144,067

     ~~Operating income is sales and operating revenue less costs and operating expenses. Unallocated corporate expenses include stock-based compensation expenses (Note 15).~~
In the quarter beginning October 1, 2003, the recognition method for insurance premiums received on certain products by Sony Life was changed from being recorded as revenues to being offset against the related provision for future insurance policy benefits, reducing revenue in the Financial Services segment in the year ended March 31, 2004, by approximately 30.8 billion yen. This change did not have a material effect on operating income.
~~Assets:~~

March 31
2002 2003 2004
(Yen in millions)
Total assets:
Electronics 3,089,791 2,848,492 2,876,490
Game 722,021 673,208 684,226
Music 675,186 604,311 575,276
Pictures 960,266 868,395 856,517
Financial Services 2,482,536 2,897,119 3,475,039
Other 315,984 350,521 393,291

Total 8,245,784 8,242,046 8,860,839
Elimination (268,416 ) (261,407 ) (313,245 )
Corporate assets 208,427 389,906 543,068

Consolidated total 8,185,795 8,370,545 9,090,662

~~F-69~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
~~Unallocated corporate assets consist primarily of cash and cash equivalents, marketable securities and property, plant and equipment maintained for general corporate purposes.~~
~~Other significant items:~~

Year Ended March 31
2002 2003 2004
(Yen in millions)
Depreciation and amortization:
Electronics 211,910 190,836 196,185
Game 49,655 53,496 57,256
Music 33,388 32,605 30,826
Pictures 10,619 8,552 7,844
Financial Services, including deferred insurance acquisition costs 37,227 52,041 56,586
Other 8,015 10,157 13,455

Total 350,814 347,687 362,152
Corporate 3,321 4,238 4,117

Consolidated total 354,135 351,925 366,269

Capital expenditures for segment assets:
Electronics 220,032 170,323 242,696
Game 47,822 40,986 100,360
Music 20,882 20,284 12,935
Pictures 11,501 7,138 6,013
Financial Services 16,023 3,655 4,618
Other 5,861 16,993 10,124

Total 322,121 259,379 376,746
Corporate 4,613 1,862 1,518

Consolidated total 326,734 261,241 378,264

     ~~The capital expenditures in the above table represent the additions to fixed assets of each segment.~~
     The following table is a breakdown of Electronics sales and operating revenue to external customers by product category. The Electronics business is managed as a single operating segment by Sony’s management. Effective for the year ended March 31, 2004, Sony has partly changed its product category configuration. The main changes are that the computer display product group, which includes LCD television and computer display, has been moved from “Information and Communications” to “Televisions”, and the set-top box product group which includes digital set-top boxes has been moved from
~~F-70~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
“Televisions” to “Video”. Accordingly, sales and operating revenue for the years ended March 31, 2002 and 2003 have been restated to conform to the presentation for the year ended March 31, 2004.

Year Ended March 31
2002 2003 2004
(Yen in millions)
Audio 747,469 682,517 623,582
Video 847,311 851,064 948,111
Televisions 984,290 950,166 917,207
Information and Communications 998,773 836,724 834,757
Semiconductors 182,276 204,710 253,237
Components 511,579 527,782 623,799
Other 500,852 490,350 557,707

Total 4,772,550 4,543,313 4,758,400

~~Geographic information -~~
Sales and operating revenue which are attributed to countries based on location of customers for the years ended March 31, 2002, 2003 and 2004 and long-lived assets as of March 31, 2002, 2003 and 2004 are as follows:

Year Ended March 31
2002 2003 2004
(Yen in millions)
Sales and operating revenue:
Japan 2,248,115 2,093,880 2,220,747
U.S.A. 2,461,523 2,403,946 2,121,110
Europe 1,609,111 1,665,976 1,765,053
Other 1,259,509 1,309,831 1,389,481

Total 7,578,258 7,473,633 7,496,391

March 31
2002 2003 2004
(Yen in millions)
Long-lived assets:
Japan 1,462,709 1,365,160 1,430,443
U.S.A. 812,309 713,524 671,534
Europe 156,560 164,459 211,147
Other 174,070 148,616 133,640

