UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 20052006
Commission file number 1-6439
Sony Kabushiki Kaisha
(Exact name of Registrant as specified in its charter)
SONY CORPORATION
SONY CORPORATIONJAPAN
(Translation of Registrant’s name into English)
JAPAN
(Jurisdiction of incorporation or organization)
(Jurisdiction of incorporation or organization)
7-35, KITASHINAGAWA 6-CHOME, SHINAGAWA-KU,
TOKYO 141-0001, JAPAN
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act.
   
Title of each classEach Class Name of each exchangeEach Exchange on which registeredWhich Registered
   
American Depositary Shares* New York Stock Exchange
Pacific Stock Exchange
Chicago Stock Exchange
Common Stock** New York Stock Exchange
Pacific Stock Exchange
Chicago Stock Exchange
 
 *American Depositary Shares evidenced by American Depositary Receipts.

Each American Depositary Share represents one share of Common Stock.
Each American Depositary Share represents one share of Common Stock.
** No par value per share.
**No par value per share.Not for trading, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the New York Stock Exchange.
Not for trading, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the relevant exchanges.
Securities registered pursuant to Section 12(g) of the Act.
None
 
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
 
(Title of Class)
    Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
     
 Outstanding as of
   
  Outstanding as of
March 31, 20052006 March 30, 20052006
Title of Class (Tokyo Time) (New York Time)
Common Stock997,211,213     
Subsidiary TrackingCommon Stock 3,072,0001,000,938,776  
American Depositary Shares   135,460,544145,074,404
    Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ  No o
    If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes o  No þ
    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No o
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
   
YesLarge Accelerated Filer  þ
 NoAccelerated Filer  oNon-Accelerated Filer  o
    Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o  Item 18 þ
    If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ
Item 18 þ
    In this document, Sony Corporation and its consolidated subsidiaries are together referred to as “Sony.” In addition, sales and operating revenue is referred to as “sales” in the narrative description except in the Consolidated Financial Statements.
    The noon buying rate for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on June 20, 2005August 30, 2006 was 109.42117.07 yen = 1 U.S. dollar.
    As of March 31, 2005,2006, Sony Corporation had 913936 consolidated subsidiaries (including variable interest entities). It has applied the equity accounting method with respect to its 5658 affiliated companies.
 
 

Cautionary Statement
      Statements made in this annual report with respect to Sony’s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of Sony. Forward-looking statements include, but are not limited to, those statements using words such as “believe”, “expect”, “plans”, “strategy”, “prospects”, “forecast”, “estimate”, “project”, “anticipate”, “aim”,“believe,” “expect,” “plans,” “strategy,” “prospects,” “forecast,” “estimate,” “project,” “anticipate,” “aim,” “may” or “might” and words of similar meaning in connection with a discussion of future operations, financial performance, events or conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Sony cautions you that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not rely on any obligation of Sony to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Sony disclaims any such obligation. Risks and uncertainties that might affect Sony include, but are not limited to (i) the global economic environment in which Sony operates, as well as the economic conditions in Sony’s markets, particularly levels of consumer spending; (ii) exchange rates, particularly between the yen and the U.S. dollar, the euroEuro and other currencies in which Sony makes significant sales or in which Sony’s assets and liabilities are denominated; (iii) Sony’s ability to continue to design and develop and win acceptance of, as well as achieve sufficient cost reductions for, its products and services, which are offered in highly competitive markets characterized by continual new product introductions, rapid development in technology and subjective and changing consumer preferences (particularly in the Electronics, Game Music,and Pictures segments, and Other segments)music business); (iv) Sony’s ability to recoup large-scale investment required for technology development, increasing production capacity and by the Game segment for the development and introduction of a new platform; (v) Sony’s ability to implement successfully personnel reduction and other business reorganization activities in its Electronics Music, Pictures and Other segments; (v)segment; (vi) Sony’s ability to implement successfully its network strategy for its Electronics, Music,Game and Pictures segments, All Other and Other segmentsthe music business, and to develop and implement successful sales and distribution strategies in its Music, Pictures segment and Other segmentsmusic business in light of the Internet and other technological developments; (vi)(vii) Sony’s continued ability to devote sufficient resources to research and development and, with respect to capital expenditures, to correctly prioritize investments (particularly in the Electronics segment); (vii)(viii) shifts in customer demand for financial services such as life insurance and failureSony’s ability to conduct successful Asset Liability Management in the Financial Services segmentsegment; and (viii)(ix) the success of Sony’s joint ventures and alliances. Risks and uncertainties also include the impact of any future events with material unforeseen impacts.
      Important information regarding risks and uncertainties is also set forth elsewhere in this annual report, including in “Risk Factors” included in “Item 3.Key Information,”, “Item 4.Information on the Company,”, “Item 5.Operating and Financial Review and Prospects,”, “Legal Proceedings” included in “Item 8.Financial Information,”, Sony’s Consolidated Financial Statements referenced in “Item 8.Financial Information,”, and “Item 11.Quantitative and Qualitative Disclosures Aboutabout Market Risk.”.

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TABLE OF CONTENTS
       
 Item 1.Identity of Directors, Senior Management and Advisers
  5 
 Item 2.Offer Statistics and Expected Timetable
  5 
 Item 3.Key Information
  5 
 
 Selected Financial Data
  5 
 
 Capitalization and Indebtedness
  7 
 
 Reasons for the Offer and Use of Proceeds
  7 
 
 Risk Factors
  7 
 Item 4.Information on the Company
  15 
 
 History and Development of the Company
  15 
  
 Principal Capital Investments
  16 
 
 Business Overview
  1617 
  
 Important Changes during the Fiscal Year
  1617 
  
 Products and Services
  1718 
  
 Sales and Distribution
  2021 
  
 Sources of Supply
  2223 
  
 After-Sales Service
  23 
  
 Patents and Licenses
  2324 
  
 Competition
  2324 
  
 Government Regulations
  2425 
 
 Organizational Structure
  2526 
 
 Property, Plant and Equipment
  2526 
 Item 5.Operating and Financial Review and Prospects
  2829 
 
 Operating Results
  2829
Operating Results for the Fiscal Year Ended March 31, 2006 compared with the Fiscal Year Ended March 31, 2005
29 
  
 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
4344 
 
 Liquidity and Capital Resources
  7274 
 
 Research and Development
  7476 
 
 Trend Information
  7577 
  
 Issues Facing Sony and Management’s Response to those Issues
76
Forecast of Consolidated Results
  77 
 
 Critical Accounting Policies
  79 
 
 Recently Adopted Accounting Standards
  84 
 
 Recent Pronouncements
  85 
 Item 6.Directors, Senior Management and Employees
  86 
 
 Directors and Senior Management
  86 
 
 Compensation
  9793 
 
 Board Practices
  9794 
 
 Employees
  9996 
 
 Share Ownership
  10197 
 Item 7.Major Shareholders and Related Party Transactions
  10299 
 
 Major Shareholders
  10299 
 
 Related Party Transactions
  10299
Interests of Experts and Counsel
100 

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 Interests of Experts and CounselItem 8.Financial Information
  103
Item 8.Financial Information
103100 
 
 Consolidated Statements and Other Financial Information
  103100 
 
 Legal Proceedings
  103100 
 
 Dividend Policy
  103100 
 
 Significant Changes
  104100 
 Item 9.The Offer and Listing
  104101 
 
 Offer and Listing Details
  104101 
 
 Plan of Distribution
  104101 
 
 Markets
  104101 
  
 Trading Markets
  104101 
  
 Trading on the TSE and NYSE
  105102 
 
 Selling Shareholders
  106103 
 
 Dilution
  106103 
 
 Expenses of the Issue
  106103 
 Item 10.Additional Information
  106103 
 
 Share Capital
  106103 
 
 Memorandum and Articles of Association
  106103 
 
 Material Contracts
  119111 
 
 Exchange Controls
  119111 
 
 Taxation
  120112 
 
 Dividends and Paying Agent
  123115 
 
 Statement by Experts
  123115 
 
 Documents on Display
  123115 
 
 Subsidiary Information
  123115 
 Item 11.Quantitative and Qualitative Disclosures about Market Risk
  123115 
 Item 12.12. Description of Securities Other Than Equity Securities
  125117 
 Item 13.13. Defaults, Dividend Arrearages and Delinquencies
  125117 
 Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds
  125117 
 Item 15.Controls and Procedures
  125117 
 Item 16.[Reserved]
  125117 
 Item 16A.Audit Committee Financial Expert
  125117 
 Item 16B.Code of Ethics
  125117 
 Item 16C.Principal Accountant Fees and Services
  126118 
 
 Audit and Non-Audit Fees
  126118 
 
 Audit Committee’s Pre-Approval Policies and Procedures
  126118 
 Item 16D.Exemptions from Listing Standards for Audit Committees
  127119 
 Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  127119 
 Item 17.Financial Statements
  128120 
 Item 18.Financial Statements
  128120 
 Item 19.ExhibitsExhibits
  128120 
 EX-1.1 ARTICLES OF INCORPORATION
 EX-1.2 SHARE HANDLING REGULATIONS
EX-1.3 CHARTER OF THE BOARD OF DIRECTORS
 EX-12.1 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION REQUIRED BY 17 C.F.R. 240. 13a-14(a)CERTIFICATIONS
 EX-12.2 PRINCIPAL FINANCIAL OFFICER CERTIFICATION REQUIRED BY 17 C.F.R. 240. 13a-14(a)CERTIFICATIONS
 EX-13 CERTIFICATIONS REQUIRED BY 18 U.S.C.EX-13.1 SECTION 1350 CERTIFICATIONS
 EX-15.1 CONSENT OF CHUOAOYAMA PRICEWATERHOUSECOOPERSINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Item 1.Identity of Directors, Senior Management and Advisers
      Not Applicable
Item 2.Offer Statistics and Expected Timetable
      Not Applicable
Item 3.Key Information
Selected Financial Data
                                            
 Fiscal Year Ended March 31  Fiscal Year Ended March 31
     
 2001 2002 2003 2004 2005  2002 2003 2004 2005 2006
                     
 (Yen in millions, Yen per share amounts)  (Yen in millions, Yen per share amounts)
Income Statement Data:
Income Statement Data:
                
Income Statement Data:
                
Sales and operating revenue  7,314,824  7,578,258  7,473,633  7,496,391  7,159,616 Sales and operating revenue  7,578,258  7,473,633  7,496,391  7,159,616  7,475,436 
Operating income  225,346  134,631  185,440  98,902  113,919 Operating income  134,631  185,440  98,902  113,919  191,255 
Income before income taxes  265,868  92,775  247,621  144,067  157,207 Income before income taxes  92,775  247,621  144,067  157,207  286,329 
Income taxes  115,534  65,211  80,831  52,774  16,004 Income taxes  65,211  80,831  52,774  16,044  176,515 
Income before cumulative effect of accounting changes  121,227  9,332  115,519  90,628  168,551 Income before cumulative effect of accounting changes  9,332  115,519  90,628  168,551  123,616 
Net income  16,754  15,310  115,519  88,511  163,838 Net income  15,310  115,519  88,511  163,838  123,616 
Data per Share of Common Stock:
Data per Share of Common Stock:
                
Data per Share of Common Stock:
                
Income before cumulative effect of accounting changes                Income before cumulative effect of accounting changes                
 — Basic  132.64  10.21  125.74  98.26  180.96  — Basic  10.21  125.74  98.26  180.96  122.58 
 — Diluted  124.36  10.18  118.21  89.03  162.59  — Diluted  10.18  118.21  89.03  162.59  116.88 
Net income                Net income                
 — Basic  18.33  16.72  125.74  95.97  175.90  — Basic  16.72  125.74  95.97  175.90  122.58 
 — Diluted  19.28  16.67  118.21  87.00  158.07  — Diluted  16.67  118.21  87.00  158.07  116.88 
Cash dividends declared                Cash dividends declared                
 Interim  12.50  12.50  12.50  12.50  12.50  Interim  12.50  12.50  12.50  12.50  12.50 
  (11.15 cents)  (10.07 cents)  (10.50 cents)  (11.37 cents)  (12.12 cents)   (10.07 cents)  (10.50 cents)  (11.37 cents)  (12.12 cents)  (10.36 cents)
 Fiscal year-end  12.50  12.50  12.50  12.50  12.50  Fiscal year-end  12.50  12.50  12.50  12.50  12.50 
  (10.01 cents)  (9.78 cents)  (10.53 cents)  (11.26 cents)  (11.29 cents)   (9.78 cents)  (10.53 cents)  (11.26 cents)  (11.29 cents)  (11.04 cents)
Depreciation and amortization*
Depreciation and amortization*
  348,268  354,135  351,925  366,269  372,865 
Depreciation and amortization*
  354,135  351,925  366,269  372,865  381,843 
Capital expenditures (additions to fixed assets)
Capital expenditures (additions to fixed assets)
  465,209  326,734  261,241  378,264  356,818 
Capital expenditures (additions to fixed assets)
  326,734  261,241  378,264  356,818  384,347 
Research and development costs
Research and development costs
  416,708  433,214  443,128  514,483  502,008 
Research and development costs
  433,214  443,128  514,483  502,008  531,795 
Balance Sheet Data:
Balance Sheet Data:
                
Balance Sheet Data:
                
Net working capital  830,734  778,716  719,166  381,140  746,803 Net working capital  778,716  719,166  381,140  746,803  569,296 
Long-term debt  843,687  838,617  807,439  777,649  678,992 Long-term debt  838,617  807,439  777,649  678,992  764,898 
Stockholders’ equity  2,315,453  2,370,410  2,280,895  2,378,002  2,870,338 Stockholders’ equity  2,370,410  2,280,895  2,378,002  2,870,338  3,203,852 
Total assets  7,827,966  8,185,795  8,370,545  9,090,662  9,499,100 Total assets  8,185,795  8,370,545  9,090,662  9,499,100  10,607,753 
Number of shares issued at fiscal year-end (thousands of shares of common stock)  919,617  919,744  922,385  926,418  997,211 Number of shares issued at fiscal year-end (thousands of shares of common stock)  919,744  922,385  926,418  997,211  1,001,680 
Stockholders’ equity per share of common stock  2,521.19  2,570.31  2,466.81  2,563.67  2,872.21 Stockholders’ equity per share of common stock  2,570.31  2,466.81  2,563.67  2,872.21  3,200.85 
 
* Depreciation and amortization includes amortization expenses for intangible assets and for deferred insurance acquisition costs.

5

                   
  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 
                   
  Average* High Low Period-End
         
  (Yen)
Yen Exchange Rates per U.S. Dollar:
                
 Fiscal year ended March 31                
  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 
  2006  113.15   120.93   104.41   117.78 
 2006                
  January      117.55   113.96   116.88 
  February      118.95   115.82   115.82 
  March      119.07   115.89   117.48 
  April      118.66   113.79   113.79 
  May      113.46   110.07   112.26 
  June      116.42   111.66   114.51 
  July      117.44   113.97   114.44 
  August (through August 30)      117.31   114.21   117.07 
 
The noon buying rate for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on June 20, 2005August 30, 2006 was 109.42117.07 yen = 1 U.S. 1 dollar.
*The average yen exchange rates represent average noon buying rates on the last business day of each month during the respective period.
Notes to Selected Financial Data:
1. In July 2003, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants issued the Statement of Position (“SOP”)03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or annuity receivable options. Additionally, SOP03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP03-1 on April 1, 2004. As a result of the adoption of SOP03-1, Sony’s operating income decreased by 5,156 million yen for the fiscal year ended March 31, 2005. Additionally, on April 1, 2004, Sony recognized a charge of 4,713 million yen 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.”Share”. In accordance with Statement of Financial Accounting Standards (“FAS”) No. 128, “Earnings Per Share,”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 havehad 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 ofCo-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise suchthe 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

6

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, 2004 were restated. Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the fiscal year ended

6

March 31, 2005 were decreased by 7.26 yen and 7.06 yen, respectively, compared to those before the adoptionas a result of adopting EITF Issue No. 04-8.
 
3. In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research BulletinsBulletin (“ARB”) No. 51”, and the revised. FIN No. 46 was issued in December 2003. This interpretation addresses consolidation by a primary beneficiary of a variable interest entity (“VIE”). Sony early adopted the provisions of FIN No. 46 on July 1, 2003. As a result of adopting the adoption oforiginal FIN No. 46, Sony recognized a one-time charge with no tax effect of 2,117 million yen charge as a cumulative effect of an accounting change. Additionally,change in the consolidated statement of income, and Sony’s assets and liabilities increased by 96,77695,255 million yen and 97,950 million yen, respectively, including cash and cash equivalents of 1,521 million yen.
4. On April 1, 2001, Sony adopted FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”respectively. These increases were treated as amended by FAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities — an Amendment of FASB Statement No. 133”. As a result, Sony’s operating income, income before income taxes and net income for the fiscal year ended March 31, 2002 decreased by 3,007 million yen, 3,441 million yen and 2,167 million yen, respectively. Additionally, Sony recorded a one-time non-cash after-tax unrealized gain of 1,089 million yen in accumulated other comprehensive income in the consolidated balance sheet, as well as an after-tax gain of 5,978 million yen in the cumulative effect of accounting changestransactions in the consolidated statement of income.cash flows. In April 2003,addition, cash and cash equivalents increased by ¥1,521 million. Sony subsequently early adopted the FASB issued FASprovisions of FIN No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” Sony adopted FAS46R, which replaced FIN No. 149 on July 1,46, upon issuance in December 2003. The adoption of FASFIN No. 14946R did not have an impact on Sony’s results of operations and financial position.
5. In July 2001,position or impact the FASB issued FAS No. 142, “Goodwill and Other Intangible Assets.”way Sony adopted FAS No. 142 retroactive to April 1, 2001. As a result, Sony’s operating income and income before income taxeshad previously accounted for the fiscal year ended March 31, 2002 increased by 20,114 million yen and income before cumulative effect of accounting changes as well as net income for the fiscal year ended March 31, 2002 increased by 18,932 million yen.VIEs.

Capitalization and Indebtedness
      Not Applicable
Reasons for the Offer and Use of Proceeds
      Not Applicable
Risk Factors
      This section contains forward-looking statements that are subject to the Cautionary Statement appearing on page 2 of this annual report. Risks to Sony are also discussed elsewhere in this annual report, including without limitation in the other sections of this annual report referred to in the Cautionary Statement.
Sony must overcome increasingly intense pricing competition, especially in the Electronics and Game segments.
Sony must overcome increasingly intense pricing competition, especially in the Electronics and Game segments.
      Sony’s Electronics and Game segments producesegment produces consumer products that compete against products sold by an increasing number of competitors on the basis of factors including price. In order to produce products that appeal to changing and increasingly diverse consumer preferences, and to overcome the fact that a relatively high percentage of consumers already possess products similar to those that Sony offers, Sony’s Electronics and Game segments must develop superior technology, anticipate consumer tastes and rapidly develop attractive products. In the Electronics segment, Sony faces increasingly intense pricing pressure in a

7

variety of consumer product areas. Sony’s sales and operating income depend on Sony’s ability to continue to develop and offer Electronics and Game products at competitive prices that meet changing and increasingly diversifieddiverse consumer preferences.
Sony is subject to competition from firms that may be more specialized.
Sony is subject to competition from firms that may be more specialized.
      Sony’s businesses, primarily within the Electronics segment, face a broad range of competitors, from large international companies to an increasing number of relatively small, rapidly growing, and highly specialized organizations. Sony has a portfolio of businesses in different industries while many of its competitors specialize in one or more of these business areas. As a result, Sony may not fund or invest in certain of its businesses to the same degree that its competitors do, and these competitors may have greater financial, technical, and marketing resources available to them than the businesses of Sony against which they compete.

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Sony may not be able to recover its increasingly diverse and increasingly expensive investments in technology development and production capacity.
Sony’s salesbusinesses, particularly the Electronics and Game segments, compete in intensely competitive markets characterized by changing consumer preferences and rapid technological innovation. In order to be profitable in such markets, Sony is continuing to invest heavily in research and development and semiconductor fabrication equipment. Recent examples of such expenditures include research and development investment in 65 nanometer semiconductor process technology and related capital expenditures with IBM Corporation and Toshiba Corporation for production of the Cell chip within the Electronics segment for sale primarily to the Game segment, and an investment in a joint venture,S-LCD Corporation(“S-LCD”), with Samsung Electronics Co., Ltd. (“Samsung”) to produce 7th generation amorphous thin film transistor (“TFT”) LCD panels. In addition, in July 2006, Sony and Samsung signed the final contract regarding the manufacture of 8th generation TFT LCD Panels atS-LCD. The total amount of the investment required is expected to be approximately 1.9 billion U.S. dollars (approximately 50 percent of which will be borne by Sony). Sony may not be able to recover these investments, in part or in full, and its mid-term profitability are sensitivecould be adversely affected as a result. (Refer to economic trends“Trend Information” in Sony’s major markets.“Item 5.Operating and Financial Review and Prospects.”)
      A consumer’s decision
Sony’s business reorganization efforts are costly and may not attain their objectives.
      Sony has engaged in significant reorganization initiatives in an effort to purchase products such as those offeredallocate managerial resources into core areas and improve operating efficiency and profitability. These efforts have included the concentration of resources into profitable businesses by Sony’s Electronics, Game, Music and Pictures segments iswithdrawing from or downsizing selected businesses. Other efforts include the execution of a plan to reduce costs including a very significant extent discretionary. Accordingly, weakening economic conditions or outlook can reduce consumptionreduction in anythe number of Sony’s major markets, causing material declinesemployees around the world.
      On September 22, 2005, Sony announced its mid-term corporate strategy for the three fiscal years ending March 31, 2006 through March 31, 2008. This mid-term corporate strategy includes restructuring initiatives focused on the reduction in Sony’s salesthe number of business categories and operating income.the number of product models, the rationalization of manufacturing sites, the streamlining of administrative and headquarter functions, as well as the sale of non-core assets.
      In association with these restructuring initiatives 138.7 billion yen of restructuring charges were recorded for the fiscal year ended March 31, 2005, 29.3 percent, 27.6 percent2006. Sony anticipates the recording of 50 billion yen in restructuring charges for the fiscal year ending March 31, 2007.
      Restructuring charges are recorded in cost of sales, selling, general and 22.6 percentadministrative expenses and loss on sale, disposal or impairment of assets, net and thus decrease Sony’s salesconsolidated operating and operating revenue were attributablenet income. Moreover, due to Japan,internal or external factors, the U.S.improved efficiencies and Europe, respectively. If economiccost savings projected may not be realized as scheduled and, even if those benefits are realized, Sony may not be able to achieve the level of profitability expected due to a worsening of market conditions beyond expectations. Such possible internal factors could include, for example, a decision to implement new restructuring initiatives not already planned or a decision to increase research and development outlays or other investments beyond currently projected levels, either of which might increase total costs. Possible external factors could include, for example, increased burdens from regional labor regulations and union contracts that could prevent Sony from executing its restructuring initiatives as planned. Therefore, such reorganizations may not result in Japan, the U.S.improved efficiency, increased ability to respond to market changes or Europe deteriorate, or if the effectsreallocation of international politicalresources to more profitable activities. The inability to fully and military instability depress consumer confidence, Sony’s short-successfully implement restructuring programs may cause Sony to mid-term saleshave insufficient financial resources to carry out its research and profitability may be significantly adversely affected.development plans and to invest in targeted growth business areas.
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.
Foreign exchange rate fluctuations can affect financial results because a large portion of Sony’s sales and assets are denominated in currencies other than the yen.
      Sony’s consolidated statements of income are prepared from the local currency-denominated financial results of each of Sony Corporation’s subsidiaries around the world which are translated into yen at the

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average market rate during each financial period. Sony’s consolidated balance sheets are prepared using local currency-denominated assets and liabilities of each of Sony Corporation’s subsidiaries around the world, which are translated into yen at the market rate at the end of each financial period. A large proportion of Sony’s consolidated financial results, assets and liabilities is accounted for in currencies other than the Japanese yen. For example, only 29.329.0 percent of Sony’s sales and operating revenue in the fiscal year ended March 31, 20052006 were originally recorded in Japan. Accordingly, Sony’s consolidated results, assets and liabilities in Sony’s businesses that operate internationally, principally in its Electronics, Game Music and Pictures segments, may be materially affected by changes in the exchange rates of foreign currencies when translating into Japanese yen. In the fiscal year ended March 31, 2005,2006, for example, Sony’s consolidated operating income prepared on the basis of Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”) in yen increased from the preceding fiscal year by 15.267.9 percent; however, if Sony’s consolidated operating income had been prepared on a local currency basis, it would have increased by 2623 percent. (Refer to “Operating Results” in “Item 5.Operating and Financial Review and Prospects.”) Operating results on a local currency basis described herein reflect sales and operating revenue and operating income obtained by applying the yen’s monthly average exchange rate in the previous fiscal year to local currency-denominated monthly sales, cost of sales, and selling, general and administrative expenses in the current fiscal year. Foreign exchange fluctuations may have a negative impact on Sony’s results in the future, especially if the yen strengthens significantly against the U.S. dollar or euro.Euro.
Foreign exchange fluctuations can affect Sony’s results of operations due to sales and expenses in different currencies.
Foreign exchange fluctuations can affect Sony’s results of operations due to sales and expenses in different currencies.
      Exchange rate fluctuations affect Sony’s operating profitability because many of Sony’s products are sold in countries other than the ones in which they were manufactured. The concentration of research and development, administrative functions and manufacturing activities within the Electronics segment largely in Japan, makes this segment particularly sensitive to the yen’s appreciation as the ratio of yen-denominated

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costs to total costs is higher than the ratio of yen-denominated revenue to total revenue. Volatile mid- to long-term changes in exchange rate levels, such as the decade-long strengthening of the yen against major currencies between 1985 and 1995, when the yen appreciated from a level in excess of 260 yen to the U.S. dollar to a level of less than 80 yen to the U.S. dollar, may interfere with Sony’s global allocation of resources and hinder Sony’s ability to execute procurement, production, logistics, and sales activities in a manner that is profitable after the effect of such exchange rate changes.
      Although Sony hedges the net foreign currency exposure resulting from import and export transactions shortly before they are projected to occur, such hedging activity cannot entirely eliminate the risk of adverse exchange rate fluctuations.
Sony may not be able to recover its increasingly diverse and increasingly expensive investments in technology development and production capacity.
      Sony’s businesses, particularly the Electronics segment, compete in markets characterized by ever-shortening product life cycles caused by changing consumer preferences and rapid technological innovation. In order to be profitable in such markets, Sony is continuing to invest heavily in research and development and semiconductor fabrication equipment. Recent examples of such expenditures include research and development investment in 65 nanometer semiconductor process technology with IBM Corporation and Toshiba Corporation and an investment in a joint venture with Samsung Electronics Co., Ltd. (“Samsung”) to produce 7th generation amorphous thin film transistor (“TFT”) LCD panels. Sony may not be able to recover these investments, in part or in full, and its mid-term profitability could be adversely affected as a result. (Refer to “Trend Information” in “Item 5.Operating and Financial Review and Prospects.”)
Sony’s business reorganization efforts are costly and may not attain their objectives.
      Sony has engaged in significant reorganization initiatives in an effort to allocate managerial resources into core areas and improve operating efficiency and profitability. These efforts have included the concentration of resources into profitable businesses by withdrawing from or downsizing selected businesses. Other efforts have been made to reduce fixed costs including a reduction in the number of Sony’s employees around the world.
      Since the fiscal year ended March 31, 2004, Sony has been implementing Transformation 60, a three-year program scheduled to end March 31, 2006, that consists of a series of fundamental reforms including an increase in research and development spending and investments in order to strengthen core businesses, and undertaking restructuring initiatives such as implementing personnel reductions, withdrawal from selected businesses and other programs to reduce fixed costs.
      Restructuring charges recorded on a consolidated basis for Transformation 60 during the fiscal years ended March 31, 2004 and 2005 were 168.1 billion yen and 90.0 billion yen, respectively. Sony expects to incur restructuring charges totaling approximately 330 billion yen through the three-year implementation of Transformation 60. The details of the restructuring plan for the fiscal year ending March 31, 2006 have yet to be determined in full.
      Restructuring charges are recorded in cost of sales, selling, general, and administrative expense and loss on sale, disposal or impairment of assets, net and thus decrease Sony’s consolidated operating and net income. Moreover, due to internal or external factors, the improved efficiencies and cost savings projected may not be realized as scheduled and, even if those benefits are realized, Sony may not be able to achieve the level of profitability expected due to a worsening of market conditions beyond expectations. Such possible internal factors could include, for example, a decision to implement new restructuring initiatives not already planned or a decision to increase research and development outlays or other investments beyond currently projected levels, either of which might increase total costs of the program. Possible external factors could include, for example, increased burdens from regional labor regulations and union contracts that could prevent Sony from executing its restructuring initiatives as planned. Therefore, such reorganizations may not result in improved efficiency, increased ability to respond to market changes or reallocation of resources to more profitable activities. The inability to fully and successfully implement restructuring programs may cause Sony to have

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insufficient financial resources to carry out its research and development plans and to invest in targeted growth business areas.
Sony must efficiently manage its procurement of parts, the market conditions for which are volatile, and control its inventory of products and parts, the demand for which is volatile.
Sony must efficiently manage its procurement of parts, the market conditions for which are volatile, and control its inventory of products and parts, the demand for which is volatile.
      In the Electronics and Game segments Sony places orders for components, determines production and plans inventory in advance based on its forecast of consumer demand, which is highly volatile and difficult to predict. In the past Sony has experienced both a shortage of semiconductors, which resulted in Sony’s inability to meet demand for its personal computers (“PCs”) and audio visual products, and a surplus in certain semiconductors that resulted in the recordingrecognition of losses when semiconductor prices fell. Sony consumes a tremendous volume of parts and components for its products such as semiconductors and LCD panels. Consequently, market fluctuations may cause a shortage of parts and components, and may affect Sony’s production or the cost of goods sold. Sony’s profitability may also be adversely affected by supply or inventory shortages or inventory adjustments that, as a result of efforts to reduce inventory by temporarily halting production or by reducing the price of goods, will lead to an increase in the ratio of cost of sales to sales. Sony writes down the value of its inventory when components or products have become obsolete, when inventory exceeds the amount expected to be used, or when the value of the inventory is otherwise recorded at a higher value than net realizable value. Such inventory adjustments have had and, if Sony is not successful in managing its inventory in the future, will have a material adverse effect on Sony’s operating income and

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profitability. (For more information on sources of supply refer to“Sources of Supply” in “Item 4.Information on the Company.”)
Sony’s sales and profitability are sensitive to economic trends in Sony’s major markets.
      A consumer’s decision to purchase products such as those offered by Sony’s Electronics, Game and Pictures segments, as well as by companies within All Other, is to a very significant extent discretionary. Accordingly, weakening economic conditions or outlook can reduce consumption in any of Sony’s major markets, causing material declines in Sony’s sales and operating income. In the fiscal year ended March 31, 2006, 29.0 percent, 26.2 percent and 23.0 percent of Sony’s sales and operating revenue were attributable to Japan, the U.S. and Europe, respectively. If economic conditions in Japan, the U.S. or Europe deteriorate, or if the effects of international political and military instability depress consumer confidence, Sony’s short- to mid-term sales and profitability may be significantly adversely affected.
Large-scale investment is required within the Game and Electronics segments, particularly during the development and launch period of a new gaming platform.
      Within the Game segment, providing and developing products that maintain competitiveness over an extended life-cycle requires large-scale investment relating to research and development, particularly during the development and launch period of a new platform. In addition, large-scale investment relating to capital expenditures and research and development is also required within the Electronics segmentssegment for the fabrication and manufacture of key components, including semiconductors, used in products within the Game segment. Moreover, it is particularly important in the Game segment that these products be provided to consumers at competitive prices to ensure the favorable market penetration of the platform. Should the platform fail to achieve such favorable market penetration, there is a risk that part of, or the whole of, this investment will not be recouped, resulting in a significant negative impact on Sony’s mid-term profitability. In addition, even if Sony is able to sufficiently recoup its investment, it is probable that a significant negative impact on Sony’s operating results could occur during the launch period of the platform.
      An example of this kind of large-scale investment is the new PLAYSTATION®3 (“PS3”) platform scheduled to be launched in November 2006, related charges for which are particularly sensitiveanticipated to year-end holiday season demand.result in a significant loss within the Game segment for the fiscal year ending March 31, 2007, reflecting primarily an expected negative margin as a result of strategic pricing on PS3 hardware sales. In connection with this, during the fiscal year ended March 31, 2006, a write-down of approximately 25.0 billion yen for semiconductor components for use in PS3 was recorded within the Game segment.
Sony’s Game and Electronics segments are particularly sensitive to year-end holiday season demand.
      Since the Game segment offers a relatively small range of hardware products (PS one,(including PlayStation®2 PlayStation Portable) and PSPtm (PlayStation®Portable)) and a significant portion of overall demand is dependent uponweighted towards the year-end holiday season, demand, factors such as changes in the competitive environment, changes in market conditions, delays in the release of highly anticipated software titles and insufficient supply of hardware during the year-end holiday season can negatively impact the financial performance of the segment.
      The Electronics segment is also dependent upon year-end holiday season demand and, to a lesser extent than the Games segment, is susceptible to weak sales and supply shortages that prevent it from meeting demand for its products during this season.
Sony’s Music segment, Sony’s investment in SONY BMG MUSIC ENTERTAINMENT,
Operating results for Sony’s Pictures segment vary according to the cost of productions, customer acceptance, and competing products.
      Operating results for the Pictures segment’s motion picture and television productions can materially fluctuate depending primarily upon the cost of such productions and acceptance of such productions by the public, which are difficult to predict. In addition, the commercial success of the Pictures segment’s motion picture and television productions depend upon the acceptance of other competing productions, and the Pictures segment are subject to digital piracy, which may become increasingly more prevalent with the developmentavailability of new technologies.
      In Sony’s Music segment, at SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), as well as in the Pictures segment, the developmentalternative forms of digital technology has created new risks with respect to Sony’s ability to protect its copyrights. Advances in technology that enable the transferentertainment and downloading of digital audio and visual files from the Internet without authorization from the owners of rights to such content threaten the conventional copyright-based business model by making it easier to create and redistribute unauthorized audio and visual files. Such unauthorized distribution has adversely affected sales and operating results within the Music segment, as well as in Sony’s investment in SONY BMG, and threatens to adversely affect sales and operating income in the Pictures segment. These technological advances include new digital devices such as hard disk drive video and audio recorders, CD and DVD recorders and peer-to-peer digital distribution services. As a result, Sony has incurred and will continue to incur expenses to develop new services for the authorized digital distribution of music, movies and television programs and to combat unauthorized digital distribution of its copyrighted content. These initiatives will increase Sony’s near-term expenses and may not achieve their intended result.leisure activities.

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Sony’s Music segment and Sony’s investment in SONY BMG are dependent on establishing new artists, and Sony’s Music and Pictures segments, as well as Sony’s investment in SONY BMG, are subject to increasing prices for talent.
      The success of Sony’s Music segment and Sony’s investment in SONY BMG is highly dependent on establishing artists that appeal to customers, and the competition with other entertainment companies for such talent is intense. If the Music segment and SONY BMG are unable to find and establish new talented artists, sales, operating income and equity in net income (loss) of affiliated companies may be adversely affected. In addition, with respect to the Music and Pictures segments, as well as SONY BMG, Sony has experienced and may continue to experience significant increases in talent-related spending.
Sony’s Pictures segment is subject to labor interruption.
Sony’s Pictures segment is subject to labor interruption.
      The Pictures segment is dependent upon highly specialized union members who are essential to the production of motion pictures and television programs. A strike by one or more of these unions could delay or halt production activities. Such a delay or halt, depending on the length of time involved, could cause delay or interruption in the release of new motion pictures and television programs and thereby could adversely affect revenues and cash flows in the Pictures segment.
Operating results for Sony’s Pictures segment vary according to the cost of productions, customer acceptance, and competing products.
      Operating results for the Pictures segment’s motion picture and television productions can materially fluctuate depending primarily upon the cost of such productions and acceptance of such productions by the public, which are difficult to predict. In addition, the commercial success of the Pictures segment’s motion picture and television productions depend upon the acceptance of other competing productions, and the availability of alternative forms of entertainment and leisure activities.
In addition to the need for maintaining a prudent and prescient Asset Liability Management, Sony’s Financial Services segment is subject to valuation losses, shifts in customers’ demand and a variability in claims, at Sony Life Insurance Co., Ltd. and Sony Assurance Inc., as well as mandatory contributions to the Life Insurance Policyholders Protection Corporation of Japan by Sony Life.
In addition to the need for maintaining a prudent and prescient Asset Liability Management, Sony’s Financial Services segment is subject to unrealized holding losses and valuation losses associated with market fluctuations, shifts in customers’ demand and a variability in claims, at Sony Life Insurance Co., Ltd., Sony Assurance Inc. and Sony Bank Inc., as well as mandatory contributions to the Life Insurance Policyholders Protection Corporation of Japan by Sony Life.
      Sony’s Financial Services segment faces rapid shifts in customer demand from more profitable protection-orientated products such as term insurance to less profitable savings-oriented products such as endowment insurance, as well as a risk of unpredictable increases in insurance claims. This segment also may incur valuation losses and unrealized holding losses if there is a decrease in the value of securities and other financial instruments purchased for investment purposes decreases.resulting from fluctuations in interest rates, foreign exchange rates, or in the equity markets. In addition, if it fails to conduct Asset Liability Management (“ALM”) in a prudent and prescient manner to pursue an optimal combination of possible risks and expected returns on investment assets, financing liabilities and underwriting risks on insurance policy benefits, Sony’s Financial Services segment may not be able to keep providing competitive products and services to customers on a long-term basis. Sony Life Insurance Co., Ltd. (“Sony Life”), which constitutes the largest portion of this segment, is also subject to mandatory contributed reserves for the Life Insurance Policyholders Protection Corporation of Japan (“PPC”), the organization that provides support to insolvent life insurance companies. Sony Life’s estimated required contribution based on the assessments made by the PPC is incorporated in other expenses within Sony Life’s statements of income and long-term liabilities in its balance sheets in Japan.sheets. If there are bankruptcies of life insurers, solvent life insurers including Sony Life may be required to contribute additional financial resources.
Sony’s Music business, Sony’s investment in SONY BMG MUSIC ENTERTAINMENT, and the Pictures segment are subject to digital piracy, which may become increasingly more prevalent with the development of new technologies.
      In Sony’s Music business, including its investment in SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), as well as in the Pictures segment, the development of digital technology has created new risks with respect to Sony’s ability to protect its copyrights. Advances in technology that enable the transfer and downloading of digital audio and visual files from the Internet without authorization from the owners of rights to such content threaten the conventional copyright-based business model by making it easier to create and redistribute unauthorized audio and visual files. Such unauthorized distribution has adversely affected sales and operating results within the Music business, as well as in Sony’s investment in SONY BMG, and threatens to adversely affect sales and operating income in the Pictures segment. These technological advances include new digital devices such as hard disk drive video and audio recorders, CD and DVD recorders andpeer-to-peer digital distribution services. As a result, Sony has incurred and will continue to incur expenses to develop new services for the authorized digital distribution of music, movies and television programs and to combat unauthorized digital distribution of its copyrighted content. These initiatives will increase Sony’s near-term expenses and may not achieve their intended result.
Sony’s Music business and Sony’s investment in SONY BMG are dependent on establishing new artists, and together with Sony’s Pictures segment are subject to increasing prices for talent.
      The success of Sony’s Music business and Sony’s investment in SONY BMG is highly dependent on establishing artists that appeal to customers, and the competition with other entertainment companies for such talent is intense. If the Music business and SONY BMG are unable to find and establish new talented artists,

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sales, operating income and equity in net income (loss) of affiliated companies may be adversely affected. In addition, with respect to the Music business and the Pictures segment, as well as SONY BMG, Sony has experienced and may continue to experience significant increases in talent-related spending.
SONY BMG is subject to renewed regulatory approval from European Union competition authorities.
      In August 2004, Sony combined its recorded music business outside of Japan with the recorded music business of Bertelsmann AG forming SONY BMG, after approval from, among others, the European Commission competition authorities. On December 3, 2004, Impala, an international association consisting of 2,500 independent recorded music companies withinapplied for annulment of the Financial Services segment other thandecision to clear the merger. On July 13, 2006, the European Court of First Instance overruled the Commission’s decision to allow the merger to go forward, requiring the Commission tore-examine the merger. While the Commission completes its reexamination, Sony Life, such ascontinues to account for the results of Sony Bank Inc., thereBMG under the equity method. If the Commission does not approve the merger and the previously combined company is a risk of recording valuation losses ifforced to unwind the value of securities purchased for investment purposes decreases, or if there is a failure to conduct ALM in a prudentmerger, Sony may incur significant costs and prescient manner.
Sony may not be successful in implementingable to achieve its broadband network strategy.objectives with respect to its recorded music business.
Sony may not be successful in implementing its broadband network strategy.
      Sony believes that the utilization of broadband networks to facilitate the integration of hardware and content is essential to differentiating itself in the marketplace. Sony also believes that this strategy will

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eventually lead to consistent revenue streams. However, this strategy depends on the development (both inside and outside of Sony) of certain network technologies, coordination among Sony’s various business units, and the standardization of technological and interface specifications across business units and within industries. If Sony is not successful in implementing this strategy, it could adversely affect Sony’s mid- to long-term competitiveness.
Sony’s utilization of joint ventures and alliances within strategic business areas may not be successful.
Sony’s utilization of joint ventures and alliances within strategic business areas may not be successful.
      The composition of Sony during the last several years has reflected a shift towards the establishment of joint ventures and strategic alliances in order to supplement or replace functions that were previously performed by divisions of Sony Corporation or wholly ownedwholly-owned subsidiaries, to mitigate the burden of substantial investments and to achieve operating efficiencies through cooperation with other companies.
      Sony currently has investments in several joint ventures, including Sony Ericsson Mobile Communications, AB (“Sony Ericsson”), S.T. Liquid Crystal Display Corporation(“ST-LCD”), a joint venture with Toyota Industries Corporation, and other companies. In April 2004, Sony establishedS-LCD, Corporation a joint venture with Samsung for the production of 7th generation amorphous TFT LCD panels. In August 2004, Sony combined its recorded music business outside of Japan with the recorded music business of Bertelsmann AG forming the jointly-owned company, SONY BMG. In April 2005, a consortium led by Sony Corporation of America and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, completed the acquisition of Metro-Goldwyn-Mayer Inc. (“MGM”). If Sony and its partners are not able to reach their common financial objectives successfully, Sony’s financial performance as a whole may be adversely affected. Sony’s financial performance may also be temporarily adversely affected by the establishment of those alliances, joint ventures and strategic investments even if Sony and its partners remain on course to achieve those common objectives. Recent examples of how Sony’s financial performance has been adversely affected in the course of these types of relationships are the equity in net loss of Sony Ericsson incurred inlosses recorded for MGM Holdings, Inc. andS-LCD during the fiscal year ended March 31, 2003, totaling 20.82006 of 16.9 billion yen and the equity in net loss recorded at SONY BMG in the fiscal year ended March 31, 2005, totaling 3.47.2 billion yen, primarily as the result of restructuring costs.respectively.
Sony’s physical facilities and information systems are subject to damage as a result of disasters, outages, malfeasance or similar events.
Sony’s physical facilities and information systems are subject to damage as a result of disasters, outages, malfeasance or similar events.
      Sony’s headquarters, some of Sony’s major data centers and many of Sony’s most advanced device manufacturing facilities, including those for semiconductors, are located in Japan, where the possibility of