Total 2,605,648 2,391,759 2,446,764

     ~~There are not any individually material countries with respect to the sales and operating revenue and long-lived assets included in Europe and Other areas.~~
     ~~Transfers between reportable business or geographic segments are made at arms-length prices.~~
     ~~There are no sales and operating revenue with a single major external customer for the years ended March 31, 2002, 2003 and 2004.~~
~~F-71~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~
The following information shows sales and operating revenue and operating income by geographic origin for the years ended March 31, 2002, 2003 and 2004. In addition to the disclosure requirements under FAS No. 131, Sony discloses this supplemental information in accordance with disclosure requirements of the Japanese Securities and Exchange Law, to which Sony, as a Japanese public company, is subject.

Year Ended March 31
2002 2003 2004
(Yen in millions)
Sales and operating revenue:
Japan —
Customers 2,498,641 2,247,030 2,352,923
Intersegment 2,312,718 2,433,998 2,514,698

Total 4,811,359 4,681,028 4,867,621
U.S.A. —
Customers 2,637,861 2,632,176 2,341,304
Intersegment 184,966 189,502 198,450

Total 2,822,827 2,821,678 2,539,754
Europe —
Customers 1,440,281 1,520,930 1,647,694
Intersegment 91,329 121,598 66,950

Total 1,531,610 1,642,528 1,714,644
Other —
Customers 1,001,475 1,073,497 1,154,470
Intersegment 853,324 789,444 813,798

Total 1,854,799 1,862,941 1,968,268
Elimination (3,442,337 ) (3,534,542 ) (3,593,896 )

Consolidated total 7,578,258 7,473,633 7,496,391

Operating income:
Japan 36,188 11,444 (70,029 )
U.S.A. 30,704 98,762 85,290
Europe 24,460 62,206 78,822
Other 76,061 63,773 70,543
Corporate and elimination (32,782 ) (50,745 ) (65,724 )

Consolidated total 134,631 185,440 98,902

~~F-72~~
~~SCHEDULE II~~
~~VALUATION AND QUALIFYING ACCOUNTS~~
~~SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES~~

Additions
Charged
Balance at to Costs Balance
Beginning and Deductions Other at End
of Period Expenses (Note 1) (Note 2) of Period
(Yen in millions)
Year ended March 31, 2002:
Allowance for doubtful accounts and sales returns 109,648 68,434 (64,657 ) 7,401 120,826

Year ended March 31, 2003:
Allowance for doubtful accounts and sales returns 120,826 87,330 (89,284 ) (8,378 ) 110,494

Year ended March 31, 2004:
Allowance for doubtful accounts and sales returns 110,494 78,323 (65,281 ) (10,862 ) 112,674

~~Notes:~~
1. ~~Amounts written off.~~
2. ~~Translation adjustment.~~

Balance at Balance
Beginning Other at End
of Period Additions Deductions (Note 1) of Period
Year ended March 31, 2002:
Valuation allowance — Deferred tax assets 198,613 77,519 (35,147 ) 11,223 252,208

Year ended March 31, 2003:
Valuation allowance — Deferred tax assets 252,208 72,303 (189,843 ) (18,600 ) 116,068

Year ended March 31, 2004:
Valuation allowance — Deferred tax assets 116,068 63,936 (39,199 ) (13,228 ) 127,577

F-75
~~Note:~~
1. ~~Translation adjustment.~~
~~F-73~~


Title of each class		Name of each exchange on which registered

American Depositary Shares*		New York Stock Exchange
		Pacific Stock Exchange
		Chicago Stock Exchange

Common Stock**		New York Stock Exchange
		Pacific Stock Exchange
		Chicago Stock Exchange


	Outstanding as of

	March 31, 2005		~~Outstanding as of~~	March 30, 2005

	~~March 31, 2004~~			~~March 30, 2004~~
Title of Class	(Tokyo Time)		~~(Tokyo Time)~~			(New York Time)