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disaster or damage from earthquake is generally higher than in other parts of the world. In addition, Sony’s offices and facilities, including those used for research and development, material procurement, manufacturing, logistics, sales and services are located throughout the world and are subject to possible destruction, temporary stoppage or disruption as a result of any number of unexpected events. If any of these facilities or offices were to experience a significant loss as a result of any of the above events, it could disrupt Sony’s operations, delay production, shipments and revenue, and result in large expenses to repair or replace these facilities or offices.
      In addition, as network and information systems become more important to Sony’s operating activities, network and information system shutdowns caused by unforeseen events such as power outages, disasters, terrorist attack, hardware or software defects, computer viruses and computer hacking pose increasing risks. Such an event could also result in the disruption of Sony’s operations, delay production, shipments and revenue, and result in large expenditures necessary to repair or replace such network information systems. Furthermore, Sony’s operating activities could be subject to risks caused by misappropriation, misuse, leakage, falsification, and disappearance of internal databases, including customer and vendor data.
Judging from the experience of other similarly situated companies, it is possible that Sony could be exposed to significant monetary liability if such risks were to materialize, and it is also possible that such events could harm Sony’s reputation and credibility. Considering the increasing social awareness concerning the importance of personal information and relevant legislation (Refer to “Government Regulations” in

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“Item “Item 4.Information on the Company”Company”), such risks are increasing particularly for businesses that handle a large amount of customer and consumer data. Although Sony continues to take precautions against such unforeseen risks, such as by undertaking efforts to educate operators and administrators who have access to databases about appropriate ways to protect such information, these measures may be insufficient, and Sony may be unable to avoid or prevent such events.
Sony is subject to financial and reputational risks due to product quality and liability issues.
Sony is subject to financial and reputational risks due to product quality and liability issues.
      Sony products, such as software (including software for mobile phone handsets) and electronic devices including semiconductors are becoming increasingly sophisticated and complicated as rapid advancements in technologies occur, and as demand increases for digital equipment. At the same time product quality and liability issues present greater risks. Such issues may occur not only in relation to Sony’s own branded products but also in association with appliances and devices designed or manufactured for third parties. Sony’s efforts to manage the rapid advancements in technologies and increased demand, as well as to control product quality, may not be successful, and if they are not, Sony may incur expenses in connection with, for example, product recalls, service and lawsuits, and Sony’s brand image and reputation as a producer of high-quality products may suffer. An example of this includes the recall by Dell Inc. and Apple Computer Inc. oflithium-ion battery packs, containing battery cells originally manufactured by Sony, used in their notebook computers (refer to “Performance by Product Category” for “Electronics” within“Operating Results for the Fiscal Year Ended March 31, 2006” in “Item 5.Operating and Financial Review and Prospects”).
Sony may be adversely affected by its employee benefit obligations.
Sony may be adversely affected by its employee benefit obligations.
      Sony recognizes 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”.Pensions.” Any decrease of pension asset value due to low returns from investments or increases in PBO due to a lower discount rate may increase unfunded pension obligations, resulting in an increase in pension expenses recorded as cost of sales or as a selling, general and administrative expense. Refer to Note 14 of Notes to Consolidated Financial Statements for more information regarding Sony’s pension and severance plans. Also refer to “Critical Accounting Policies” in “Item 5.Operating and Financial Review and Prospects”.Prospects.”
      Most pension assets and liabilities recognized on Sony’s consolidated balance sheets relate to Japanese plans, which are subject to the Japanese Defined Benefit Corporate Pension Plan Act pursuant to which Sony is required to meet certain financial criteria including periodic actuarial revaluation and annual settlement of

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gain or loss of the plan. In the eventuality that the actuarial reserve required by law exceeds the fair value of pension assets, Sony may be required to make an additional contribution to the plan, which would reduce consolidated cash flow.
Sony may be accused of infringing others’ intellectual property rights
Sony may be accused of infringing others’ intellectual property rights.
      Sony’s products incorporate a wide variety of technologies. Claims have been and could be asserted against Sony that such technology infringes intellectual property owned by others, and the outcome of any such claim would be uncertain.
Sony is dependent upon certain intellectual property rights of others, and Sony may not be able to continue to obtain necessary licenses to employ technology covered by such rights
Sony is dependent upon certain intellectual property rights of others, and Sony may not be able to continue to obtain necessary licenses to employ technology covered by such rights.
      Many of Sony’s products are designed to include intellectual property licensed from third parties. Based upon past experience and industry practice, Sony believes that it will be able to obtain or renew licenses relating to various intellectual properties useful in its business that it needs in the future; however, such licenses may not be available at all or on acceptable terms.
Increased reliance on external suppliers may increase financial, reputational and other risks to Sony.
Increased reliance on external suppliers may increase financial, reputational and other risks to Sony.
      With the increasing necessity of pursuing quick business development and high operating efficiency with limited managerial resources, Sony increasingly procures from third-party suppliers components (including LCD panels for televisions), and technologies (such as operating softwaresystems for PCs). In addition, it consigns to external suppliers extensive activities including procurement, manufacturing, logistics, sales and other services. Reliance on outside sources increases the chance that Sony will be unable to prevent products from

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incorporating defective or inferior third-party technology or components. Products with such defects can adversely affect Sony’s consolidated sales and its reputation for quality products. This reliance on external suppliers may also expose Sony to the effects of suppliers’ insufficient compliance with applicable regulations or infringement of third-party intellectual property rights.
Sony is subject to environmental and occupational health and safety regulations that can increase the costs of operations or limit its activities.
Sony is subject to environmental and occupational health and safety regulations that can increase the costs of operations or limit its activities.
      Sony is subject to environmental and occupational health and safety regulations relating to matters such as reductions or prohibitions in the use of harmful substances, comprehensive compliance and risk management practices in manufacturing activities and products, decreases in the level of standby power of certain products, protection of natural resources and remediation as a result of certain manufacturing operations and the recycling of products, batteries and packaging materials. The European Parliament and the Council of the European Union have published directives on waste electrical and electronic equipment and on the restriction of the use of certain hazardous substances in electrical and electronic equipment. TheseSimilar regulations are being formulated in other parts of the world including China.
      Since August 2005 these European directives will requirehave required 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 Junebeginning July 2006 require that new electrical and electronic equipment does not contain specified hazardous substances. WhileUnder the cost of these directives to Sony cannot be determined before regulations are adopted incurrent situation where all individual member states have not yet adopted regulations based upon these directives, the compliance cost for Sony cannot precisely be estimated, but it maycould be substantial. In the event it is determined that Sony has not complied in a material way with certain environmental laws and regulations, Sony may incur remediation costs or sustain injury to its brand image. Sony’s activities also may be limited if Sony is unable to comply with such regulations, which could adversely affect Sony’s results.
Sony is subject to the risks of operations in different countries.
Sony is subject to the risks of operations in different countries.
      A substantial portion of Sony’s activities are conducted outside Japan, including in developing and emerging markets. Sony operates its manufacturing subsidiaries in 1620 countries and its sales subsidiaries in

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43 countries. Countries where Sony manufactures its principal products are Japan, Malaysia, China, the U.S., the U.K., Singapore, Spain and Mexico.
      International operations bring challenges. Production in China and other Asian countries of electronics products increases the time necessary to supply products to Europe and the U.S., which can make it more difficult to meet changing customer demand and preferences. Concentration of the production of personal computerPC components in China and Taiwan could lead to production interruptions if a catastrophe or widespread contagion, similar to the spread of Severe Acute Respiratory Syndrome (“SARS”), occurs in the region. Further, Sony may encounter difficulty in planning and managing operations due to unfavorable political or economic factors, such as instability in the Middle East resulting from the Iraq War, cultural and religious conflicts, foreign exchange controls, or unexpected legal or regulatory changes such as import or export controls, nationalization of assets or restrictions on repatriation of returns from foreign investments.
American Depositary Share holders have fewer rights than shareholders and may not be able to enforce judgments based on U.S. securities laws.
American Depositary Shareholders have fewer rights than shareholders and may not be able to enforce judgments based on U.S. securities laws.
      The rights of shareholders under Japanese law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining Sony’s accounting books and records and exercising appraisal rights are available only to shareholders of record. Because the depositary, through its custodian agents, is the record holder of the shares underlying the American Depositary Shares (“ADSs”), only the depositary can exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares underlying ADSs in accordance with the instructions of ADS holders and will pay the dividends and distributions collected from Sony. However, ADS holders will not be able to bring a derivative action, examine Sony’s accounting books and records, or exercise appraisal rights through the depositary.
      Sony Corporation is incorporated in Japan with limited liability. A substantial portion of the assets of Sony Corporation are located outside the U.S. As a result, it may be more difficult for investors to enforce against Sony Corporation judgments obtained in U.S. courts predicated upon the civil liability provisions of the Federal securities laws of the U.S. or

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judgments obtained in other courts outside Japan. There is doubt as to the enforceability in Japanese courts, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the Federal securities laws of the U.S.
Item 4.Information on the Company
History and Development of the Company
      Sony Corporation, the ultimate parent company of Sony, was established in Japan in May 1946 as Tokyo Tsushin Kogyo Kabushiki Kaisha, a joint stock company (Kabushiki Kaisha) under the Japanese Commercial Code (Shoho). In January 1958, it changed its name to Sony Kabushiki Kaisha (“Sony Corporation” in English).
      In December 1958, Sony Corporation was listed on the Tokyo Stock Exchange (the “TSE”). In June 1961, Sony Corporation issued American Depositary Receipts (“ADRs”) in the U.S.
      In March 1968, Sony Corporation established CBS/ Sony Records Inc. in Japan, currently Sony Music Entertainment (Japan) Inc. (“SMEJ”), as a 50:50 joint venture company between Sony Corporation and CBS Inc. in the U.S. In January 1988, SMEJ became a wholly-owned subsidiary of Sony Corporation. In November 1991, SMEJ was listed on the Second Section of the TSE.
      In September 1970, Sony Corporation was listed on the New York Stock Exchange (the “NYSE”).
      In August 1979, Sony Corporation established Sony Prudential Life Insurance Co., Ltd. in Japan, currently Sony Life Insurance Co., Ltd. (“Sony Life”), as a 50:50 joint venture company between Sony Corporation and The Prudential Insurance Company of America. In March 1996, Sony Life became a wholly-owned subsidiary of Sony Corporation.Corporation, and in April 2004, with the establishment of a financial holding company Sony Financial Holdings Inc. (“SFH”), Sony Life became a wholly-owned subsidiary of SFH.

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      In July 1984, Sony Magnescale Inc., a subsidiary of Sony Corporation and currently Sony Precision Technology Inc., was listed on the Second Section of the TSE. In July 1987, Sony Chemicals Corporation, a subsidiary of Sony Corporation, was listed on the Second Section of the TSE.
      In January 1988, Sony Corporation acquired CBS Records Inc., a music business division of CBS Inc. in the U.S. In January 1991, CBS Records Inc. changed its name to Sony Music Entertainment Inc. (“SMEI”). In November 1989, Sony Corporation acquired Columbia Pictures Entertainment, Inc. in the U.S. In August 1991, Columbia Pictures Entertainment, Inc. changed its name to Sony Pictures Entertainment Inc. (“SPE”).
      In November 1993, Sony established Sony Computer Entertainment Inc. (“SCEI”) in Japan.
      In January 2000, acquisition transactions by way of exchanges of stock were completed such that SMEJ, Sony Chemicals Corporation, and Sony Precision Technology Inc. became wholly-owned subsidiaries of Sony Corporation. In June 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which iswas intended to be linked to the economic value of Sony Communication Network Corporation (“SCN”). Sony Corporation recently announced its intention to terminate theAll shares of subsidiary tracking stock. (For further information regarding subsidiary tracking stock referwere terminated and converted to “Memorandum and Articlesshares of Association”Sony’s common stock in “Item 10.Additional Information.”)December 2005. SCN was listed on the Mother’s market of the TSE in December 2005. Sony Corporation continues to hold a majority of shares of SCN.
      In October 2001, Sony Corporation established Sony Ericsson Mobile Communications, AB (“Sony Ericsson”), as a 50:50 joint venture company between Sony Corporation and Telefonaktiebolaget LM Ericsson of Sweden.Sweden, was established.
      In October 2002, Aiwa Co., Ltd. (“Aiwa”) became a wholly-owned subsidiary of Sony Corporation. In December 2002, Aiwa was merged into Sony Corporation merged with Aiwa.Corporation.
      In June 2003, Sony Corporation adopted the “Company with Committees” system in line with the revised Japanese Commercial Code. (Refer to “Board Practices” in “Item 6.Directors, Senior Management and EmployeesEmployees.”.)
      In April 2004, Sony Corporation established Sony Financial Holdings Inc. (“SFH”)SFH in Japan. Sony Life, Sony Assurance Inc., and Sony Bank became subsidiaries of SFH.

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      In April 2004,S-LCD Corporation, a joint venture between Sony Corporation and Samsung Electronics Co., Ltd. of Korea, was established in Korea.
      In August 2004, Sony combined its worldwide recorded music business, excluding its recorded music business in Japan, with the worldwide recorded music business of Bertelsmann AG forming the jointly-owned company,50:50 joint venture, SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”) in the U.S. and Europe..
      In April 2005, a consortium led by Sony Corporation of America (“SCA”) and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, completed the acquisition of Metro-Goldwyn-Mayer Inc. (“MGM”).
      Sony Corporation’s registered office is located at7-35, Kitashinagawa6-chome,Shinagawa-ku, Tokyo141-0001, Japan, telephone +81-3-5448-2111.+81-3-5448-2111.
      The agent in the U.S. for purposes of this Item 4 is Sony Corporation of America, 550 Madison Avenue, New York, NY 10022 (Attn: Office of the General Counsel).
Principal Capital Investments
      In the fiscal years ended March 31, 2003, 2004 and 2005, Sony’s capital expenditures (additions to fixed assets on the balance sheets) were 261.2 billion yen, 378.3 billion yen and 356.8 billion yen, respectively. Sony’s capital expenditures are expected to be 410 billion yen during the fiscal year ending March 31, 2006. For a breakdown of principal capital expenditures and divestitures (including interests in other companies), refer to “Item 5.Operating and Financial Review and Prospects”. Sony invested approximately 150 billion yen in the semiconductor business during the fiscal year ended March 31, 2005. Sony plans to invest 160 billion yen in the semiconductor business in the fiscal year ending March 31, 2006. To finance capital expenditures for the development and manufacturing of semiconductors such as Cell, a highly-advanced processor that will be embedded in a broad range of next-generation digital consumer electronics products, and key devices, including display devices, Sony raised 250 billion yen through the issuance of euro yen zero coupon convertible bonds in December 2003.
      In the fiscal years ended March 31, 2004, 2005 and 2006, Sony’s capital expenditures (additions to fixed assets on the balance sheets) were 378.3 billion yen, 356.8 billion yen and 384.3 billion yen, respectively. Sony’s capital expenditures are expected to be 460 billion yen during the fiscal year ending March 31, 2007. For a breakdown of principal capital expenditures and divestitures (including interests in other companies), refer to “Item 5.Operating and Financial Review and Prospects.” Sony invested approximately 140 billion yen in the semiconductor business during the fiscal year ended March 31, 2006. Sony plans to invest approximately 170 billion yen in the semiconductor business in the fiscal year ending March 31, 2007. To finance

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capital expenditures for the development and manufacturing of semiconductors such as Cell, a highly advanced processor that will be embedded in next-generation digital consumer electronics products, as well as capital expenditures related to other key devices, including display devices, Sony raised 250 billion yen through the issuance of Euro yen zero coupon convertible bonds in December 2003, as well as separate funds generated through self-financing. Refer to “Property, Plant and Equipment” below for a geographic distribution of these investments.
Business Overview
Important Changes during the Fiscal Year
      Effective April 1, 2005, Sony no longer breaks out its music business as a reportable segment as it no longer meets the materiality threshold. Accordingly, the results for Sony’s music business are now included within All Other and the results for the fiscal years ended March 31, 2004 and March 31, 2005 have been reclassified to All Other for comparative purposes. Results for the fiscal year ended March 31, 2006 in All Other include the results of SMEI’s music publishing business and SMEJ, excluding Sony’s Japan-based disc manufacturing business which, effective April 1, 2005, has been reclassified to the Electronics segment. However, results for the previous fiscal year in All Other include the consolidated results for SMEI’s recorded music business for the period through August 1, 2004, as well as the results for SMEI’s music publishing business and SMEJ excluding Sony’s Japan-based disc manufacturing business.
      On April 8, 2005, a consortium led by SCA and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, completed the acquisition of MGM. Under the terms of the acquisition agreement, the aforementioned investor group acquired MGM for 12.00 U.S. dollars in cash per MGM share, for a total purchase price of approximately 5.0 billion U.S. dollars. In conjunction with the acquisition, SPE entered into agreements toco-finance and produce new motion pictures with MGM, and to distribute MGM’s existing film and television content through SPE’s global distribution channels. MGM continues to operate under the Metro-Goldwyn-Mayer name as a private company headquartered in Los Angeles. As part of the acquisition, SCA invested 257 million U.S. dollars in exchange for 20 percent of the total equity capital. However, based on the percentage of common stock owned, Sony records 45 percent of MGM Holdings, Inc.’s net income (loss) as equity in net income of affiliated companies.
      In June 2006, MGM and SPE modified this arrangement with respect to theco-financing of motion pictures and further to allow MGM to bring its worldwide television distribution businessin-house and to consolidate substantially all of its worldwide home entertainment distribution activities with another major studio.
      In August 2004, Sony combined its recorded music business outside of Japan with the recorded music business of Bertelsmann AG forming SONY BMG, after approval from, among others, the European Commission competition authorities. On December 3, 2004, Impala, an international association consisting of 2500 independent recorded music companies applied for annulment of the decision to clear the merger. On July 13, 2006, the European Court of First Instance overruled the Commission’s decision to allow the merger to go forward, requiring the Commission tore-examine the merger. While the Commission completes its reexamination, Sony continues to account for the results of Sony BMG under the equity method.
      Commencing April 1, 2005, Sony partly realigned its product category configuration in the Electronics segment. Accordingly, results of the previous fiscal year have been reclassified. The primary changes are as follows;
Main ProductPrevious Product CategoryNew Product Category
Professional-use projector“Televisions”“Information and Communications”

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      As
Products and Services
      The following table sets forth Sony’s sales and operating revenue by operating segments. Figures in parentheses indicate percentage of sales and operating revenue.
                          
  Fiscal Year Ended March 31
   
  2004 2005 2006
       
  (Yen in millions)
Electronics  4,858,631   (64.8)  4,806,494   (67.1)  4,763,555   (63.7)
Game  753,732   (10.1)  702,524   (9.8)  918,251   (12.3)
                   
Pictures  756,370   (10.1)  733,677   (10.3)  745,859   (10.0)
                   
Financial Services  565,752   (7.5)  537,715   (7.5)  720,566   (9.6)
                   
All Other  561,906   (7.5)  379,206   (5.3)  327,205   (4.4)
                   
 Sales and operating revenue  7,496,391   (100.0)  7,159,616   (100.0)  7,475,436   (100.0)
                   
Electronics
      The following table sets forth Sony’s Electronics segment sales and operating revenue by product categories. Figures in parentheses indicate percentage of sales and operating revenue.
                         
  Fiscal Year Ended March 31
   
  2004 2005 2006
       
  (Yen in millions)
Audio
  675,496   (13.9)  571,864   (11.9)  536,187   (11.3)
Video
  949,320   (19.6)  1,036,328   (21.5)  1,021,325   (21.4)
Televisions
  884,600   (18.2)  921,195   (19.2)  927,769   (19.5)
Information and Communications
  878,855   (18.1)  816,150   (17.0)  842,537   (17.7)
Semiconductors
  253,237   (5.2)  246,314   (5.1)  240,771   (5.0)
Components
  623,799   (12.8)  619,477   (12.9)  656,768   (13.8)
Other
  593,324   (12.2)  595,166   (12.4)  538,198   (11.3)
                   
Electronics Total  4,858,631   (100.0)  4,806,494   (100.0)  4,763,555   (100.0)
                   
Note:
Sony manages the Electronics segment as a single operating segment. However, Sony believes that the product category information in the Electronics segment is useful to investors in understanding the sales contributions of the products in this business segment.
      In the Electronics segment, Sony is engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer and professional markets. Sony’s principal manufacturing facilities are located in Japan, Malaysia, China, the U.S., Singapore, Spain and Mexico, and its products are marketed by sales subsidiaries and unaffiliated local distributors and sold through direct sales via the Internet throughout the world. In addition to internationalizing its production operations, Sony has been promoting the transfer of research and development activities and management functions overseas to bring its overseas operations into closer proximity to local communities and markets.

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Audio:
      “Audio” includes home audio, portable audio, car audio and car navigation systems.
Video:
      “Video” includes video cameras, digital cameras, video decks, and DVD-Video players/recorders.
Televisions:
      “Televisions” includes televisions incorporating cathode ray tubes (“CRTs”), rear-projection televisions, liquid crystal displays (“LCD”) televisions, and computer displays.
Information and Communications:
      “Information and Communications” includes PCs, printer systems, broadcast- and professional-use audio, video and monitors and other professional-use equipment.
Semiconductors:
      “Semiconductors” includes LCDs, charge coupled devices (“CCDs”) and other semiconductors.
Components:
      “Components” includes optical pickups, batteries, audio/video/data recording media, and data recording systems.
Other:
      “Other” includes sales to outside customers, such as sales of August 1, 2004,mobile phone handsets to Sony combined its recorded music business outside of Japan, with the recorded music business of Bertelsmann AG. The newly formed company, SONY BMG, is 50 percent owned by each parent company. Under U.S. GAAP, SONY BMG is accounted forEricsson by Sony using the equity methodEMCS Corporation (“Sony EMCS”), an Integrated Circuit (“IC”) card business, CD and since August 1, 2004, 50 percent of the net profits or losses of this business have been included under “equity in net income (loss) of affiliated companies.”
      In connection with the establishment of this joint venture, Sony’s non-Japan basedDVD disc manufacturing and physical distribution businesses, formerlyand products and services that are not included within the Music segment, have been reclassified to the Electronics segment to recognize the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. Results for the previous fiscal year in the Electronics and Music segments have been restated to account for this reclassification.
      In the Music segment, results for this fiscal year only include the results of SMEI’s recorded music business for the months of April through July 2004, and results of SMEI’s music publishing business and SMEJ’s for the entire fiscal year. However, results for the previous fiscal year in the Music segment include the consolidated results for SMEI’s recorded music business for all twelve months of the fiscal year, as well as the full fiscal year results for SMEI’s music publishing business and SMEJ.
      In July 2004, Sony completed the integration of its semiconductor manufacturing business in order to establish a more efficient and coordinated semiconductor supply structure by transferring Sony Computer Entertainment’s semiconductor manufacturing operation from the Game segment to the Electronics segment. As a result of this transfer, sales revenue and expenditures associated with this operation are now recorded

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within the “Semiconductor” category in the Electronics segment. The results for the same period of the prior fiscal years have not been restated as such comparable figures cannot be practically obtained given that the semiconductor manufacturing operation was not operated as a separate line of business within the Game segment. This integration of the semiconductor manufacturing businesses is a part of Sony’s semiconductor strategy of utilizing semiconductor technologies and manufacturing equipment originally developed or designed for the Game business within Sony as a whole.
      On April 8, 2005 a consortium led by SCA and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, completed the acquisition of MGM. Under the terms of the acquisition agreement, the aforementioned investor group acquired MGM for $12.00 in cash per MGM share, for a total purchase price of approximately $5.0 billion. In conjunction with the acquisition, SPE entered into agreements to co-finance and produce new motion pictures with MGM, and to distribute MGM’s existing film and television content through SPE’s global distribution channels. MGM will continue to operate under the Metro-Goldwyn-Mayer name as a private company headquartered in Los Angeles. As part of the acquisition, SCA invested $257 million in exchange for 20 percent of the total equity capital. However, based on the percentage of common stock owned, Sony will record 45 percent of MGM’s net income (loss) as equity in net income of affiliated companies.
      Commencing April 1, 2004, Sony partly realigned its product category configuration in the Electronics segment. Accordingly, results of the previous fiscal year have been reclassified. The primary changes are as follows;
above categories.
Main ProductPrevious Product CategoryNew Product Category
AIWA“Other”“Audio” or “Video” or “Televisions”
Set-top box“Video”“Televisions”
Products and Services
Game
      The following table sets forth Sony’s sales and operating revenue by operating segments and product categories. Figures in parentheses indicate percentage of sales and operating revenue.
                          
  Fiscal Year Ended March 31
   
  2003 2004 2005
       
  (Yen in millions)
Electronics                        
 
Audio
  784,114   (10.5)  675,496   (9.0)  571,864   (8.0)
 
Video
  828,308   (11.1)  949,261   (12.7)  1,034,736   (14.5)
 
Televisions
  981,655   (13.1)  925,501   (12.3)  957,122   (13.4)
 
Information and Communications
  836,724   (11.2)  834,757   (11.1)  778,374   (10.9)
 
Semiconductors
  204,710   (2.7)  253,237   (3.4)  246,314   (3.4)
 
Components
  527,782   (7.1)  623,799   (8.3)  619,477   (8.6)
 
Other
  460,888   (6.2)  576,217   (7.7)  578,349   (8.1)
                   
 Segment Total  4,624,181   (61.9)  4,838,268   (64.5)  4,786,236   (66.9)
                   
Game  936,274   (12.5)  753,732   (10.1)  702,524   (9.8)
                   
Music  433,147   (5.8)  409,487   (5.5)  216,779   (3.0)
                   
Pictures  802,770   (10.7)  756,370   (10.1)  733,677   (10.2)
                   
Financial Services  509,398   (6.8)  565,752   (7.5)  537,715   (7.5)
                   
Other  167,863   (2.3)  172,782   (2.3)  182,685   (2.6)
                   
 Sales and operating revenue  7,473,633   (100.0)  7,496,391   (100.0)  7,159,616   (100.0)
                   

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Notes:
Sony manages the Electronics segment as a single operating segment. However, Sony believes that the product category information in the Electronics segment is useful to investors in understanding the sales contributions of the products in this business segment.
In the third quarter beginning October 1, 2003, the recognition method of insurance premiums received on certain products at Sony Life was changed from being recorded as revenues to being offset against the related provision for future insurance policy benefits, reducing revenue in the Financial Services segment in the fiscal year ended March 31, 2004 and in the fiscal year ended March 31, 2005, by 30.8 billion yen and 67.5 billion yen, respectively. This change did not have a material effect on operating income in the Financial Services segment.
Electronics
      In the Electronics segment, Sony is engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer and professional markets. Sony’s principal manufacturing facilities are located in Japan, Malaysia, China, the U.S., the U.K., Singapore, Spain and Mexico, and its products are marketed by sales subsidiaries and unaffiliated local distributors and sold through direct sales via the Internet throughout the world. In addition to internationalizing its production operations, Sony has been promoting the transfer of research and development activities and management functions overseas to bring its overseas operations into closer proximity to local communities and markets.
Audio:
      “Audio” includes home audio, portable audio, car audio and car navigation systems.
Video:
      “Video” includes video cameras, digital still cameras, video decks, and DVD-Video players/recorders.
Televisions:
      “Televisions” includes televisions incorporating cathode ray tubes (“CRTs”), projection televisions, plasma televisions, liquid crystal displays (“LCDs”) televisions, computer displays, and CRTs.
Information and Communications:
      “Information and Communications” includes PCs, printer systems, personal digital assistants, and broadcast-and professional-use audio, video and monitors and other professional-use equipment.
Semiconductors:
      “Semiconductors” includes LCDs, charge coupled devices (“CCDs”) and other semiconductors.
Components:
      “Components” includes optical pickups, batteries, audio/video/data recording media, and data recording systems.
Other:
      “Other” includes sales to outside customers, such as sales of mobile phone handsets to Sony Ericsson, by Sony EMCS Corporation (“Sony EMCS”), CD and DVD disc manufacturing and physical distribution businesses, and products and services which are not included in the above categories.

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Game
      SCEI develops, produces, manufactures, markets and distributes PlayStation, PS one, PlayStation 2 (“PS2”) and PlayStation Portable hardware and related software in Japan, and is developing the PLAYSTATION 3 entertainment system. Sony Computer Entertainment America Inc. (“SCEA”) and Sony Computer Entertainment Europe Ltd. (“SCEE”) market and distribute PlayStation, PS one, PS2 and PlayStation Portable
      Sony Computer Entertainment Inc. (“SCEI”) develops, produces, markets and distributes PlayStation®, PS onetm, PlayStation®2 (“PS2”) and PSPtm (PlayStation®Portable) (“PSP”) hardware and related software in Japan, and is developing the PLAYSTATION®3 (“PS3”) computer entertainment system scheduled to be launched in November 2006. Sony Computer Entertainment America Inc. (“SCEA”) and Sony Computer Entertainment Europe Ltd. (“SCEE”) market and distribute PlayStation, PS one, PS2 and PSP hardware, and develop, produce, manufacture, market and distribute related software in the U.S. and Europe. SCEI, SCEA and SCEE enter into licenses with third-party software developers.
Music
      SMEI, through its ownership of SONY BMG, a 50 percent owned joint venture with Bertelsmann AG (the financial results of which impact Sony’s equity in net income (loss) of affiliated companies), and SMEJ produce recorded music and music videos through contracts with many artists worldwide in all musical genres. SMEJ also produces, manufactures, markets and distributes CDs, MDs, DVDs, UMDs, Super Audio CDs, and pre-recorded audio and video cassettes and produces and manufactures CD-ROMs and DVD-ROMs.
      SMEI’s operations primarily consist of its music publishing business which owns and acquires rights to musical compositions, exploits and markets these compositions and receives royalties or fees for their use.
Pictures
      Global operations in the Pictures segment encompass motion picture production, acquisition and distribution; television production, acquisition and distribution; home entertainment production, acquisition and distribution; television broadcasting; digital production and online distribution; and operation of studio facilities.
      SPE’s motion picture arm, the Columbia TriStar Motion Picture Group, includes SPE’s principal motion picture production organizations, Columbia Pictures, TriStar Pictures, Screen Gems and Sony Pictures Classics, as well as Sony Pictures Home Entertainment, Sony Pictures Releasing and Sony Pictures Releasing International. SPE is an equity investor in Revolution Studios and has the rights to market and distribute its motion picture product throughout most of the world. Upon delivery of Revolution Studios’ films, SPE advances a portion of the production cost and then incurs distribution and marketing costs in those markets where SPE distributes. SPE retains a fee for its distribution services in addition to its participation in Revolution Studios’ profits and losses as a result of its equity ownership stake. In conjunction with the acquisition of MGM in April 2005 by SCA and its equity partners, SPE entered into agreements to co-finance and produce new motion pictures with MGM and to distribute MGM’s existing film and television content through SPE’s global distribution channels.
      SPE’s Television Group is primarily comprised of Sony Pictures Television and Sony Pictures Television International with various broadcast channel investments. SPE develops and produces network television series, first-run syndication programming, made-for-cable programming, daytime serials, syndicated games shows, animated series, made for television movies, miniseries and other television programming and distributes such programs to the networks, syndication and cable markets.
      Sony Pictures Digital operates SPE’s digital production and online distribution businesses including Sony Online Entertainment, as well as operating Sony Pictures Imageworks, Sony Pictures Animation and Sony Pictures Digital Sales & Marketing.
      SPE manages a studio facility, Sony Pictures Studios, which includes post production facilities, at SPE’s world headquarters in Culver City, California. A second studio facility, The Culver Studios, which was owned and operated by SPE, was sold by SPE in April 2004. SPE is leasing back a portion of this facility for a two-year period.

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Financial Services
      In the Financial Services segment, on April 1, 2004 Sony established a wholly-owned subsidiary, SFH, a holding company composed of Sony Life, Sony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”) with the aim of integrating various financial services including savings and loans, and offering individual customers high value-added products and high-quality services.
      Sony conducts insurance operations primarily through Sony Life, a Japanese life insurance company, and Sony Assurance, a Japanese non-life insurance company, both wholly owned by SFH. Sony also operates an Internet-based banking business in Japan through Sony Bank, which is an 84.2 percent directly owned subsidiary of SFH. Sony is also engaged in a leasing and credit financing business in Japan through Sony Finance International Inc. (“Sony Finance”).
Other
      The Other segment is mainly comprised of an advertising agency business in Japan; Sony Communication Network (“SCN”), an Internet-related service business subsidiary operating mainly in Japan; a retail seller of imported general merchandise in Japan; an in-house facilities management business in Japan and an Integrated Circuit (“IC”) card business.
Pictures
      Global operations in the Pictures segment encompass motion picture production, acquisition and distribution; television production, acquisition and distribution; home entertainment production, acquisition and distribution; television broadcasting; digital content creation and distribution; and operation of studio facilities.
      SPE’s motion picture arm, the Columbia TriStar Motion Picture Group, includes SPE’s principal motion picture production organizations, Columbia Pictures, TriStar Pictures, Screen Gems and Sony Pictures Classics, as well as Sony Pictures Home Entertainment, Sony Pictures Releasing and Sony Pictures Releasing International. SPE also holds a 7.5 percent equity interest in Revolution Studios and has the rights to market and distribute its motion picture product throughout most of the world. Upon delivery of Revolution Studios’ films, SPE advances a portion of the production cost and then incurs distribution and marketing costs in those markets where SPE distributes. SPE retains a fee for its distribution services in addition to its participation in

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Revolution Studios’ profits and losses as a result of its equity ownership stake. In conjunction with the acquisition of MGM in April 2005 by SCA and its equity partners, SPE entered into agreements toco-finance and produce new motion pictures with MGM and to distribute MGM’s existing film and television content through SPE’s global distribution channels.
      In June 2006, MGM and SPE modified this arrangement with respect to theco-financing of motion pictures and further to allow MGM to bring its worldwide television distribution businessin-house and to consolidate substantially all of its worldwide home entertainment distribution activities with another major studio.
      SPE’s Television Group is primarily comprised of Sony Pictures Television and Sony Pictures Television International with various broadcast channel investments. SPE develops and produces network television series, first-run syndication programming, made-for-cable programming, daytime serials, syndicated games shows, animated series, made for television movies, miniseries and other television programming and distributes such programs to the networks, syndication and cable markets.
      Sony Pictures Digital operates SPE’s digital content creation and distribution businesses including Sony Online Entertainment, as well as operating Sony Pictures Imageworks and Sony Pictures Animation.
      SPE manages a studio facility, Sony Pictures Studios, which includes post production facilities, at SPE’s world headquarters in Culver City, California. A second studio facility, The Culver Studios, which was owned and operated by SPE, was sold by SPE in April 2004. SPE initially leased back a portion of this facility for a two-year period and subsequently extended the lease for an additional one-year period expiring April 20, 2007.
Financial Services
      In the Financial Services segment, on April 1, 2004 Sony established a wholly-owned subsidiary, SFH, a holding company for Sony Life, Sony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”), with the aim of integrating various financial services including savings and loans, and offering individual customers high value-added products and high-quality services.
      Sony conducts insurance operations primarily through Sony Life, a Japanese life insurance company, and Sony Assurance, a Japanese non-life insurance company, both wholly-owned by SFH. Sony also operates an Internet-based banking business in Japan through Sony Bank, which is an 88 percent owned subsidiary of SFH. Aside from SFH, Sony is also engaged in a leasing and credit financing business in Japan through Sony Finance International Inc. (“Sony Finance”), a wholly-owned subsidiary of Sony Corporation.
All Other
      All Other is mainly comprised of SMEJ, a Japanese domestic recorded music business that produces recorded music and music videos through contracts with many artists in all musical genres; SMEI’s music publishing business, which owns and acquires rights to musical compositions, exploits and markets these compositions and receives royalties or fees for their use; Sony Communication Network Corporation (“SCN”), an Internet-related service business subsidiary operating mainly in Japan; an in-house facilities management business in Japan; and an advertising agency business in Japan.

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Sales and Distribution
      The following table shows Sony’s sales in each of its major markets for the periods indicated. Figures in parentheses indicate the percentage of worldwide sales and operating revenue for which the particular market accounts.
                          
  Fiscal Year Ended March 31
   
  2003 2004 2005
       
  (Yen in millions)
Japan  2,093,880   (28.0)  2,220,747   (29.6)  2,100,793   (29.3)
United States  2,403,946   (32.2)  2,121,110   (28.3)  1,977,310   (27.6)
Europe  1,665,976   (22.3)  1,765,053   (23.6)  1,612,536   (22.6)
Other Areas  1,309,831   (17.5)  1,389,481   (18.5)  1,468,977   (20.5)
                   
 Sales and operating revenue  7,473,633   (100.0)  7,496,391   (100.0)  7,159,616   (100.0)
                   
      The following table shows Sony’s sales in each of its major markets for the periods indicated. Figures in parentheses indicate the percentage of worldwide sales and operating revenue for which the particular market accounts.
                          
  Fiscal Year Ended March 31
   
  2004 2005 2006
       
  (Yen in millions)
Japan  2,220,747   (29.6)  2,100,793   (29.3)  2,168,723   (29.0)
United States  2,121,110   (28.3)  1,977,310   (27.6)  1,957,644   (26.2)
Europe  1,765,053   (23.6)  1,612,536   (22.6)  1,715,704   (23.0)
Other Areas  1,389,481   (18.5)  1,468,977   (20.5)  1,633,365   (21.8)
                   
 Sales and operating revenue  7,496,391   (100.0)  7,159,616   (100.0)  7,475,436   (100.0)
                   
Electronics
      Sony’s electronics products and services are marketed throughout the world under the trademark “Sony”, which has been registered in 204 countries and territories.
      In most cases, sales of Sony’s electronics products are made to sales subsidiaries of Sony Corporation located in or responsible for sales in the countries and territories where Sony’s products and services are marketed. These subsidiaries then sell those products to local distributors and dealers. In some regions, sales of certain products and services are made directly to local distributors by Sony Corporation.
      Sales in the Electronics segment are particularly seasonal and also vary significantly with the timing of new product introductions and economic conditions of each country. Sales for the third quarter ending December 31 of each fiscal year are generally higher than other quarters of the same fiscal year due to demand in the year-end holiday season.
Japan:
      Sony Marketing (Japan) Inc. markets consumer electronics products through retailers and also markets professional electronics products and services. For electronic components, Sony sells products directly to wholesalers and manufacturers.
United States:
      Sony markets its electronics products and services through Sony Electronics Inc. and other wholly owned subsidiaries in the U.S.
Europe:
      In Europe, Sony’s consumer electronics products and services are marketed through sales subsidiaries including Sony United Kingdom Limited, Sony Deutschland G.m.b.H., and Sony France S.A. Sales of electronics products for professional use, electronic components, and services are made through several divisions, differentiated by product, covering all of Europe.
Other Areas:
      In overseas areas other than the U.S. and Europe, Sony’s electronics products and services are marketed throughout the world under the trademark “Sony”, which has been registered in 204 countries and territories.
      In most cases, sales of Sony’s electronics products are made tothrough sales subsidiaries ofincluding Sony Corporation located in or responsible for salesof Hong Kong Limited, Sony Gulf FZE in the countries and territories where Sony’s products and services are marketed. These subsidiaries then sell those products to local distributors and dealers. In some regions, sales of certain products and services are made directly to local distributors by Sony Corporation.
      Sales in the Electronics segment are particularly seasonal, and also vary significantly with the timing of new product introductions and economic conditions of each country. Sales for the third quarter ending December 31 of each fiscal year are generally higher than other quarters of the same fiscal year due to demand in the year-end holiday season.
Japan:
      Sony Marketing (Japan) Inc. markets consumer electronics products through retailers and also markets professional electronics products and services. For electronic components, Sony sells products directly to wholesalers and manufacturers.

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United States:
      Sony markets its electronics products and services through Sony Electronics Inc. and other wholly-owned subsidiaries in the U.S.
Europe:
      In Europe, Sony’s consumer electronics products and services are marketed through sales subsidiaries including Sony United Kingdom Limited, Sony Deutschland G.m.b.H., and Sony France S.A. Sales of electronics products for professional use, electronic components, and services are made through several divisions, differentiated by product, covering all of Europe.
Other Areas:
      In overseas areas other than the U.S. and Europe, Sony’s electronics products and services are marketed through sales subsidiaries including Sony Corporation of Hong Kong Limited, Sony Gulf FZE in the United Arab Emirates, Sony Electrónicos de México, S.A. de C.V., Sony of Canada Ltd., and Sony Australia Limited.
Game
      SCEI, SCEA, and SCEE market and distribute PlayStation, PS one, PS2, and PlayStation Portable entertainment hardware and related software.
      Sales in the Game segment are particularly dependent on holiday season demand, in addition to the timing of the introduction of attractive software.
Music
      SMEJ produces, manufactures, markets, and distributes CDs, MDs, DVDs, Super Audio CDs, and pre-recorded audio and video software. SMEJ conducts business in Japan under “Sony Records”, “Epic Records”, “Ki/oon Records”, “SMEJ Associated Records”, “Defstar Records”, and other labels.
      SMEI owns and acquires rights to musical compositions, exploits and markets these compositions, receives royalties or fees for their use and conducts its music publishing business in countries other than Japan primarily under the Sony/ ATV Music Publishing name.
      SMEI, through its 50 percent ownership of SONY BMG, a joint venture with Bertelsmann AG (the financial results of which impact Sony’s equity in net income (loss) of affiliated companies), produces revenue through the marketing, sales and licensing of recorded music in physical and digital formats and conducts business under “Columbia Records “, “Epic Records”, “Arista Records”, “RCA Records” and other labels.
      In May 2004, Sony officially launched the Connect music store, a digital music downloading service. The Connect music store offers consumers music product from SONY BMG as well as other major and independent labels and independent artists.
Pictures
      SPE, with global operations in 67 countries, generally retains all rights relating to the worldwide distribution of its internally produced motion pictures, including rights for theatrical exhibition, videocassette and DVD distribution, pay and free television exhibition and other markets. SPE also acquires distribution rights to motion pictures produced by other companies, and jointly produces films with other studios or production companies. These rights may be limited to particular geographic regions, specific forms of media or period of time. SPE uses its own distribution service business, Sony Pictures Releasing, for the U.S. theatrical release of its films and for theatrical release of films acquired from and produced by others.

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

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Game
      SCEI, SCEA, SCEE and subsidiaries in Asia market and distribute PlayStation, PS one, PS2, and PSP entertainment hardware and related software.
      Sales in the Game segment are dependent on the timing of the introduction of attractive software and a significant portion of overall demand is weighted towards the year-end holiday season.
Pictures
      SPE, with global operations in 72 countries, generally retains all rights relating to the worldwide distribution of its internally produced motion pictures, including rights for theatrical exhibition, videocassette, DVD andBlu-ray distribution, pay and free television exhibition and other markets. SPE also acquires distribution rights to motion pictures produced by other companies, and jointly produces films with other studios or production companies. These rights may be limited to particular geographic regions, specific forms of media or period of time. SPE uses its own distribution service business, Sony Pictures Releasing, for the U.S. theatrical release of its films and for the theatrical release of films acquired from and produced by others.
      Outside the U.S., SPE generally distributes and markets its films through one of its Sony Pictures Releasing International subsidiaries. In certain countries, however, SPE has joint distribution arrangements with other studios or arrangements with independent local distributors.
      SPE’s theatrical release strategy focuses on offering a diverse slate of films with a mix of genres, talent and budgets. For the fiscal year ending March 31, 2007, 48 films are currently slated for release by SPE, including 16 films under the Columbia banner, six films under the Screen Gems or TriStar banner, 19 Sony Pictures Classics releases, five Revolution Studios releases, and two filmsco-financed with MGM. SPE has a motion picture library of more than 3,500 feature films, including 12 with Best Picture Academy Awards®. Currently, SPE is converting its library (including acquired product) to a digital format and approximately 2,000 titles have been converted. In addition, SPE and four other motion picture studios are equal investors in Movielink LLC, an online movie download service offering feature films on anon-demand basis.
      The worldwide home entertainment distribution of SPE’s motion pictures and television programming (and programming acquired or licensed from others) is handled through Sony Pictures Home Entertainment, except in certain countries where SPE has joint distribution arrangements with other studios or arrangements with independent local distributors. Product is distributed on both videocassette and DVD formats.
      SPE produces local language programming in key markets around the world, some of which areco-produced with local partners and sellsSPE-owned formats in approximately 25 countries. This programming, along with SPE’s library of television programming and motion pictures, is licensed to affiliated and independent stations and broadcasters in the U.S., and to affiliated and independent international television stations and other broadcasters throughout the world. In the U.S., SPE owns and operates the cable channel GSN (formerly Game Show Network) jointly with Liberty Media Corporation. SPE also has investments in more than 40 international networks, which are available in more than 100 countries worldwide.
Financial Services
      Sony Life conducts a life insurance business primarily in Japan, utilizing Sony Life’s highly trained Lifeplanner® life insurance professionals and independent agencies to serve individual customers. Sony Life provides tailor-made life insurance products that are optimized for each customer. In order to provide a sense of reassurance to its diversified customer base, Sony Life provides an extensive lineup of products and services supplemented with consulting and after-salesfollow-up. As of March 31, 2006, Sony Life employed 3,826 Lifeplanner life insurance professionals. Sony Life maintains an extensive service network including 83 Lifeplanner branch offices, 26 regional sales offices, and 2,264 independent agencies in Japan. In addition, Sony has aimed to apply Sony Life’s insurance expertise in countries other than Japan, operating Sony Life Insurance (Philippines) Corporation in the Philippines since November 1999.

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      Sony Assurance has conducted a non-life insurance business in Japan since October 1999 utilizing a “direct insurance provider” business model. As a direct insurance provider, Sony Assurance communicates directly with customers over the telephone or via the Internet. Theseone-to-one relationships help to provide a clear understanding of customers’ opinions and needs, which Sony Assurance can reflect in its product and service offerings. Sony Assurance principally sells automobile insurance, as well as medical and cancer insurance.
      Sony Bank has conducted banking operations in Japan since June 2001 and, as a general rule, provides its services via the Internet 24 hours a day, 365 days a year. Sony Bank has developed new products and services in a proactive and flexible manner based on its consistent policy of providing financial services, primarily for asset management, to independent individual customers. Sony Bank’s main product and service lineups now include yen deposits, foreign currency deposits in eight currencies, investment trusts, and mortgage loans. By using the MONEYKit tool, Sony Bank’s transaction channel, account holders can invest and manage assets according to their life plans over the Internet.
      Sony Finance conducts a leasing business for corporations, and a consumer financing business including “My Sony Card,” a credit card for individual customers, through Sony’s electronic retailers and other affiliated partners.
All Other
      SMEJ produces, markets, and distributes CDs, MDs, DVDs, and pre-recorded audio and video software. SMEJ conducts business in Japan under “Sony Records,” “Epic Records,” “Ki/oon Records,” “SMEJ Associated Records,” “Defstar Records,” and other labels.
      SMEI owns and acquires rights to musical compositions, exploits and markets these compositions, receives royalties or fees for their use and conducts its music publishing business in countries other than Japan primarily under the Sony/ ATV Music Publishing name.
      SCN provides Internet broadband network services to subscribers as well as creating and distributing content through its portal service to various platforms including PCs, mobile phones and other home electronics devices including TVs and game consoles. Both fee-based and charge-free services are provided via these content distribution platforms.
Sources of Supply
      Sony pursues procurement of raw materials, parts and components to be used in the production of its products on a global basis on the most favorable terms that it can achieve. These items are purchased from various suppliers around the world. Generally, Sony maintains multiple suppliers for most significant categories of parts and components.
      However, when raw materials, parts and components become scarce, the cost of production rises. During the fiscal year ended March 31, 2005, prices of raw materials including iron and crude oil were high, and as a

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result, products that consume these materials in the manufacturing process rose significantly. Furthermore, there is growing concern that the supply of certain silicon devices such as NAND flash memory and analog semiconductors may become limited because of the growing demand among manufacturers for digital audio player components.
      However, when raw materials, parts and components become scarce, the cost of production rises. For example, the recent sharp rise in the market price of copper has the potential to proportionately affect the cost of parts that utilize copper such as printed circuit boards and power cables. In addition, there is growing concern that the price of resin may rise resulting in an increase to the cost of plastic parts.
After-Sales Service
      In the Electronics and Game segments, Sony provides repair and servicing functions in the areas where its products are sold. Sony provides these services through its own service centers, factories, authorized independent service centers, authorized servicing dealers and subsidiaries.
      In line with the industry practice of the electronics and game businesses, almost all of Sony’s products sold in Japan carry a warranty, generally for a period of one year from the date of purchase, covering repairs, free of charge, in the case of malfunctions in the course of ordinary use of the product. In the case of broadcast- and professional-use products, Sony maintains support contracts with customers in addition to warranties. Overseas warranties are generally provided for various periods of time depending on the product and the area where its products are sold. Sony provides these services through its own service centers, factories, authorized independent service centers, authorized servicing dealers and subsidiaries.
      In line with the industry practices of the electronics and game businesses, almost all of Sony’s products sold in Japan carry a warranty, generally for a period of one year from the date of purchase, covering repairs, free of charge, in the case of a malfunction in the course of ordinary use of the product. In the case of broadcast- and professional-use products, Sony maintains support contracts with customers in addition to

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warranties. Overseas warranties are generally provided for various periods of time depending on the product and the area in which it is marketed.
      To further ensure customer satisfaction, Sony maintains customer information centers in its principal markets.
Patents and Licenses
      Sony has a number of Japanese and foreign patents relating to its products. Sony is licensed to use a number of patents owned by others, covering a wide range of products. Certain licenses are important to Sony’s business, such as that for optical disc related products. Sony products that employ
      Sony has a number of Japanese and foreign patents relating to its products. Sony is licensed to use a number of patents owned by others, covering a wide range of products. Certain licenses are important to Sony’s business, such as that for optical disc related products. Sony products that employDVD-Video player functions, including PS2 hardware, are substantially dependent upon certain patents licensed by MPEG LA LLC, Dolby Laboratories Licensing Corporation and Nissim Corp. These patents relate to technologies essential to DVD specification. Sony considers its overall license position beneficial to its operations. While Sony believes that its various proprietary intellectual property rights are important to its success, it believes that neither its business as a whole nor any business segment is materially dependent on any particular patent or license, or any particular group of patents or licenses, except as set forth above.
Competition
      In each of its principal product lines, Sony encounters intense competition throughout the world. Sony believes, however, that in the aggregate it competes successfully and has a major position in all of the principal product lines in which it is engaged, although the strength of its position varies with products and markets. Refer to “Risk Factors” in “Item 3.Key Information.”
      In the Electronics segment, Sony believes that its product planning and product design expertise, the high quality of its products, its record of innovative product introductions and product improvements, its price competitiveness derived from reductions in manufacturing and indirect costs, and its extensive marketing and servicing efforts are important factors in maintaining its competitive position.
      The Game segment is in a historically volatile and highly dynamic industry and Sony’s competitive position is affected by changing technology and product introductions, limited platform life cycles, popularity of software titles, seasonality, consumer spending and other economic trends. To be successful in the game industry, it is important to win customer acceptance of Sony’s format.
      Success in the Music segment is dependent to a large extent upon the artistic and creative abilities of employees and outside talent and is subject to the vagaries of public taste. Sony’s
      In each of its principal product lines, Sony encounters intense competition throughout the world. Sony believes, however, that in the aggregate it competes successfully and has a major position in all of the principal product lines in which it is engaged, although the strength of its position varies with products and markets. Refer to “Risk Factors” in “Item 3.Key Information.”
      In the Electronics segment, Sony believes that its product planning and product design expertise, the high quality of its products, its record of innovative product introductions and product improvements, its price competitiveness derived from reductions in manufacturing and indirect costs, and its extensive marketing and servicing efforts are important factors in maintaining its competitive position.
      The Game segment is in a historically volatile and highly dynamic industry and SCEI’s competitive position is affected by changing technology and product introductions, limited platform life cycles, popularity of software titles, seasonality, consumer spending and other economic trends. To be successful in the game industry, it is important to win customer acceptance of SCEI’s format.
      In the Pictures segment, SPE faces intense competition from other major motion picture studios and, to a lesser extent, from independent production companies. SPE must compete to obtain story rights and talent, including writers, actors, directors and producers, which are essential to the success of SPE’s products. SPE also competes to attract the attention of audiences worldwide and to obtain exhibition and distribution outlets and optimal release dates for its products. Competition in television production, distribution, and syndication is also intense because available broadcast time is limited and the audience is increasingly fragmented among broadcast networks, cable, and other independent television stations both in the U.S. and internationally. Furthermore, broadcast networks are increasingly producing their own shows internally. This competitive environment has resulted in fewer opportunities to produce shows for networks and a shorter lifespan for ordered shows that do not immediately achieve favorable ratings.
      In the Financial Services segment, it is critical for Sony Life, Sony Assurance and Sony Bank to maintain customer confidence and satisfaction. To be credible and competitive in the financial services market, it is important to maintain a strong and healthy financial foundation for the business as well as to meet diversifying customer needs. Sony Life has maintained a high solvency margin ratio, based on a Japanese domestic criteria that stipulates the maintenance of a certain level of solvency margin ratio in order for the business to be evaluated as financially sound, and differentiates itself from competitors through its unique needs-based consulting sales approach from its Lifeplanner sales force, Sony Life’s team of highly trained life insurance professionals. Sony Assurance, through direct communications over the telephone or via the Internet, endeavors to provide products and services that customers recognize as clearly distinctive from other companies’ offerings and has maintained a leading position in the direct-type of non-insurance business in

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Japan. Sony Assurance also has maintained a high solvency margin ratio based on the aforementioned Japanese domestic criteria. Sony Bank has strengthened its financial base and has maintained an adequate capital adequacy ratio based on Japanese domestic criteria concerning this ratio. By taking advantage of the special characteristics of the Internet, Sony Bank, as an Internet bank for independent individual customers’ asset management, offers a variety of unique products and services. Sony Finance faces competitive pressure to achieve a leading position in the new arena of secure payment systems on the Internet by utilizing new technology.
      Within All Other, success at SMEJ is dependent to a large extent upon the artistic and creative abilities of employees and outside talent and is subject to the vagaries of public taste. SMEJ’s future competitive position depends on its continuing ability to attract and develop artists who can achieve a high degree of public acceptance. In terms of music distribution, it is important to make appropriate investments in new technologies for secure, high-quality music distribution, while maintaining customer convenience.

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      In the Pictures segment, SPE faces intense competition from other major motion picture studios and, to a lesser extent, from independent production companies. SPE competes to attract the attention of the movie-going public worldwide and to obtain exhibition outlets and optimal release dates for its products. SPE must also compete to obtain story rights and talent, including writers, actors, directors and producers, which are essential to the success of SPE’s products. Competition in television production, distribution, and syndication is also intense because available broadcast time is limited and the audience is increasingly fragmented among broadcast networks, cable, and other independent television stations both in the U.S. and internationally. Furthermore, broadcast networks are increasingly producing their own shows internally. This competitive environment has resulted in fewer opportunities to produce shows for networks and a shorter lifespan for ordered shows that do not immediately achieve favorable ratings.
      In the Financial Services segment, it is critical for Sony Life, Sony Assurance and Sony Bank to maintain customer confidence particularly in the face of several insolvencies of large financial institutions in Japan over the past decade. To be credible and competitive in the financial services market, it is important to offer attractive rates of return on customer investments. In addition, in order to meet diversifying customer demand, it is critical to provide attractive services to customers through unique marketing channels, such as Lifeplanner financial consultants at Sony Life, and through direct communication by telephone and over the Internet at Sony Assurance and Sony Bank. Sony Finance faces competitive pressure to achieve a leading position in the new arena of secure payment systems on the Internet by utilizing new technology.
      In the Other segment, SCN faces competition in Japan from many existing large companies, as well as from new entrants to the market. Telecommunication companies that possess a large Internet-ready infrastructure and other entrants that compete solely on the basis of price have created a market in which competitive price reductions are the norm. Rapid technological advancement has created many new opportunities but it has also increased the rate at which new and more efficient services must be brought to market to earn customer approval. Customer price elasticity is high, and users are able to change Internet service providers with increasing ease. The penetration of mobile Internet services provided by telecommunications companies may also provide a substitute to the home-centric Internet service provided by SCN.
Government Regulations
      Sony’s business activities are subject to various governmental regulations in countries in which it operates, including regulations relating to business/investment approvals, import and export regulations including customs and export control, antitrust, intellectual property, consumer and business taxation, exchange controls, personal information protection, and environmental and recycling requirements.
      In Japan, insurance and banking businesses are subject to approvals and oversight from the Financial Services Agency. In addition, satellite broadcasting and telecommunication businesses are subject to approvals from the Ministry of Internal Affairs and Communications.
      Sony is also subject to environmental and occupational health and safety regulations in the jurisdictions in which it operates, particularly those in which it has manufacturing, research, or similar operations in its Electronics and Game segments. Refer to “Risk Factors” in “Item 3.Key Information.”

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Organizational Structure
      The following table sets forth the significant subsidiaries owned, directly or indirectly, by Sony Corporation.
Country of Internal Affairs and Communications. An increasing number(As of countries have enacted or are contemplating enactment of personal information protection related laws and regulations. In Japan, comprehensive laws and regulations covering the private sector entered into force as of April 1, 2005. Under these laws, various obligations are imposed upon enterprises handling more than a certain amount of personal information, and possible administrative actions including fines and other penalties, may be imposed for compliance failures. Sony is also subject to environmental and occupational health and safety regulations in the jurisdictions in which it operates, particularly those in which it has manufacturing, research, or similar operations in its Electronics and Game segments. Refer to “Risk Factors” in “Item 3.Key Information”.

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Organizational Structure
      The following table sets forth the significant subsidiaries owned, directly or indirectly, by Sony Corporation.
Country of(As of March 31, 2005)March 31, 2006)
Name of company incorporation Percentage owned
     
Sony EMCS Corporation  Japan100.0
Sony Semiconductor Kyushu CorporationJapan100.0
Sony Marketing (Japan) Inc. Japan100.0
Sony Computer Entertainment Inc. Japan100.0
Sony Financial Holdings, Inc. Japan100.0
Sony Life Insurance Co., Ltd. Japan100.0
Sony Music Entertainment (Japan) Inc. Japan100.0
Sony Americas Holding Inc. U.S.A.100.0
Sony Corporation of AmericaU.S.A.100.0
Sony Electronics Inc. U.S.A.100.0
Sony DADC US Inc. U.S.A.100.0
Sony Computer Entertainment America Inc. U.S.A.100.0
Sony Pictures Entertainment Inc. U.S.A.100.0
Sony Europe Holding B.V.Netherlands100.0
Sony Europe G.m.b.H.Germany100.0
Sony United Kingdom Ltd. U.K.100.0
Sony Computer Entertainment Europe Ltd. U.K.100.0
Sony Global Treasury Services PlcU.K.100.0
Sony Holding (Asia) B.V.Netherlands100.0
Sony Electronics Asia Pacific Pte. Ltd. Singapore   100.0 
Sony Semiconductor Kyushu Corporation
Property, Plant and Equipment
      Sony has a number of offices, plants and warehouses throughout the world. Most of the buildings and land in and on which they are located are owned by Sony, free from significant encumbrances.

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      The following table sets forth information as of March 31, 2006 with respect to plants for the manufacturing of products for the Electronics segment and for the Game segment with floor space of more than 500,000 square feet:
  Japan   100.0
Sony Marketing (Japan) Inc. Japan100.0
Sony Computer Entertainment Inc. Japan100.0
Sony Music Entertainment (Japan) Inc. Japan100.0
Sony Financial Holdings, Inc. Japan100.0
Sony Life Insurance Co., Ltd. Japan100.0
Sony Americas Holding Inc. U.S.A.100.0
Sony Corporation of AmericaU.S.A.100.0
Sony Electronics Inc. U.S.A.100.0
Digital Audio Disc CorporationU.S.A.100.0
Sony Computer Entertainment America Inc. U.S.A.100.0
Sony Pictures Entertainment Inc. U.S.A.100.0
Sony Europe Holding B.V. Holland100.0
Sony Europe G.m.b.H. Germany100.0
Sony Computer Entertainment Europe Ltd. U.K.100.0
Sony Global Treasury Services Plc. U.K.100.0
Sony Holding (Asia) B.V. Holland100.0
Sony Electronics Asia Pacific Pte. Ltd. Singapore100.0 
Property, Plant and Equipment
      Sony has a number of offices, plants and warehouses throughout the world. Most of the buildings and land on which they are located are owned by Sony, free from significant encumbrances.

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      The following table sets forth information as of March 31, 2005 with respect to plants for the manufacturing of products for the Electronics segment and entertainment hardware for the Game segment with
Approximate
Locationfloor space of more than 500,000 Principal products manufactured
(square feet:
feet)
  
In Japan:
      
Nagasaki
(Sony Semiconductor Kyushu Corporation
— Nagasaki TEC)2,232,000Semiconductors
Kokubu, Kagoshima
(Sony Semiconductor Kyushu Corporation
— Kagoshima TEC)1,132,000Semiconductors
Kumamoto
(Sony Semiconductor Kyushu Corporation
— Kumamoto TEC)980,000Semiconductors
Kohda, Aichi
(Sony EMCS Corporation — Kohda TEC)		957,000Video cameras, digital cameras, Memory Sticks, and printers
Inazawa, Aichi
(Sony EMCS Corporation — Inazawa TEC)		862,000LCD televisions
Kanuma, Tochigi
(Sony Chemicals Corporation)		843,000Magnetic tapes, adhesives, and electronic components
Ichinomiya, Aichi
(Sony EMCS Corporation — Ichinomiya TEC)		833,000Rear projection televisions, and digital cameras
Tochigi, Tochigi
(Sony Energy Devices Corporation)		609,000Magnetic and optical storage media and batteries
Kisarazu, Chiba
(Sony EMCS Corporation — Kisarazu TEC)		601,000DVD Recorders and PCs
Koriyama, Fukushima
(Sony Energy Devices Corporation)		581,000Batteries
Kosai, Shizuoka
(Sony EMCS Corporation — Kosai TEC)		562,000Broadcast- and professional-use video equipment
Minokamo, Gifu
(Sony EMCS Corporation — Minokamo TEC)		542,000Video cameras, digital cameras, mobile phones, and modules

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 Approximate
Locationfloor spacePrincipal products manufactured
(square feet)
In Japan:
      
Nagasaki
(Sony Semiconductor Kyushu Corporation
— Nagasaki TEC and SCEI)2,232,000Semiconductors
Kokubu, Kagoshima
(Sony Semiconductor Kyushu Corporation
— Kokubu TEC)1,146,000Semiconductors
Kumamoto
(Sony Semiconductor Kyushu Corporation
— Kumamoto TEC)980,000Semiconductors
Kohda, Aichi
(Sony EMCS Corporation — Kohda TEC)		953,000Video cameras, digital still cameras, Memory Sticks, and printers
Inazawa, Aichi
(Sony EMCS Corporation — Inazawa TEC)		859,000CRT televisions
Ichinomiya, Aichi
(Sony EMCS Corporation — Ichinomiya TEC)		833,000CRT televisions, flat panel televisions, and digital still cameras
Kanuma, Tochigi
(Sony Chemicals Corporation)		819,000Magnetic and optical storage media and batteries
Tochigi, Tochigi
(Sony Energy Devices Corporation)		609,000Magnetic tapes, adhesives, and electronic components
Kisarazu, Chiba
(Sony EMCS Corporation — Kisarazu TEC)		601,000DVD Recorders and PCs
Koriyama, Fukushima
(Sony Energy Devices Corporation)		584,000Batteries
Kosai, Shizuoka
(Sony EMCS Corporation — Kosai TEC)		562,000Broadcast- and professional-use video equipment
Minokamo, Gifu
(Sony EMCS Corporation — Minokamo TEC)		528,000Video cameras, digital still cameras, mobile phones, and modules

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Approximate
Locationfloor spacePrincipal products manufactured
(square feet)
Overseas:
Pittsburgh, Pennsylvania, U.S.A.
(Sony Electronics Inc.)		2,820,000CRT televisions, rear projection televisions, and CRTs
San Diego, California, U.S.A.
(Sony Electronics Inc.)		1,249,000CRTs
Wuxi, China
(Sony Electronics (Wuxi) Co., Ltd. and Sony (China) Ltd.)		1,160,000Batteries, televisions, PCs, and digital still cameras
Penang, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — PG TEC)		988,000Audio equipment and data storage systems
Tijuana, Mexico
(Sony de Tijuana Este, S.A. de C.V.)		935,000CRT televisions, rear projection televisions, TV tuners, computer displays, and audio equipment
Jurong, Singapore
(Sony Display Device (Singapore))		838,000CRTs
Dothan, Alabama, U.S.A.
(Sony Electronics Inc.)		809,000Magnetic tape products and polarized film for LCD
Bangi, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd.��— KL TEC)		797,000CRT televisions, rear projection televisions, TV tuners, DVD players, and VTRs
Bridgend, Wales, U.K.
(Sony Manufacturing Company U.K.)		752,000CRTs and TV components
Pencoed, Wales, U.K.
(Sony Manufacturing Company U.K.)		707,000CRT televisions, broadcast cameras, and professional-use displays
Terre Haute, Indiana, U.S.A.
(Digital Audio Disc Corporation)		655,000CDs, CD-ROMs, DVDs, and DVD-ROMs
Nuevo Laredo, Mexico
(Sony Electronics Inc.)		608,000Magnetic storage media and batteries
Pitman, New Jersey, U.S.A.
(Sony Music Entertainment Inc.)		568,000CDs, CD-ROMs, DVDs, and DVD-ROMs
Viladecavallas, Spain
(Sony Espana, S.A.)		566,000CRT televisions, TV components, projectors, and flat panel televisions
Huizou, China
(Sony Precision Devices (Huizou) Co., Ltd.)		526,000
Approximate
Locationfloor spacePrincipal products manufactured
(square feet)
Overseas:
Pittsburgh, Pennsylvania, U.S.A.
(Sony Electronics Inc.)		2,820,000Rear projection televisions
San Diego, California, U.S.A.
(Sony Electronics Inc.)		1,249,000CRTs
Wuxi, China
(Sony Electronics (Wuxi) Co., Ltd., Sony Digital Products (Wuxi) Co., Ltd. and Sony (China) Ltd.)		1,160,000Batteries, televisions, PCs, and digital cameras
Penang, Malaysia
(Sony EMCS (Malaysia) Sdn. Bhd. — PG TEC)		988,000Audio equipment and data storage systems
Huizhou, China
(Sony Precision Devices (Huizhou) Co., Ltd.)		985,000  Optical pickups and DVD players

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Tijuana, Mexico
(Sony plans to increase its semiconductor manufacturing capacity at Sony Semiconductor Kyushu Corporation. Sony plans to invest 160.0 billion yen in semiconductor fabrication facilities and equipment. This investment includes investment in the production capacity for chips used for PLAYSTATION 3, de Tijuana Este, S.A. de C.V.)		935,000LCD televisions, LCD rear projection televisions, TV tuners, computer displays, and mobile products.
      In addition to the facilities above, audio equipment
Dothan, Alabama, U.S.A.
(Sony has a number of other plantsElectronics Inc.)		809,000Magnetic tape products and polarized film for electronic products throughout the world. LCD
Bangi, Malaysia
(Sony owns researchEMCS (Malaysia) Sdn. Bhd. — KL TEC)		797,000CRT televisions, rear projection televisions, TV tuners, DVD players, and development facilitiesVTRs
Jurong, Singapore
(Sony Display Device (Singapore))		786,000CRTs
Pencoed, Wales, U.K.
(Sony Manufacturing Company U.K.)		707,000Broadcast cameras and employee housingprofessional-use displays
Terre Haute, Indiana, U.S.A.
(Sony Music Entertainment Inc.)		665,000CDs, CD-ROMs, DVDs, and recreation facilities, as well as DVD-ROMs
Nuevo Laredo, Mexico
(Sony Corporation’s headquarters buildings in Tokyo, Japan, where administrative functionsElectronics Inc.)		608,000Magnetic storage media and product development activities are carried out. SCEI leases its corporate headquarters buildings located in Tokyo, where administrative functions, product development,batteries
Pitman, New Jersey, U.S.A.
(Sony Music Entertainment Inc.)		568,000CDs, CD-ROMs, DVDs, and software development are carried out. SCEADVD-ROMs
Viladecavallas, Spain
(Sony Espana, S.A.)		566,000LCD televisions, TV components, projectors, and SCEE lease their offices in the U.S. and Europe, respectively.
      Most of SMEJ’s offices, including leased premises, are located in Tokyo, Japan.
      SPE’s corporate offices and motion picture and television production facilities are headquartered in Culver City, California, where it owns and operates a studio facility, Sony Pictures Studios. A second studio facility, The Culver Studios, which was owned and operated by SPE was sold by SPE in April 2004. SPE is leasing back a portion of this facility for a two-year period.flat panel televisions

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      Sony plans to increase its semiconductor manufacturing capacity at Sony Semiconductor Kyushu Corporation. Sony plans to invest 170.0 billion yen in semiconductor fabrication facilities and equipment during the fiscal year ending March 31, 2007. This investment includes investment in the production capacity for chips used for PS3, LCD televisions, LCD rear projection televisions, and mobile products.
      In addition to the facilities above, Sony has a number of other plants for electronic products throughout the world. Sony owns research and development facilities and employee housing and recreation facilities, as well as Sony Corporation’s headquarters buildings in Tokyo, Japan, where administrative functions and product development activities are carried out. SCEI leases its corporate headquarters buildings located in Tokyo, where administrative functions, product development, and software development are carried out. SCEA and SCEE lease their offices in the U.S. and Europe, respectively.
      Most of SMEJ’s offices, including leased premises, are located in Tokyo, Japan.
      SPE’s corporate offices and motion picture and television production facilities are headquartered in Culver City, California, where it owns and operates a studio facility, Sony Pictures Studios. A second studio facility, The Culver Studios, which was owned and operated by SPE was sold by SPE in April 2004. SPE initially leased back a portion of this facility for a two-year period and subsequently extended the lease for an additional one-year period expiring April 20, 2007. SPE also leases office space and motion picture and television support facilities from affiliates of Sony Corporation and other third parties in various worldwide locations. SPE’s film and videotape storage operations are located in various leased locations in the U.S. and Europe.
      In December 2001, SCA entered into a lease with a Variable Interest Entity, which is consolidated by Sony, for its corporate headquarters. Sony has the option to purchase the building at any time during the lease term which expires in December 2008. The aggregate floor space of this building is approximately 723,000 square feet.
Item 5.Operating and Financial Review and Prospects
OPERATING RESULTS
Operating Results for the Fiscal Year Ended March 31, 2006 compared with the Fiscal Year Ended March 31, 2005
Overview
      After translation of Sony’s financial results into yen (the currency in which Sony’s financial statements are prepared), in accordance with Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”), Sony’s sales and operating revenue (“sales”) for the fiscal year ended March 31, 2006 increased 4.4 percent compared with the previous fiscal year. On a local currency basis (regarding references to results of operations expressed on a local currency basis, refer to“Foreign Exchange Fluctuations and Risk Hedging” below), sales for the fiscal year increased slightly. The 4.4 percent increase is mainly due to an increase in revenues within the Financial Services segment, as a result of an improvement in gains and losses on investments at Sony Life Insurance Co., Ltd. (“Sony Life”) due to the favorable Japanese domestic equity market conditions, and increased sales within the Game segment, as the result of the contribution from PSPtm (PlayStation® Portable) (“PSP”). In the Electronics segment, although sales benefited from the depreciation of the yen and there was an increase in sales of liquid crystal display (“LCD”) televisions, sales to outside customers decreased 0.9 percent compared with the previous fiscal year. There was a decline in sales of CRT televisions, due to a continued shift in demand towards flat panel televisions, and in plasma televisions, where new product development has been terminated.
      Operating income increased 67.9 percent compared with the previous fiscal year. On a local currency basis, operating income increased approximately 23 percent compared with the previous fiscal year. Operating income includes a one-time net gain of 73.5 billion yen, which resulted from the transfer to the Japanese Government of the substitutional portion of Sony’s Employee Pension Fund. Of this, a gain of 64.5 billion yen was recorded within the Electronics segment. In the Financial Services segment, operating income increased

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due to an improvement in gains and losses on investments at Sony Life resulting from the above-mentioned favorable Japanese domestic equity market conditions. In the Electronics segment, although restructuring charges increased compared with the previous fiscal year, the amount of operating loss decreased as a result of a net gain resulting from the transfer to the Japanese Government of the substitutional portion of Sony’s Employee Pension Fund mentioned above and favorable exchange rates. Operating income within the Game segment declined primarily as a result of an increase in research and development costs associated mainly with PLAYSTATION®3 (“PS3”). In the Pictures segment, operating income also declined due to lower worldwide theatrical and home entertainment revenues on feature films.
Restructuring
      In the fiscal year ended March 31, 2006, Sony recorded restructuring charges of 138.7 billion yen, an increase from the 90.0 billion yen recorded in the previous fiscal year. The primary restructuring activities were in the Electronics segment and All Other.
      Of the total 138.7 billion yen, Sony recorded 48.3 billion yen in personnel-related costs. This expense was incurred because 5,700 people, mainly in Japan, the U.S. and Western Europe, left Sony primarily through early retirement programs.
      For more detailed information about restructuring, please refer to Note 17 of Notes to the Consolidated Financial Statements.
Electronics
      Restructuring charges in the Electronics segment for the fiscal year ended March 31, 2006 were 125.8 billion yen, compared to 83.2 billion yen in the previous fiscal year.
      Due to the worldwide market shrinkage and demand shift from CRT televisions to plasma and LCD panel televisions, Sony has been implementing a worldwide plan to rationalize CRT and CRT television production facilities and has been downsizing its business over several years. In the fiscal year ended March 31, 2006, as part of this restructuring program, Sony recorded a non-cash impairment charge of 25.5 billion yen for CRT TV display manufacturing facilities located in the U.S. The impairment charge was calculated as the difference between the carrying value of the asset group and the present value of estimated future cash flows. The charge was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income.
      In addition to the above restructuring efforts, Sony undertook several headcount reduction programs to further reduce operating costs in the Electronics segment. As a result of these programs, Sony recorded restructuring charges of 45.1 billion yen for the fiscal year ended March 31, 2006, and these charges were included in selling, general and administrative expenses in the consolidated statements of income. These staff reductions were achieved worldwide mostly through the implementation of early retirement programs. The remaining liability balance as of March 31, 2006 was 19.4 billion yen and will be paid through the fiscal year ending March 31, 2007. Sony will continue seeking the appropriate headcount level to optimize the workforce in the Electronics segment.
All Other
      Restructuring charges within All Other for the fiscal year ended March 31, 2006 were 10.4 billion yen, compared to 5.3 billion yen recorded in the previous fiscal year. The main component of the restructuring charges recorded during the fiscal year ended March 31, 2006 was an 8.5 billion yen asset impairment write-down associated with the sale of the Metreon, a U.S. entertainment complex.

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Operating Performance
             
  Fiscal Year Ended  
  March 31  
     
  2005 2006 Percent change
       
  (Yen in billions)  
Sales and operating revenue  7,159.6   7,475.4   +4.4%
Operating income  113.9   191.3   +67.9 
Income before income taxes  157.2   286.3   +82.1 
Equity in net income of affiliated companies  29.0   13.2   -54.6 
Net income  163.8   123.6   -24.5 
Sales
      Sales for the fiscal year ended March 31, 2006 increased by 315.8 billion yen, or 4.4 percent, to 7,475.4 billion yen compared with the previous fiscal year. A further breakdown of sales figures is presented under“Operating Performance by Business Segment”below.
      “Sales” in this analysis of the ratio of selling, general and administrative expenses to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue, and excludes Financial service revenue. This is because Financial service expenses are recorded separately from cost of sales and selling, general and administrative expenses. Furthermore, in the analysis of cost of sales, including research and development costs, to sales, only “net sales” are used. This is because cost of sales is an expense associated only with net sales. The calculations of all ratios below that pertain to business segments include intersegment transactions.
Cost of Sales and Selling, General and Administrative Expenses
      Cost of sales for the fiscal year ended March 31, 2006 increased by 151.3 billion yen, or 3.0 percent, to 5,151.4 billion yen compared with the previous fiscal year, and increased from 76.2 percent to 77.0 percent as a percentage of sales. Year on year, the cost of sales ratio increased from 81.8 percent to 81.9 percent in the Electronics segment, increased from 73.0 percent to 80.4 percent in the Game segment, and increased from 58.7 percent to 60.2 percent in the Pictures segment.
      In the Electronics segment, there was a deterioration in the cost of sales ratio for several products, in particular image sensors and CRT televisions. In the Game segment, there was an increase in the cost of sales ratio as a result of research and development costs associated with PS3. In the Pictures segment, the cost of sales ratio also increased primarily due to lower worldwide theatrical and home entertainment revenues on feature films.
      There was a decrease in personnel-related costs included in cost of sales of 9.8 billion yen, primarily within the Electronics segment, compared with the previous fiscal year.
      Research and development costs (all research and development costs are included within cost of sales) for the fiscal year ended March 31, 2006 increased by 29.8 billion yen to 531.8 billion yen compared with the previous fiscal year. The ratio of research and development costs to sales was 7.9 percent compared to 7.6 percent in the previous fiscal year.
      Selling, general and administrative expenses for the fiscal year ended March 31, 2006 decreased by 8.0 billion yen, or 0.5 percent, to 1,527.0 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales improved from 23.2 percent in the previous fiscal year to 22.6 percent. Year on year, the ratio of selling, general and administrative expenses to sales improved from 19.0 percent to 18.1 percent in the Electronics segment and from 21.0 percent to 18.7 percent in the Game segment. On the other hand, the ratio of selling, general and administrative expenses to sales increased from 32.5 percent to 36.0 percent in the Pictures segment.