Common Stock		~~926,418,280~~997,211,213
Subsidiary Tracking Stock		3,072,000
American Depositary Shares					~~115,546,136~~135,460,544


Item 1. Identity of Directors, Senior Management and Advisers					5
Item 2. Offer Statistics and Expected Timetable					5
Item 3. Key Information					5
	Selected Financial Data				5
	Capitalization and Indebtedness				87
	Reasons for the Offer and Use of Proceeds				87
	Risk Factors				87
Item 4. Information on the Company					15
	History and Development of the Company				15
		Principal Capital Investments			16
	Business Overview				16
		Important Changes during the Fiscal Year			16
		Products and ~~Organizational Structure~~Services			17
		~~Products~~Sales and ~~Services~~Distribution			1820
		~~Sales and Distribution~~Sources of Supply			22
		~~Overseas Operations~~After-Sales Service			23
		Patents and Licenses			23
		Competition			23
		Government Regulations			24
			~~Sources of Supply~~Organizational Structure			24
		~~After-Sales Service~~			25
			~~Patents~~Property, Plant and ~~Licenses~~Equipment			25
				~~Competition~~			25
		~~Government Regulations~~			26
	~~Property, Plant and Equipment~~				27
Item 5. Operating and Financial Review and Prospects					2928
	~~OPERATING RESULTS~~Operating Results				2928
		Operating Results for the Fiscal Year Ended March 31, 2005 compared with the Fiscal Year Ended March 31, 2004			28
		Operating Results for the Fiscal Year Ended March 31, 2004 compared with the Fiscal Year Ended March 31, 2003			29
		~~Operating Results for the Fiscal Year Ended March 31, 2003 compared with the Fiscal Year Ended March 31, 2002~~			4443
	~~LIQUIDITY AND CAPITAL RESOURCES~~Liquidity and Capital Resources				72
	Research and Development				74
	Trend Information				75
		~~RESEARCH AND DEVELOPMENT~~Issues Facing Sony and Management’s Response to those Issues			7876
		Forecast of Consolidated Results			77
	~~TREND INFORMATION~~Critical Accounting Policies				79
			~~Issues Facing Sony and Management’s Response to those Issues~~Recently Adopted Accounting Standards			79
		~~Forecast of Consolidated Results~~			8184
	~~CRITICAL ACCOUNTING POLICIES~~Recent Pronouncements				83
	~~RECENTLY ADOPTED ACCOUNTING STANDARDS~~				88
	~~RECENT PRONOUNCEMENTS~~				9085
Item 6. Directors, Senior Management and Employees					9086
	Directors and Senior Management				9086
	Compensation				97
	Board Practices				97
	Employees				99
	~~Board Practices~~Share Ownership				99101
			~~Employees~~Item 7.Major Shareholders and Related Party Transactions				102
	~~Share Ownership~~Major Shareholders				~~103~~
~~Item 7.~~~~Major Shareholders and Related Party Transactions~~					~~105~~102
	~~Major Shareholders~~Related Party Transactions				~~105~~
	~~Related Party Transactions~~				~~105~~
	~~Interests of Experts and Counsel~~				~~106~~102



		Year Ended March 31

		2000		2001		2002		2003		2004


		(Yen in millions, Yen per share amounts)
Balance Sheet Data:
	Net working capital		861,674		830,734		778,716		719,166		381,140
	Long-term debt		813,828		843,687		838,617		807,439		777,649
	Stockholders’ equity		2,182,906		2,315,453		2,370,410		2,280,895		2,378,002
	Total assets		6,807,197		7,827,966		8,185,795		8,370,545		9,090,662
	Number of shares issued at year-end (thousands of shares of common stock)		453,639		919,617		919,744		922,385		926,418
	Stockholders’ equity per share of common stock*:		2,409.36		2,521.19		2,570.31		2,466.81		2,563.67


			Average*		High		Low		Period-End

			(Yen)
Yen Exchange Rates per U.S. Dollar:
	Fiscal year ended March 31
		2001		111.65		104.19		125.54		125.54
		2002		125.64		115.89		134.77		132.70
		2003		121.10		115.71		133.40		118.07
		2004		113.07		120.55		104.18		104.18
		2005		107.49		114.30		102.26		107.22
	2004
		December				105.59		102.56		102.68
	2005
		January				104.93		102.26		103.55
		February				105.84		103.70		104.25
		March				107.49		103.87		107.22
		April				108.67		104.64		104.64
		May				108.17		104.41		107.97
		June (through June 20)				109.58		106.64		109.42


*	American Depositary Shares evidenced by American Depositary Receipts.