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      Personnel-related costs in selling, general and administrative expenses decreased by 60.4 billion yen compared with the previous fiscal year mainly due to a decrease in severance-related expenses in the Electronics segment resulting from the implementation of restructuring initiatives. In addition, advertising and publicity expenses for the fiscal year increased by 59.8 billion yen compared with the previous fiscal year. This was due to the fact that advertising and publicity expenses increased, primarily within the Pictures and Game segments.
      Loss on sale, disposal or impairment of assets, net was 73.9 billion yen, compared with 28.0 billion in the previous fiscal year. This increase was as a result of losses recorded on the sale, disposal and impairment of CRT and CRT television production equipment in the Electronics segment, as well as an asset impairment write-down associated with the sale of the Metreon, a U.S. entertainment complex.
Operating Income
      Operating income for the fiscal year ended March 31, 2006 increased by 77.3 billion yen, or 67.9 percent, to 191.3 billion yen compared with the previous fiscal year. The operating income margin increased from 1.6 percent to 2.6 percent. In descending order by amount of financial impact, the Financial Services segment, the Pictures segment, All Other and the Game segment contributed to operating income. On the other hand, although there was a net gain from the transfer to the Japanese Government of the substitutional portion of Sony’s Employee Pension Fund and the depreciation of the yen, the Electronics segment recorded an operating loss mainly due to a decrease in sales to outside customers, an increase in loss on sale, disposal or impairment of assets and a deterioration in the cost of sales ratio associated with a decline in unit selling prices. For a further breakdown of operating income for each segment, please refer to“Operating Performance by Business Segment” below.
Other Income and Expenses
      In the consolidated results for the fiscal year ended March 31, 2006, other income increased by 56.0 billion yen, or 57.4 percent, to 153.6 billion yen, while other expenses increased by 4.2 billion yen, or 7.7 percent, to 58.5 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 95.1 billion yen, an increase of 51.8 billion yen, compared with the previous fiscal year.
      The gain on change in interest in subsidiaries and equity investees increased by 44.5 billion yen, or 272.7 percent compared to the previous fiscal year to 60.8 billion yen. This was mainly the result of a gain of 21.5 billion yen on the change in interest in subsidiaries and equity investees resulting from the initial public offering of Sony Communication Network Corporation (“SCN”), a gain of 20.6 billion yen on the change in interest resulting from the partial sale of Sony’s investment in Monex Beans Holdings, Inc., and gains of 12.0 billion yen and 6.6 billion yen respectively on the change of interest at So-net M3 Inc., a consolidated subsidiary of SCN and at DeNA Co., Ltd., an equity affiliate of SCN accounted for by the equity method.
      Interest and dividends of 24.9 billion yen was recorded in the fiscal year ended March 31, 2006 an increase of 10.2 billion yen, or 69.5 percent, compared with the previous year. This increase was mainly the result of an increase in interest received resulting from an improvement in the rate of return on overseas investments.
      For the fiscal year ended March 31, 2006, interest payments totaling 29.0 billion yen were recorded, an increase of 4.4 billion yen, or 18.0 percent, compared with the previous year.
      In addition, a net foreign exchange loss of 3.1 billion yen was recorded in the fiscal year ended March 31, 2006, compared to a net foreign exchange loss of 0.5 billion yen recorded in the previous fiscal year. The net foreign exchange loss was recorded because the value of the yen, especially during the first and third quarters of the fiscal year ended March 31, 2006, was lower than the value of the yen at the time that Sony entered into foreign exchange forward contracts and foreign currency option contracts. These contracts are entered into by Sony to mitigate the foreign exchange rate risk to cash flows that arises from settlements of foreign currency

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denominated accounts receivable and accounts payable, as well as foreign currency denominated transactions between consolidated subsidiaries.
Income before Income Taxes
      Income before income taxes for the fiscal year ended March 31, 2006 increased 129.1 billion yen, or 82.1 percent, to 286.3 billion yen compared with the previous fiscal year, as a result of the increase in operating income and the increase in the net amount of other income and other expenses mentioned above.
Income Taxes
      Income taxes for the fiscal year ended March 31, 2006 increased by 160.5 billion yen to 176.5 billion yen. Compared to an effective tax rate of 10.2 percent in the previous fiscal year, the effective tax rate was 61.6 percent in the current fiscal year. This effective tax rate exceeded the Japanese statutory tax rate primarily due to the recording of additional valuation allowances against deferred tax assets by Sony Corporation and several of Sony’s Japanese domestic and overseas consolidated subsidiaries, mainly within the Electronics segment, due to continued losses recorded at these businesses and the recording of an additional tax provision for the undistributed earnings of certain foreign subsidiaries. The effective tax rate was significantly lower than the Japanese statutory rate in the previous fiscal year as a result of the reversal of valuation allowances at Sony’s U.S. subsidiaries associated with an improvement in operating performance.
      On June 30, 2006, Sony Corporation and SCEI each received notification from the Tokyo Regional Taxation Bureau (“TRTB”) of a reassessment of the profits they reported from transactions between SCEI and its subsidiary Sony Computer Entertainment America Inc. (“SCEA”), for the fiscal years ended March 31, 2000 through 2005. On the same date, Sony Corporation also received notification of a reassessment of the profits reported from transactions related to CD and DVD disc manufacturing operations with a number of its overseas subsidiaries for the fiscal years ended March 31, 2004 and 2005.
      Sony Corporation and SCEI believe that their allocation of income for the periods in question was appropriate and that they have paid the proper amount of taxes in each of the jurisdictions. Therefore Sony Corporation and SCEI disagree with the position of the TRTB and have lodged an objection. In addition, Sony Corporation and SCEI plan to formally request bilateral consultations (where available) to obtain relief from double taxation under the applicable tax treaties of various countries.
      Transfer pricing was reassessed in accordance with the notification from the TRTB, resulting in additional Japanese income of 74.4 billion yen, which led to Sony Corporation and SCEI incurring an estimated additional cash tax (including corporate tax and others) of approximately 27.9 billion yen. Sony Corporation and SCEI believe that double taxation will be avoided through the procedure described above, and therefore Sony does not expect any material impact on its consolidated profit and loss as a result of this reassessment.
Results of Affiliated Companies Accounted for under the Equity Method
      Equity in net income of affiliated companies during the fiscal year ended March 31, 2006 was 13.2 billion yen, a decrease of 15.9 billion yen, or 54.6 percent compared to the previous fiscal year. Equity in net income of affiliated companies for the previous fiscal year included the recording of 12.6 billion yen as equity in net income for InterTrust Technologies Corporation (“InterTrust”), which reflected InterTrust’s proceeds from a license agreement arising from the settlement of a patent-related suit. In the current fiscal year, Sony Ericsson, as a result of increased sales of products including camera phone and “Walkman®” phone models, contributed 29.0 billion yen to equity in net income, an increase of 11.6 billion yen compared to the previous fiscal year. Sony recorded equity income of 5.8 billion yen for SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”) during the current fiscal year, compared to an equity loss of 3.4 billion yen in the previous fiscal year as a result of a reduction in restructuring charges and the realization of incremental cost savings. However, Sony recorded an equity in net loss of 7.2 billion yen for S-LCD Corporation (“S-LCD”), a joint-venture with Samsung Electronics Co., Ltd. for the manufacture of amorphous TFT LCD panels and equity in

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net loss of 16.9 billion yen for MGM Holdings, Inc. (“MGM Holdings”). The equity in net loss for MGM Holdings includes non-cash interest of 6.0 billion yen on cumulative preferred stock.
Minority Interest in Income (Loss) of Consolidated Subsidiaries
      In the fiscal year ended March 31, 2006, minority interest in loss of consolidated subsidiaries of 0.6 billion yen was recorded compared to minority interest in income of 1.7 billion yen previous year. This loss was primarily due to the recording of loss at ST Mobile Display Corporation, a joint venture with Toyota Industries Corporation for the manufacture of low-temperature polysilicon thin film transistor liquid crystal display panels for mobile products.
Net Income
      Net income for the fiscal year ended March 31, 2006 decreased by 40.2 billion yen, or 24.5 percent, to 123.6 billion yen compared with the previous fiscal year. This decrease was primarily the result of the above-mentioned increase in income taxes and decrease in equity in net income of affiliated companies. As a percentage of sales, net income decreased from 2.3 percent to 1.7 percent. Return on stockholders’ equity decreased from 6.2 percent to 4.1 percent. (This ratio is calculated by dividing net income by the simple average of stockholders’ equity at the end of the previous fiscal year and at the end of the fiscal year ended March 31, 2006.)
      Basic net income per share was 122.58 yen compared with 175.90 yen in the previous fiscal year, and diluted net income per share was 116.88 yen compared with 158.07 yen in the previous fiscal year. Refer to Notes 2 and 21 of Notes to Consolidated Financial Statements.
Operating Performance by Business Segment
      The following discussion is based on segment information. Sales and operating revenue in each business segment include intersegment transactions. Refer to Note 24 of Notes to Consolidated Financial Statements.
Business Segment Information
              
  Fiscal Year Ended  
  March 31  
     
  2005 2006 Percent change
       
  (Yen in billions)  
Sales and operating revenue
            
 Electronics  5,066.8   5,150.5   +1.7%
 Game  729.8   958.6   +31.4 
 Pictures  733.7   745.9   +1.7 
 Financial Services  560.6   743.2   +32.6 
 All Other  459.9   408.9   -11.1 
 Elimination  (391.1)  (531.6)  — 
          
Consolidated  7,159.6   7,475.4   +4.4 
          

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  Fiscal Year Ended  
  March 31  
     
  2005 2006 Percent change
       
  (Yen in billions)  
Operating income (loss)
            
 Electronics  (34.3)  (30.9)  — 
 Game  43.2   8.7   -79.7%
 Pictures  63.9   27.4   -57.1 
 Financial Services  55.5   188.3   +239.4 
 All Other  4.2   16.2   +286.4 
          
Sub-Total  132.5   209.8   +58.3 
 Elimination and unallocated corporate expenses  (18.6)  (18.5)  — 
          
Consolidated  113.9   191.3   +67.9 
          
      As of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses in a joint venture. The newly formed company, SONY BMG, is 50 percent owned by each parent company. Under U.S. GAAP, SONY BMG is accounted for by Sony using the equity method and, since August 1, 2004, 50 percent of net profits or losses of this business have been included under “Equity in net income (loss) of affiliated companies.”
      In connection with the establishment of this joint venture, Sony’s non-Japan-based disc manufacturing and physical distribution businesses, formerly included within the Music segment, a separate reporting segment until the end of the previous fiscal year, have been reclassified to the Electronics segment to recognize the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. Effective April 1, 2005, a similar change was made with respect to Sony’s Japan-based disc manufacturing business. Results for the fiscal year ended March 31, 2005 in the Electronics segment have been restated to account for these reclassifications.
      Effective April 1, 2005, Sony no longer breaks out its music business as a reportable segment as it no longer meets the materiality threshold. Accordingly, the results for Sony’s music business are now included within All Other, and the results for the fiscal year ended March 31, 2005 have been reclassified to All Other for comparative purposes. Results for the fiscal year ended March 31, 2006 in All Other include the results of Sony Music Entertainment Inc.’s (“SMEI”) music publishing business and Sony Music Entertainment (Japan) Inc. (“SMEJ”), excluding Sony’s Japan-based disc manufacturing business which, as noted above, has been reclassified to the Electronics segment. However, results for the previous fiscal year in All Other include the consolidated results for SMEI’s recorded music business for the period through August 1, 2004, as well as the results for SMEI’s music publishing business and SMEJ excluding Sony’s Japan-based disc manufacturing business.
Electronics
      Sales for the fiscal year ended March 31, 2006 increased 83.6 billion yen, or 1.7 percent, to 5,150.5 billion yen compared with the previous fiscal year. An operating loss of 30.9 billion in the Electronics segment was recorded compared to the operating loss of 34.3 billion yen in the previous fiscal year. Sales to outside customers on a yen basis decreased 0.9 percent compared to the previous fiscal year. Regarding sales to outside customers by geographical area, although sales decreased in Japan by 12 percent, in the U.S. by 1 percent and in Europe by 4 percent, sales increased by 11 percent in non-Japan Asia and other geographic areas (“Other Areas”).
      In Japan, although there was a significant increase in the sales of LCD televisions, as well as increased sales for flash memory and hard drive digital audio players, sales decreased for such products as mobile phones, principally to Sony Ericsson, CRT televisions and plasma televisions. In the U.S., although there was an increase in sales of LCD and rear projection televisions, sales decreased for such products as CRT and

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plasma televisions. In Europe, although sales increased for such products as LCD televisions, there was a decline in sales of such products as CRT and plasma televisions, and mobile phones, primarily to Sony Ericsson. In Other Areas, sales of such products as LCD televisions and PCs increased, while sales of such products as CD-R/ RW drives and CRT televisions decreased.
Performance by Product Category
      Sales and operating revenue by product category discussed below represent sales to outside customers, which do not include intersegment transactions. Refer to Note 24 of Notes to Consolidated Financial Statements.
      “Audio” sales decreased by 35.7 billion yen, or 6.2 percent, to 536.2 billion yen. Sales of flash memory and hard drive digital audio players increased significantly, in conjunction with an increase in shipments to approximately 4.5 million units, compared to approximately 850,000 unit shipments recorded in the previous fiscal year. On the other hand, there was a significant decrease in the unit shipments of both CD and MD format headphone stereos due to a shift in market demand. In addition, car audio experienced a decrease in sales, and there was a slight decrease in home audio sales.
      “Video” sales decreased by 15.0 billion yen, or 1.4 percent, to 1,021.3 billion yen. In addition to a decrease in sales of digital cameras in Japan, the U.S. and Europe, there was a decrease in sales of VHS video recorders. Sales of digital cameras decreased, coupled with a decrease in worldwide shipments by approximately 0.5 million units to approximately 13.5 million units. Worldwide shipments of DVD recorders increased by approximately 300,000 units to approximately 2.0 million units, while sales increased slightly. Worldwide shipments of home-use video cameras increased by approximately 250,000 units to approximately 7.6 million units. DVD-Video player unit shipments decreased by approximately 1.5 million units to approximately 8.0 million units.
      “Televisions” sales increased by 6.6 billion yen, or 0.7 percent, to 927.8 billion yen. There was a significant increase in worldwide sales of LCD televisions, as worldwide shipments of LCD televisions increased by approximately 1.8 million units, to approximately 2.8 million units. Sales of projection televisions increased as the sales percentage of higher priced units increased, although worldwide shipments remained largely unchanged at approximately 1.2 million units. On the other hand, there was a significant decrease in worldwide sales of CRT televisions, primarily as a result of both a decrease in worldwide shipments of CRT televisions by approximately 2.7 million units to approximately 6.8 million units due to the continued shift in demand towards flat panel televisions, as well as a fall in unit prices. In addition, sales of plasma televisions, where new product development has been terminated, also decreased worldwide.
      “Information and Communications” sales increased by 26.4 billion yen, or 3.2 percent, to 842.5 billion yen. Although sales of desktop PCs decreased, overall sales increased as a result of favorable worldwide sales of notebook PCs. Worldwide unit shipments of PCs increased approximately 400,000 units to approximately 3.7 million units. Sales of broadcast- and professional-use products increased as a result of favorable sales of high-definition related products.
      “Semiconductors” sales decreased by 5.5 billion yen, or 2.3 percent, to 240.8 billion yen. The decrease was due to a decrease in sales of CCDs as the result of pricing pressures.
      “Components” sales increased by 37.3 billion yen, or 6.0 percent, to 656.8 billion yen. This increase was primarily due to an increase in sales of lithium-ion batteries, primarily for use in PCs and power tools, and Memory Sticks. On the other hand, sales of CD-R/ RW drives and optical pickups declined, primarily as a result of significant unit price declines. Sales of DVD+/-R/ RW drives increased, despite a deterioration in unit selling prices, as a result of a significant growth in units sold in association with the expansion of the market.
      “Other” sales decreased by 57.0 billion yen, or 9.6 percent, to 538.2 billion yen. This decrease was the result of a decrease in sales of mobile phones, primarily to Sony Ericsson.

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      In the Electronics segment, cost of sales for the fiscal year ended March 31, 2006 increased by 67.5 billion yen, or 1.6 percent to 4,184.5 billion yen compared with the previous fiscal year. The cost of sales ratio deteriorated by 0.1 percent to 81.9 percent compared to 81.8 percent in the previous fiscal year. Although there was an improvement in the cost of sales ratio for such products as video cameras and PCs, products that contributed to the deterioration in the cost of sales ratio included image sensors and CRT televisions, which experienced decreased sales. Restructuring charges recorded in cost of sales amounted to 23.8 billion yen, an increase of 14.2 billion yen compared with the 9.6 billion yen recorded in the previous fiscal year. Research and development costs decreased 15.2 billion yen, or 3.5 percent, from 433.3 billion yen in the previous fiscal year to 418.1 billion yen.
      Selling, general and administrative expenses decreased by 27.2 billion yen, or 2.8 percent to 933.0 billion yen compared with the previous fiscal year. The primary reason for this decrease was the recording of a 64.5 billion yen net gain resulting from the transfer to the Japanese Government of the substitutional portion of Sony’s Employee Pension Fund. Of the restructuring charges recorded in the Electronics segment, the amount recorded in selling, general and administrative expenses decreased by 4.1 billion yen from 53.6 billion yen in the previous fiscal year to 49.5 billion yen. Of the restructuring charges recorded in selling, general and administrative expenses, the amount recorded for headcount reductions, including reductions through the early retirement program, was 45.1 billion yen, a decrease of 5.8 billion yen compared with the previous fiscal year. On the other hand, royalty expenses decreased 17.2 billion yen. The ratio of selling, general and administrative expenses to sales decreased 0.9 percentage points from the 19.0 percent recorded in the previous fiscal year to 18.1 percent.
      Loss on sale, disposal or impairment of assets, net increased 40.0 billion yen to 63.9 billion yen compared with the previous fiscal year. This amount includes 52.5 billion yen in restructuring charges, which includes 25.5 billion yen of restructuring charges related to CRT and CRT television manufacturing facilities in the U.S. The amount of restructuring charges included in loss on sale, disposal or impairment, net in the previous fiscal year was 19.2 billion yen.
      The amount of operating loss recorded in the Electronics segment for the fiscal year ended March 31, 2006 decreased as a result of the net gain resulting from the transfer to the Japanese Government of the substitutional portion of Sony’s Employee Pension Fund, despite the recording of increased restructuring charges. Regarding profit performance by product, excluding restructuring charges and the impact of the net gain resulting from the transfer to the Japanese Government of the substitutional portion of Sony’s Employee Pension Fund, operating losses recorded by CRT televisions and LCD televisions increased, in addition to a decrease in operating income recorded by image sensors. On the other hand, the amount of operating loss recorded by DVD recorders (including PSXtm) decreased. In addition, there was an increase in operating income for video cameras and PCs.
      In August 2006, Dell Inc. (“Dell”) and Apple Computer Inc. (“Apple”) each announced voluntary recalls of lithium-ion battery packs used in certain notebook computers sold by these two companies. The recalled packs contain battery cells originally manufactured by Sony. Sony supports these recalls by our customers Dell and Apple.
      As of August 31, 2006, Sony anticipates no further recalls of battery packs using these particular battery cells.
      The recall arises because, on rare occasions, microscopic metal particles in the recalled battery cells may come into contact with other parts of the battery cell, leading to a short circuit within the cell. Typically, a battery pack will simply power off when a cell short circuit occurs. However, under certain rare conditions, an internal short circuit may lead to cell overheating and potentially flames. The potential for this to occur can be affected by variations in the system configurations found in different notebook computers. Sony has introduced a number of additional safeguards into its battery manufacturing process to address this condition and to provide a greater level of safety and security.

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      As of August 31, 2006, Sony estimates that the overall cost to Sony in supporting the recall programs of Apple and Dell will amount to between 20 billion yen and 30 billion yen. This overall cost is an estimate based on the costs of replacement battery packs and any other related costs to be incurred by Sony.
Manufacturing by Geographic Area
      Slightly more than 50 percent of the Electronics segment’s total annual production during the fiscal year ended March 31, 2006 took place in Japan, including the production of digital cameras, video cameras, flat panel televisions, PCs, semiconductors and components such as batteries and Memory Stick. Approximately 65 percent of the annual production in Japan was destined for other regions. China accounted for slightly more than 10 percent of total annual production, approximately 70 percent of which was destined for other regions. Asia, excluding Japan and China, accounted for slightly more than 10 percent of total annual production, with approximately 60 percent destined for Japan, the U.S. and Europe. The Americas and Europe together accounted for the remaining slightly less than 25 percent of total annual production, most of which was destined for local distribution and sale.
Comparison of Results on a Local Currency Basis and Results on a Yen Basis
      In the Electronics segment, operating results benefited from the positive effect of the depreciation of the yen against the U.S. dollar and the Euro. Sales for the fiscal year ended March 31, 2006 increased, on a yen basis, by 1.7 percent, but decreased on a local currency basis by approximately 3 percent. In terms of operating performance, there was a decrease in the amount of operating loss compared to the previous fiscal year, but if calculated on a local currency basis, this operating loss was larger when compared to the actual results on a yen basis.
      Sales to outside customers by geographic area on a yen basis decreased in Japan by 12 percent, in the U.S. by 1 percent and in Europe by 4 percent. However, sales increased in Other Areas by 11 percent. Sales on a local currency basis for regions outside Japan decreased in the U.S. and Europe by 7 percent, but increased by 2 percent in Other Areas.
Game
      Sales for the fiscal year ended March 31, 2006 increased by 228.9 billion yen, or 31.4 percent, to 958.6 billion yen compared with the previous fiscal year. Operating income decreased by 34.4 billion yen, or 79.7 percent, to 8.7 billion yen compared with the previous fiscal year, and the operating income margin decreased from 5.9 percent to 0.9 percent.
      Sales in the Game segment on a local currency basis increased approximately 27 percent. In addition, on a local currency basis, operating income decreased approximately 62 percent compared to the previous fiscal year. By region, although sales decreased slightly in Japan, there was a significant increase in sales in the U.S. and Europe.
      There was a significant increase in hardware sales compared to the previous fiscal year. Sales increased significantly, mainly in the U.S and Europe, and sales in Japan remained relatively unchanged compared to the previous fiscal year, primarily due to a significant contribution to sales from PSP, which experienced favorable growth in all geographic areas and the fact that PlayStation®2 (“PS2”) sales were on a par with those in the previous fiscal year. In addition, although PS2 software sales decreased, as a result of the contribution to sales from PSP software, software sales in Japan, the U.S. and Europe were relatively unchanged compared to the previous fiscal year.

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      Total worldwide production shipments of hardware and software were as follows:
      Worldwide hardware production shipments:*
—  PS2:16.22 million units (an increase of 0.05 million units)
—  PSP:14.06 million units (an increase of 11.09 million units)
      Worldwide software production shipments:*/**
—  PS2:223 million units (a decrease of 29 million units)
—  PSP:41.6 million units (an increase of 35.9 million units)
* Production shipments of hardware and software are counted upon shipment of the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers.
** Including those both from Sony and third parties under Sony licenses.
      Operating income decreased significantly compared with the previous fiscal year. Although profits from the PS2 and PSP businesses exceeded those in the previous fiscal year, the decrease in operating income was mainly the result of continued high research and development costs associated with PS3, as well as the recording of charges associated with preparation for the launch of the PS3 platform including a write-down of approximately 25.0 billion yen for semiconductor components for use in PS3.
      The cost of sales to sales ratio deteriorated by 7.4 percent, from 73.0 percent in the previous fiscal year, to 80.4 percent for the reasons mentioned above for operating income. The ratio of selling, general and administrative expenses to sales decreased by 2.3 percent, compared to 21.0 percent in the previous fiscal year, to 18.7 percent as a result of the sales increase.
      Charges related to the launch of the PS3 platform are anticipated to result in a significant loss within the Game segment for the fiscal year ending March 31, 2007, reflecting primarily an expected negative margin as a result of strategic pricing on PS3 hardware sales.
Pictures
      Sales for the fiscal year ended March 31, 2006 increased by 12.2 billion yen, or 1.7 percent, to 745.9 billion yen compared with the previous fiscal year. Operating income decreased by 36.5 billion yen, or 57.1 percent, to 27.4 billion yen and the operating income margin decreased from 8.7 percent to 3.7 percent. The results in the Pictures segment consist of the results of Sony Pictures Entertainment Inc. (“SPE”), aU.S.-based subsidiary.
      On a U.S. dollar basis, sales for the fiscal year in the Pictures segment decreased approximately 4 percent and operating income decreased by approximately 61 percent. Sales decreased primarily due to lower worldwide theatrical and home entertainment revenues on feature films, partially offset by an increase in television product revenues. The lower theatrical and home entertainment revenues primarily resulted from the strong performance ofSpider-Man 2in the prior fiscal year coupled with the disappointing performance of certain films in the current fiscal year film slate, particularlyStealth, Zathuraand theLegend of Zorro.Sales for the fiscal year release slate decreased 967 million U.S. dollars as compared to the previous fiscal year. Television product revenues increased by approximately 220 million U.S. dollars primarily due to higher advertising and subscription sales from several of SPE’s international channels, higher sales of television library product and the extension of a licensing agreement forWheel of Fortune.
      Operating income for the segment decreased significantly, primarily due to the disappointing overall performance of the current fiscal year’s film slate in both the theatrical and home entertainment markets. Operating loss from the current fiscal year release slate increased 623 million U.S. dollars as compared to the prior fiscal year’s release slate due to the same factors contributing to the decrease in film revenue noted above. Partially offsetting this was an increase in operating income of 83 million U.S. dollars for television product due to the same factors noted above for revenue.

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      As of March 31, 2006, unrecognized license fee revenue at SPE was approximately 1.2 billion U.S. dollars. SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television product. The license fee revenue will be recognized in the fiscal year that the product is available for broadcast.
Financial Services
      Please note that the revenue and operating income at Sony Life, Sony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”) discussed below on a U.S. GAAP basis differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
      Financial Services revenue for the fiscal year ended March 31, 2006 increased by 182.7 billion yen, or 32.6 percent, to 743.2 billion yen compared with the previous fiscal year. Operating income increased by 132.8 billion yen, or 239.4 percent, to 188.3 billion yen and the operating income margin increased to 25.3 percent compared with the 9.9 percent of the previous fiscal year.
      At Sony Life, revenue increased by 170.8 billion yen, or 36.0 percent, to 645.0 billion yen compared with the previous fiscal year. The main reasons for this increase were an improvement in gains and losses from investments at Sony Life, primarily within the general account, as well as an increase in revenue from insurance premiums reflecting an increase ofinsurance-in-force. The improvement in gains and losses from investments in the general account was principally a result of an improvement in valuation gains from stock conversion rights in convertible bonds resulting from the aforementioned favorable Japanese domestic stock market conditions. Operating income at Sony Life increased by 127.4 billion yen or 208.8 percent to 188.4 billion yen, mainly as a result of a significant improvement in gains and losses on investments in the general account mentioned above.
      At Sony Assurance, revenue increased due to higher insurance revenue brought about by an expansion in automobileinsurance-in-force. Operating income increased due to an increase in insurance revenue and an improvement in the expense ratio (the ratio of sales, general and administrative expenses to premiums).
      At Sony Bank, which started operations in June 2001, although foreign exchange losses were recorded as a result of the depreciation of the yen on part of Sony Bank’s foreign currency deposits, revenue rose as there was an increase in interest revenue associated with an increase in the balance of assets from investing activities, in addition to revenues from other investing activities. The amount of the operating loss decreased compared with the previous fiscal year, as a result of the increase in revenue.
      At Sony Finance International, Inc. (“Sony Finance”), a leasing and credit financing business subsidiary in Japan, revenue increased due to an increase in leasing and credit card revenue. In terms of profitability, a reduced operating loss was recorded compared to the previous fiscal year, as a result of improved profitability at a credit card business at Sony Finance.
Condensed Statements of Income Separating Out the Financial Services Segment (Unaudited)
      The following schedule shows unaudited condensed statements of income for the Financial Services segment and all other segments excluding Financial Services as well as condensed consolidated statements of income. This presentation is not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements.

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      Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
Condensed Statements of Income
          
  Fiscal Year ended
  March 31
   
  2005 2006
     
  (Yen in millions)
Financial Services
        
 Financial service revenue  560,557   743,215 
 Financial service expenses  505,067   554,892 
       
 
Operating income
  55,490   188,323 
 Other income (expenses), net  10,204   24,522 
       
 
Income before income taxes
  65,694   212,845 
 Income taxes and other  25,698   80,586 
       
 
Income before cumulative effect of an accounting change
  39,996   132,259 
 Cumulative effect of an accounting change  (4,713)  — 
       
 
Net income
  35,283   132,259 
       
          
  Fiscal Year ended
  March 31
   
  2005 2006
     
  (Yen in millions)
Sony without Financial Services
        
 Net sales and operating revenue  6,632,728   6,763,907 
 Costs and expenses  6,575,354   6,762,375 
       
 
Operating income
  57,374   1,532 
 Other income (expenses), net  40,639   71,952 
       
 
Income before income taxes
  98,013   73,484 
 Income taxes and other  (37,043)  82,127 
       
 
Income (loss) before cumulative effect of an accounting change
  135,056   (8,643)
 Cumulative effect of an accounting change  —   — 
       
 
Net income (loss)
  135,056   (8,643)
       

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  Fiscal Year ended
  March 31
   
  2005 2006
     
  (Yen in millions)
Consolidated
        
 Financial service revenue  537,715   720,566 
 Net sales and operating revenue  6,621,901   6,754,870 
       
    7,159,616   7,475,436 
 Costs and expenses  7,045,697   7,284,181 
 
Operating income
  113,919   191,255 
 Other income (expenses), net  43,288   95,074 
       
 
Income before income taxes
  157,207   286,329 
 Income taxes and other  (11,344)  162,713 
       
 
Income before cumulative effect of an accounting change
  168,551   123,616 
 Cumulative effect of an accounting change  (4,713)  — 
       
 
Net income
  163,838   123,616 
       
All Other
      During the fiscal year ended March 31, 2006, sales within All Other were comprised mainly of sales from SMEJ, a Japanese domestic recorded music business; SMEI’s music publishing business; SCN, an Internet-related service business subsidiary operating mainly in Japan; a retailer of imported general merchandise in Japan; an in-house facilities management business in Japan; and an advertising agency business in Japan. Results for the first four months of the previous fiscal year in All Other incorporated the results for SMEI’s recorded music business, which, as noted above, was combined with Bertelsmann AG’s recorded music business to form the SONY BMG joint venture which is accounted for by the equity method.
      Sales for the fiscal year ended March 31, 2006 decreased by 51.0 billion yen, or 11.1 percent, to 408.9 billion yen, compared with the previous fiscal year. Of total segment sales, 80 percent were sales to outside customers. In terms of profit performance, operating income for All Other increased for the fiscal year from 4.2 billion yen to 16.2 billion yen.
      During the fiscal year, the sales decrease within All Other reflects the fact that, as noted above, the results for the first four months of the previous fiscal year in All Other incorporated the results for SMEI’s recorded music business.
      Sales at SMEJ were relatively unchanged compared with the previous fiscal year. Best selling albums during the fiscal year includedKen Hirai 10th Anniversary Complete Single Collection ’95-’05 “Uta Baka”by Ken Hirai,NATURALby ORANGE RANGE andBESTby Mika Nakashima.
      Excluding sales recorded within Sony’s music business, there was an increase in sales within All Other. This increase was mainly due to strong sales at a business engaged in the production and marketing of animation products, favorable sales both at SCN and its subsidiaries, as well as an increase in sales recorded at an imported general merchandise retail business.
      Regarding profit performance within All Other, operating income of 16.2 billion yen was recorded, an 12.0 billion yen increase compared to the 4.2 billion yen of operating income recorded in the previous fiscal year. This increase was mainly the result of the fact that the results for SMEI’s recorded music business, which recorded an operating loss in the previous fiscal year, are now recorded as part of the results of the SONY BMG joint venture, and the continued strong performance at SMEJ, where operating income increased approximately 40 percent compared to the previous fiscal year mainly due to an improvement in the cost of sales ratio and the recording of a net gain resulting from the transfer to the Japanese government of the substitutional portion of Sony’s Employee Pension Fund.

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      Excluding the operating income recorded in the music business, a loss was recorded within All Other mainly as the result of an asset impairment write-down associated with the sale of the Metreon, a U.S. entertainment complex. This was offset to some extent by cost reductions at network related businesses within Sony Corporation.
      In June 2006, Sony Corporation transferred 51 percent stock of StylingLife Holdings Inc., a holding company covering six retail companies within Sony previously included within All Other, to a wholly-owned subsidiary of Nikko Principal Investments Japan Ltd. As a result of this transaction, Sony recognized a 18.0 billion yen gain on change in interest in subsidiaries and equity investees during the first quarter of the fiscal year ending March 31, 2007.
Foreign Exchange Fluctuations and Risk Hedging
      During the fiscal year ended March 31, 2006, the average value of the yen was 112.3 yen against the U.S. dollar, and 136.3 yen against the Euro, which was 5.1 percent lower against the U.S. dollar and 2.0 percent lower against the Euro, respectively, compared with the average of the previous fiscal year. 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, 2006, as if the value of the yen had remained constant.
      In the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of SPE (aU.S.-based operation that has worldwide subsidiaries).
      Therefore, analysis and discussion of certain portions of the operating results of SPE are specified as being on “a U.S. dollar basis.” Results on a local currency basis and results on a U.S. dollar basis are not on the same basis as Sony’s consolidated financial statements and do not conform with U.S. GAAP. In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that local currency basis results provide additional useful information to investors regarding operating performance.
      Sony’s consolidated results are subject to foreign currency rate fluctuations mainly derived from the fact that the countries where manufacturing takes place may be different from those where such products are sold. In order to reduce the risk caused by such fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy. Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies.
      Sony Global Treasury Services Plc (“SGTS”) in London provides integrated treasury services for Sony Corporation and its subsidiaries. Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should enter into commitments with SGTS for hedging their exposures. Sony Corporation and most of its subsidiaries utilize SGTS for this purpose. The concentration of foreign exchange exposures at SGTS means that, in effect, SGTS hedges the net foreign exchange exposure of Sony Corporation and its subsidiaries. SGTS in turn enters into foreign exchange transactions with creditworthy third-party financial institutions. Most of the transactions are entered into against projected exposures before the actual export and import transactions take place. In general, SGTS hedges the projected exposures on average three months before the actual transactions take place. However, in certain cases SGTS partially hedges the projected exposures one month before the actual transactions take place when business requirements such as shorter production-sales cycle for certain products arise. Sony enters into foreign exchange transactions with financial institutions primarily for hedging purposes. Sony does not use these derivative financial instruments for trading or speculative purposes except for certain derivatives in the Financial Services segment utilized for portfolio investments and Asset Liability Management (“ALM”).

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      To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.
      Changes in the fair value of derivatives designated as cash flow hedges, including foreign exchange forward contracts and foreign currency option contracts, are initially recorded in accumulated other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges aremarked-to-market with changes in value recognized in Other Income and Expenses. The notional amounts of foreign exchange forward contracts, currency option contracts purchased and currency option contracts written as of March 31, 2006 were 1,489.2 billion yen, 457.4 billion yen and 163.7 billion yen, respectively.
Operating Results for the Fiscal Year Ended March 31, 2005 compared with the Fiscal Year Ended March 31, 2004
Overview
      After translation of Sony’s financial results into yen (the currency in which Sony’s financial statements are prepared), in accordance with Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”). Sony’s sales and operating revenue (“sales”) for the fiscal year ended March 31, 2005 decreased 4.5 percent compared with the previous fiscal year. On a local currency basis (regarding references to results of operations expressed on a local currency basis, refer to “Foreign Exchange Fluctuations and Risk Hedging
Overview
      After translation of Sony’s financial results into yen (the currency in which Sony’s financial statements are prepared), in accordance with Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”), Sony’s sales and operating revenue (“sales”) for the fiscal year ended March 31, 2005 decreased 4.5 percent compared with the previous fiscal year. On a local currency basis (regarding references to results of operations expressed on a local currency basis, refer to“Foreign Exchange Fluctuations and Risk Hedging”” below), sales for the fiscal year decreased approximately 3 percent. This decrease is mainly due to the fact that, as of August 1, 2004, the sales of Sony’s overseas recorded music business are no longer recorded within Sony’s consolidated sales as a result of the establishment of SONY BMG, MUSIC ENTERTAINMENT (“SONY BMG”), which is accounted for by the equity method, through the merger of Sony’s overseas recorded music business with Bertelsmann AG’s recorded music business, and a change in the method of recognizing insurance premiums received on certain products at Sony Life, as of the third quarter beginning October 1, 2003, from being recorded as revenues to being offset against the related provision for future insurance policy benefits.
      Operating income increased 15.2 percent compared with the previous fiscal year. On a local currency basis, operating income increased approximately 26 percent compared with the previous fiscal year. In addition to a decrease in restructuring charges compared to the previous fiscal year, several segments experienced an improvement in profitability such as the Pictures segment, whereSpider-Man 2was a significant contributor, and the Music segment, where several best-selling albums and singles in Japan contributed to improved profitability. On the other hand, the Electronics segment, where the cost of sales ratio deteriorated due to pricing pressures, and the Game segment, where there was a decrease in hardware sales, both experienced deteriorated profitability.

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Restructuring
      In the fiscal year ended March 31, 2005, Sony recorded restructuring charges of 90.0 billion yen, a decrease from the 168.1 billion yen recorded in the previous fiscal year. The primary restructuring activities were in the Electronics and Music segments.
      Of the total 90.0 billion yen, Sony recorded 53.6 billion yen in personnel related provision for future insurance policy benefits.
      Operating income increased 15.2 percent compared with the previous fiscal year. On a local currency basis, operating income increased approximately 26 percent compared with the previous fiscal year. In addition to a decrease in restructuring charges compared to the previous fiscal year, increased operating income was recorded in the Pictures segment, whereSpider-Man 2was a significant contributor, and operating income was recorded in All Other, where several best-selling albums and singles at SMEJ contributed to improved profitability. On the other hand, the Electronics segment, where the cost of sales ratio deteriorated due to pricing pressures, and the Game segment, where there was a decrease in hardware sales, both experienced deteriorated profitability.
Restructuring
      In the fiscal year ended March 31, 2005, Sony recorded restructuring charges of 90.0 billion yen, a decrease from the 168.1 billion yen recorded in the previous fiscal year. The primary restructuring activities were in the Electronics segment and All Other.
      Of the total 90.0 billion yen, Sony recorded 53.6 billion yen in personnel-related costs. This expense was incurred because 12,000 people, mainly in Japan, the U.S. and Western Europe, left the company primarily through early retirement programs.
      For more detailed information about restructuring, please refer to Note 17 of Notes to the Consolidated Financial Statements.
Electronics
      Restructuring charges in the Electronics segment for the fiscal year ended March 31, 2005 were 81.8 billion yen, compared to 143.3 billion yen in the previous fiscal year. Of these restructuring charges, restructuring charges of 2.1 billion yen and 1.1 billion yen, for the years ended March 31, 2004 and 2005, respectively, were recorded in the non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment but reclassified to the Electronics segment.
      Restructuring charges in the Electronics segment for the fiscal year ended March 31, 2005 were 83.2 billion yen, compared to 145.7 billion yen in the previous fiscal year. Of these restructuring charges, for

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the fiscal year ended March 31, 2004 restructuring charges of 2.1 billion yen were recorded in Sony’s non-Japan disc manufacturing and physical distribution businesses, formerly included within the Music segment, a separate reporting segment until the end of the previous fiscal year, have been reclassified to the Electronics segment to recognize the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. See Note 24 of Notes to the Consolidated Financial Statements for more information on this reclassification.
      In the fiscal year ended March 31, 2004, Sony made a decision to shut down certain TV display CRT manufacturing operations in Japan to rationalize production facilities and downsize its business, due to a contraction in the market as a result of a shift in demand from CRT televisions to plasma and liquid crystal display (“LCD”) panel televisions. In the year ended March 31, 2005, as part of this restructuring program, Sony recorded a non-cash impairment charge of 7.5 billion yen for the CRT TV display manufacturing facilities located in Europe. The impairment charge was calculated as the difference between the carrying value of the asset group and the present value of estimated future cash flows. The charge was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income.
      In addition to the above restructuring efforts, Sony undertook several headcount reduction programs to further reduce operating costs in the Electronics segment. As a result of these programs, Sony recorded restructuring charges of 50.3 billion yen for the fiscal year ended March 31, 2005, and these charges were included in selling, general and administrative expenses in the consolidated statements of income. These staff reductions were achieved worldwide mostly through the implementation of early retirement programs. The remaining liability balance as of March 31, 2005 was 14.0 billion yen and will be paid through the fiscal year ending March 31, 2006. Sony will continue seeking the appropriate headcount level to optimize the workforce in the Electronics segment.
      In the fiscal year ended March 31, 2004, Sony made a decision to shut down certain CRT TV display manufacturing operations in Japan to rationalize production facilities and downsize its business, due to a contraction in the market as a result of a shift in demand from CRT televisions to plasma and LCD panel televisions. In the fiscal year ended March 31, 2005, as part of this restructuring program, Sony recorded a non-cash impairment charge of 7.5 billion yen for the CRT TV display manufacturing facilities located in Europe. The impairment charge was calculated as the difference between the carrying value of the asset group and the present value of estimated future cash flows. The charge was recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income.
      In addition to the above restructuring efforts, Sony undertook several headcount reduction programs to further reduce operating costs in the Electronics segment. As a result of these programs, Sony recorded restructuring charges of 51.0 billion yen for the fiscal year ended March 31, 2005, and these charges were included in selling, general and administrative expenses in the consolidated statements of income. These staff reductions were achieved worldwide mostly through the implementation of early retirement programs. The remaining liability balance as of March 31, 2005 was 14.0 billion yen and will be paid through the fiscal year ended March 31, 2006.
MusicAll Other
      Restructuring charges in the Music segment, including at Sony Music Entertainment (Japan) Inc. (“SMEJ”), for the fiscal year ended March 31, 2005 were 3.8 billion yen, compared to 9.9 billion yen in the previous fiscal year.
      Due
      Restructuring charges in All Other, including at SMEJ, for the fiscal year ended March 31, 2005 were 5.3 billion yen, compared to 13.7 billion yen in the previous fiscal year.
      With regard to Sony’s music business included within All Other, due to the continued contraction of the worldwide music market caused by slow worldwide economic growth, the saturation of the CD market, the effects of piracy and other illegal duplication, parallel imports, pricing pressures and the diversification of customer preferences, Sony has been actively repositioning the Music segment for the future by looking to create a more effective and profitable business model. As a result, the Music segment has undertaken a worldwide restructuring program since the fiscal year ended March 31, 2001 to reduce staffing and other costs through the consolidation and rationalization of facilities worldwide.
      During the fiscal year ended March 31, 2005, in continuation of the worldwide restructuring program and in connection with the merger of its recorded music business into a joint venture with Bertelsmann AG, Sony recorded restructuring charges totaling 3.0 billion yen within the Music segment. These restructuring charges exclude restructuring charges that were recorded in the non-Japan based disc manufacturing and physical

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

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

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      For the fiscal year ended March 31, 2005, a loss on devaluation of securities investments of 3.7 billion yen was recorded, an improvement of 12.8 billion yen, or 77.5 percent, compared with the previous year. This improvement was primarily due to the recording of valuation losses of 10.3 billion yen in the previous fiscal year related to securities issued by a privately held Japanese company engaged in cable broadcasting and other businesses which Sony accounted for under the cost method.
      The gain on change in interest in subsidiaries and equity investees increased by 11.5 billion yen, or 235.2 percent compared to the previous fiscal year to 16.3 billion yen. This was mainly the result of gains of 9.0 billion yen from a change in interest from Monex Inc., an equity affiliate of Sony, following its business integration by way of share transfer with Nikko Beans, Inc and total gains of 4.7 billion yen from the sale of stock and a change in interest in a subsidiary resulting from the initial public offering of the worldwide music market caused by slow worldwide economic growth, the saturation of the CD market, the effects of piracy and other illegal duplication, parallel imports, pricing pressures and the diversification of customer preferences, Sony has been actively repositioning its music business for the future by looking to create a more effective and profitable business model. As a result, Sony’s music business has undertaken a worldwide restructuring program since the fiscal year ended March 31, 2001 to reduce staffing and other costs through the consolidation and rationalization of facilities worldwide.
      During the fiscal year ended March 31, 2005, in continuation of the worldwide restructuring program and in connection with the merger of its recorded music business into a joint venture with Bertelsmann AG, Sony recorded restructuring charges totaling 3.0 billion yen within its music business. These restructuring charges exclude restructuring charges that were recorded in the disc manufacturing and physical distribution businesses that were formerly included within the Music segment, a separate reporting segment until the end of the previous fiscal year, but have now been reclassified to the Electronics segment. Restructuring activities included the shutdown of certain distribution operations after the establishment of the recorded music joint venture with Bertelsmann AG as well as the further rationalization of overhead functions through staff reductions. The restructuring charges consisted of personnel-related costs of 0.9 billion yen and other related costs of 2.1 billion yen. These charges are included in selling, general and administrative expenses in the consolidated statements of income. Positions were eliminated across various employee levels, business functions, operating units, and geographic regions during this phase of the worldwide restructuring program.
      Excluding restructuring within Sony’s consolidated music business, 2.0 billion yen of restructuring charges were recorded within All Other during the fiscal year ended March 31, 2005, mainly as a result of non-cash impairment charges recorded at resulting network-related businesses within Sony Corporation as a result of business reorganizations. The restructuring charges consisted of personnel-related costs of 0.7 billion yen and other related costs of 1.3 billion yen.

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Operating Performance
             
  Fiscal Year Ended  
  March 31  
     
  2004 2005 Percent change
       
  (Yen in billions)  
Sales and operating revenue  7,496.4   7,159.6   -4.5%
Operating income  98.9   113.9   +15.2 
Income before income taxes  144.1   157.2   +9.1 
Equity in net income of affiliated companies  1.7   29.0   +1,594.2 
Net income  88.5   163.8   +85.1 
Sales
      Sales for the fiscal year ended March 31, 2005 decreased by 336.8 billion yen, or 4.5 percent, to 7,159.6 billion yen compared with the previous fiscal year. A further breakdown of sales figures is presented under“Operating Performance by Business Segment”below.
      “Sales” in this analysis of the ratio of selling, general and administrative expenses to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue, and excludes Financial service revenue. This is because Financial Service expenses are recorded separately from cost of sales and selling, general and administrative expenses. Furthermore, in the analysis of cost of sales, including research and development costs, to sales, only “net sales” are used. This is because cost of sales is an expense associated only with net sales. The calculations of all ratios below that pertain to business segments include intersegment transactions.
Cost of Sales and Selling, General and Administrative Expenses
      Cost of sales for the fiscal year ended March 31, 2005 decreased by 58.1 billion yen, or 1.1 percent, to 5,000.1 billion yen compared with the previous fiscal year, but increased from 73.5 percent to 76.2 percent as a percentage of sales. Year on year, the cost of sales ratio rose from 78.9 percent to 81.8 percent in the Electronics segment, increased from 70.1 percent to 73.0 percent in the Game segment and decreased from 74.0 percent to 73.7 percent in All Other. On the other hand, the cost of sales ratio improved in the Pictures segment from 60.0 percent to 58.7 percent.
      In the Electronics segment, there was a deterioration in the cost of sales ratio particularly within the CRT television, portable audio, DVD recorder (including PSX) and video camera businesses. In the Game segment, there was an increase in the cost of sales ratio as a result of costs associated with both the launch of PSP and the changeover to the new PS2 model. In the Pictures segment, the cost of sales ratio also improved primarily due to the substantial contribution fromSpider-Man 2. In All Other, there was an improvement in the cost of sales ratio in the music business due to the establishment of SONY BMG which is accounted for under the equity method resulting in a higher percentage of sales being derived from SMEJ which benefited from the contribution of greatest hits album sales.
      Personnel-related costs included in cost of sales decreased by 52.5 billion yen compared with the previous fiscal year, primarily within the Electronics segment.
      Research and development costs (all research and development costs are included within cost of sales) for the fiscal year ended March 31, 2005 decreased by 12.5 billion yen to 502.0 billion yen compared with the previous fiscal year. The ratio of research and development costs to sales was 7.6 percent compared to 7.5 percent in the previous fiscal year.
      Selling, general and administrative expenses for the fiscal year ended March 31, 2005 decreased by 263.2 billion yen, or 14.6 percent, to 1,535.0 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales improved from 25.9 percent in the previous fiscal year to 23.2 percent. Year on year, the ratio of selling, general and administrative expenses to sales improved from 21.2 percent to 19.0 percent in the Electronics segment, from 21.1 percent to 21.0 percent in the Game

46

segment, and improved from 39.5 percent to 37.3 percent in All Other, and from 35.0 percent to 32.5 percent in the Pictures segment.
      Personnel-related costs in selling, general and administrative expenses decreased by 169.3 billion yen compared with the previous fiscal year mainly due to a decrease in severance related expenses in the Electronics segment resulting from the implementation of restructuring initiatives, and the fact that personnel-related costs in Sony’s recorded music business outside Japan are no longer recorded within Sony’s consolidated selling, general and administrative expenses due to the establishment of SONY BMG mentioned above. In addition, advertising and publicity expenses for the fiscal year decreased by 51.6 billion yen compared to the previous fiscal year. This was primarily due to the fact that advertising and publicity expenses that were recorded in All Other decreased due to the establishment of SONY BMG and a reduction in advertising and publicity expenses in the Pictures segment.
      Loss on sale, disposal or impairment of assets, net was 28.0 billion yen, compared with 35.5 billion in the previous fiscal year. Although losses were recorded on the sale, disposal and impairment of CRT and CRT television production equipment in the Electronics segment, gains were recorded mainly from the sale of land and buildings in both the Electronics segment and All Other.
Operating Income
      Operating income for the fiscal year ended March 31, 2005 increased by 15.0 billion yen, or 15.2 percent, to 113.9 billion yen compared with the previous fiscal year. The operating income margin increased from 1.3 percent to 1.6 percent. The business segments that contributed the most to operating income, in descending order by amount of financial impact, were the Pictures, Financial Services and Game segments. On the other hand, the Electronics segment recorded an operating loss mainly due to the appreciation of the yen against the U.S. dollar as well as an increase in cost of sales that exceeded the reduction in selling, general and administrative expenses. For a further breakdown of operating income for each segment, please refer to“Operating Performance by Business Segment”below.
Other Income and Expenses
      In the consolidated results for the fiscal year ended March 31, 2005, other income decreased by 24.7 billion yen, or 20.2 percent, to 97.6 billion yen, while other expenses decreased by 22.8 billion yen, or 29.5 percent, to 54.3 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 43.3 billion yen, a decrease of 1.9 billion yen, or 4.2 percent, compared with the previous fiscal year.
      A net foreign exchange loss of 0.5 billion yen was recorded in the fiscal year ended March 31, 2005, compared to a net foreign exchange gain of 18.1 billion yen recorded in the previous fiscal year. The net foreign exchange loss was recorded because the value of the yen, especially during the first quarter of the fiscal year ended March 31, 2005, was lower than the value of the yen at the time that Sony entered into foreign exchange forward contracts and foreign currency option contracts. These contracts are entered into by Sony to mitigate the foreign exchange rate risk to cash flows that arises from settlements of foreign currency denominated accounts receivable and accounts payable, as well as foreign currency denominated transactions between consolidated subsidiaries.
      For the fiscal year ended March 31, 2005, a loss on devaluation of securities investments of 3.7 billion yen was recorded, an improvement of 12.8 billion yen, or 77.5 percent, compared with the previous year. This improvement was primarily due to the recording of valuation losses of 10.3 billion yen in the previous fiscal year related to securities issued by a privately held Japanese company engaged in cable broadcasting and other businesses which Sony accounted for under the cost method.
      The gain on change in interest in subsidiaries and equity investees increased by 11.5 billion yen, or 235.2 percent compared to the previous fiscal year to 16.3 billion yen. This was mainly the result of gains of 9.0 billion yen from a change in interest from Monex Inc., an equity affiliate of Sony, following its business integration by way of share transfer with Nikko Beans, Inc and total gains of 4.7 billion yen from the sale of

47

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

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

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      As of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses, excluding Sony’s Japanese recorded music business, in a joint venture. The newly formed company, SONY BMG, is 50 percent owned by each parent company. Under U.S. GAAP, SONY BMG is accounted for by Sony using the equity method and, since August 1, 2004, 50 percent of net profits or losses of this business have been included under equity in net income (loss) of affiliated companies.
      In connection with the establishment of this joint venture, Sony’s non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment, have been reclassified to the Electronics segment to reflect the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. Results for the previous fiscal year in the Electronics and Music segments have been restated to account for this reclassification.
      In the Music segment, results for the fiscal year ended March 31, 2005 only include the results of Sony Music Entertainment Inc.’s (“SMEI”) recorded music business for the months of April through July 2004, and the twelve months results of SMEI’s music publishing business and SMEJ. However, results for the previous fiscal year in the Music segment include the consolidated results for SMEI’s recorded music business for all twelve months of the fiscal year, as well as the full year’s results for SMEI’s music publishing business and SMEJ.
      In July 2004, in order to establish a more efficient and coordinated semiconductor supply structure, Sony completed the integration of its semiconductor manufacturing business by transferring Sony Computer Entertainment’s semiconductor manufacturing operation from the Game segment to the Electronics segment. As a result of this transfer, sales revenue and expenditures associated with this operation are now recorded within the “Semiconductor” category in the Electronics segment. The results for the same period of the previous fiscal year have not been restated as such comparable figures cannot be practically obtained given that it was not operated as a separate business within the Game segment. This integration of the semiconductor manufacturing businesses is a part of Sony’s semiconductor strategy of utilizing semiconductor technologies and manufacturing equipment originally developed or designed for the Game business within Sony as a whole.
Electronics
      Sales for the fiscal year ended March 31, 2005 decreased 20.7 billion yen, or 0.4 percent, to 5,021.6 billion yen compared with the previous fiscal year. An operating loss of 34.3 billion in the Electronics segment was recorded compared to the operating loss of 6.8 billion yen in the previous fiscal year. Sales to outside customers on a yen basis decreased 1.1 percent compared to the previous fiscal year. Regarding sales to outside customers by geographical area, although sales decreased in Japan by 10 percent and in the U.S. by 4 percent, they remained almost unchanged in Europe and increased by 9 percent in non-Japan Asia and other geographic areas (“Other Areas”).
      In Japan, although there was a significant increase in the sales of LCD televisions, and an increase in the sales of DVD recorders (including PSX), there was a decrease in the sales of PCs, cellular
      Income before income taxes for the fiscal year ended March 31, 2005 increased 13.1 billion yen, or 9.1 percent, to 157.2 billion yen compared with the previous fiscal year, as a result of the increase in operating income and the decrease in net amount of other income and other expenses mentioned above.
Income Taxes
      Income taxes for the fiscal year ended March 31, 2005 decreased by 36.7 billion yen, or 69.6 percent, to 16.0 billion yen. Compared to an effective tax rate of 36.6 percent in the previous fiscal year, the effective tax rate was 10.2 percent in the current fiscal year. As a result of the recording of operating losses in the past, the U.S. subsidiaries of Sony have had valuation allowances against deferred tax assets for U.S. federal taxes and certain state taxes. However, in the fiscal year ended March 31, 2005, based on both improved operating results in recent years and a sound outlook for the future operating performance at Sony’s U.S. subsidiaries, Sony reversed 67.9 billion yen of such valuation allowances, resulting in a reduction to income tax expense. On the other hand, certain of Sony’s subsidiaries recorded new valuation allowances against deferred tax assets during the fiscal year ended March 31, 2005.
Results of Affiliated Companies Accounted for under the Equity Method
      Equity in net income of affiliated companies during the fiscal year ended March 31, 2005 was 29.0 billion yen, an increase of 27.3 billion yen, or 1,594.2 percent, compared to 1.7 billion yen recorded in the previous fiscal year. Equity in net income of Sony Ericsson, a joint venture focused on mobile phone handsets, was 17.4 billion yen, an increase of 11.0 billion yen, or 171.9 percent, compared to the 6.4 billion yen recorded in the previous fiscal year. Equity in net income of affiliated companies for the current fiscal year includes the recording of 12.6 billion yen as equity in net income from InterTrust. This amount reflects InterTrust’s proceeds from a license agreement with Microsoft Corporation arising from the settlement of a patent-related lawsuit. In addition, due to significant restructuring costs, an equity loss of 3.4 billion yen was recorded at SONY BMG. Furthermore, equity in net loss was recorded at affiliates such as Star Channel Inc., a Japan-based subscription television company specializing in the broadcast of movies, andS-LCD, a joint-venture with Samsung Electronics Co., Ltd. for the manufacture of amorphous TFT LCD panels.
Minority Interest in Income of Consolidated Subsidiaries
      In the fiscal year ended March 31, 2005, minority interest in income of consolidated subsidiaries decreased by 0.7 billion yen, or 30.6 percent, to 1.7 billion yen. This decrease was primarily due to the recording of minority interest at certain television and home entertainment subsidiaries in the Pictures segment in the previous fiscal year.
Net Income
      Net income for the fiscal year ended March 31, 2005 increased by 75.3 billion yen, or 85.1 percent, to 163.8 billion yen compared with the previous fiscal year. This increase was the result primarily of the abovementioned increase in income before income taxes, a decrease in the effective tax rate, as well as an increase in equity in net income of affiliated companies. As a percentage of sales, net income increased from 1.2 percent to 2.3 percent. Return on stockholders’ equity increased from 3.8 percent to 6.2 percent. (This

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ratio is calculated by dividing net income by the simple average of stockholders’ equity at the end of the previous fiscal year and at the end of the fiscal year ended March 31, 2005.)
      Basic net income per share was 175.90 yen compared with 95.97 yen in the previous fiscal year, and diluted net income per share was 158.07 yen compared with 87.00 yen in the previous fiscal year. Refer to Notes 2 and 21 of Notes to Consolidated Financial Statements.
Operating Performance by Business Segment
      The following discussion is based on segment information. Sales and operating revenue in each business segment include intersegment transactions. Refer to Note 24 of Notes to Consolidated Financial Statements.
Business Segment Information
              
  Fiscal Year Ended  
  March 31  
     
  2004 2005 Percent change
       
  (Yen in billions)  
Sales and operating revenue
            
 Electronics  5,087.5   5,066.8   -0.4%
 Game  780.2   729.8   -6.5 
 Pictures  756.4   733.7   -3.0 
 Financial Services  593.5   560.6   -5.6 
 All Other  662.8   459.9   -30.6 
 Elimination  (384.0)  (391.1)  — 
          
Consolidated  7,496.4   7,159.6   -4.5 
          
              
  Fiscal Year Ended  
  March 31  
     
  2004 2005 Percent change
       
  (Yen in billions)  
Operating income (loss)
            
 Electronics  (8.1)  (34.3)  — 
 Game  67.6   43.2   -36.1%
 Pictures  35.2   63.9   +81.4 
 Financial Services  55.2   55.5   +0.6 
 All Other  (16.2)  4.2   — 
          
Total  133.7   132.5   -0.9 
 Elimination and unallocated corporate expenses  (34.8)  (18.6)  — 
          
Consolidated  98.9   113.9   +15.2 
          
      As of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses in a joint venture. The newly formed company, SONY BMG, is 50 percent owned by each parent company. Under U.S. GAAP, SONY BMG is accounted for by Sony using the equity method and, since August 1, 2004, 50 percent of net profits or losses of this business have been included under “Equity in net income (loss) of affiliated companies.”
      In connection with the establishment of this joint venture, Sony’s non-Japan-based disc manufacturing and physical distribution businesses, formerly included within All Other, have been reclassified to the Electronics segment to recognize the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. Effective April 1, 2005, a similar change was made with respect to Sony’s Japan-based disc manufacturing business. Results for the fiscal years ended

49

March 31, 2004 and March 31, 2005 in the Electronics segment have been restated to account for these reclassifications.
      Effective April 1, 2005, Sony no longer breaks out its music business as a reportable segment as it no longer meets the materiality threshold. Accordingly, the results for Sony’s music business are now included within All Other and the results for the fiscal year ended March 31, 2004 and March 31, 2005 have been reclassified to All Other for comparative purposes. Results for the fiscal year ended March 31, 2005 in All Other include the consolidated results for SMEI’s recorded music business for the period through August 1, 2004, as well as the results for SMEI’s music publishing business and SMEJ excluding Sony’s Japan-based disc manufacturing business. However, results for the fiscal year ended March 31, 2004 include the consolidated results for SMEI’s recorded music business for the full twelve month period, as well as the results for SMEI’s music publishing business and SMEJ excluding Sony’s Japan-based disc manufacturing business.
      In July 2004, Sony completed the integration of its semiconductor manufacturing business in order to establish a more efficient and coordinated semiconductor supply structure by transferring Sony Computer Entertainment’s semiconductor manufacturing operation from the Game segment to the Electronics segment. As a result of this transfer, sales revenue and expenditures associated with this operation are now recorded within the “Semiconductor” category in the Electronics segment. The results for the same period of the prior fiscal years have not been restated as such comparable figures cannot be practically obtained given that the semiconductor manufacturing operation was not operated as a separate line of business within the Game segment. This integration of the semiconductor manufacturing businesses is a part of Sony’s semiconductor strategy of utilizing semiconductor technologies and manufacturing equipment originally developed or designed for the Game business within Sony as a whole.
Electronics
      Sales for the fiscal year ended March 31, 2005 decreased 20.6 billion yen, or 0.4 percent, to 5,066.8 billion yen compared with the previous fiscal year. An operating loss of 34.3 billion in the Electronics segment was recorded compared to the operating loss of 8.1 billion yen in the previous fiscal year. Sales to outside customers on a yen basis decreased 1.1 percent compared to the previous fiscal year. Regarding sales to outside customers by geographical area, although sales decreased in Japan by 10 percent and in the U.S. by 4 percent, they remained almost unchanged in Europe and increased by 9 percent in non-Japan Asia and other geographic areas (“Other Areas”).
      In Japan, although there was a significant increase in the sales of LCD televisions, and an increase in the sales of DVD recorders (including PSX), there was a decrease in the sales of PCs, mobile phones, primarily to Sony Ericsson, broadcast- and professional-use equipment and CRT televisions. In the U.S., there was an increase in sales of LCD rear projection televisions and digital still cameras, although sales mainly of CRT televisions, PCs, computer displays and portable audio declined. In Europe, sales increased, primarily of digital still cameras, LCD televisions and plasma televisions. However, there was a decrease in the sales mainly of CRT televisions and portable audio. In Other Areas, sales mainly of digital still cameras, CD-R/RW and DVD+/-R/RW drives and PCs increased while sales of primarily portable audio, optical pickups and home audio decreased.
Performance by Product Category
      Sales and operating revenue by product category discussed below represent sales to outside customers, which do not include intersegment transactions. Refer to Note 24 of Notes to Consolidated Financial Statements.

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      “Audio” sales decreased by 103.6 billion yen, or 15.3 percent, to 571.9 billion yen. Sales of headphone stereos declined as a result of a significant decrease in the unit shipments of both CD format and MD format devices due to a shift in demand towards hard disc- and flash-based memory players. Worldwide shipments of CD format devices decreased by approximately 3.68 million units to approximately 7.28 million units and worldwide shipments of MD format devices decreased by approximately 1.44 million units to 1.92 million

50

units. Sales of home audio declined primarily due to a contraction of the market. On the other hand, overall sales of car audio increased slightly due to strong sales in the European market and Other Areas.
      “Video” sales increased by 87.0 billion yen, or 9.2 percent, to 1,036.3 billion yen. There was a growth in the sales of digital cameras outside of Japan and DVD recorders (including PSX) recorded a significant increase in sales worldwide. Worldwide shipments of digital cameras increased by approximately 4.0 million units to approximately 14.0 million units. Worldwide shipments of DVD recorders were approximately 650,000 units in the previous fiscal year but increased to approximately 1.7 million units in the fiscal year ended March 31, 2005. Worldwide shipments of home-use video cameras increased by approximately 750,000 units to approximately 7.35 million units, but overall sales remained almost unchanged, due to increased price competition. DVD-Video player sales decreased due to pricing pressure, although unit shipments increased by approximately 1.0 million units to approximately 9.5 million units.
      “Televisions” sales increased by 36.6 billion yen, or 4.1 percent, to 921.2 billion yen. In addition to a significant increase in worldwide sales of LCD televisions, there was a significant increase in the sales of plasma televisions outside of Japan, particularly in Europe, and of projection televisions in the U.S. Worldwide shipments of LCD televisions increased by approximately 570,000 units, compared to the previous fiscal year, to approximately 1.0 million units; plasma television shipments increased by approximately 90,000 units to approximately 300,000 units; and projection televisions shipments increased by approximately 280,000 units to approximately 1.2 million units. On the other hand, although there was an increase in worldwide shipments of CRT televisions by approximately 100,000 units to approximately 9.5 million units, sales decreased significantly as a result of a fall in unit prices due to the continued shift in demand towards flat panel televisions. In addition, sales of computer displays also decreased worldwide.
      “Information and Communications” sales decreased by 62.7 billion yen, or 7.1 percent, to 816.2 billion yen. Despite an increase in notebook PC sales due to strong sales outside Japan, overall sales decreased due to a decrease in sales of desktop PCs. Worldwide unit shipments of PCs increased approximately 100,000 units to approximately 3.3 million units. Sales of personal digital assistants decreased significantly due to a downsizing of the business. Sales of broadcast- and professional-use products decreased slightly compared to the previous fiscal year, despite recording increased sales outside Japan, as sales in Japan decreased as a result of the recording of higher sales, in the previous fiscal year, from the sale of equipment to two television stations which opened new broadcasting facilities.
      “Semiconductors” sales decreased by 6.9 billion yen, or 2.7 percent, to 246.3 billion yen. The decrease was due to a decrease in sales of CCDs as the result of pricing pressures. Regarding LCDs, sales of low temperature polysilicon LCDs for mobile phones increased significantly.
      “Components” sales decreased by 4.3 billion yen, or 0.7 percent, to 619.5 billion yen. The decrease was primarily due to a decrease in sales ofCD-R/RW drives and optical pickups associated mainly with significant declines in unit prices. Sales ofDVD+/-R/RW drives increased due to a production and sales alliance with a third party. Regarding lithium-ion batteries, sales for use in digital cameras and mobile phones increased.
      “Other” sales increased by 1.8 billion yen, or 0.3 percent, to 595.2 billion yen. The increase resulted from increased sales at Sony’s non-Japan-based disc manufacturing business. However, there was a slight decrease in sales of mobile phone handsets mainly to Sony Ericsson.
      In the Electronics segment, cost of sales for the fiscal year ended March 31, 2005 increased by 131.5 billion yen, or 3.3 percent to 4,117.0 billion yen compared with the previous fiscal year. The cost of sales to sales ratio deteriorated by 2.9 percent to 81.8 percent compared to 78.9 percent in the previous fiscal year. Products that contributed to the deterioration in the cost of sales to sales ratio were CRT televisions and portable audio products, which both experienced a decrease in sales, and DVD recorders (including PSX) and video cameras, which were both impacted by falling unit prices. Restructuring charges recorded in cost of sales amounted to 9.6 billion yen, a decrease of 0.5 billion yen compared with the 10.1 billion yen recorded in the previous fiscal year. Research and development costs increased 2.4 billion yen, or 0.6 percent, from 431.0 billion yen in the previous fiscal year to 433.3 billion yen. Although there was an increase in research and development costs within the segment as a result of the transfer of semiconductor manufacturing operations

51

from the Game segment to the Electronics segment in association with the business integration of Sony’s semiconductor manufacturing operations, overall research and development costs within the segment only increased slightly as a result of the carrying out of a stringent process for the selection of research and development activities.
      Selling, general and administrative expenses decreased by 119.2 billion yen, or 11.0 percent to 960.2 billion yen compared with the previous fiscal year. The primary reason for this decrease was a decrease in restructuring charges. Of the restructuring charges recorded in the Electronics segment, the amount recorded in selling, general and administrative expenses decreased by 71.4 billion yen from 125.0 billion yen in the previous fiscal year to 53.6 billion yen. Of the restructuring charges recorded in selling, general and administrative expenses, the amount recorded for headcount reductions, including reductions through the early retirement program, was 51.0 billion yen, a decrease of 63.3 billion yen compared with the previous fiscal year. On the other hand, royalty expenses increased 17.0 billion yen. The ratio of selling, general and administrative expenses to sales decreased 2.2 percentage points from the 21.2 percent recorded in the previous fiscal year to 19.0 percent.
      Loss on sale, disposal or impairment of assets, net decreased 6.7 billion yen to 23.9 billion yen compared with the previous fiscal year. This amount includes 19.2 billion yen in restructuring charges, which includes 7.5 billion yen related to CRT and CRT televisions manufacturing facilities in Europe. The amount of restructuring charges included in loss on sale, disposal or impairment, net in the previous fiscal year was 10.6 billion yen.
      An increased operating loss was recorded in the Electronics segment for the fiscal year ended March 31, 2005 due to a significant deterioration in the cost of sales ratio, as mentioned above. Regarding profit performance by product, excluding restructuring charges, semiconductors recorded an operating loss for the fiscal year, compared to the operating profit of the previous fiscal year. This loss was due to the recording, within the Electronics segment, of research and development costs related to system large scale integration (“LSI”) manufacturing, in particular the next generation processor chip, as a result of the integration of Sony’s semiconductor manufacturing business operations within the Electronics segment mentioned above. These costs were previously recorded within the Game segment. CRT televisions and portable audio products recorded a loss for the fiscal year compared to the operating income recorded in the previous fiscal year. DVD recorders (including PSX) also experienced an increased operating loss. The operating income for video cameras also decreased.
      On the other hand, results were positively affected by a decreased operating loss from personal digital assistants through the implementation of significant business downsizing, and a significant increase in operating income recorded for PCs and broadcast- and professional-use products.
Manufacturing by Geographic Area
      Approximately 50 percent of the Electronics segment’s total annual production during the fiscal year ended March 31, 2005 took place in Japan, including the production of digital cameras, video cameras, flat panel televisions, PCs, semiconductors and components such as batteries and Memory Sticks. Approximately 60 percent of the annual production in Japan was destined for other regions. China accounted for approximately 10 percent of total annual production, approximately 70 percent of which was destined for other regions. Asia, excluding Japan and China, accounted for slightly more than 10 percent of total annual production, with approximately 60 percent destined for Japan, the U.S. and Europe. The Americas and Europe together accounted for the remaining total annual production of slightly less than 30 percent, most of which was destined for local distribution and sale.
Comparison of Results on a Local Currency Basis and Results on a Yen Basis
      In the Electronics segment, the negative effect of the appreciation of the yen against the U.S. dollar exceeded the positive effect of the appreciation of the Euro against the yen. Sales for the fiscal year ended March 31, 2005 decreased, on a yen basis, by 1.1 percent, but increased on a local currency basis by approximately 1 percent. In terms of operating performance, there was a deterioration in the operating loss

52

compared to the previous fiscal year, but if calculated on a local currency basis, this operating loss was smaller compared to the actual results on a yen basis.
      Sales to outside customers by geographic area on a yen basis decreased in Japan by 10 percent, and in the U.S. by 4 percent: however, sales in Europe remained relatively unchanged and sales increased in Other Areas by 9 percent. Sales on a local currency basis for regions outside Japan increased in the U.S. by 1 percent and in Other Areas by 13 percent, but decreased in Europe by 2 percent.
Game
      Sales for the fiscal year ended March 31, 2005 decreased by 50.5 billion yen, or 6.5 percent, to 729.8 billion yen compared with the previous fiscal year. Operating income decreased by 24.4 billion yen, or 36.1 percent, to 43.2 billion yen compared with the previous fiscal year, and the operating income margin decreased from 8.7 percent to 5.9 percent.
      Sales in the Game segment on a local currency basis decreased approximately 6 percent. In addition, on a local currency basis, operating income decreased approximately 45 percent compared to the previous fiscal year. By region, although sales increased in Japan, there was a decrease in sales in the U.S. and Europe.
      Hardware sales declined. Although there was an increase in sales in Japan primarily associated with the launch of PSP in December 2004, there was a decline in hardware sales in the U.S. and Europe associated with a decline in unit sales, and strategic price reductions, of PS2. On the other hand, both unit shipments of both CD format and MD format devices due to a shift in demand towards hard disc- and flash-based memory players. Worldwide shipments of CD format devices decreased by approximately 3.68 million units to approximately 7.28 million units and worldwide shipments of MD format devices decreased by approximately 1.44 million units to 1.92 million units. Sales of home audio declined primarily due to a contraction of the market. On the other hand, overall sales of car audio increased slightly due to strong sales in the European market and Other Areas.
      “Video” sales increased by 85.5 billion yen, or 9.0 percent, to 1,034.7 billion yen. There was a growth in the sales of digital still cameras outside of Japan and DVD recorders (including PSX) recorded a significant increase in sales worldwide. Worldwide shipments of digital still cameras increased by approximately 4.0 million units to approximately 14.0 million units. Worldwide shipments of DVD recorders were approximately 650,000 units in the previous fiscal year but increased to approximately 1.7 million units in the fiscal year ended March 31, 2005. Worldwide shipments of home-use video cameras increased by approximately 750,000 units to approximately 7.35 million units, but overall sales remained almost unchanged, due to increased price competition. DVD-Video player sales decreased due to pricing pressure, although unit shipments increased by approximately 1.0 million units to approximately 9.5 million units.
      “Televisions” sales increased by 31.6 billion yen, or 3.4 percent, to 957.1 billion yen. In addition to a significant increase in worldwide sales of LCD televisions, there was a significant increase in the sales of plasma televisions outside of Japan, particularly in Europe, and of projection televisions in the U.S. Worldwide shipments of LCD televisions increased by approximately 570,000 units, compared to the previous fiscal year, to approximately 1.0 million units; plasma television shipments increased by approximately 90,000 units to approximately 300,000 units; and projection televisions shipments increased by approximately 280,000 units to approximately 1.2 million units. On the other hand, although there was an increase in worldwide shipments of CRT televisions by approximately 100,000 units to approximately 9.5 million units, sales decreased significantly as a result of a fall in unit prices due to the continued shift in demand towards flat panel televisions. In addition, sales of computer displays also decreased worldwide.
      “Information and Communications” sales decreased by 56.4 billion yen, or 6.8 percent, to 778.4 billion yen. Despite an increase in notebook PC sales due to strong sales outside Japan, overall sales decreased due to a decrease in sales of desktop PCs. Worldwide unit shipments of PCs increased approximately 100,000 units to approximately 3.3 million units. Sales of personal digital assistants decreased significantly due to a downsizing of the business. Sales of broadcast- and professional-use products decreased slightly compared to the previous fiscal year, despite recording increased sales outside Japan, as sales in Japan decreased as a result of the recording of higher sales, in the previous fiscal year, from the sale of equipment to two television stations which opened new broadcasting facilities.
      “Semiconductors” sales decreased by 6.9 billion yen, or 2.7 percent, to 246.3 billion yen. The decrease was due to a decrease in sales of CCDs as the result of pricing pressures. Regarding LCDs, sales of low temperature polysilicon LCDs for cellular phones increased significantly.
      “Components” sales decreased by 4.3 billion yen, or 0.7 percent, to 619.5 billion yen. The decrease was primarily due to a decrease in sales of CD-R/ RW drives and optical pickups associated mainly with significant declines in unit prices. Sales of DVD+/-R/ RW drives increased due to a production and sales alliance with a third party. Regarding lithium-ion batteries, sales for use in digital still cameras and cellular phones increased.
      “Other” sales increased by 2.1 billion yen, or 0.4 percent, to 578.3 billion yen. The increase resulted from increased sales at Sony’s non-Japan based disc manufacturing business. However, there was a slight decrease in sales of mobile phone handsets mainly to Sony Ericsson.
      In the Electronics segment, cost of sales for the fiscal year ended March 31, 2005 increased by 129.1 billion yen, or 3.3 percent to 4,079.1 billion yen compared with the previous fiscal year. The cost of sales to sales ratio deteriorated by 2.9 percent to 81.8 percent compared to 78.9 percent in the previous fiscal year. Products that contributed to the deterioration in the cost of sales to sales ratio were CRT televisions and portable audio products, which both experienced a decrease in sales, and DVD recorders (including PSX) and

35

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

36

Comparison of Results on a Local Currency Basis and Results on a Yen Basis
      In the Electronics segment, the negative effect of the appreciation of the yen against the U.S. dollar exceeded the positive effect of the appreciation of the euro against the yen. Sales for the fiscal year ended March 31, 2005 decreased, on a yen basis, by 0.4 percent, but increased on a local currency basis by approximately 1 percent. In terms of operating performance, there was a deterioration in the operating loss compared to the previous fiscal year, but if calculated on a local currency basis, this operating loss was smaller compared to the actual results on a yen basis.
      Sales to outside customers by geographic area on a yen basis decreased in Japan by 10 percent, and in the U.S. by 4 percent: however, sales in Europe remained relatively unchanged and sales increased in Other Areas by 9 percent. Sales on a local currency basis for regions outside Japan increased in the U.S. by 1 percent and in Other Areas by 13 percent, but decreased in Europe by 2 percent.
Game
      Sales for the fiscal year ended March 31, 2005 decreased by 50.5 billion yen, or 6.5 percent, to 729.8 billion yen compared with the previous fiscal year. Operating income decreased by 24.4 billion yen, or 36.1 percent, to 43.2 billion yen compared with the previous fiscal year, and the operating income margin decreased from 8.7 percent to 5.9 percent.
      Sales in the Game segment on a local currency basis decreased approximately 6 percent. In addition, on a local currency basis, operating income decreased approximately 45 percent compared to the previous fiscal year. By region, although sales increased in Japan, there was a decrease in sales in the U.S. and Europe.
      Hardware sales declined. Although there was an increase in sales in Japan primarily associated with the launch of PlayStation Portable in December 2004, there was a decline in hardware sales in the U.S. and Europe associated with a decline in unit sales, and strategic price reductions, of PS2. On the other hand, both units sales and overall sales of software increased in Japan, the U.S. and Europe.
      Total worldwide production shipments of hardware and software were as follows:
              
  Fiscal Year Ended  
  March 31  
    Cumulative as of
  2004 2005 March 31, 2005
       
  (Million units)
Total Production Shipments of Hardware*            
 
PlayStation® + PS one™
  3.31   2.77   102.49 
 PlayStation 2  20.10   16.17   87.47 
 PlayStation Portable      2.97   2.97 
Total Production Shipments of Software*/**            
 PlayStation  32.00   10.00   959.00 
 PlayStation 2  222.00   252.00   824.00 
 PlayStation Portable      5.70   5.70 
*Production shipments of hardware and software were as follows:
              
  Fiscal Year Ended  
  March 31  
    Cumulative as of
  2004 2005 March 31, 2005
       
  (Million units)
Total Production Shipments of Hardware*            
 PlayStation + PS one  3.31   2.77   102.49 
 PlayStation 2  20.10   16.17   87.47 
 PlayStation Portable      2.97   2.97 
Total Production Shipments of Software*/**            
 PlayStation  32.00   10.00   959.00 
 PlayStation 2  222.00   252.00   824.00 
 PlayStation Portable      5.70   5.70 
* Production shipments of hardware and software are counted upon shipment of the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers.
** Including those both from Sony and third parties under Sony licenses.
      Operating income decreased compared with the previous fiscal year. Although there was an increase in software sales, the decrease in operating income was the result of a decrease in hardware sales coupled primarily with start up costs for the PlayStation Portable. The cost of sales to sales ratio deteriorated as a result of costs associated with both the launch of the PlayStation Portableproducts from manufacturing bases. Sales of such products are recognized when the products are delivered to customers.
** Including those both from Sony and third parties under Sony licenses.
      Operating income decreased compared with the previous fiscal year. Although there was an increase in software sales, the decrease in operating income was the result of a decrease in hardware sales coupled primarily with start up costs for the PSP. The cost of sales to sales ratio deteriorated as a result of costs associated with both the launch of the PSP and with the changeover to the new PS2 model. The ratio of selling, general and administrative expenses to sales compared to the previous fiscal year was relatively unchanged.
Pictures
      Sales for the fiscal year ended March 31, 2005 decreased by 22.7 billion yen, or 3.0 percent, to 733.7 billion yen compared with the previous fiscal year. Operating income increased by 28.7 billion yen, or 81.4 percent, to 63.9 billion yen and the operating income margin increased from 4.7 percent to 8.7 percent. The results in the Pictures segment consist of the results of SPE, aU.S.-based subsidiary.

53

      On a U.S. dollar basis, sales for the fiscal year in the Pictures segment increased approximately 1 percent and operating income increased by approximately 76 percent. Sales increased primarily due to higher worldwide home entertainment, international television syndication and worldwide theatrical revenues on films. Worldwide home entertainment and international television syndication revenues were higher as a result of the performance of films from the prior year release slate including50 First Dates, Big FishandBad Boys 2. For theatrical revenues, the success of the current year film slate, particularlySpider-Man 2,HitchandThe Grudge, more than offset the impact of releasing fewer films this fiscal year. Sales for the fiscal year release slate decreased 70 million U.S. dollars as compared to the previous fiscal year. However, sales in the fiscal year ended March 31, 2005 from the prior year release slate increased 304 million U.S. dollars as compared to sales in the previous fiscal year from the release slate for the fiscal year ended March 31, 2003. While benefiting from higher theatrical revenues, total fiscal year release slate revenues were lower due to the timing of the fiscal year’s film slate’s release in the home entertainment market. The higher sales from films were partially offset by a 248 million U.S. dollar decrease in sales resulting from the absence in the fiscal year ended March 31, 2005 of several transactions in the television business that occurred in the prior fiscal year. These included syndication sales ofKing of QueensandSeinfeldas well as the extension of a licensing agreement forWheel of Fortune. Television sales in the fiscal year ended March 31, 2005 benefited from the highly successful DVD release ofSeinfeld.
      Operating income for the segment increased significantly, resulting in record operating income for the segment, due to the strong overall performance of the current fiscal year’s film slate and the home entertainment and international television syndication carryover performance of the prior fiscal year’s film slate noted above. Operating loss from the fiscal year release slate decreased 415 million U.S. dollars and operating income for the prior fiscal year’s release slate increased 173 million U.S. dollars as compared to the prior fiscal year.Spider-Man 2’s worldwide success contributed substantially to this fiscal year’s earnings, offset somewhat by the disappointing theatrical performance ofSpanglish. Further improving operating income was a 38 million U.S. dollar decrease in restructuring charges. Partially offsetting these increases in operating income was the impact of the absence of the television transactions noted above, which reduced operating income by approximately 150 million U.S. dollars due primarily to the factors noted above for revenue.
      As of March 31, 2005, unrecognized license fee revenue at SPE was approximately 1.3 billion U.S. dollars. SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television product. The license fee revenue will be recognized in the fiscal year that the product is available for broadcast.
Financial Services
      Please note that the revenue and operating income at Sony Life, 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, 2005 decreased by 33.0 billion yen, or 5.6 percent, to 560.6 billion yen compared with the previous fiscal year. Operating income increased by 0.3 billion yen, or 0.6 percent, to 55.5 billion yen and the operating income margin increased to 9.9 percent compared with the 9.3 percent of the previous fiscal year.
      At Sony Life, revenue decreased by 38.7 billion yen, or 7.5 percent, to 474.3 billion yen compared with the previous fiscal year. The main reasons for the decrease in revenue were a change in the method of recognizing insurance premiums received on certain products, as of the third quarter beginning October 1, 2003, from being recorded as revenues to being offset against the related provision for future insurance policy benefits, coupled with a small decrease in valuation gains in the current fiscal year compared to the previous fiscal year in which significant valuation gains were recorded against stock conversion rights from convertible bonds. Although there was a decrease in insurance premium revenue as a result of the above mentioned change in accounting method, there were increases ininsurance-in-force at the end of the fiscal year compared to the end of the previous fiscal year. Operating income at Sony Life decreased by 2.2 billion yen or

54

3.4 percent to 61.0 billion yen, mainly due to a decrease in valuation gains against stock conversion rights from convertible bonds, although this was partially offset by an increase in revenue from insurance premiums excluding the effect of the change in revenue recognition method noted above. In addition, the impact on operating income from the change in revenue recognition method noted above was slight.
      At Sony Assurance, revenue increased due to higher insurance revenue brought about by an expansion in automobileinsurance-in-force. Operating income increased due to an increase in insurance revenue, although there was a deterioration in the loss ratio (the ratio of insurance payouts to premiums).
      At Sony Bank, which started operations in June 2001, revenue rose as there was an increase in interest revenue associated with an increase in the balance of assets from investing activities. Although revenue increased, an increase in operating expenses resulted in a relatively unchanged operating loss compared with the previous fiscal year.
      At Sony Finance, a leasing and credit financing business subsidiary in Japan, revenue decreased due to a fall in leasing revenue. In terms of profitability, the operating loss decreased due to the recording of a loss, in the previous fiscal year ended March 31, 2004, from the lease of certain fixed assets to Crosswave Communications Inc (“Crosswave”), which commenced reorganization proceedings under the Corporate Reorganization Law of Japan during the same fiscal year.
Condensed Statements of Income Separating Out the changeover to the new PS2 model. The ratio of selling, general and administrative expenses to sales compared to the previous fiscal year was relatively unchanged.

37

MusicFinancial Services Segment (Unaudited)
      Sales for the fiscal year ended March 31, 2005 decreased by 191.2 billion yen, or 43.4 percent, to 249.1 billion yen compared with the previous fiscal year. Of the Music segment’s sales, 62 percent were generated by SMEJ, a Japan-based subsidiary, and 38 percent were generated by SMEI, a U.S.-based subsidiary. Compared to an operating loss of 6.0 billion yen in the previous fiscal year, operating income of 8.8 billion yen was recorded.
      On a local currency basis, sales in the Music segment decreased by approximately 42 percent, although the Music segment recorded operating income as compared to an operating loss in the previous fiscal year.
      As previously noted, the recorded music business of SMEI merged with the recorded music business of Bertelsmann AG to form SONY BMG. As a result, there were no recorded music sales at SMEI after July 31, 2004. Therefore, SMEI’s results are not comparable with the results of the previous fiscal year.
      Sales at SMEJ increased by 6.9
      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.
Condensed Statements of Income
          
  Fiscal Year Ended
  March 31
   
  2004 2005
     
  (Yen in millions)
Financial Services
        
 Financial service revenue  593,544   560,557 
 Financial service expenses  538,383   505,067 
       
 
Operating income
  55,161   55,490 
 Other income (expenses), net  1,958   10,204 
       
 
Income before income taxes
  57,119   65,694 
 Income taxes and other  22,975   25,698 
       
 
Income before cumulative effect of an accounting change
  34,144   39,996 
 Cumulative effect of an accounting change  —   (4,713)
       
 
Net income
  34,144   35,283 
       

55

          
  Fiscal Year Ended
  March 31
   
  2004 2005
     
  (Yen in millions)
Sony without Financial Services
        
 Net sales and operating revenue  6,939,964   6,632,728 
 Costs and expenses  6,896,377   6,575,354 
       
 
Operating income
  43,587   57,374 
 Other income (expenses), net  52,746   40,639 
       
 
Income before income taxes
  96,333   98,013 
 Income taxes and other  30,916   (37,043)
       
 
Income before cumulative effect of an accounting change
  65,417   135,056 
 Cumulative effect of an accounting change  (2,117)  — 
       
 
Net income
  63,300   135,056 
       
          
  Fiscal Year Ended
  March 31
   
  2004 2005
     
  (Yen in millions)
Consolidated
        
 Financial service revenue  565,752   537,715 
 Net sales and operating revenue  6,930,639   6,621,901 
       
   7,496,391   7,159,616 
 Costs and expenses  7,397,489   7,045,697 
       
 
Operating income
  98,902   113,919 
 Other income (expenses), net  45,165   43,288 
       
 
Income before income taxes
  144,067   157,207 
 Income taxes and other  53,439   (11,344)
       
 
Income before cumulative effect of an accounting change
  90,628   168,551 
 Cumulative effect of an accounting change  (2,117)  (4,713)
       
 
Net income
  88,511   163,838 
       
All Other
      During the fiscal year ended March 31, 2005, sales within All Other were comprised mainly of sales from SMEJ; SMEI’s recorded music business for the four months through August 1, 2004 prior to the establishment of SONY BMG; SMEI’s music publishing business; SCN, an Internet-related service business subsidiary operating mainly in Japan; a retailer of imported general merchandise in Japan; anin-house facilities management business in Japan; and an advertising agency business in Japan. Results for the previous fiscal year in All Other include the consolidated results for SMEI’s recorded music business for all twelve months, as well as the full year’s results for SMEI’s publishing business and SMEJ.
      Sales for the fiscal year ended March 31, 2005 decreased by 202.9 billion yen, or 30.6 percent, to 459.9 billion yen, compared with the previous fiscal year. Of total segment sales, 82 percent were sales to outside customers. In terms of profit performance, operating income of 4.2 billion yen was recorded for All Other compared to the operating loss of 16.2 billion yen recorded in the previous fiscal year.
      During the fiscal year, the significant sales decrease within All Other reflects the fact that, as noted above, the results for the twelve months of the previous fiscal year in All Other incorporated the results for SMEI’s recorded music business.