	Interests of Experts and Counsel		103
Item 8. Financial Information			103
	Consolidated Statements and Other Financial Information		103
	Legal Proceedings		103
	Dividend Policy		103
	Significant Changes		104
Item 9.The Offer and Listing			104
	Offer and Listing Details		104
	Plan of Distribution		104
	Markets		104
		Trading Markets	104
		Trading on the TSE and NYSE	105
	Selling Shareholders		106
	~~Consolidated Statements and Other Financial Information~~Dilution		106
	~~Legal Proceedings~~Expenses of the Issue		106
Item 10.Additional Information			106
	~~Dividend Policy~~Share Capital		106
	~~Significant Changes~~		~~106~~
~~Item 9.~~~~The Offer~~Memorandum and ~~Listing~~Articles of Association			106
	~~Offer and Listing Details~~		~~106~~
	~~Plan of Distribution~~		~~106~~
	~~Markets~~		~~106~~
		~~Trading Markets~~	~~106~~
		~~Trading on the TSE and NYSE~~	~~107~~
	~~Selling Shareholders~~		~~108~~
	~~Dilution~~		~~108~~
	~~Expenses of the Issue~~		~~108~~
~~Item 10.~~~~Additional Information~~			~~108~~
	~~Share Capital~~		~~108~~
	~~Memorandum and Articles of Association~~		~~108~~
	Material Contracts		~~118~~
	~~Exchange Controls~~		~~118~~
	~~Taxation~~		119
	~~Dividends and Paying Agent~~Exchange Controls		~~122~~119
	~~Statement by Experts~~Taxation		~~122~~120
	~~Documents on Display~~Dividends and Paying Agent		~~122~~123
	Statement by Experts		123
	Documents on Display		123
	Subsidiary Information		123
Item 11. Quantitative and Qualitative Disclosures ~~About~~about Market Risk			123
Item 12. Description of Securities Other Than Equity Securities			~~124~~125
Item 13. Defaults, Dividend Arrearages and Delinquencies			~~124~~125
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			~~124~~
~~Item 15.~~~~Controls and Procedures~~			~~124~~
~~Item 16.~~~~[Reserved]~~			125
Item 15.Controls and Procedures			125
Item 16.[Reserved]			125
Item 16A. Audit Committee Financial Expert			125
Item 16B. Code of Ethics			125
Item 16C. Principal Accountant Fees and Services			~~125~~126
	Audit and Non-Audit Fees		~~125~~126
	Audit Committee’s Pre-Approval Policies and Procedures		~~125~~
~~Item 16D.~~~~Exemptions From Listing Standards for Audit Committees~~			126
Item 16D.Exemptions from Listing Standards for Audit Committees			127
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			~~126~~127
Item 17. Financial Statements			~~126~~128
Item 18. Financial Statements			~~126~~128
Item 19. Exhibits			~~126~~128
EX-1.1 ARTICLES OF INCORPORATION
EX-1.2 REGULATIONS OF THE BOARD OF DIRECTORS
~~EX-31 CERTIFICATIONS~~EX-12.1 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION REQUIRED BY 17 C.F.R. 240. 13a-14(a)
~~EX-32~~EX-12.2 PRINCIPAL FINANCIAL OFFICER CERTIFICATION REQUIRED BY 17 C.F.R. 240. 13a-14(a)
EX-13 CERTIFICATIONS REQUIRED BY 18 U.S.C. SECTION 1350 ~~CERTIFICATIONS~~
EX-15.1 CONSENT OF CHUOAOYAMA PRICEWATERHOUSECOOPERS