56

      Sales at SMEJ increased 5.7 percent compared with the previous fiscal year mainly due to an increase in album and single sales. Best-selling albums and singles during the fiscal year includedmusiQby ORANGE RANGE,SENTIMENTALoversby Ken Hirai and two greatest hits albums PORNO GRAFFITTI BEST BLUE’Sby Porno Graffitti. Operating
      Excluding sales recorded in Sony’s music business, there was a decrease in sales within All Other. This was principally a result of a decrease in intersegment sales due to contract changes at a Japanese subsidiary involved in the advertising agency business.
      Regarding profit performance within All Other, operating income increased by approximately 250 percentwas recorded compared to the operating loss in the previous fiscal year as a result of significantly increased operating income at SMEJ due mainly to the higher sales noted above and an improvement in the cost of sales ratio associated with strong sales of greatest hits albums.
Pictures
      Sales for the fiscal year ended March 31, 2005 decreased by 22.7 billion yen, or 3.0 percent, to 733.7 billion yen compared with the previous fiscal year. Operating income increased by 28.7 billion yen, or 81.4 percent, to 63.9 billion yen and the operating income margin increased from 4.7 percent to 8.7 percent. The results in the Pictures segment consist of the results of Sony Pictures Entertainment Inc. (“SPE”), a U.S. based subsidiary.
      On a U.S. dollar basis, sales for the fiscal year in the Pictures segment increased approximately 1 percent and operating income increased by approximately 76 percent. Sales increased primarily due to higher worldwide home entertainment, international television syndication and worldwide theatrical revenues on films. Worldwide home entertainment and international television syndication revenues were higher as a result of the performance of films from the prior year release slate including50 First Dates, Big FishandBad Boys 2. For theatrical revenues, the success of the current year film slate, particularlySpider-Man 2,HitchandThe Grudge, more than offset the impact of releasing fewer films this fiscal year. Sales for the fiscal year release slate decreased 70 million U.S. dollars as compared to the previous fiscal year. However, sales in the fiscal year ended March 31, 2005 from the prior year release slate increased 304 million U.S. dollars as compared to sales in the previous fiscal year from the release slate for the fiscal year ended March 31, 2003. While benefiting from higher theatrical revenues, total fiscal year release slate revenues were lower due to the timing of the fiscal year’s film slate’s release in the home entertainment market. The higher sales from films were partially offset by a 248 million U.S. dollar decrease in sales resulting from the absence in the fiscal year ended March 31, 2005 of several transactions in the television business that occurred in the prior fiscal year. These included syndication sales ofKing of Queens andSeinfeldas well as the extension of a licensing agreement forWheel of Fortune.Television sales in the fiscal year ended March 31, 2005 benefited from the highly successful DVD release ofSeinfeld.
      Operating income for the segment increased significantly, resulting in record operating income for the segment, due to the strong overall performance of the current year film slate and the home entertainment and international television syndication carryover performance of the prior year film slate noted above. Operating loss from the fiscal year release slate decreased 415 million U.S. dollars and operating income for the prior year’s release slate increased 173 million U.S. dollars as compared to the prior year.Spider-Man 2’s worldwide success contributed substantially to this fiscal year’s earnings, offset somewhat by the disappointing theatrical performance ofSpanglish. Further improving operating income was a 38 million U.S. dollar decrease in restructuring charges. Partially offsetting these increases in operating income was the impact of the absence of

38

the television transactions noted above, which reduced operating income by approximately 150 million U.S. dollars due primarily to the factors noted above for revenue.
      As of March 31, 2005, unrecognized license fee revenue at SPE was approximately 1.3 billion U.S. dollars. SPE expects to record this amount in the future having entered into contracts with television broadcasters to provide those broadcasters with completed motion picture and television product. The license fee revenue will be recognized in the fiscal year that the product is available for broadcast.
Financial Services
      Please note that the revenue and operating income at Sony Life Insurance Co., Ltd. (“Sony Life”), Sony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony Bank”) discussed below differ from the results that Sony Life, Sony Assurance and Sony Bank disclose on a Japanese statutory basis.
      Financial Services revenue for the fiscal year ended March 31, 2005 decreased by 33.0 billion yen, or 5.6 percent, to 560.6 billion yen compared with the previous fiscal year. Operating income increased by 0.3 billion yen, or 0.6 percent, to 55.5 billion yen and the operating income margin increased to 9.9 percent compared with the 9.3 percent of the previous fiscal year.
      At Sony Life, revenue decreased by 38.7 billion yen, or 7.5 percent, to 474.3 billion yen compared with the previous fiscal year. The main reasons for the decrease in revenue were a change in the method of recognizing insurance premiums received on certain products, as of the third quarter beginning October 1, 2003, from being recorded as revenues to being offset against the related provision for future insurance policy benefits,albums, coupled with a small decrease in valuation gains in the current fiscal year compared to the previous fiscal year in which significant valuation gains were recorded against stock conversion rights from convertible bonds. Although there was a decrease in insurance premium revenue as a result of the above mentioned change in accounting method, there were increases in insurance-in-forcereduced fixed costs at the end of the fiscal year compared to the end of the previous fiscal year. Operating income atnetwork related businesses within Sony Life decreased by 2.2 billion yen or 3.4 percent to 61.0 billion yen, mainly due to a decrease in valuation gains against stock conversion rights from convertible bonds, although this was partially offset by an increase in revenue from insurance premiums excluding the effect of the change in revenue recognition method noted above. In addition, the impact on operating income from the change in revenue recognition method noted above was slight.
      At Sony Assurance, revenue increased due to higher insurance revenue brought about by an expansion in automobile insurance-in-force. Operating income increased due to an increase in insurance revenue, although there was a deterioration in the loss ratio (the ratio of insurance payouts to premiums).
      At Sony Bank, which started operations in June 2001, revenue rose as there was an increase in interest revenue associated with an increase in the balance of funds from investing activities. Although revenue increased, an increase in operating expenses resulted in a relatively unchanged operating loss compared with the previous fiscal year.
      At Sony Finance International, Inc. (“Sony Finance”), a leasingCorporation, and credit financing business subsidiary in Japan, revenue decreased due to a fall in leasing revenue. In terms of profitability, the operating loss decreased due to the recording of a loss, in the previous fiscal year ended March 31, 2004, from the lease of certain fixed assets to Crosswave Communications Inc (“Crosswave”), which commenced reorganization proceedings under the Corporate Reorganization Law of Japan during the same fiscal year.
Condensed Statements of Income Separating Out the Financial Services Segment (Unaudited)
      The following schedule shows unaudited condensed statements of income for the Financial Services segment and all other segments excluding Financial Services as well as condensed consolidated statements of income. This presentation is not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements.

39

      Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
Condensed Statements of Income
          
  Fiscal Year Ended
  March 31
   
  2004 2005
     
  (Yen in millions)
Financial Services
        
 Financial service revenue   593,544   560,557 
 Financial service expenses   538,383   505,067 
       
 
Operating income
  55,161   55,490 
 Other income (expenses), net  1,958   10,204 
       
 
Income before income taxes
  57,119   65,694 
 Income taxes and other  22,975   25,698 
       
 
Income before cumulative effect of an accounting change
  34,144   39,996 
 Cumulative effect of an accounting change  —   (4,713)
       
 
Net income
  34,144   35,283 
       
          
  Fiscal Year Ended
  March 31
   
  2004 2005
     
  (Yen in millions)
Sony without Financial Services
        
 Net sales and operating revenue  6,939,964   6,632,728 
 Costs and expenses  6,896,377   6,575,354 
       
 
Operating income
  43,587   57,374 
 Other income (expenses), net  52,746   40,639 
       
 
Income before income taxes
  96,333   98,013 
 Income taxes and other  30,916   (37,043)
       
 
Income before cumulative effect of an accounting change
  65,417   135,056 
 Cumulative effect of an accounting change  (2,117)  — 
       
 
Net income
  63,300   135,056 
       

40

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

41

Foreign Exchange Fluctuations and Risk Hedging
Foreign Exchange Fluctuations and Risk Hedging
      During the fiscal year ended March 31, 2005, the average value of the yen was 106.5 yen against the U.S. dollar, and 133.7 yen against the euro,Euro, which was 5.2 percent higher against the U.S. dollar and 1.9 percent lower against the euro,Euro, respectively, compared with the average of the previous fiscal year. Operating results on a local currency basis described in “Overview” and “Operating Performance” show results of sales and operating revenue and operating income obtained by applying the yen’s monthly average exchange rate in the previous fiscal year to monthly local currency-denominated sales, cost of sales, and selling, general and administrative expenses for the fiscal year ended March 31, 2005, as if the value of the yen had remained constant.
      In the Music segment, Sony consolidates the yen-translated results of SMEI (a U.S. based operation that aggregates the results of its worldwide subsidiaries on a U.S. dollar basis) and the results of SMEJ (a Japan based operation that aggregates the results of its operations in yen). In addition, in the Music segment, results for this fiscal year only include the results of SMEI’s recorded music business for the months of April through July 2004, and the twelve month results for SMEI’s music publishing business and SMEJ. However, results for the previous fiscal year in the Music segment include the consolidated results for SMEI’s recorded music business for all twelve months, as well as the full year’s results for SMEI’s publishing business and SMEJ.
      In the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of SPE (a U.S. basedU.S.-based operation that has worldwide subsidiaries).
Therefore, analysis and discussion of certain portions of the operating results of SMEI and SPE are specified as being on “a U.S. dollar basis.” Results on a local currency basis and results on a U.S. dollar basis are not on the same basis as Sony’s consolidated financial statements and do not conform with U.S. GAAP. In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that local currency basis results provide additional useful information to investors regarding operating performance.
      In All Other, Sony consolidates the yen-translated results of SMEI (aU.S.-based operation that aggregates the results of its worldwide subsidiaries on a U.S. dollar basis) and the results of SMEJ (a Japan-based operation that aggregates the results of its operations in yen). In addition, in All Other, results for this fiscal year only include the results of SMEI’s recorded music business for the months of April through July 2004, and the twelve month results for SMEI’s music publishing business and SMEJ. However, results for the previous fiscal year in All Other include the consolidated results for SMEI’s recorded music business for all twelve months, as well as the full year’s results for SMEI’s publishing business and SMEJ.
      Sony’s consolidated results are subject to foreign currency rate fluctuations mainly derived from the fact that the countries where manufacturing takes place may be different from those where such products are sold. In order to reduce the risk caused by such fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy. Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies.
      Sony Global Treasury Services Plc (“SGTS”) in London provides integrated treasury services for Sony Corporation and its subsidiaries. Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should enter into commitments with SGTS for hedging their exposures. Sony Corporation and most of its subsidiaries utilize SGTS for this purpose. The concentration of foreign exchange exposures at

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SGTS means that, in effect, SGTS hedges the net foreign exchange exposure of Sony Corporation and its subsidiaries. SGTS in turn enters into foreign exchange transactions with creditworthy third-party financial institutions. Most of the transactions are entered into against projected exposures before the actual export and import transactions take place. In general, SGTS hedges the projected exposures on average three months before the actual transactions take place. However, in certain cases SGTS partially hedges the projected exposures one month before the actual transactions take place when business requirements such as shorter production-sales cycle for certain products arise. Sony enters into foreign exchange transactions with financial institutions primarily for hedging purposes. Sony does not use these derivative financial instruments for trading or speculative purposes except for certain derivatives in the Financial Services segment utilized for portfolio investments.
      To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.

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      Changes in the fair value of derivatives designated as cash flow hedges, including foreign exchange forward contracts and foreign currency option contracts, are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges are marked-to-marketmarked-to-market with changes in value recognized in Other Income and Expenses. The notional amounts of foreign exchange forward contracts, currency option contracts purchased and currency option contracts written as of March 31, 2005 were 1,545.8 billion yen, 428.3 billion yen and 146.5 billion yen, respectively.
Operating Results for the Fiscal Year Ended March 31, 2004 compared with the Fiscal Year Ended March 31, 2003
Overview
      Although the global economy showed some signs of growth in the fiscal year ended March 31, 2004, the political situation, especially in Iraq, and concern about potential terrorist attacks led to a continued sense of uncertainty regarding the economy. In Japan, although the stock market showed signs of recovery, questions remained about the sustainability of economic growth and the strength of the recovery in consumer spending.
      Despite these market conditions and the impact of the translation of financial results into yen, in accordance with Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”), the currency in which Sony’s financial statements are prepared, Sony’s sales and operating revenue (“sales”) for the fiscal year ended March 31, 2004 increased 0.3 percent compared with the previous fiscal year. Sales to outside customers in the Electronics segment increased, and revenue in the Financial Services segment increased due to improvements in valuation gains and losses at Sony Life Insurance Co., Ltd. (“Sony Life”), despite a decrease in sales in the Game, Pictures and Music segments.
      Operating income decreased 46.7 percent compared with the previous fiscal year. This decrease was mainly due to the increase in restructuring charges in the Electronics segment, the decrease in sales and increase in research and development costs in the Game segment, and the absence of profits contributed by the breakaway performance ofSpider-Manin the previous fiscal year in the Pictures segment. Partially offsetting the decrease in operating income were the improvements in valuation gains and losses from investments in the general account at Sony Life in the Financial Services segment, and the benefits of restructuring, a decrease in restructuring charges and a reduction in advertising and promotion expenses in the Music segment.
      On a local currency basis (regarding references to results of operations expressed on a local currency basis, refer to“Foreign Exchange Fluctuations and Risk Hedging” below), Sony’s sales for the fiscal year ended March 31, 2004 increased approximately 3 percent, and operating income decreased approximately 47 percent compared with the previous fiscal year.
Restructuring
      In the fiscal year ended March 31, 2004, Sony recorded restructuring charges of 168.1 billion yen, an increase from the 106.3 billion yen recorded in the previous fiscal year. The primary restructuring activities were in the Electronics, Music and Pictures segments.
      Of the total restructuring costs incurred, Sony recorded 133.4 billion yen of personnel related costs. This expense was incurred because 9,000 people, mainly in Japan, the U.S. and Western Europe, left the company primarily through early retirement programs. Of the 9,000 people, 5,000 were people who left the company in Japan.
      For more detailed information about restructuring, please refer to Note 17 of Notes to the Consolidated Financial Statements.

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Electronics
      Restructuring charges in the Electronics segment for the fiscal year ended March 31, 2004 were 145.4 billion yen, compared to 80.4 billion yen in the previous fiscal year. Of these restructuring charges, 8.0 billion yen and 2.1 billion yen for the fiscal years ended March 31, 2003 and 2004, respectively, were recorded in the non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment but reclassified to the Electronics segment. See Note 24 of Notes to the Consolidated Financial Statements for more information on this reclassification.
      In the fiscal year ended March 31, 2004, Sony made a decision to shut down certain TV display CRT manufacturing operations in Japan to rationalize production facilities and downsize its business, due to a contraction in the market and a shift in demand from CRT televisions to plasma and liquid crystal display (“LCD”) panel televisions. Restructuring charges associated with the shut down totaled 8.5 billion yen, and consisted of 3.1 billion yen in personnel related costs and 5.3 billion yen in non-cash equipment impairment, disposal and other costs. Of the 8.5 billion yen in restructuring charges, 0.2 billion yen was recorded in cost of sales, 3.1 billion yen was included in selling, general and administrative expense, and 5.2 billion yen was included in loss on sale, disposal or impairment of assets, net.
      In addition to the above restructuring effort, during the fiscal year ended March 31, 2004, the Electronics segment accelerated the implementation of headcount reduction through early retirement programs resulting in personnel related costs of 114.9 billion yen, an increase of 92.6 billion yen compared to the previous fiscal year. Of the 9,000 people who left the company on a consolidated basis, the majority came from the Electronics segment. The headcount of relatively high-paid white collar employees in Japan, the U.S. and Western Europe was reduced through early retirement programs while the headcount increased at manufacturing facilities in East Asia, particularly in China.
Music
      Restructuring charges in the Music segment, including at SMEJ, for the fiscal year ended March 31, 2004 were 9.9 billion yen, compared to 16.0 billion yen in the previous fiscal year.
      In response to the continued contraction of the worldwide music market due to slow worldwide economic growth, the saturation of the CD market, the effects of piracy and other illegal duplication, parallel imports, pricing pressures and the diversification of customer preferences, Sony has been actively repositioning the Music segment for the future by looking to create a more effective and profitable business model. As a result, the Music segment has undergone a worldwide restructuring program since the fiscal year ended March 31, 2001 to reduce staffing and other costs through the consolidation and rationalization of facilities worldwide.
      During the fiscal year ended March 31, 2004, Sony broadened the scope of its worldwide restructuring of the Music segment, which resulted in restructuring charges totaling 8.6 billion yen at SMEI, compared to 14.4 billion yen in the fiscal year ended March 31, 2003. These restructuring charges exclude restructuring charges, including costs relating to the shutdown of CD manufacturing activities in the U.S., that were recorded in the non-Japan based disc manufacturing and physical distribution businesses that were formerly included in the Music segment but have now been reclassified to the Electronics segment. Restructuring activities at SMEI included the restructuring of the music label operations and further rationalization of overhead functions through staff reductions. The restructuring charges consisted of personnel related costs of 4.3 billion yen, lease abandonment costs of 1.3 billion yen and other related costs of 3.0 billion yen including non-cash asset impairments and disposals. Most of these charges were recorded in selling, general and administrative expense. Positions were eliminated across various employee levels, business functions, operating units, and geographic regions during this phase of the worldwide restructuring program.
Pictures
      Restructuring charges in the Pictures segment for the fiscal year ended March 31, 2004 were 4.6 billion yen, compared to 0.5 billion yen in the previous fiscal year. A variety of initiatives were undertaken in the segment in an effort to reduce fixed costs including the reduction of staffing levels and the disposal of certain

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long-lived assets. Restructuring charges consisted of 1.0 billion yen of personnel related costs, 1.7 billion yen of non-cash asset impairment and disposal costs and 1.9 billion yen of other restructuring costs. Among these charges, 1.5 billion yen was recorded in cost of sales, 1.3 billion yen was recorded in selling, general and administrative expenses, and 1.7 billion yen was recorded in loss on sale, disposal or impairment of assets, net.
Operating Performance
             
  Fiscal Year Ended
  March 31
   
  2003 2004 Percent change
       
  (Yen in billions)  
Sales and operating revenue  7,473.6   7,496.4   +0.3%
Operating income  185.4   98.9   -46.7 
Income before income taxes  247.6   144.1   -41.8 
Equity in net income of affiliated companies  (44.7)  1.7   — 
Net income  115.5   88.5   -23.4 
Sales
      Sales for the fiscal year ended March 31, 2004 increased by 22.8 billion yen, or 0.3 percent, to 7,496.4 billion yen compared with the previous fiscal year. A further breakdown of sales figures is presented under“Operating Performance by Business Segment”below.
      (“Sales” in this analysis of the ratio of selling, general and administrative expenses to sales refers only to the “net sales” and “other operating revenue” portions of consolidated sales and operating revenue, and excludes Financial Service revenue. This is because Financial Service expenses are recorded separately from cost of sales and selling, general and administrative expenses. Furthermore, in the analysis of cost of sales, including research and development costs, to sales, only “net sales” are used. This is because cost of sales is an expense associated only with net sales. All the ratios below that pertain to business segments are calculated with intersegment transactions included.)
Cost of Sales and Selling, General and Administrative Expenses
      Cost of sales for the fiscal year ended March 31, 2004 increased by 78.8 billion yen, or 1.6 percent, to 5,058.2 billion yen compared with the previous fiscal year, and increased from 72.0 percent to 73.5 percent as a percentage of sales. Year on year, the cost of sales ratio was almost unchanged from 78.8 percent to 78.9 percent in the Electronics segment and almost unchanged from 70.2 percent to 70.1 percent in the Game segment. The cost of sales ratio decreased from 58.8 percent to 58.5 percent in the Music segment. However, the cost of sales ratio increased from 58.2 percent to 60.0 percent in the Pictures segment.
      In the Electronics segment, the benefit of restructuring undertaken in previous fiscal years was offset primarily by an increase in research and development costs during the fiscal year. In the Game segment, the effect of increased PS2 software sales was offset by increased research and development costs. The cost of sales ratio in the Music segment decreased due to the benefits from restructuring activities implemented over the past several fiscal years. However, the cost of sales ratio in the Pictures segment increased due to the absence of the higher margins generated by revenues fromSpider-Manin the prior fiscal year.
      Personnel related costs included in cost of sales increased only 1.7 billion yen compared with the previous fiscal year.
      Research and development costs (included in cost of sales) for the fiscal year ended March 31, 2004 increased by 71.4 billion yen, or 16.1 percent, to 514.5 billion yen compared with the previous fiscal year, primarily due to increases in the Electronics and Game segments. The ratio of research and development costs to sales increased from 6.4 percent to 7.5 percent.

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      Selling, general and administrative expenses for the fiscal year ended March 31, 2004 increased by 15.9 billion yen, or 0.9 percent, to 1,798.2 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales increased from 25.6 percent in the previous fiscal year to 25.9 percent. Year on year, the ratio of selling, general and administrative expenses to sales increased from 19.8 percent to 21.2 percent in the Electronics segment, from 18.0 percent to 21.1 percent in the Game segment, from 34.4 percent to 35.0 percent in the Pictures segment, and from 41.2 percent to 41.8 percent in the Music segment.
      Of selling, general and administrative expenses, personnel related costs increased by 89.7 billion yen compared with the previous fiscal year mainly due to an increase in severance related expenses in the Electronics segment resulting from the implementation of restructuring initiatives. However, the increase in selling, general and administrative expenses was partially offset by a decrease in royalty expenses, which decreased by 20.5 billion yen compared with the previous fiscal year due to the reversal, in the fiscal year ended March 31, 2004, of royalty expense reserves provided for in the previous fiscal year in the Electronics segment.
      Loss on sale, disposal or impairment of assets, net decreased 4.4 billion yen, or 11.1 percent, compared with the previous fiscal year, to 35.5 billion yen. Losses were recorded on the sale, disposal and impairment of CRT production equipment in the Electronics segment, on the impairment of goodwill that resulted from the making of a manufacturing subsidiary into a wholly owned subsidiary in the Electronics segment, and on the commencement of reorganization proceedings under the Corporate Reorganization Law of Japan by Crosswave, which leased fixed assets from a business in the Financial Services segment. On the other hand, a one time gain was recorded in the Other segment due to the sale of rights to a portion of the Sony Card portfolio.
Operating Income
      Operating income for the fiscal year ended March 31, 2004 decreased by 86.5 billion yen, or 46.7 percent, to 98.9 billion yen compared with the previous fiscal year. Operating income margin decreased from 2.5 percent to 1.3 percent. The Electronics segment recorded an operating loss mainly due to an increase in restructuring charges. On the other hand, the business segments that contributed the most to operating income, in descending order by amount of financial impact, were the Game and Financial Services segments.
Other Income and Expenses
      In the consolidated results for the fiscal year ended March 31, 2004, other income decreased by 35.2 billion yen, or 22.4 percent, to 122.3 billion yen, while other expenses decreased by 18.2 billion yen, or 19.1 percent, to 77.1 billion yen, compared with the previous fiscal year. The net amount of other income and other expenses was net other income of 45.2 billion yen, a decrease of 17.0 billion yen, or 27.4 percent, compared with the previous fiscal year.
      The decrease in other income was primarily due to the recording, in the fiscal year ended March 31, 2003, of a 66.5 billion yen gain on the sale of Sony’s equity interest in Telemundo, a U.S. based Spanish language television network and station group that was accounted for under the equity method. Partially offsetting the decrease in other income was a 16.1 billion yen increase in net foreign exchange gain, from 1.9 billion yen in the previous fiscal year to 18.1 billion yen. The net foreign exchange gain was recorded because the value of the yen, especially during the second half of the fiscal year ended March 31, 2004, was higher than the value of the yen at the time that Sony entered into foreign exchange forward contracts and foreign currency option contracts. These contracts are entered into by Sony to mitigate the foreign exchange rate risk to cash flows that arises from settlements of foreign currency denominated accounts receivable and accounts payable, as well as foreign currency denominated transactions between consolidated subsidiaries. Compared to the previous fiscal year, royalty income increased 1.9 billion yen, or 5.8 percent, from 32.4 billion yen to 34.2 billion yen. Interest and dividends received increased by 4.3 billion yen, or 29.9 percent, to 18.8 billion yen.

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      The decrease in other expenses was primarily due to a 6.7 billion yen, or 29.0 percent, decrease to 16.5 billion yen in loss on devaluation of securities investments compared with the previous fiscal year. During the fiscal year ended March 31, 2004, the valuation losses Sony recorded included 10.3 billion yen recorded in regards to securities issued by a privately held Japanese company engaged in cable broadcasting and other businesses which Sony accounted for under the cost method. Compared to the previous fiscal year, interest paid increased 0.5 billion yen, or 2.0 percent, to 27.8 billion yen.
      In January 2004, FeliCa Networks Inc. (“FeliCa Networks”) issued 11.5 billion yen in shares (115,000 shares at 100,000 yen per share) in a private offering. FeliCa Networks engages in the development and licensing of an Integrated Circuit (“IC”) chip for cellular phones based on the contactless IC card technology “FeliCa,” which was developed by Sony. It also operates a platform, based on FeliCa-ready cellular phones, for use by service providers. Sony recorded a gain of 3.4 billion yen and also recorded deferred taxes on this gain. This issuance reduced Sony’s ownership interest from 100 percent to 60 percent. In June 2004, FeliCa Networks allocated new shares to a third party; Sony’s ownership interest is now approximately 57 percent.
      In addition to the above transaction, for the fiscal year ended March 31, 2004, Sony recognized 1.5 billion yen of other gains on issuances of stock by subsidiaries and equity investees resulting in total gains of 4.9 billion yen. These transactions were not part of a broader corporate reorganization and the reacquisition of such shares was not contemplated at the time of issuance.
Income before Income Taxes
      Income before income taxes for the fiscal year ended March 31, 2004 decreased 103.6 billion yen, or 41.8 percent, to 144.1 billion yen compared with the previous fiscal year. As mentioned above, operating income and the net amount of other income and other expenses decreased compared with the previous fiscal year.
Income Taxes
      Income taxes for the fiscal year ended March 31, 2004 decreased by 28.1 billion yen, or 34.7 percent, to 52.8 billion yen, as a result of the decrease in income before income taxes. Income taxes decreased 91.6 billion yen, or 51.2 percent, to 87.2 billion yen, while deferred income tax expense decreased by 63.6 billion yen, or 64.9 percent, to 34.4 billion yen. The effective tax rate for the fiscal year was 36.6 percent, lower than the statutory rate in Japan due to a decrease in deferred tax liabilities on undistributed earnings of foreign subsidiaries and because U.S. income was taxed at a lower rate due to utilization of tax loss and foreign tax credit carryforwards. However, this rate was higher than the effective tax rate of 32.6 percent in the prior fiscal year, which benefited from a reversal in valuation allowances on deferred tax assets by Aiwa Co., Ltd. and its subsidiaries (“Aiwa”).
Results of Affiliated Companies Accounted for under the Equity Method
      Equity in net income of affiliated companies during the fiscal year ended March 31, 2004 was 1.7 billion yen, an improvement over the 44.7 billion yen in losses recorded in the previous fiscal year. Equity in net income of Sony Ericsson, a joint venture focused on mobile phone handsets, was 6.4 billion yen, an improvement from the 20.8 billion yen in losses recorded in the previous fiscal year. This improvement was due to strong demand for Sony Ericsson’s products, particularly in the Global System for Mobile Communications (“GSM”) and Japanese markets, and due to improvements in operating efficiencies at the company. Moreover, S.T. Liquid Crystal Display Corporation (“ST-LCD”), an LCD joint venture in Japan, recorded a profit compared with a loss in the previous fiscal year. Partially offsetting these improvements were equity in net losses of some other affiliated companies such as Crosswave, which commenced reorganization proceedings under the Corporate Reorganization Law of Japan during the fiscal year ended March 31, 2004. The equity in net loss related to Crosswave for the fiscal year ended March 31, 2004 was 1.4 billion yen.

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Minority Interest in Income of Consolidated Subsidiaries
      In the fiscal year ended March 31, 2004, minority interest in income of consolidated subsidiaries decreased 4.2 billion yen, or 63.9 percent, to 2.4 billion yen. This decrease is due to the absence of the previous fiscal year increase which resulted from the reversal, in that fiscal year, of valuation allowances on deferred tax assets held by Aiwa, as described above, and the fact that Sony ceased to record a minority interest in the losses of Aiwa in that fiscal year, as a result of taking Aiwa private. For the fiscal year ended March 31, 2004, minority interest in income was recorded mainly at certain television and home entertainment subsidiaries in the Pictures segment.
Net Income
      Net income for the fiscal year ended March 31, 2004 decreased by 27.0 billion yen, or 23.4 percent, to 88.5 billion yen compared with the previous fiscal year. As a percentage of sales, net income decreased 0.3 percentage points from 1.5 percent to 1.2 percent. Although income before income taxes decreased as described above, the year on year change from loss to income in equity in net income (loss) of affiliated companies partially offset the decline in net income. Return on stockholders’ equity decreased 1.2 percentage points from 5.0 percent to 3.8 percent. (This ratio is calculated by dividing net income by the simple average of stockholders’ equity at the end of the previous fiscal year and at the end of the fiscal year ended March 31, 2004.)
      Basic net income per share was 95.97 yen compared with 125.74 yen in the previous fiscal year, and diluted net income per share was 87.00 yen compared with 118.21 yen in the previous fiscal year. Refer to Notes 2 and 21 of Notes to Consolidated Financial Statements.
Operating Performance by Business Segment
      The following discussion is based on segment information. Sales and operating revenue in each business segment include intersegment transactions. Refer to Note 24 of Notes to Consolidated Financial Statements.
Business Segment Information
              
  Fiscal Year Ended  
  March 31  
     
  2003 2004 Percent change
       
  (Yen in billions)  
Sales and operating revenue
            
 Electronics  5,096.0   5,042.3   -1.1%
 Game  955.0   780.2   -18.3 
 Music  466.3   440.3   -5.6 
 Pictures  802.8   756.4   -5.8 
 Financial Services  537.3   593.5   +10.5 
 Other  261.1   268.3   +2.7 
 Elimination  (644.9)  (384.7)  — 
             
Consolidated  7,473.6   7,496.4   +0.3 
             
             

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  Fiscal Year Ended  
  March 31  
     
  2003 2004 Percent change
       
  (Yen in billions)  
Operating income (loss)
            
 Electronics  65.9   (6.8)  — 
 Game  112.7   67.6   -40.0%
 Music  (28.3)  (6.0)  — 
 Pictures  59.0   35.2   -40.3 
 Financial Services  22.8   55.2   +142.4 
 Other  (28.3)  (12.1)  — 
 Elimination and unallocated corporate expenses  (18.3)  (34.2)  — 
             
Consolidated  185.4   98.9   -46.7 
             
             
      At the beginning of the fiscal year ended March 31, 2004, Sony partly realigned its business segment configuration. Expenses incurred in connection with the creation of a network platform business have been transferred out of the Other segment and reclassified as unallocated corporate expenses, because the expected future benefits of this business will be spread across Sony. In the Music segment, certain non-core businesses of Sony Music Entertainment (Japan), Inc., such as media, animation, character and cosmetics, were transferred to the newly-established Sony Culture Entertainment, Inc. (“SCU”) and SCU was classified in the Other segment. In accordance with this realignment, results of the previous fiscal year have been reclassified to conform to the presentation for the fiscal year ended March 31, 2004.
      In connection with the establishment of the SONY BMG joint venture, Sony’s non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment, have been reclassified to the Electronics segment to reflect the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. Results for the fiscal years ended March 31, 2003 and 2004 in the Electronics and Music segments have been restated to account for this reclassification.
Electronics
      Sales for the fiscal year ended March 31, 2004 decreased by 53.7 billion yen, or 1.1 percent, to 5,042.3 billion yen compared with the previous fiscal year. An operating loss of 6.8 billion yen was recorded compared to operating income of 65.9 billion yen in the previous fiscal year.
      The year-on-year decrease in sales was due to a significant decrease in intersegment sales to the Game segment as a result of the outsourcing of PS2 game console production to third parties in China. Sales to outside customers on a yen basis increased 4.6 percent compared with the previous fiscal year.
      Regarding sales to outside customers by geographic area, sales on a yen basis increased in Japan by 11 percent, in Europe by 10 percent, and in non-Japan Asia and other geographic areas (“Other Areas”) by 8 percent. Sales on a yen basis in the U.S. decreased 7 percent.
      In Japan, mainly due to the strong sales of Sony Ericsson, sales of mobile phones, primarily to Sony Ericsson, increased significantly. In addition, sales of charge coupled devices (“CCDs”), which benefited from an expansion in demand mainly from digital still cameras, DVD recorders (including PSX), plasma and LCD flat panel televisions, and broadcast- and professional-use equipment increased. On the other hand, sales of PCs and CRT televisions decreased. In Europe, sales of digital still cameras, flat panel televisions, cellular phones, and PCs increased significantly. Sales of CRT televisions, portable audio, Aiwa products, and home audio, however, decreased. In Other Areas, sales of CD-R/ RW and DVD+/-R/ RW drives, digital still cameras, PCs, and video cameras increased while sales of CRT televisions decreased. In the U.S., a significant decrease in the sales of CRT televisions combined with decreased sales of Aiwa products, computer displays,

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set-top boxes, and personal digital assistants to cause a decline in sales, but sales of flat panel televisions, projection televisions, digital still cameras and PCs increased.
Performance by Product Category
      Sales and operating revenue by product category discussed below represent sales to customers, which do not include intersegment transactions. Refer to Note 24 of Notes to Consolidated Financial Statements.
      “Audio” sales decreased by 108.6 billion yen, or 13.9 percent, to 675.5 billion yen. Sales of home audio declined due to a contraction of the market and increased price competition. Regarding headphone stereos, sales declined primarily due to falling prices, but the unit shipments of both MD format and CD format devices slightly exceeded their levels in the previous fiscal year. Worldwide shipments of MD format devices increased by approximately 40,000 units to approximately 3.36 million units and worldwide shipments of CD format devices increased by approximately 240,000 units to approximately 10.96 million units. On the other hand, sales of car audio increased due to strong sales in the European market. Also, sales of Aiwa products decreased in all regions.
      “Video” sales increased by 121.0 billion yen, or 14.6 percent, to 949.3 billion yen. In addition to a significant increase in the sales of digital still cameras outside of Japan, sales of DVD recorders (including PSX) increased significantly primarily in Japan. Worldwide shipments of digital still cameras increased by approximately 4.4 million units to approximately 10 million units. Worldwide shipments of DVD recorders were approximately 20,000 units in the previous fiscal year but increased to approximately 650,000 units in the fiscal year ended March 31, 2004. Regarding home-use video cameras, worldwide shipments of combined analog and digital devices increased by approximately 850,000 units to approximately 6.6 million units, but overall sales increased only slightly, as sales in Japan and the U.S. decreased due to increased price competition. DVD-Video player sales decreased due to pricing pressure, although unit shipments increased.
      “Televisions” sales decreased by 56.2 billion yen, or 5.7 percent, to 925.5 billion yen. Sales of CRT televisions decreased significantly due to a contraction of the market and declining prices, resulting primarily from a shift in demand to flat panel televisions. Worldwide shipments of CRT televisions decreased approximately 600,000 units to approximately 9.4 million units compared with the previous fiscal year. Sales of computer displays also decreased worldwide. On the other hand, sales of plasma and LCD flat panel televisions increased significantly worldwide and sales of projection televisions in the U.S. increased. Worldwide shipments of flat panel televisions increased approximately 480,000 units to approximately 640,000 units.
      “Information and Communications” sales decreased by 2.0 billion yen, or 0.2 percent, to 834.8 billion yen. Despite a decrease in sales in Japan, due to price declines in the notebook PC market, overall sales of PCs increased as sales in all regions outside of Japan increased. Worldwide unit shipments of PCs increased approximately 100,000 units to approximately 3.2 million units. Sales of personal digital assistants decreased due to a contraction of the market and the effects of price declines. Sales of broadcast- and professional-use products were almost unchanged year on year as sales in Japan increased due to the sale of equipment installed in two new broadcasting stations, while many broadcasters in the U.S. and other countries outside of Japan reduced their capital expenditures.
      “Semiconductors” sales increased by 48.5 billion yen, or 23.7 percent, to 253.2 billion yen. The increase was due to a significant increase in sales of CCDs, mainly reflecting the expansion of the market for digital still cameras. Regarding LCDs, sales of low temperature polisilicon LCDs for digital still cameras and cellular phones increased significantly.
      “Components” sales increased by 96.0 billion yen, or 18.2 percent, to 623.8 billion yen. The increase was primarily due to significant increases in sales of CD-R/ RW and DVD+/-R/ RW drives, and Memory Sticks. Moreover, sales of lithium-ion batteries increased. Sales of CD-R/ RW drives increased due to a production and sales alliance with a third party, and sales of DVD+/-R/ RW drives increased as a result of the expansion of the market for those devices. Worldwide shipments of Memory Stick increased by approximately 12 million units to approximately 31 million units due to the continued, strong demand for digital still cameras. On

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March 31, 2004, Sony’s cumulative shipments of Memory Stick had reached approximately 66 million units. Regarding lithium-ion batteries, sales for use in digital still cameras and PCs increased.
      “Other” sales increased by 115.3 billion yen, or 25.0 percent, to 576.2 billion yen. The increase resulted from a significant increase in sales to Sony Ericsson of mobile phone handsets, reflecting an increase in the sales of Sony Ericsson’s handsets. On the other hand, disc manufacturing sales decreased due to the appreciation of the yen.
      In the Electronics segment, cost of sales for the fiscal year ended March 31, 2004 decreased by 41.1 billion yen, or 1.0 percent to 3,950.0 billion yen compared with the previous fiscal year. The cost of sales to sales ratio increased 0.1 percentage point from 78.8 percent to 78.9 percent. Products that contributed to an increase in the cost of sales to sales ratio was a significant increase in the sales of mobile phone handsets, produced for Sony Ericsson, which have a relatively high cost of sales to sales ratio. Offsetting this increase, however, were PCs, which benefited from an emphasis on profitability and an increase in the proportion of high value added models in the product line-up, and low temperature polysilicon LCDs, which benefited from a significant expansion in sales. Restructuring charges recorded in cost of sales amounted to 10.1 billion yen compared with 22.2 billion yen in the previous fiscal year. Research and development costs increased 49.2 billion yen, or 12.9 percent, from 381.2 billion yen in the previous fiscal year to 430.5 billion yen.
      Selling, general and administrative expenses increased by 59.6 billion yen, or 5.9 percent to 1,069.7 billion yen compared with the previous fiscal year. The primary reason for this increase was an increase in restructuring charges. Of the restructuring charges recorded in the Electronics segment, the amount recorded in selling, general and administrative expenses increased by 80.4 billion yen from 44.4 billion yen in the previous fiscal year to 124.7 billion yen. Of the restructuring charges recorded in selling, general and administrative expenses, the amount recorded for headcount reductions, including reductions through the early retirement program, was 118.0 billion yen, an increase of 85.6 billion yen compared with the previous fiscal year. In addition to these personnel related costs, restructuring charges were recorded in relation to TV display CRT manufacturing facilities in Japan. In contrast to the increase in restructuring charges, royalty expenses decreased 20.4 billion yen and after sales service expenses decreased 8.6 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to sales increased 1.4 percentage points from 19.8 percent recorded in the previous fiscal year to 21.2 percent, due to the decrease in sales.
      Loss on sale, disposal or impairment of assets, net increased 0.6 billion yen to 29.5 billion yen compared with the previous fiscal year. This amount includes 10.6 billion yen in restructuring charges, which includes 5.2 billion yen related to the TV display CRT manufacturing facilities in Japan. The amount of restructuring charges included in loss on sale, disposal or impairment, net in the previous fiscal year was 13.9 billion yen.
      Regarding profit performance of the segment, an operating loss was recorded for the fiscal year due to a significant increase in restructuring charges, especially severance-related expenses, as mentioned above. Regarding profit performance by product, excluding restructuring charges, compared with the previous fiscal year, operating income was recorded in PCs compared with an operating loss in the previous fiscal year, and a significant increase in operating income of CCDs was recorded. Losses from Aiwa products decreased while the operating income of CD-R/ RW and DVD+/-R/ RW drives, as well as of video cameras, increased.
      On the other hand, operating income of CRT televisions decreased significantly while operating income of optical pickups decreased due to a sharp decline in prices. Furthermore, personal digital assistants recorded an operating loss compared with operating income recorded in the previous fiscal year.
Manufacturing by Geographic Area
      Approximately 50 percent of the Electronics segment’s total annual production took place in Japan, including the production of digital still cameras, video cameras, flat panel televisions, PCs, semiconductors and components such as batteries and Memory Sticks. Approximately 60 percent of the annual production in Japan was destined for other regions. China accounted for approximately 10 percent of total annual production, approximately 70 percent of which was destined for other regions. Asia, excluding Japan and

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China, accounted for approximately 15 percent of total annual production, with approximately 60 percent destined for Japan, the U.S. and Europe. The Americas and Europe together accounted for the remaining approximately 25 percent of total annual production, most of which was destined for local distribution and sale. Until July 2003, total annual production included the assembly of PS2 hardware for the Game segment; however, due to the outsourcing of PS2 hardware production to China-based third parties, this assembly activity ceased in July 2003.
Comparison of Results on a Local Currency Basis and Results on a Yen Basis
      In the Electronics segment, the negative effect of the appreciation of the yen against the U.S. dollar slightly exceeded the positive effect of the appreciation of the euro against the yen. Sales for the fiscal year ended March 31, 2004 decreased, on a yen basis, by 1.1 percent, but increased on a local currency basis by approximately 1 percent. In terms of operating performance on a local currency basis, a small operating profit was recorded compared to the operating loss on a yen basis.
      Regarding sales to outside customers by geographic area, sales on a yen basis increased in Japan by 11 percent, in Europe by 10 percent, and in Other Areas by 8 percent. Sales on a yen basis in the U.S. decreased 7 percent. Sales on a local currency basis for regions outside Japan increased in every region, with sales in Europe increasing 4 percent, sales in Other Areas increasing 14 percent and sales in the U.S. increasing 1 percent.
Game
      Sales for the fiscal year ended March 31, 2004 decreased by 174.8 billion yen, or 18.3 percent, to 780.2 billion yen compared with the previous fiscal year. Operating income decreased by 45.1 billion yen, or 40.0 percent, to 67.6 billion yen compared with the previous fiscal year, and the operating income margin decreased from 11.8 percent to 8.7 percent.
      Sales in the Game segment on a local currency basis decreased 18 percent, approximately the same as on a yen basis. In regards to operating income, the positive impact of the depreciation of the yen against the euro exceeded the negative impact of the appreciation of the yen against the U.S. dollar, resulting in a 52 percent decrease in operating income on a local currency basis.
      By region, sales decreased in Japan, the U.S. and Europe. In Japan, hardware sales declined due to a strategic price reduction of PS2 hardware, despite higher unit sales of PS2 hardware. Software sales in Japan also decreased due to lower unit sales. In the U.S., sales declined due to a decrease in unit sales of PS2 hardware, a strategic price reduction of PS2 hardware and a decrease in software unit sales. In Europe, although hardware unit sales increased as the market penetration of PS2 hardware continued to expand, hardware sales declined due to a strategic price reduction of PS2 hardware. Software unit sales and software sales in Europe both increased.
      Total worldwide production shipments of hardware and software were as follows:
              
  Fiscal Year Ended  
  March 31  
    Cumulative as of
  2003 2004 March 31, 2004
       
  (Million units)
Total Production Shipments of Hardware*            
 PlayStation + PS one  6.78   3.31   99.72 
 PlayStation 2  22.52   20.10   71.30 
Total Production Shipments of Software*/**            
 PlayStation  61.00   32.00   949.00 
 PlayStation 2  189.90   222.00   572.00 
* Production shipments of hardware and software are counted upon shipment of the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers.