Item 1.	*Identity of Directors, Senior Management and Advisers*


*	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:
	Year ended March 31
		2000		110.02		101.53		124.45		102.73
		2001		111.65		104.19		125.54		125.54
		2002		125.64		115.89		134.77		132.70
		2003		121.10		115.71		133.40		118.07
		2004		113.07		120.55		104.18		104.18
	2003
		December				109.6		106.9		107.1
	2004
		January				107.2		105.5		105.8
		February				109.6		105.4		109.3
		March				112.1		104.2		104.2
		April				110.4		103.7		110.4
		May				114.3		108.5		110.2
		June (through June 21)				111.3		108.6		108.6


*	Per share data prior to the year ended March 31, 2001 have been adjusted to reflect the two-for-one stock split that took effect on May 19, 2000. However, no adjustment to reflect such stock split has been made to the number of shares issued prior to the year ended March 31, 2001.

**	~~Depreciation and amortization includes amortization expenses for intangible assets and for deferred insurance acquisition costs.~~

~~***~~	The average yen exchange rates represent average noon buying rates on the last business day of each month during the respective period.


1.	In July 2003, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants issued the Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP 03-1, Sony’s operating income decreased by 5,156 million yen for the fiscal year ended March 31, 2005. Additionally, on April 1, 2004, Sony recognized 4,713 million yen of loss (net of income taxes of 2,675 million yen) as a cumulative effect of an accounting change. In addition, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” on the consolidated balance sheet, were excluded from the category of separate accounts under SOP 03-1. Accordingly, assets previously treated as separate account assets are now treated within general account assets.

2.	In July 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.” In accordance with Statement of Financial Accounting Standards (“FAS”) No. 128, “Earnings Per Share,” Sony had not previously included in the computation of diluted earnings per share (“EPS”) the number of potential shares of common stock issuable upon the conversion of contingently convertible debt instruments (“Co-Cos”) that have not met the conditions to exercise the associated stock acquisition rights. EITF Issue No. 04-8 requires that the maximum number of shares of common stock that could be issued upon the conversion of Co-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise such rights have been met. EITF Issue No. 04-8 is effective for reporting periods ending after December 15, 2004. Sony adopted EITF Issue No. 04-8 during the quarter ended


	*~~Sony must overcome increasingly intense pricing competition, especially in the Electronics and Game segments.~~*


	*~~Sony’s sales and profitability are sensitive to economic trends in Sony’s major markets.~~*


	*~~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.~~*


Yes þ		No o


	*~~Foreign exchange fluctuations can affect Sony’s results of operations due to sales and expenses in different currencies.~~*


	*~~Sony may not be able to recover its increasingly diverse and increasingly expensive investments in technology development and production capacity.~~*


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


	*~~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.~~*


	*~~Sony’s Game and Electronics segments are particularly sensitive to year-end holiday season demand.~~*


	*~~Sony’s Music and Pictures segments are subject to digital piracy, and this risk grows more acute as new technologies develop.~~*


	*~~Sony’s Music segment is dependent on establishing new artists, and Sony’s Music and Pictures segments are subject to increasing prices for talent.~~*


	*~~Sony’s Pictures segment is subject to labor interruption.~~*


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


	*~~Sony may not be successful in implementing its broadband network strategy.~~*


	*~~Sony’s cooperation and alliances with, and strategic investments in, third parties may not produce successful results.~~*


	*Sony’s ~~physical facilities and information systems are subject to damage as a result of disasters, outages, malfeasance or similar events.~~*


	*~~Sony is subject to financial and reputational risks due to product quality and liability issues.~~*


	*~~Sony may be adversely affected by its employee benefit obligations.~~*


	*~~Sony may be accused of infringing on others’ intellectual property rights and may not be able to continue to obtain necessary licenses.~~*


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


	*~~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 the risks of operations in different countries.~~*


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


	*~~American Depositary Share (“ADS”) holders have fewer rights than shareholders and may not be able to enforce judgments based on U.S. securities laws.~~*