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** Including those both from SonyAssets, Liabilities and third parties under Sony licenses.Stockholders’ Equity
      In terms of profitability, operating income decreased compared with the previous fiscal year. This decrease was due to an increase in research and development costs for future businesses and a decrease in hardware sales. Research and development costs increased by 21.9 billion yen to 83.4 billion yen compared with the previous fiscal year. Although research and development costs for software development increased only slightly, costs for the development of semiconductors and process technologies increased significantly.
      Cost of sales in the Game segment decreased due to the decrease in hardware unit sales and reductions in the cost of producing hardware. The cost of sales to sales ratio, however, remained unchanged as the cost of producing PS2 hardware decreased in line with the decrease in hardware sales. Selling, general and administrative expenses decreased as a result of a decline in advertising and promotion expenses, reflecting the decrease in hardware units sold. However, the ratio of selling, general and administrative expenses to sales rose compared to the previous fiscal year as the ratio of personnel related costs and advertising and promotion expenses to sales rose compared with the previous fiscal year.
Music
      Sales for the fiscal year ended March 31, 2004 decreased by 26.0 billion yen, or 5.6 percent, to 440.3 billion yen compared with the previous fiscal year. The operating loss for the year ended March 31, 2004 decreased by 22.3 billion yen, or 78.8 percent, to 6.0 billion yen compared with the previous fiscal year.
      Sales at SMEI, a U.S. based subsidiary, were flat on a U.S. dollar basis. (Refer to“Foreign Exchange Fluctuations and Risk Hedging” below. ) In terms of profitability, operating results improved as the operating loss for SMEI decreased compared to the previous fiscal year. The appreciation of European currencies against the U.S. dollar contributed to higher sales outside of the U.S. which were offset by lower sales in the U.S. On a worldwide basis, total album sales at SMEI decreased due to the continued contraction of the global music industry and the lack of hit releases. Although unit sales in various markets such as the U.S. have begun to reverse their downward trend, the global music market has continued to experience an overall contraction primarily due to piracy (i.e. unauthorized file sharing and CD burning) and competition from other entertainment sectors.
      The improvement in profitability primarily resulted from the benefits realized from the worldwide restructuring activities implemented over the past two fiscal years to reduce costs in response to the downward trend of the market. These activities included the rationalization of support functions including record label shared services through elimination of redundancy. Operating income also benefited from lower restructuring charges as compared to the prior fiscal year. The total restructuring charges for the fiscal year ended March 31, 2004 was 76 million U.S. dollars or 8.6 billion yen, a decrease of 46 million U.S. dollars from the prior fiscal year (Refer to “Restructuring” above for details.) A third factor contributing to the improved operating results were lower advertising and promotion expenses. The above factors more than offset the negative effect of lower worldwide album sales. The savings realized from previously implemented restructuring initiatives, lower restructuring charges and the decrease in advertising and promotion expenses resulted in a decrease in selling, general and administrative expenses for the fiscal year and an improvement in the ratio of selling, general and administrative expenses to sales.
      Regarding the results of SMEJ, sales were flat compared with the previous fiscal year, despite the continued contraction of the music industry. Operating income increased 69 percent compared with the prior fiscal year due to a reduction in selling, general and administrative expenses, primarily advertising and promotion expenses, and strong sales of Japanese artists’ recordings.
      On a yen basis, 67 percent of the Music segment’s sales were generated by SMEI while 33 percent were generated by SMEJ.
Pictures
      Sales for the fiscal year ended March 31, 2004 decreased by 46.4 billion yen, or 5.8 percent, to 756.4 billion yen compared with the previous fiscal year. Operating income decreased by 23.7 billion yen, or

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40.3 percent, to 35.2 billion yen and the operating income margin decreased from 7.3 percent to 4.7 percent. The results in the Pictures segment consist of the results of SPE, a U.S. based subsidiary.
      On a U.S. dollar basis, sales for the fiscal year in the Pictures segment increased approximately 2 percent and operating income decreased approximately 30 percent. The increase in sales was primarily due to higher television performance in the fiscal year. Television revenues increased significantly due to initial syndication sales 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 an increase in operating loss of 412 million U.S. dollars compared to the prior fiscal year release slate. Additionally, operating income was also negatively impacted by a 38 million U.S. dollar increase in restructuring charges recorded in the fiscal year. (Refer to “Restructuring” above for details.) Partially offsetting these decreases in operating income was the contribution from the syndication sales and extension of a licensing agreement noted above, DVD sales of television library product and an additional syndication sale 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 despite a 30.8 billion yen reduction in revenue resulting from a change in the method of recognizing insurance premiums received on certain products from being recorded as revenues to being offset against the related provision for future insurance policy benefits since the third quarter beginning October 1, 2003. Insurance revenue decreased as a result of this change in method of recording revenue but the actual life insurance business remained strong as new insurance sales increased compared with the previous fiscal year, and the amount of insurance-in-force at the end of the fiscal year increased compared with the end of the previous fiscal year. Operating income at Sony Life increased due to improvements in valuation gains and losses from investments in the general account. The above mentioned change in revenue recognition method did not have a material effect on operating income. Valuation gains and losses from investments in the separate account accrue directly to the account of policyholders and, therefore, do not affect operating income.

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      At Sony Assurance, revenue increased due to higher insurance revenue brought about by an expansion in automobile insurance-in-force. Operating income was recorded during the fiscal year compared to an operating loss in the previous fiscal year due to the increase in insurance revenue and an improvement in the expense ratio (the ratio of operating expenses to premiums) and the loss ratio (the ratio of insurance payouts to premiums).
      Sony Bank, which started business in June 2001, recorded a loss, as was also the case in the previous fiscal year, but the amount of loss decreased.
      At Sony Finance, a leasing and credit financing business subsidiary in Japan, revenue was unchanged compared to the previous fiscal year as credit financing revenue increased slightly and leasing revenue and rent revenue decreased slightly. In terms of profitability, the operating loss increased due to the recording of a loss from the lease of certain fixed assets to Crosswave, which commenced reorganization proceedings under the Corporate Reorganization Law of Japan, and an increase in expenses associated with the start of a credit card business.
Condensed Statements of Income Separating Out the Financial Services Segment (Unaudited)
      The following schedule shows unaudited condensed statements of income for the Financial Services segment and all other segments excluding Financial Services as well as condensed consolidated statements of income. This presentation is not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements.
Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
                         
      All other segments    
    excluding  
  Financial Services Financial Services Consolidated
       
Fiscal Year Ended March 31 2003 2004 2003 2004 2003 2004
             
  (Yen in millions)
Financial Services revenue  537,276   593,544   —   —   509,398   565,752 
Net sales and operating revenue  —   —   6,974,980   6,939,964   6,964,235   6,930,639 
                   
   537,276   593,544   6,974,980   6,939,964   7,473,633   7,496,391 
                   
Costs and expenses  514,518   538,383   6,811,292   6,896,377   7,288,193   7,397,489 
                   
Operating income  22,758   55,161   163,688   43,587   185,440   98,902 
                   
Other income (expenses) net  (1,282)  1,958   67,846   52,746   62,181   45,165 
                   
Income before income taxes  21,476   57,119   231,534   96,333   247,621   144,067 
                   
Income taxes and other  13,071   22,975   120,089   30,916   132,102   53,439 
Cumulative effect of accounting changes  —   —   —   (2,117)  —   (2,117)
                   
Net income  8,405   34,144   111,445   63,300   115,519   88,511 
                   
Other
      During the fiscal year ended March 31, 2004, sales of the Other segment were comprised mainly of an advertising agency business in Japan and SCN, an Internet-related service business subsidiary operating mainly in Japan.
      Sales for the fiscal year ended March 31, 2004 increased by 7.2 billion yen, or 2.7 percent, to 268.3 billion yen, compared with the previous fiscal year. Of total segment sales, 64 percent were sales to outside customers.

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In terms of profit performance, operating losses for the segment decreased from 28.3 billion yen to 12.1 billion yen.
      During the fiscal year ended March 31, 2004, sales increased primarily due to an increase in sales at the in-house oriented information system service business, reflecting greater demand for its services by other businesses within Sony. Regarding profit performance, the segment recorded a loss primarily due to the recording of expenses associated with the development of network and content technology and services, intended to facilitate new businesses in the broadband age. Overall segment losses decreased compared to the previous fiscal year primarily because a U.S. subsidiary recorded a one-time gain of 7.7 billion yen on the sale of rights related to a portion of the Sony Card portfolio and because software in a discontinued professional-use video software business had been written off in the previous fiscal year. On the other hand, an operating loss was recorded at SCN compared with operating income in the previous fiscal year, due to increased expenses for subscriber acquisition.
Foreign Exchange Fluctuations and Risk Hedging
      During the fiscal year ended March 31, 2004, the average value of the yen was 112.1 yen against the U.S. dollar, and 131.1 yen against the euro, which was 7.3 percent higher against the U.S. dollar and 9.7 percent lower against the euro, respectively, compared with the average of the previous fiscal year. Operating results on a local currency basis described in “Overview” and “Operating Performance” show results of sales and operating revenue and operating income obtained by applying the yen’s monthly average exchange rate in the previous fiscal year to monthly local currency-denominated sales, cost of sales, and selling, general and administrative expenses for the fiscal year ended March 31, 2004, as if the value of the yen had remained constant. In the Music segment, Sony consolidates the yen-translated results of SMEI (a U.S. based operation that aggregates the results of its worldwide subsidiaries on a U.S. dollar basis) and the results of SMEJ (a Japan based operation that aggregates the results of its operations in yen). In the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of SPE (a U.S. based operation that has worldwide subsidiaries). Therefore, analysis and discussion of certain portions of the operating results of SMEI and SPE are specified as being on “a U.S. dollar basis.” Results on a local currency basis and results on a U.S. dollar basis are not on the same basis as Sony’s consolidated financial statements and do not conform with U.S. GAAP. In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that local currency basis results provide additional useful information to investors regarding operating performance.
      Sony’s consolidated results are subject to foreign currency fluctuations mainly derived from the fact that the countries where manufacturing takes place may be different from those where such products are sold. In order to reduce the risk caused by such fluctuations, Sony employs derivatives, including foreign exchange forward contracts and foreign currency option contracts, in accordance with a consistent risk management strategy. Such derivatives are used primarily to mitigate the effect of foreign currency exchange rate fluctuations on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies.
      In 2001, SGTS was established in London for the purpose of providing integrated treasury services for Sony Corporation and its subsidiaries. Sony’s policy is that Sony Corporation and all subsidiaries with foreign exchange exposures should enter into commitments with SGTS for hedging their exposures. Sony Corporation and most of its subsidiaries utilize SGTS for this purpose. The concentration of foreign exchange exposures at SGTS means that, in effect, SGTS hedges the net foreign exchange exposure of Sony Corporation and its subsidiaries. SGTS in turn enters into foreign exchange transactions with creditworthy third-party financial institutions. Most of the transactions are entered into against projected exposures before the actual export and import transactions take place. In particular SGTS hedges the majority of the exposures on major currency pairs such as U.S. dollar against Japanese yen, euro against Japanese yen and euro against U.S. dollar, on average three months before the actual transactions take place. In the case of emerging market currencies, such as Brazil, with high inflation and high interest rates, the majority of the projected exposures are hedged one month before the actual transactions take place due to cost effectiveness considerations. Sony enters into

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foreign exchange transactions with financial institutions only for hedging purposes and does not undertake speculative transactions.
      To minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.
      Changes in the fair value of derivatives designated as cash flow hedges, including foreign exchange forward contracts and foreign currency option contracts, are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Foreign exchange forward contracts, foreign currency option contracts and other derivatives that do not qualify as hedges are marked-to-market with changes in value recognized in Other Income and Expenses. The notional amounts of foreign exchange forward contracts, currency option contracts purchased and currency option contracts written as of March 31, 2004 were 1,348.2 billion yen, 375.6 billion yen and 124.9 billion yen, respectively.
Assets, Liabilities and Stockholders’ Equity
Assets
      Total assets on March 31, 20052006 increased by 408.41,108.7 billion yen, or 4.511.7 percent, to 9,499.110,607.8 billion yen, compared with the previous fiscal year-end. Total assets on March 31, 20052006 in all segments excluding the Financial Services segment decreasedincreased by 32.9364.4 billion yen, or 0.56.0 percent, to 6,027.96,392.3 billion yen and total assets on March 31, 20052006 in the Financial Services segment increased by 410.5680.1 billion yen, or 11.817.5 percent, to 3,885.54,565.6 billion yen, compared with the previous fiscal year-end. Total assets on March 31, 20052006 in all segments excluding the Financial Services segment would have decreasedincreased by approximately 2 percent compared with the previous fiscal year-end if the value of the yen had remained the same on March 31, 20052006 as it was on March 31, 2004.2005.
Current Assets
      Current assets on March 31, 2005 increased by 192.8 billion yen, or 5.7 percent, to 3,556.2 billion yen compared with the previous fiscal year-end. Current assets on March 31, 2005 in all segments excluding the Financial Services segment decreased by 99.6 billion yen, or 3.7 percent, to 2,592.8
      Current assets on March 31, 2006 increased by 213.4 billion yen, or 6.0 percent, to 3,769.5 billion yen compared with the previous fiscalyear-end. Current assets on March 31, 2006 in all segments excluding the Financial Services segment increased by 363.7 billion yen, or 14.0 percent, to 2,956.5 billion yen.
      Cash and cash equivalents on March 31, 2005 in all segments excluding Financial Services segment decreased 73.2 billion yen, or 12.3 percent, to 519.7 billion yen compared with the previous fiscal year-end. This is primarily a result of 57.3 billion yen repayment of long-term debt relating to a variable interest entity responsible for the operation and development of a real estate complex in Berlin, Germany.
      Notes and accounts receivable, trade (net of allowance for doubtful accounts and sales returns) on March 31, 2005, in all segments excluding Financial Services segment increased 9.1 billion yen, or 1.0 percent, compared with the previous fiscal year-end to 952.7 billion yen.
      Inventories on March 31, 2005 decreased by 35.2 billion yen, or 5.3 percent, to 631.3 billion yen compared with the previous fiscal year-end. The inventory to cost of sales turnover ratio (based on the average of inventories at the end of each fiscal year and previous fiscal year) was 1.56 months compared to 1.53 months at the end of the previous fiscal year. Sony considers this level of inventory to be appropriate in the aggregate.
      Current assets on March 31, 2005 in the Financial Services segment increased by 290.5 billion yen, or 41.5 percent, to 990.2 billion yen, compared with the previous fiscal year-end. The increase was primarily attributable to an increase in marketable securities. (Refer to Note 7 of Notes to Consolidated Financial Statements.)
      Cash and cash equivalents on March 31, 2006 in all segments excluding the Financial Services segment increased 65.7 billion yen, or 12.6 percent, to 585.5 billion yen compared with the previous fiscal year-end. This is primarily a result of an increase in cash equivalents in association with the issuance of straight bonds carried out by Sony Corporation and the initial public offering of SCN.
      Notes and accounts receivable, trade (net of allowance for doubtful accounts and sales returns) on March 31, 2006 excluding the Financial Services segment increased 21.0 billion yen, or 2.2 percent, compared with the previous fiscal year-end to 973.7 billion yen.
      Inventories on March 31, 2006 increased by 173.4 billion yen, or 27.5 percent, to 804.7 billion yen compared with the previous fiscal year-end. This increase was primarily a result of both increased semiconductor inventory, primarily for use in PS3, and LCD television inventory in the Electronics segment and increased inventory in the Game segment resulting from the world-wide full-scale introduction of the PSP platform. The inventory to cost of sales turnover ratio (based on the average of inventories at the end of each

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fiscal year and previous fiscal year) was 1.67 months compared to 1.56 months at the end of the previous fiscal year. Sony considers this level of inventory to be appropriate in the aggregate.
      Current assets on March 31, 2006 in the Financial Services segment decreased by 138.7 billion yen, or 14.0 percent, to 851.5 billion yen, compared with the previous fiscal year-end. This decrease was primarily attributable to the fact that cash and cash equivalents were utilized for investments and advances.
Investments and Advances
      Investments and advances on March 31, 2005 increased by 232.7 billion yen, or 9.3 percent, to 2,745.7 billion yen, compared with the previous fiscal year-end.

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      Investments and advances on March 31, 2005 in all segments excluding the Financial Services segment increased by 86.8 billion yen, or 24.2 percent, to 445.4 billion yen. This increase was mainly the result of investments associated with the establishment of S-LCD, a joint venture with Samsung Electronics Co., Ltd. for the manufacture of amorphous TFT LCD panels.
      Investments and advances on March 31, 2005 in the Financial Services segment increased by 104.5 billion yen, or 4.6 percent, to 2,379.0 billion yen, compared with the previous fiscal year-end. This increase was primarily due to investments mainly in Japanese fixed income securities resulting from an increase in insurance premiums at Sony Life, and an increase in housing
      Investments and advances on March 31, 2006 increased by 774.2 billion yen, or 28.2 percent, to 3,519.9 billion yen, compared with the previous fiscalyear-end.
      Investments and advances on March 31, 2006 in all segments excluding the Financial Services segment increased by 31.6 billion yen, or 7.1 percent, to 477.1 billion yen. This was primarily a result of an increase in investments and advances towards affiliated companies such as MGM Holdings, Inc.
      Investments and advances on March 31, 2006 in the Financial Services segment increased by 749.8 billion yen, or 31.5 percent, to 3,128.7 billion yen, compared with the previous fiscal year-end. This increase was primarily due to investments mainly in Japanese fixed income securities resulting from an increase in insurance premiums at Sony Life, and an increase in mortgage loans due to a campaign carried out at Sony Bank.
      Also see “Investments” below.
Property, Plant and Equipment (after deduction of accumulated depreciation)
      Property, plant and equipment on March 31, 2005 increased by 7.4 billion yen, or 0.5 percent, to 1,372.4 billion yen, compared with the previous fiscal year-end.
      Property, plant and equipment on March 31, 2005 in all segments excluding the Financial Services segment increased by 9.6 billion yen, or 0.7 percent, to 1,333.8 billion yen, compared with the previous fiscal year-end.
      Capital expenditures (part of the increase in property, plant and equipment) for the fiscal year ended March 31, 2005 decreased by 21.4 billion yen, or 5.7 percent, to 356.8 billion yen compared with the previous fiscal year. Capital expenditures in the Electronics segment increased by 59.1 billion yen, or 23.5 percent, to 311.1 billion yen but decreased in the Game segment by 81.5 billion yen, or 81.2 percent, to 18.8 billion yen. Capital expenditures in the semiconductor businesses mainly in the Electronics segment amounted to 150.0 billion yen, of which investments in production equipment for system LSI including next generation broadband microprocessors amounted to 90.0 billion yen. Capital expenditures in the Music segment decreased by 0.8 billion yen, or 20.7 percent, to 2.9 billion yen, and decreased in the Pictures segment by 0.2 billion yen, or 3.4 percent to 5.8 billion yen, and decreased in the Other segment by 4.0 billion yen, or 39.3 percent, to 6.1 billion yen.
      Property, plant and equipment on March 31, 2005 in the Financial Services segment decreased by 2.3 billion yen, or 5.6 percent, to 38.6 billion yen compared with the previous fiscal year-end. Capital expenditures in the Financial Services segment decreased by 0.8 billion yen, or 16.7 percent, to 3.8
      Property, plant and equipment on March 31, 2006 increased by 16.1 billion yen, or 1.2 percent, to 1,388.5 billion yen, compared with the previous fiscalyear-end.
      Property, plant and equipment on March 31, 2006 in all segments excluding the Financial Services segment increased by 17.3 billion yen, or 1.3 percent, to 1,351.1 billion yen, compared with the previous fiscalyear-end.
      Capital expenditures (part of the increase in property, plant and equipment) for the fiscal year ended March 31, 2006 increased by 27.5 billion yen, or 7.7 percent, to 384.3 billion yen compared with the previous fiscal year. Capital expenditures in the Electronics segment increased by 17.5 billion yen, or 5.6 percent, to 328.6 billion yen but decreased in the Game segment by 10.4 billion yen, or 55.3 percent, to 8.4 billion yen. Capital expenditures in the semiconductor business within the Electronics segment, including capital expenditures related to the Cell microprocessor, amounted to 140.0 billion yen. Capital expenditures in the Pictures segment increased by 4.3 billion yen, or 73.8 percent to 10.1 billion yen. In All Other, which includes Sony’s consolidated music business, 4.2 billion yen of capital expenditures were recorded, compared to the 9.0 billion yen of capital expenditures recorded in the previous fiscal year.
      Property, plant and equipment on March 31, 2006 in the Financial Services segment decreased by 1.1 billion yen, or 2.9 percent, to 37.4 billion yen compared with the previous fiscal year-end. Capital expenditures in the Financial Services segment increased by 0.6 billion yen, or 15.9 percent, to 4.5 billion yen.
Other Assets
      Other assets on March 31, 2005 decreased by 46.7 billion yen, or 2.9 percent, to 1,545.9 billion yen, compared with the previous fiscal year-end.
      Other assets on March 31, 2005 in all segments excluding the Financial Services segment decreased by 62.5 billion yen to 1,189.4 billion yen. This decrease was primarily the result of the fact that, due to the establishment of SONY BMG, artist’s contracts belonging to the joint venture are no longer recorded as intangible assets within Sony’s consolidated balance sheets.
      Deferred tax assets on March 31, 2005 increased by 37.2 billion yen, or 18.3 percent, to 240.4 billion yen compared with the previous fiscal year-end. As a result of the recording of operating losses in the past, certain U.S. subsidiaries of Sony have had valuation allowances against deferred tax assets for U.S. federal taxes and certain state taxes. However, in the fiscal year ended March 31, 2005, based on both improved operating results in recent years and a sound outlook for the future operating performance at Sony’s U.S. subsidiaries, Sony reversed 67.9 billion yen of such valuation allowances. On the other hand, certain of Sony’s subsidiaries recorded new valuation allowances against deferred tax assets during the fiscal year ended March 31, 2005.
      Other assets in the Financial Services segment on March 31, 2005 increased by 17.8 billion yen, or 3.9 percent, to 477.8 billion yen compared with the previous fiscal year-end. This was mainly due to an increase in deferred insurance acquisition costs at Sony Life.

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Liabilities
      Total current and long-term liabilities on March 31, 2005 decreased by 84.9 billion yen, or 1.3 percent, to 6,604.9 billion yen compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, 2005 in all segments excluding the Financial Services segment decreased by 489.5 billion yen, or 12.7 percent, to 3,366.4 billion yen. Total current and long-term liabilities in the Financial Services segment on March 31, 2005 increased by 365.5 billion yen, or 11.8 percent, to 3,465.3 billion yen, compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, 2005 in all segments excluding the Financial Services segment would have decreased by approximately 14 percent compared with the previous fiscal year-end if the value of the yen had remained the same on March 31, 2005 as it was on March 31, 2004.
      Other assets on March 31, 2006 increased by 23.5 billion yen, or 1.5 percent, to 1,569.4 billion yen, compared with the previous fiscalyear-end.
      Other assets on March 31, 2006 in all segments excluding the Financial Services segment decreased by 129.6 billion yen to 1,059.8 billion yen.
      Deferred tax assets on March 31, 2006 decreased by 61.6 billion yen, or 25.6 percent, to 178.8 billion yen compared with the previous fiscal year-end. This was due to the recording of additional valuation allowances against deferred tax assets by Sony Corporation and several of Sony’s Japanese domestic and overseas consolidated subsidiaries, mainly within the Electronics segment due to continued losses recorded at these businesses.

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      Other assets in the Financial Services segment on March 31, 2006 increased by 70.2 billion yen, or 14.7 percent, to 548.0 billion yen compared with the previous fiscalyear-end.
Liabilities
      Total current and long-term liabilities on March 31, 2006 increased by 761.9 billion yen, or 11.5 percent, to 7,366.8 billion yen compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, 2006 in all segments excluding the Financial Services segment increased by 185.5 billion yen, or 5.5 percent, to 3,551.9 billion yen. Total current and long-term liabilities in the Financial Services segment on March 31, 2006 increased by 512.3 billion yen, or 14.8 percent, to 3,977.6 billion yen, compared with the previous fiscal year-end. Total current and long-term liabilities on March 31, 2006 in all segments excluding the Financial Services segment would have increased by approximately 2 percent compared with the previous fiscalyear-end if the value of the yen had remained the same on March 31, 2006 as it was on March 31, 2005.
Current Liabilities
      Current liabilities on March 31, 2005 decreased by 172.8 billion yen, or 5.8 percent, to 2,809.4 billion yen compared with the previous fiscal year-end. Current liabilities on March 31, 2005 in all segments excluding the Financial Services segment decreased by 236.1 billion yen, or 9.9 percent, to 2,137.5
      Current liabilities on March 31, 2006 increased by 390.9 billion yen, or 13.9 percent, to 3,200.2 billion yen compared with the previous fiscal year-end. Current liabilities on March 31, 2006 in all segments excluding the Financial Services segment increased by 191.8 billion yen, or 9.0 percent, to 2,329.3 billion yen.
      Short-term borrowings and current portion of long-term debt on March 31, 2005 in all segments excluding the Financial Services segment decreased 205.7 billion yen, or 50.2 percent, to 204.0 billion yen compared with the previous fiscal year-end. This decrease was mainly a result of the fact that of 300.0 billion yen of convertible bonds due on March 31, 2005, 5.0 billion yen were redeemed on the maturity date with 282.8 billion yen of the 287.8 billion yen balance outstanding at the start of the fiscal year being converted into common stock, which was partially offset by the reclassification of long term debt to current liabilities mainly consisting of 119.0 billion yen of straight bonds and bonds with warrants redeemable during the fiscal year ending March 31, 2006. (Refer to Note 11 of Notes to Consolidated Financial Statements.)
      Notes and accounts payable, trade on March 31, 2005 in all segments excluding the Financial Services segment increased by 28.0 billion yen, or 3.6 percent, to 801.3 billion yen compared with the previous fiscal year-end, mainly due to an increase within the Game segment.
      Current liabilities on March 31, 2005 in the Financial Services segment increased by 59.8 billion yen, or 9.2 percent, to 708.6 billion yen, mainly due to the increase in deposits from customers in the banking business. Deposits from customers in the banking business increased by 167.9 billion yen, or 44.3 percent, to 546.7 billion yen, due to the expansion of the banking business.
      Short-term borrowings and current portion of long-term debt on March 31, 2006 in all segments excluding the Financial Services segment increased 21.1 billion yen, or 10.3 percent, to 225.1 billion yen compared with the previous fiscalyear-end. This was principally a result of an increase in the current portion oflong-term debt.
      Notes and accounts payable, trade on March 31, 2006 in all segments excluding the Financial Services segment increased by 3.1 billion yen, or 0.4 percent, to 804.4 billion yen compared with the previous fiscal year-end.
      Current liabilities on March 31, 2006 in the Financial Services segment increased by 209.7 billion yen, or 29.6 percent, to 918.3 billion yen, mainly due to an increase in short-term borrowing and an increase in deposits from customers at Sony Bank.
Long-term Liabilities
      Long-term liabilities on March 31, 2006 increased by 371.0 billion yen, or 9.8 percent, to 4,166.6 billion yen compared with the previous fiscalyear-end.
      Long-term liabilities on March 31, 2006 in all segments excluding the Financial Services segment decreased by 6.3 billion yen, or 0.5 percent, to 1,222.6 billion yen. In addition, Long-term debt on March 31, 2006 in all segments excluding the Financial Services segment increased 74.0 billion yen, or 11.8 percent, to 701.4 billion yen.
      Long-term debt increased primarily due to the issuance of straight bonds in order to redeem bonds maturing during the fiscal years ending March 31, 2006 and March 31, 2007. Long-term liabilities decreased, as accrued pension and severance costs decreased by 169.3 billion yen, or 50.1 percent, to 168.8 billion yen, principally as a result of the transfer to the Japanese Government of the substitutional portion of Sony’s Employee Pension Fund.
      Long-term liabilities on March 31, 2006 in the Financial Services segment increased by 302.6 billion yen, or 11.0 percent, to 3,059.3 billion yen. This was due to an increase ininsurance-in-force in the life insurance business which resulted in an increase in future insurance policy benefits and other of 280.0 billion yen, or 11.4 percent, to 2,744.3 billion yen.
      Long-term liabilities on March 31, 2005 increased by 88.0 billion yen, or 2.4 percent, to 3,795.5 billion yen compared with the previous fiscal year-end.
      Long-term liabilities on March 31, 2005 in all segments excluding the Financial Services segment decreased by 253.5 billion yen, or 17.1 percent, to 1,228.9 billion yen. Long-term debt on March 31, 2005 in all segments excluding the Financial Services segment decreased 147.9 billion yen, or 19.1 percent, to 627.4 billion yen. This was primarily the result of the reclassification of long-term debt to current liabilities, including 119.0 billion yen of bonds redeemable during the fiscal year ending March 31, 2006 and a decrease in accrued pension and severance costs of 20.2 billion yen, or 5.6 percent, to 338.0 billion yen, primarily due to the reform of Sony’s employee retirement pension plan in Japan.
      Long-term liabilities on March 31, 2005 in the Financial Services segment increased by 305.7 billion yen, or 12.5 percent, to 2,756.7 billion yen. This was due to an increase in insurance-in-force in the life insurance business which resulted in an increase in future insurance policy benefits and other of 285.7 billion yen, or 13.1 percent, to 2,464.3 billion yen.

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Total Interest-bearing Debt
      Total interest-bearing debt on March 31, 2005 decreased by 343.4 billion yen, or 27.4 percent, to 909.3 billion yen, compared with the previous fiscal year-end. Total interest-bearing debt on March 31, 2005 in all segments excluding the Financial Services segment decreased by 353.6 billion yen, or 29.8 percent, to 831.4
      Total interest-bearing debt on March 31, 2006 increased by 192.0 billion yen, or 21.1 percent, to 1,101.2 billion yen, compared with the previous fiscal year-end. Total interest-bearing debt on March 31, 2006

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in all segments excluding the Financial Services segment increased by 95.1 billion yen, or 11.4 percent, to 926.5 billion yen.
Stockholders’ Equity
      Stockholders’ equity on March 31, 2005 increased by 492.3 billion yen, or 20.7 percent, to 2,870.3 billion yen compared with the previous fiscal year-end. As noted above, of 300.0 billion yen of convertible bonds due on March 31, 2005, 5.0 billion yen were redeemed on the maturity date with 282.8 billion yen of the 287.8 billion yen balance outstanding at the start of the fiscal year being converted into common stock, and, therefore, incorporated into stockholders’ equity and additional paid-in capital. Retained earnings increased 139.0 billion yen compared with the previous fiscal year-end, and other comprehensive income (net of tax) was 64.3 billion yen. This was primarily due to comprehensive income of 74.2 billion yen arising from foreign currency translation adjustments in current fiscal year due to the devaluation of the yen, partially offset by the recording of a change in accumulated other comprehensive income of 7.3 billion yen arising from unrealized gains on securities in the current fiscal year. The ratio of stockholders’ equity to total assets increased 4.0 percent from 26.2 percent to 30.2 percent.
Stockholders’ Equity
      Stockholders’ equity on March 31, 2006 increased by 333.5 billion yen, or 11.6 percent, to 3,203.9 billion yen compared with the previous fiscal year-end. Retained earnings increased 96.6 billion yen compared with the previous fiscal year-end, and accumulated other comprehensive income (net of tax) was 156.4 billion yen. This was primarily due to comprehensive income of 140.5 billion yen arising from foreign currency translation adjustments in current fiscal year due to the depreciation of the yen against the U.S. dollar, partially offset by the recording of a change in accumulated other comprehensive income of 38.1 billion yen arising from unrealized gains on securities in the current fiscal year. The ratio of stockholders’ equity to total assets remained unchanged at 30.2 percent compared to the previous fiscal year-end.
Condensed Balance Sheets Separating Out the Financial Services Segment (Unaudited)
      The following schedule shows an unaudited condensed balance sheet for the Financial Services segment and all other segments excluding Financial Services as well as the condensed consolidated balance sheet. This presentation is not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated

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financial statements. Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.
Financial Services
          
  March 31
   
  2005 2006
     
  (Yen in millions)
ASSETS
Current assets:        
 Cash and cash equivalents  259,371   117,630 
 Marketable securities  456,130   532,895 
 Notes and accounts receivable, trade  77,023   17,236 
 Other  197,667   183,693 
       
   990,191   851,454 
 
Investments and advances  2,378,966   3,128,748 
Property, plant and equipment  38,551   37,422 
Other assets:        
 Deferred insurance acquisition costs  374,805   383,156 
 Other  103,004   164,827 
       
   477,809   547,983 
       
   3,885,517   4,565,607 
       
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:        
 Short-term borrowings  45,358   136,723 
 Notes and accounts payable, trade  7,099   11,707 
 Deposits from customers in the banking business  546,718   599,952 
 Other  109,438   169,956 
       
   708,613   918,338 
Long-term liabilities:        
 Long-term debt  135,750   128,097 
 Accrued pension and severance costs  14,362   13,479 
 Future insurance policy benefits and other  2,464,295   2,744,321 
 Other  142,272   173,354 
       
   2,756,679   3,059,251 
 
Minority interest in consolidated subsidiaries  5,476   4,089 
Stockholders’ equity  414,749   583,929 
       
   3,885,517   4,565,607 
       

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Sony without Financial Services
          
  March 31
   
  2005 2006
     
  (Yen in millions)
ASSETS
Current assets:        
 Cash and cash equivalents  519,732   585,468 
 Marketable securities  4,072   4,073 
 Notes and accounts receivable, trade  952,692   973,675 
 Other  1,116,353   1,393,306 
       
   2,592,849   2,956,522 
 
Film costs  278,961   360,372 
Investments and advances  445,446   477,089 
Investments in Financial Services, at cost  187,400   187,400 
Property, plant and equipment  1,333,848   1,351,125 
Other assets  1,189,398   1,059,786 
       
   6,027,902   6,392,294 
       
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:        
 Short-term borrowings  204,027   225,082 
 Notes and accounts payable, trade  801,252   804,394 
 Other  1,132,201   1,299,809 
       
   2,137,480   2,329,285 
Long-term liabilities:        
 Long-term debt  627,367   701,372 
 Accrued pension and severance costs  338,040   168,768 
 Other  263,520   352,457 
       
   1,228,927   1,222,597 
 
Minority interest in consolidated subsidiaries  18,471   32,623 
Stockholders’ equity  2,643,024   2,807,789 
       
   6,027,902   6,392,294 
       

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Consolidated
          
  March 31
   
  2005 2006
     
  (Yen in millions)
ASSETS
Current assets:        
 Cash and cash equivalents  779,103   703,098 
 Marketable securities  460,202   536,968 
 Notes and accounts receivable, trade  1,025,362   985,508 
 Other  1,291,504   1,543,950 
       
   3,556,171   3,769,524 
 
Film costs  278,961   360,372 
Investments and advances  2,745,689   3,519,907 
Property, plant and equipment  1,372,399   1,388,547 
Other assets:        
 Deferred insurance acquisition costs  374,805   383,156 
 Other  1,171,075   1,186,247 
       
   1,545,880   1,569,403 
       
   9,499,100   10,607,753 
       
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:        
 Short-term borrowings  230,266   336,321 
 Notes and accounts payable, trade  806,044   813,332 
 Deposits from customers in the banking business  546,718   599,952 
 Other  1,226,340   1,450,623 
       
   2,809,368   3,200,228 
Long-term liabilities:        
 Long-term debt  678,992   764,898 
 Accrued pension and severance costs  352,402   182,247 
 Future insurance policy benefits and other  2,464,295   2,744,321 
 Other  299,858   475,106 
       
   3,795,547   4,166,572 
 
Minority interest in consolidated subsidiaries  23,847   37,101 
Stockholders’ equity  2,870,338   3,203,852 
       
   9,499,100   10,607,753 
       
Investments
      Sony regularly evaluates its investment portfolio to identify other-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether an other-than-temporary decline in value has occurred include: the length of time and extent to which the market value of the security has been less than its original cost, the financial condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors affecting the market value, deterioration of issuer’s credit condition, sovereign risk, and whether or not Sony is able to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value.

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      In evaluating the factors for available-for-sale securities with readily determinable fair values, management presumes a decline in value to be other-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally a period of up to six to twelve months). The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value is other-than-temporary.
      The assessment of whether a decline in the value of an investment is other-than-temporary is often judgmental in nature and involves certain assumptions and estimates concerning the expected operating results, business plans and future cash flows of the issuer of the security. Accordingly, it is possible that investments in Sony’s portfolio that have had a decline in value that Sony currently believes to be temporary may be determined to be other-than-temporary in the future based on Sony’s evaluation of additional information such as continued poor operating results, future broad declines in value of worldwide equity markets and the effect of world wide interest rate fluctuations. As a result, unrealized losses recorded for investments may be recognized into income in future periods.
      The following table contains available for sale and held to maturity securities, breaking out the unrealized gains and losses by investment category.
                     
  March 31, 2006
   
  Cost Unrealized gain Unrealized Loss Fair Market Value
         
  (Yen in Millions)
Financial Services Business:                
 Available for sale                
  Debt securities                
   Sony Life  2,062,410   10,702   (15,122)  2,057,990 
   Other  453,926   6,285   (7,561)  452,650 
  Equity securities                
   Sony Life  155,878   112,230   (1,137)  266,971 
   Other  9,323   4,176   (33)  13,466 
 Held to maturity                
  Debt securities                
   Sony Life  —   —   —   — 
   Other  33,189   132   (221)  33,100 
             
    Total Financial Services  2,714,726   133,525   (24,074)  2,824,177 
             
Non-Financial Services:                
 Available for sale securities  68,406   55,549   (546)  123,409 
 Held to maturity securities  4   —   —   4 
             
    Total Non-Financial Services  68,410   55,549   (546)  123,413 
             
Consolidated  2,783,136   189,074   (24,620)  2,947,590 
             
      The most significant portion of these unrealized losses relate to investments held by Sony Life. Sony Life principally invests in debt securities in various industries. Most securities were rated “BBB” or better by Standard & Poor’s, Moody’s or others. As of March 31, 2006, Sony Life had debt and equity securities which had gross unrealized losses of 15.1 billion yen and 1.1 billion yen, respectively. Of the unrealized loss amounts recorded by Sony Life, less than 1 percent relate to securities being in an unrealized loss position of greater than 12 months. These unrealized losses related to numerous investments, with no single investment being in a material unrealized loss position. In addition, there was no individual security with unrealized losses that met

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the test discussed above for impairment as the declines in value were observed to be small both in amounts and percentage, and therefore, the decline in value for those investments was still determined to be temporary in nature. The percentage of non-investment grade securities held by Sony Life represents approximately 1 percent of Sony Life’s total investment portfolio, while the percentage of unrealized losses that relate to those non-investment grade securities was approximately 2 percent of Sony Life’s total unrealized losses as of March 31, 2006.
      For fixed maturity securities with unrecognized losses held by Sony Life as of March 31, 2006 (15.1 billion yen), maturity dates vary as follows:
• Within 1 year:5 percent
• 1 to 5 years:44 percent
• 5 to 10 years:50 percent
      Sony also maintains long-term investment securities issued by a number of non-public companies. The aggregate carrying amount of the investments in non-public companies at March 31, 2006 was 59.6 billion yen. A non-public equity investment is valued at cost as fair value is not readily determinable. If the value is estimated to have declined and such decline is judged to be other than temporary, the impairment of the investment is recognized and the carrying value is reduced to its fair value.
      For the fiscal years ended March 31, 2004, 2005 and 2006, total impairment losses were 16.7 billion yen, 4.2 billion yen and 4.0 billion yen of which 0.2 billion yen, 0.5 billion yen and 0.2 billion yen, respectively, were recorded by Sony Life in Financial Services revenue (refer to “Financial Services” under“Operating Performance by Business Segment” for the fiscal years ended March 31, 2006 and March 31, 2005). Impairment losses other than at Sony Life in each of the three fiscal years were reflected in non-operating expenses and primarily relate to the certain strategic investments in non-financial services businesses. These investments primarily relate to the certain strategic investments in Japan, the U.S. and Europe with which Sony has strategic relationships for the purposes of developing and marketing new technologies. The impairment losses were recorded for each of the three fiscal years as these companies failed to successfully develop and market such technology, the operating performance of the companies was more unfavorable than previously expected and the decline in fair value of these companies was judged as other-than-temporary. None of these impairment losses was individually material to Sony, except for the devaluation of securities explained in “Other Income and Expenses” for the fiscal years ended March 31, 2004.
      Upon determination that the value of an investment is impaired, the value of the investment is written down to its fair value. For publicly traded investments, fair value is determined by the closing stock price as of the date on which the impairment determination is made. For non-public investments, fair value is determined through the use of such methodologies as discounted cash flows, valuation of recent financings and comparable valuations of similar companies. The impairment losses that were recorded in each of the three years related to the unique facts and circumstances of each individual investment and did not significantly impact other investments.
      Sony Life and Sony Bank’s investments constitute the majority of the investments in the Financial Services segment. Sony Life and Sony Bank account for approximately 82 percent and 16 percent of the investments of the Financial Services segment, respectively.
      Sony Life’s fundamental investment policy is to build an investment portfolio capable of ensuring stable mid- to long-term returns through the efficient investment of funds, taking into account both expected returns and investment risks and responding flexibly to changes in financial conditions and the investment environment, while maintaining a sound asset base. Moreover, as its fundamental stance towards Asset Liability Management (“ALM”), a method of managing interest rate fluctuation risk through the comprehensive identification of differences in duration and cash flows between assets and liabilities, Sony Life takes the distinct characteristics of liability into account in order to control price fluctuation risks and establish a portfolio that ensures a certain level of returns. Sony Life adjusts its investing style depending on changes in the investment environment, in the first half of the fiscal year ended March 31, 2006, when stock prices in Japan remained low, Sony Life invested mainly in convertible bonds, while in the second half of the fiscal year

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ended March 31, 2006, when interest rates in Japan started to trend upward, Sony Life invested mainly in long-term Japanese government bonds.
      Sony Bank operates using a similar basic investment policy as Sony Life, taking expected returns and investment risks into account in order to disperse associated risks, and structuring its asset portfolio to ensure steady returns from investments. In addition, Sony Bank is careful to match the duration of its asset portfolio with the duration of liabilities resulting from customer deposits, in order to ensure that significant discrepancies do not occur. Government bonds and corporate bonds in yen or other currencies constitute a majority of Sony Bank’s current portfolio. To safeguard its assets Sony Bank does not invest in equity securities but invests in various types of government and corporate bonds in many countries, companies and industries, to diversify associated risks. With respect to loans, Sony Bank mainly offers housing loans to individuals and does not have any corporate loan exposure.
Contractual obligations, commitments, and contingent liabilities
      The following table summarizes Sony’s contractual obligations and major commitments as of March 31, 2006. References to Note below represents a particular note within the Notes to Consolidated Financial Statements.
                      
    Payments Due by Period
     
    Less than 1 to 3 to After
  Total 1 Year 3 Year 5 Year 5 Year
           
  (Yen in millions)
Contractual Obligations and Major Commitments:*
                    
Long-term debt (Note 11)                    
 Capital lease obligations
(Notes 8 and 11)		  38,280   16,966   12,642   4,342   4,330 
 Other long-term debt (Note 11)  920,173   176,589   306,063   172,851   264,670 
Minimum rental payments required under operating leases (Note 8)  195,537   47,500   61,244   27,861   58,932 
Purchase commitments for property, plant and equipment and other assets (Note 23)  69,286   65,135   4,124   27   — 
Expected cost for the production or purchase of films and television programming or certain rights (Note 23)  76,736   50,578   25,926   213   19 
Partnership program contract with Fédération Internationale de Football Association (Note 23)  34,639   3,875   7,750   8,660   14,354 
* The total amount of expected future pension payments is not included in the above table or the total amount of commitments outstanding at March 31, 2006 discussed below as such amount is not currently determinable. Sony expects to contribute approximately 33.0 billion yen to the Japanese pension plans and approximately 6.0 billion yen to the foreign pension plans during the fiscal year ending March 31, 2007 (Note 14).
* The total unused portion of the line of credit extended under loan agreements in the Financial Services segment is not included in the above table or the amount of commitments outstanding at March 31, 2006 discussed below as it is not foreseeable how many loans will be executed. The total unused portion of the line of credit extended under these contracts was 326.7 billion yen as of March 31, 2006 (Note 23).
* The 5 year Revolving Credit Agreement with Sony BMG, which matures on August 5, 2009 and provides for a base commitment of 300 million U.S. dollars and additional incremental borrowings of up to 150 million U.S. dollars, is not included in the above table or the amount of commitments outstanding at March 31, 2006

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discussed below as such amount is not currently determinable. Sony’s outstanding commitment under this Credit Agreement as of March 31, 2006 was 26.3 billion yen (Note 23).
      The total amount of commitments outstanding at March 31, 2006 was 285.8 billion yen (Note 23). The commitments include major purchase obligations as shown above.
      In the ordinary course of business, Sony makes commitments for the purchase of property, plant and equipment. As of March 31, 2006, such commitments outstanding were 69.3 billion yen.
      A subsidiary in the Pictures segment has committed to fund a portion of the production cost of completed films and is responsible for all distribution and marketing expenses relating to these films under a distribution agreement with a third party. Further, certain subsidiaries in the Pictures segment have entered into agreements with creative talent for the development and production of films and television programming as well as agreements with third parties to acquire completed films, or certain rights therein. As of March 31, 2006, the total amount of the expected cost for the production or purchase of films and television programming or certain rights under the above commitments was 76.7 billion yen.
      Sony Corporation has entered into a partnership program contract with Fédération Internationale de Football Association (“FIFA”). Through this program Sony Corporation will be able to exercise various rights as an official sponsor of FIFA events from 2007 to 2014. As of March 31, 2006, Sony Corporation was committed to make payments under such contract of 34.6 billion yen.
      In order to fulfill its commitments, Sony will use cash generated by its operating activities, intra-group loans and borrowings from subsidiaries with excess funds to subsidiaries that are short of funds through its finance subsidiaries, and raise funds from the global capital markets and from banks when necessary.
      The following table summarizes Sony’s contingent liabilities as of March 31, 2006.
Total Amounts of
Contingent Liabilities
(Yen 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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millions)

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

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

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Consolidated
          
  Fiscal Year Ended
  March 31
   
  2004 2005
     
  (Yen in millions)
ASSETS
        
Current assets:        
 Cash and cash equivalents  849,211   779,103 
 Marketable securities  274,748   460,202 
 Notes and accounts receivable, trade  1,011,189   1,025,362 
 Other  1,228,207   1,291,504 
       
   3,363,355   3,556,171 
Film costs  256,740   278,961 
Investments and advances  2,512,950   2,745,689 
Property, plant and equipment  1,365,044   1,372,399 
Other assets:        
 Deferred insurance acquisition costs  349,194   374,805 
 Other  1,243,379   1,171,075 
       
   1,592,573   1,545,880 
       
   9,090,662   9,499,100 
       
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:        
 Short-term borrowings  475,017   230,266 
 Notes and accounts payable, trade  778,773   806,044 
 Deposits from customers in the banking business  378,851   546,718 
 Other  1,349,574   1,226,340 
       
   2,982,215   2,809,368 
Long-term liabilities:        
 Long-term debt  777,649   678,992 
 Accrued pension and severance costs  368,382   352,402 
 Future insurance policy benefits and other  2,178,626   2,464,295 
 Other  382,930   299,858 
       
   3,707,587   3,795,547 
Minority interest in consolidated subsidiaries  22,858   23,847 
Stockholders’ equity  2,378,002   2,870,338 
       
   9,090,662   9,499,100 
       
Investments
      Sony regularly evaluates its investment portfolio to identify other-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether an other-than-temporary decline in value has occurred include: the length of time and extent to which the market value of the security has been less than its original cost, the financial condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors affecting the market value, deterioration of issuer’s credit condition, sovereign risk, and whether or not Sony is able to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value.

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      In evaluating the factors for available-for-sale securities with readily determinable fair values, management presumes a decline in value to be other-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally a period of up to six to twelve months). The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value is other-than-temporary.
      The assessment of whether a decline in the value of an investment is other-than-temporary is often judgmental in nature and involves certain assumptions and estimates concerning the expected operating results, business plans and future cash flows of the issuer of the security. Accordingly, it is possible that investments in Sony’s portfolio that have had a decline in value that Sony currently believes to be temporary may be determined to be other-than-temporary in the future based on Sony’s evaluation of additional information such as continued poor operating results, future broad declines in value of worldwide equity markets and the effect of world wide interest rate fluctuations. As a result, unrealized losses recorded for investments may be recognized into income in future periods.
      The following table contains available for sale and held to maturity securities, breaking out the unrealized gains and losses by investment category.
                     
  Fiscal Year Ended March 31, 2005
   
  Cost Unrealized gain Unrealized Loss Fair Market Value
         
  (Yen in millions)
Financial Services                
 Available for sale                
  Debt securities                
    Sony Life  1,769,693   56,988   (2,130)  1,824,551 
    Other  315,101   1,096   (281)  315,916 
 Equity securities                
    Sony Life  42,256   22,735   (278)  64,713 
    Other  9,469   5,172   (12)  14,629 
 Held to maturity                
  Debt securities                
    Sony Life  —   —   —   — 
    Other  27,414   530   (13)  27,931 
             
   Total Financial Services  2,163,933   86,521   (2,714)  2,247,740 
             
Non-Financial Services:                
 Available for sale securities  61,212   21,520   (577)  82,155 
 Held to maturity securities  17   —   —   17 
             
   Total Non-Financial Services  61,229   21,520   (577)  82,172 
             
Consolidated  2,225,162   108,041   (3,291)  2,329,912 
             
      The most significant portion of these unrealized losses relate to investments held by Sony Life. Sony Life principally invests in debt securities in various industries. Almost all of these securities were rated “BBB” or better by Standard & Poor’s, Moody’s or others. As of March 31, 2005, Sony Life had debt and equity securities which had gross unrealized losses of 2.1 billion yen and 0.3 billion yen, respectively. Of the unrealized loss amounts recorded by Sony Life, less than 1 percent relate to securities being in an unrealized loss position of greater than 12 months. These unrealized losses related to numerous investments, with no single investment being in a material unrealized loss position. In addition, there was no individual security with

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unrealized losses that met the test discussed above for impairment as the declines in value were observed to be small both in amounts and percentage, and therefore, the decline in value for those investments was still determined to be temporary in nature. The percentage of noninvestment grade securities held by Sony Life represents approximately 2 percent of Sony Life’s total investment portfolio, while the percentage of unrealized losses that relate to those noninvestment grade securities was approximately 4 percent of Sony Life’s total unrealized losses as of March 31, 2005.
      For fixed maturity securities with unrecognized losses held by Sony Life as of March 31, 2005 (2.1 billion yen), maturity dates vary as follows:
• Within 1 year:18 percent
• 1 to 5 years:55 percent
• 5 to 10 years:21 percent
      Sony also maintains long-term investment securities issued by a number of non-public companies. The aggregate carrying amount of these investments in non-public companies at March 31, 2005 was 48.9 billion yen. A non-public equity investment is valued at cost as fair value is not readily determinable. If the value is estimated to have declined and such decline is judged to be other than temporary, impairment of the investment is recognized and the carrying value is reduced to its fair value.
      For the fiscal years ended March 31, 2003, 2004 and 2005, total impairment losses were 25.5 billion yen, 16.7 billion yen and 4.2 billion yen of which 2.3 billion yen, 0.2 billion yen and 0.5 billion yen, respectively, were recorded by Sony Life in Financial Services revenue (Refer to “Financial Services” under “Operating Performance by Business Segment” for the fiscal years ended March 31, 2005 and March 31, 2004). Impairment losses other than at Sony Life in each of the three fiscal years were reflected in non-operating expenses and primarily relate to the certain strategic investments in non-financial services businesses. These investments primarily relate to the certain strategic investments in Japan, the U.S. and Europe with which Sony has strategic relationships for the purposes of developing and marketing new technologies. The impairment losses were recorded for each of the three fiscal years as these companies failed to successfully develop and market such technology, the operating performance of the companies was more unfavorable than previously expected and the decline in fair value of these companies was judged as other-than-temporary. None of these impairment losses was individually material to Sony, except for the devaluation of securities explained in “Other Income and Expenses” for the fiscal years ended March 31, 2005, March 31, 2004 and March 31, 2003.
      Upon determination that the value of an investment is impaired, the value of the investment is written down to its fair value. For publicly traded investments, fair value is determined by the closing stock price as of the date on which the impairment determination is made. For non-public investments, fair value is determined through the use of such methodologies as discounted cash flows, valuation of recent financings and comparable valuations of similar companies. The impairment losses that were recorded in each of the three fiscal years related to the unique facts and circumstances of each individual investment and did not significantly impact other investments.
      Sony Life and Sony Bank’s investments constitute the majority of the investments in the Financial Services segment. Sony Life and Sony Bank account for approximately 84 percent and 14 percent of the investments of the Financial Services segment, respectively.
      Sony Life’s basic investment policy is to take both expected returns and investment risks into account in order to maintain sound asset quality, structuring its asset management portfolio to ensure steady medium- and long-term returns by investing assets in an efficient manner and responding flexibly to changes in financial conditions and the investment environment. Moreover, Sony Life analyzes the character of future insurance policy benefits by utilizing Asset Liability Management (“ALM”), a method of managing interest rate fluctuation risk through the comprehensive identification of the mismatches of duration and cash flows between assets and liabilities. Government bonds, convertible bonds, and straight corporate bonds constitute a majority of Sony Life’s current portfolio. Sony Life invests in various types of bonds in many countries,

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companies and industries, to diversify associated risks. Stocks accounted for approximately 3 percent of the current portfolio.
      Sony Bank operates using a similar basic investment policy as Sony Life, taking expected returns and investment risks into account in order to disperse associated risks, and structuring its asset portfolio to ensure steady returns from investments. In addition, Sony Bank is careful to match the duration of its asset portfolio with the duration of liabilities resulting from customer deposits, in order to ensure that significant discrepancies do not occur. Government bonds and corporate bonds in yen or other currencies constitute a majority of Sony Bank’s current portfolio. To safeguard its assets Sony Bank does not invest in equity securities but invests in various types of government and corporate bonds in many countries, companies and industries, to diversify associated risks. With respect to loans, Sony Bank mainly offers housing loans to individuals and does not have any corporate loan exposure.
Contractual Obligations, Commitments, and Contingent Liabilities
      The following table summarizes Sony’s contractual obligations and major commitments. Please note that references to Notes below are references to particular notes within the Notes to Consolidated Financial Statements.
                      
    Payments Due by Period
     
    Less than 1 to 3 to After
  Total 1 Year 3 Year 5 Year 5 Year
           
    (Yen in millions)
Contractual Obligations and Major Commitments:*
                    
Long-term debt (Note 11)                    
 Capital lease obligations (Notes 8 and 11)  40,301   11,713   17,435   6,655   4,498 
 Other long-term debt (Note 11)  805,561   155,157   192,741   278,684   178,979 
Minimum rental payments required under operating leases (Note 8)  169,951   38,182   53,561   24,556   53,652 
Purchase commitments for property, plant and equipment and other assets (Note 23)  83,683   67,698   15,973   12   — 
Expected cost for the production or purchase of films and television programming or certain rights (Note 23)  82,080   45,651   36,429   —   — 
* The total amount of expected future pension payments is not included in the above table or the total amount of commitments outstanding at March 31, 2005 discussed below as such amount is not currently determinable. Sony expects to contribute approximately 35.0 billion yen to the Japanese pension plans and approximately 6.0 billion yen to the foreign pension plans for the fiscal year ending March 31, 2006 (Note 14).
* The total unused portion of the line of credit extended under loan agreements in the Financial Services segment is not included in the above table or the amount of commitments outstanding at March 31, 2005 discussed below as it is not foreseeable how many loans will be executed. The total unused portion of the line of credit extended under these contracts was 199.9 billion yen as of March 31, 2005Liabilities: (Note 23).
* The 5 year Revolving Credit Agreement with Sony BMG, which matures on August 5, 2009 and provides for a base commitment of 32.1 billion yen and additional incremental borrowings of up
Loan guarantees to 16.1 billion yen, is not included in the above table or the amount of commitments outstanding at March 31, 2005 discussed below as such amount is not currently determinable. Sony’s outstanding commitment under this Credit Agreement as of March 31, 2005 was 24.1 billion yen (Note 23).

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      The total amount of commitments outstanding at March 31, 2005 was 240.7 billion yen (Refer to Note 23 of Notes to Consolidated Financial Statements). The commitments include major purchase obligations as shown above.
      In the ordinary course of business, Sony makes commitments for the purchase of property, plant and equipment. As of March 31, 2005, such commitments outstanding were 83.7 billion yen.
      A subsidiary in the Pictures segment has committed to fund a portion of the production cost of completed films and is responsible for all distribution and marketing expenses relating to these films under a distribution agreement with a third party. Further, certain subsidiaries in the Pictures segment have entered into agreements with creative talent for the development and production of films and television programming as well as agreements with thirdrelated parties to acquire completed films, or certain rights therein. As of March 31, 2005, the total amount of the expected cost for the production or purchase of films and television programming or certain rights under the above commitments was 82.1 billion yen.
      In order to fulfill its commitments, Sony will use cash generated by its operating activities, intra-group loans and borrowings from subsidiaries with excess funds to subsidiaries that are short of funds through its finance subsidiaries such as SGTS, and raise funds from the global capital markets and from banks when necessary.
      The following table summarizes Sony’s
9,325
Other11,747
Total contingent liabilities.
Total Amounts of
Contingent Liabilities
(Yen in millions)
Contingent Liabilities: (Notes 23)
Loan guarantees to related parties7,642
Other18,407liabilities21,072 
    
Total contingent liabilities26,049
Off-Balance Sheet Arrangements
      Sony has several accounts receivable securitization programs to provide liquidity, capital resources and credit risk support.
      In the United States, Sony has set up an accounts receivable securitization program that provides for the accelerated receipt of up to 53.5 billion yen of cash on eligible trade accounts receivable of Sony’s U.S. electronics subsidiary. Through this program, Sony can securitize and sell a percentage of an undivided interest in that pool of receivables to several multi-seller commercial paper conduits owned and operated by a bank. These securitization transactions are accounted for as a sale in accordance with FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, because Sony has relinquished control of the receivables. Accordingly, accounts receivable sold under these transactions are excluded from receivables in the accompanying consolidated balance sheet. During the period from April 2004 to January 2005, Sony sold a total of 80.3 billion yen of accounts receivable under this program. There were no outstanding amounts due at March 31, 2005 relating to the existing undivided interests in the pool of receivables that had been sold. Losses from these transactions were insignificant. This program was terminated in May 2005.
      During the fiscal year ended March 31, 2005, Sony entered into new accounts receivable sales programs that provide for the accelerated receipt of up to 47.5 billion yen of eligible trade accounts receivable of Sony Corporation. Through these programs, Sony can sell receivables to special purpose entities owned and operated by banks. These transactions are accounted for as a sale in accordance with FAS No. 140, because Sony has relinquished control of the receivables. Accordingly, accounts receivable sold under these transactions are excluded from receivables in the accompanying consolidated balance sheet. The initial sale of these receivables was in March 2005, and Sony sold a total of 10.0 billion yen for the fiscal year ended March 31, 2005. Losses from these transactions were insignificant. Although Sony continues servicing the sold

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receivables, no servicing liabilities are recorded because costs regarding collection of the sold receivables are insignificant.
      Refer to Note 6 of Notes to Consolidated Financial Statements for more information.
      Sony has, from time to time, entered into various financing arrangements with Variable Interest Entities (“VIEs”). These arrangements include facilities which provide for the leasing of certain property, the financing of film production and the development and operation of a multi-use real estate complex. Although not a significant part of its financing activities, Sony employs these arrangements because they provide a diversification of funding sources. The assets and liabilities associated with these arrangements previously qualified for off-balance sheet treatment. On July 1, 2003, Sony adopted FIN 46 and accordingly, the assets and liabilities associated with these arrangements were consolidated. Refer to Note 22 of Notes to Consolidated Financial Statements for more information. As a result, Sony recognized a one time charge with no tax effect of 2.1 billion yen for cumulative effect of an accounting change for the year ended March 31, 2004. Additionally, Sony’s assets and liabilities increased as non-cash transactions, which resulted in no cash flows, by 95.3 billion yen and 98.0 billion yen, respectively. Cash and cash equivalents as of March 31, 2005, also increased by 1.5 billion yen compared with previous fiscal year-end. As of March 31, 2005, Sony is a primary beneficiary for all the VIEs in which Sony holds a significant variable interest, and all these VIEs are consolidated by Sony. Also, in connection with Sony’s utilization of joint venture and alliances to achieve certain strategic objectives, Sony has recently entered into several joint ventures and made certain strategic investments which include SONY BMG, S-LCD and MGM. Sony has reviewed these investments and determined that both SONY BMG and S-LCD are not VIEs while MGM is a VIE. However, MGM will not be consolidated as Sony is not the primary beneficiary of this VIE. Accordingly, Sony has accounted for these investments under the equity method.
Cash Flows
(The fiscal year ended March 31, 2005 compared with the fiscal year ended March 31, 2004)
      Operating Activities: During the fiscal year ended March 31, 2005, Sony generated 647.0 billion yen of net cash from operating activities, a increase of 14.4 billion yen, or 2.3 percent compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment generated 485.4 billion yen of net cash from operating activities, a increase of 84.3 billion yen, or 21.0 percent, compared with the previous fiscal year, and the Financial Services segment generated 168.1 billion yen of net cash from operating activities, a decrease of 73.5 billion yen, or 30.4 percent, compared with the previous fiscal year.
      During the fiscal year, in addition to profit contributions from the Pictures, Financial Services, Game and Music segments and depreciation expenses, operating cash flow benefited from an increase in notes and accounts payable, trade, primarily associated with an increase in sales and procurement related primarily to the PlayStation Portable within the Game segment during the fourth quarter of the fiscal year, a decrease in notes and accounts receivable, trade, associated with a sales decrease in the Pictures segment during the fourth quarter and within the Music segment associated with the decrease in sales after August 2004, and a decrease in inventory mainly within the Game and Electronics segments. Partially offsetting these contributions were factors including an increase in notes and accounts receivable, trade primarily within the Game segment. In addition, in the Financial Services segment, an increase in future insurance policy benefits and other, due to an increase in insurance-in-force, contributed to operating cash flow in the Financial Services segment.
      Compared with the previous fiscal year, net cash provided by operating activities increased, due to a decrease in inventory during the fiscal year compared to an increase in inventory in the previous fiscal year, and there was a smaller increase in notes and accounts receivable, trade, compared with the previous fiscal year associated with the decrease in sales. These factors were partially offset by factors such as a smaller increase in notes and accounts payable, trade.
      Investing Activities: During the fiscal year, Sony used 931.2 billion yen of net cash in investing activities, an increase of 169.4 billion yen, or 22.2 percent, compared with the previous fiscal year. Of this total, all

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segments excluding the Financial Services segment used 472.1 billion yen of net cash in investing activities, an increase of 119.6 billion yen, or 33.9 percent, compared with the previous fiscal year, and the Financial Services segment used 421.4 billion yen in net cash, an increase of 19.8 billion yen, or 4.9 percent.
      During the fiscal year, purchases of fixed assets (capital expenditures) were made, primarily due to proactive capital expenditures in semiconductors mainly within the Electronics segment, mostly associated with system LSI including the advanced microprocessor “Cell,” as well as investments associated with the establishment of the amorphous TFT LCD panel manufacturing joint venture S-LCD. Within the Financial Services segment, payments for investments and advances exceeded proceeds from maturities of marketable securities, sales of securities investments and collections of advances primarily as a result of both investments in mainly Japanese fixed income securities resulting from an increase in insurance premiums at Sony Life, and a housing loan campaign carried out at Sony Bank.
      Compared with the previous fiscal year, net cash used in investing activities increased, due primarily to investments associated with S-LCD. In all segments excluding the Financial Services segment, the amount of payments for investments and advances increased by 124.8 billion yen from 33.3 billion yen to 158.2 billion yen due to the abovementioned investments at S-LCD. On the other hand, in the Financial Services segment, net cash used in investing activities increased due to an increase in proceeds from investments and advances year on year.
      In all segments excluding the Financial Services segment, the difference between cash generated from operating activities and cash used in investing activities was 13.3 billion yen for the fiscal year, a decrease of 35.3 billion yen, or 72.6 percent, compared with the previous fiscal year.
      Financing Activities: During the fiscal year ended March 31, 2005, 205.2 billion yen of net cash was provided by financing activities. Of the total, 95.4 billion yen of net cash was used for financing activities in all segments excluding the Financial Services segment as a result of 89.7 billion yen being used for the repayment of long term debt and 23.0 billion yen in cash being used for the payment of dividends.
      In the fiscal year ended March 31, 2005, net cash was used for financing activities compared to 153.8 billion yen of net cash procured in the previous fiscal year. This change was due mainly to the issuance of 250.0 billion yen in euro yen convertible bonds (bonds with stock acquisition rights) within the previous fiscal year.
      In the Financial Services segment, as a result of a 294.4 billion yen increase in customer deposits due to factors such as an increase in insurance-in-force at Sony Life and an increase in deposits from customers in the banking business,
Off-Balance Sheet Arrangements
      Sony has several off-balance sheet arrangements to provide liquidity, capital resources and/or credit risk support.
      During the fiscal year ended March 31, 2005, Sony entered into new accounts receivable sales programs that provide for the accelerated receipt of up to 47.5 billion yen of eligible trade accounts receivable of Sony Corporation. Through these programs, Sony can sell receivables to special purpose entities owned and operated by banks. These transactions are accounted for as a sale in accordance with FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, because Sony has relinquished control of the receivables. Accordingly, accounts receivable sold under these transactions are excluded from receivables in the accompanying consolidated balance sheet. The initial sale of these receivables was in March 2005, and Sony sold a total of 10.0 billion yen for the fiscal year ended March 31, 2005. Sony sold a total of 146.2 billion yen of receivables during the fiscal year ended March 31, 2006. Losses from these transactions were insignificant. Although Sony continues servicing the sold receivables, no servicing liabilities are recorded because costs regarding collection of the sold receivables are insignificant.
      Through May 2005, Sony had set up an accounts receivable securitization program in the United States that provided for the accelerated receipt of up to 500 million U.S. dollars of cash on eligible trade accounts receivable of Sony’s U.S. electronics subsidiary. Through this program, Sony could securitize and sell a percentage of an undivided interest in that pool of receivables to several multi-seller commercial paper

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conduits owned and operated by a bank. These securitization transactions were accounted for as a sale in accordance with FAS No. 140, because Sony had relinquished control of the receivables. Accordingly, accounts receivable sold under these transactions were excluded from receivables in the accompanying consolidated balance sheet. During the period from April 2004 to January 2005, Sony sold a total of 80.3 billion yen of accounts receivable under this program. There were no outstanding amounts due at March 31, 2005 relating to the existing undivided interests in the pool of receivables that had been sold. Losses from these transactions were insignificant. This program was terminated in May 2005.
      Refer to Note 6 of Notes to Consolidated Financial Statements for more information on the accounts receivable securitization.
      In addition, a subsidiary in the Picture segment entered into a production/co-financing agreement with a Variable Interest Entity (“VIE”) on December 30, 2005, to co-finance 11 films scheduled to be released over the following 15 months. The subsidiary is not the primary beneficiary of the VIE and therefore does not consolidate the results of the VIE. Under the production/co-financing agreement, the subsidiary will receive approximately 400 million U.S. dollars over the term of the agreement. The subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs. As of March 31, 2006, only one co-financed film has been released by the subsidiary. The subsidiary did not make any equity investment in the VIE nor does it issue any guarantees with respect to the VIE. In April 2006, the subsidiary entered into a second production/co-financing agreement with a VIE to co-finance an additional 11 films scheduled to be released over the following 24 months. The subsidiary will receive approximately 330 million U.S. dollars over the term of the agreement. Similar to the first agreement, the subsidiary is responsible for the marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs.
      Sony has, from time to time, entered into various arrangements with VIEs. In several of the arrangements in which Sony holds a significant variable interest, Sony is the primary beneficiary and therefore consolidates these VIEs. These arrangements include facilities which provide for the leasing of certain property, the financing of film production, the implementation of a stock option plan for Japanese employees and theU.S.-based music publishing business. The assets and liabilities associated with certain of these arrangements previously qualified for off-balance sheet treatment. In addition, Sony holds a significant variable interest in VIEs in which Sony is not the primary beneficiary and therefore does not consolidate. These VIEs include the film production/co-financing arrangements noted above.
Cash Flows
(The fiscal year ended March 31, 2006 compared with the fiscal year ended March 31, 2005)
      Operating Activities: During the fiscal year ended March 31, 2006, Sony generated 399.9 billion yen of net cash from operating activities, a decrease of 247.1 billion yen, or 38.2 percent compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment generated 252.0 billion yen of net cash from operating activities, a decrease of 233.5 billion yen, or 48.1 percent, compared with the previous fiscal year, and the Financial Services segment generated 147.1 billion yen of net cash from operating activities, a decrease of 20.9 billion yen, or 12.5 percent, compared with the previous fiscal year.
      During the fiscal year, there was a positive impact on operating cash flow mainly from the effect of the profit contribution from the Financial Services segment, and after taking account of depreciation and amortization, as well as the effect of the loss on sale, disposal or impairment of assets, net. However, primarily offsetting these contributions was an increase in inventory, particularly within the Electronics and Game segments, the effect of the non-cash net gain on the transfer to the Japanese Government of the substitutional portion of the employee pension fund, an increase in deferred acquisition costs within the Financial Services segment and effect of the gain on change in interest in subsidiaries and equity investees.

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      Compared with the previous fiscal year, net cash provided by operating activities decreased mainly as a result of taking into account the lower net income recorded during the fiscal year as compared to the previous fiscal year, and, as noted above, the increase in inventory during the fiscal year compared with the previous fiscal year, the effect of the gain on the transfer to the Japanese Government of the substitutional portion of the employee pension fund, and of the gain on change in interest in subsidiaries and equity investees.
      Investing Activities: During the fiscal year, Sony used 871.3 billion yen of net cash in investing activities, an decrease of 59.9 billion yen, or 6.4 percent, compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment used 296.4 billion yen of net cash in investing activities, an decrease of 175.7 billion yen, or 37.2 percent, compared with the previous fiscal year, and the Financial Services segment used 563.8 billion yen in net cash, an increase of 142.4 billion yen, or 33.8 percent. During the fiscal year, purchases of fixed assets (capital expenditures) were made, primarily due to proactive capital expenditures in semiconductors mainly within the Electronics segment, mostly associated with image sensors.
      Within the Financial Services segment, payments for investments and advances exceeded proceeds from maturities of marketable securities, sales of securities investments and collections of advances primarily as a result of investments in mainly Japanese fixed income securities resulting from an increase in insurance premiums at Sony Life, and an increase in the outstanding balance of mortgage loans at Sony Bank.
      Compared with the previous fiscal year, net cash used in investing activities decreased, due primarily to the fact that in the previous fiscal year, investments were carried out principally in relation to S-LCD and in semiconductor fabrication equipment, particularly investments associated with the advanced microprocessor Cell On the other hand, within the Financial Services segment, net cash used in investing activities increased due to an increase in investments and advances compared to the previous fiscal year.
      In all segments excluding the Financial Services segment, the difference between cash generated from operating activities and cash used in investing activities was a use of cash of 44.4 billion yen, as compared to the 13.3 billion yen of cash generated in the previous fiscal year.
      Financing Activities: During the fiscal year ended March 31, 2006, 359.9 billion yen of net cash was provided by financing activities. Of the total, 74.6 billion yen of net cash was generated from financing activities in all segments excluding the Financial Services segment compared to a use of net cash in the previous fiscal year of 95.4 billion yen. This was a result of straight bonds issued in order to redeem bonds maturing during the fiscal years ended March 31, 2006 and March 31, 2007.
      In the Financial Services segment, as a result of an increase in policyholder accounts at Sony Life, and an increase in deposits from customers, as well as call loan borrowings carried out at Sony Bank, 274.9 billion yen of net cash was generated by financing activities.
      Accounting for all these factors and the effect of exchange rate changes, the total outstanding balance of cash and cash equivalents at the end of the fiscal year decreased by 76.0 billion yen, or 9.8 percent, to 703.1 billion yen, compared with the end of the previous fiscal year. The total outstanding balance of cash and cash equivalents of all segments excluding the Financial Services segment increased by 65.7 billion yen, or 12.6 percent, to 585.5 billion yen, and for the Financial Services segment, decreased by 141.7 billion, or 54.6 percent, to 117.6 billion yen, compared with the end of the previous fiscal year.
Condensed Statements of Cash Flows Separating Out the Financial Services Segment (Unaudited)
      The following schedule shows unaudited condensed statements of cash flow for the Financial Services segment and all other segments excluding the Financial Services segment as well as condensed consolidated statements of cash flow. These presentations are not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and

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all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
Condensed Statements of Cash Flows
          
  Fiscal Year Ended
  March 31
   
  2005 2006
     
  (Yen in millions)
Financial Services
        
 Net cash provided by operating activities  168,078   147,149 
 Net cash used in investing activities  (421,384)  (563,753)
 Net cash provided by financing activities  256,361   274,863 
       
 Net increase (decrease) in cash and cash equivalents  3,055   (141,741)
 Cash and cash equivalents at beginning of the fiscal year  256,316   259,371 
       
 Cash and cash equivalents at end of the fiscal year  259,371   117,630 
       
          
  Fiscal Year Ended
  March 31
   
  2005 2006
     
  (Yen in millions)
Sony without Financial Services
        
 Net cash provided by operating activities  485,439   251,975 
 Net cash used in investing activities  (472,119)  (296,376)
 Net cash provided by (used in) financing activities  (95,373)  74,600 
 Effect of exchange rate changes on cash and cash equivalents  8,890   35,537 
       
 Net increase (decrease) in cash and cash equivalents  (73,163)  65,736 
 Cash and cash equivalents at beginning of the fiscal year  592,895   519,732 
       
 Cash and cash equivalents at end of the fiscal year  519,732   585,468 
       
          
  Fiscal Year Ended
  March 31
   
  2005 2006
     
  (Yen in millions)
Consolidated
        
 Net cash provided by operating activities  646,997   399,858 
 Net cash used in investing activities  (931,172)  (871,264)
 Net cash provided by financing activities  205,177   359,864 
 Effect of exchange rate changes on cash and cash equivalents  8,890   35,537 
       
 Net increase (decrease) in cash and cash equivalents  (70,108)  (76,005)
 Cash and cash equivalents at beginning of the fiscal year  849,211   779,103 
       
 Cash and cash equivalents at end of the fiscal year  779,103   703,098 
       
Cash Flows
(The fiscal year ended March 31, 2005 compared with the fiscal year ended March 31, 2004)
      Operating Activities: During the fiscal year ended March 31, 2005, Sony generated 647.0 billion yen of net cash from operating activities, a increase of 14.4 billion yen, or 2.3 percent compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment generated 485.4 billion yen of net cash from operating activities, a increase of 84.3 billion yen, or 21.0 percent, compared with the previous

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fiscal year, and the Financial Services segment generated 168.1 billion yen of net cash from operating activities, a decrease of 73.5 billion yen, or 30.4 percent, compared with the previous fiscal year.
      During the fiscal year, in addition to profit contributions from the Pictures segment, Financial Services segment, Game segment and All Other and depreciation expenses, operating cash flow benefited from an increase in notes and accounts payable, trade, primarily associated with an increase in sales and procurement related primarily to the PSP within the Game segment during the fourth quarter of the fiscal year, a decrease in notes and accounts receivable, trade, associated with a sales decrease in the Pictures segment during the fourth quarter and within All Other associated with the decrease in sales after August 2004, and a decrease in inventory mainly within the Game and Electronics segments. Partially offsetting these contributions were factors including an increase in notes and accounts receivable, trade primarily within the Game segment. In addition, in the Financial Services segment, an increase in future insurance policy benefits and other, due to an increase ininsurance-in-force, contributed to operating cash flow in the Financial Services segment.
      Compared with the previous fiscal year, net cash provided by operating activities increased, due to a decrease in inventory during the fiscal year compared to an increase in inventory in the previous fiscal year, and there was a smaller increase in notes and accounts receivable, trade, compared with the previous fiscal year associated with the decrease in sales. These factors were partially offset by factors such as a smaller increase in notes and accounts payable, trade.
      Investing Activities: During the fiscal year, Sony used 931.2 billion yen of net cash in investing activities, an increase of 169.4 billion yen, or 22.2 percent, compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment used 472.1 billion yen of net cash in investing activities, an increase of 119.6 billion yen, or 33.9 percent, compared with the previous fiscal year, and the Financial Services segment used 421.4 billion yen in net cash, an increase of 19.8 billion yen, or 4.9 percent.
      During the fiscal year, purchases of fixed assets (capital expenditures) were made, primarily due to proactive capital expenditures in semiconductors mainly within the Electronics segment, mostly associated with system LSI including the advanced microprocessor Cell as well as investments associated with the establishment of the amorphous TFT LCD panel manufacturing joint venture S-LCD. Within the Financial Services segment, payments for investments and advances exceeded proceeds from maturities of marketable securities, sales of securities investments and collections of advances primarily as a result of investments in mainly Japanese fixed income securities resulting from an increase in insurance premiums at Sony Life, and a mortgage loan campaign carried out at Sony Bank.
      Compared with the previous fiscal year, net cash used in investing activities increased, due primarily to investments associated with S-LCD. In all segments excluding the Financial Services segment, the amount of payments for investments and advances increased by 124.8 billion yen from 33.3 billion yen to 158.2 billion yen due to the abovementioned investments at S-LCD. On the other hand, in the Financial Services segment, net cash used in investing activities increased due to an increase in proceeds from investments and advances year on year.
      In all segments excluding the Financial Services segment, the difference between cash generated from operating activities and cash used in investing activities was 13.3 billion yen for the fiscal year, a decrease of 35.3 billion yen, or 72.6 percent, compared with the previous fiscal year.
      Financing Activities: During the fiscal year ended March 31, 2005, 205.2 billion yen of net cash was provided by financing activities. Of the total, 95.4 billion yen of net cash was used for financing activities in all segments excluding the Financial Services segment as a result of 89.7 billion yen being used for the repayment of long term debt and 23.0 billion yen in cash being used for the payment of dividends.
      In the fiscal year ended March 31, 2005, net cash was used for financing activities compared to 153.8 billion yen of net cash procured in the previous fiscal year. This change was due mainly to the issuance of 250.0 billion yen in Euro yen convertible bonds (bonds with stock acquisition rights) within the previous fiscal year.

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      In the Financial Services segment, as a result of a 294.4 billion yen increase in customer deposits due to factors such as an increase ininsurance-in-force at Sony Life and an increase in deposits from customers at Sony Bank, 256.4 billion yen was procured by financing activities.
      Accounting for all these factors and the effect of exchange rate changes, the total outstanding balance of cash and cash equivalents at the end of the fiscal year decreased by 70.1 billion yen, or 8.3 percent, to 779.1 billion yen, compared with the end of the previous fiscal year. The total outstanding balance of cash and cash equivalents of all segments excluding the Financial Services segment decreased by 73.2 billion yen, or 12.3 percent, to 519.7 billion yen, and for the Financial Services segment, increased by 3.1 billion, or 1.2 percent, to 259.4 billion yen, compared with the end of the previous fiscal year.
Condensed Statements of Cash Flows Separating Out the Financial Services Segment (Unaudited)
      The following schedule shows unaudited condensed statements of cash flow for the Financial Services segment and all other segments excluding the Financial Services segment as well as condensed consolidated statements of cash flow. These presentations are not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.

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

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      During the fiscal year, profits from the Game, Financial Services, Pictures and Music segments, an increase in depreciation expenses, and an increase in notes and accounts payable, trade, primarily due to an increase in the procurement of raw materials and parts reflecting the increase in sales to outside customers in the Electronics segment, contributed to operating cash flow. Partially offsetting these contributions were factors including an increase in inventories in the Electronics segment and an increase in notes and accounts receivable, trade in the Electronics and Pictures segments. An increase in future insurance policy benefits and other, due to an increase in insurance-in-force, contributed to operating cash flow in the Financial Services segment.
      Compared with the previous fiscal year, net cash provided by operating activities decreased, due to a year on year increase in notes and accounts receivable, trade during the fiscal year ended March 31, 2004, compared with a year on year decrease during the fiscal year ended March 31, 2003. The increase in notes and accounts receivable, trade was primarily due to an increase in sales to outside customers, in the fourth quarter ended March 31, 2004, of digital still cameras, flat panel televisions and cellular phones (sold to Sony Ericsson) in the Electronics segment, as well as home entertainment revenues in the Pictures segment, compared with the fourth quarter ended March 31, 2003. Although certain factors contributed to an increase in operating cash flow, such as a year on year increase, during the fiscal year ended March 31, 2004, in notes and accounts payable, trade, compared with a year on year decrease in the fiscal year ended March 31, 2003, mainly due to the increase in the procurement of raw materials and parts reflecting the increase in sales to outside customers in the Electronics segment, these factors were offset by factors such as an increase in inventories in the Electronics segment during the fiscal year ended March 31, 2004 compared with a decrease in the fiscal year ended March 31, 2003, which decreased operating cash flow.
      Investing Activities: During the fiscal year, Sony used 761.8 billion yen of net cash in investing activities, an increase of 55.4 billion yen, or 7.8 percent, compared with the previous fiscal year. Of this total, all segments excluding the Financial Services segment used 352.5 billion yen of net cash in investing activities, an increase of 166.6 billion yen, or 89.6 percent, compared with the previous fiscal year, and the Financial Services segment used 401.6 billion yen in net cash, a decrease of 115.1 billion yen, or 22.3 percent.
      During the fiscal year, purchases of fixed assets (capital expenditures) were made, primarily due to proactive capital expenditures in the Electronics and Game segments mainly for next generation broadband microprocessors and CCDs, and payments for investments and advances exceeded proceeds in the Financial Services segment due to an increase in assets under management (Refer to “Financial Services”).
      Compared with the previous fiscal year, net cash used in investing activities increased due to an increase in purchases of fixed assets, primarily in the Electronics and Game segments. In all segments excluding the Financial Services segment, the amount of payments for investments and advances decreased by 90.5 billion yen, or 73.1 percent, to 33.3 billion yen, compared with the previous fiscal year, due to investments associated with the acquisition of companies such as InterTrust Technologies Corporation and an increase in the capital stock of Sony Ericsson in the fiscal year ended March 31, 2003. On the other hand, the amount of proceeds from sales and maturities of investments and collections of advances in the segments other than Financial Services segment decreased 113.5 billion yen, or 76.2 percent to 35.5 billion yen compared with the previous fiscal year, due to the sale of Sony’s equity interest in Telemundo in the previous fiscal year. In the Financial Services segment, net cash used in investing activities decreased due to an increase in proceeds from investments and advances.
      In all segments excluding the Financial Services segment, the difference between cash generated from operating activities and cash used in investing activities was a positive 48.6 billion yen for the fiscal year, a decrease of 309.6 billion yen, or 86.4 percent, compared with the previous fiscal year.
      Financing Activities: During the fiscal year ended March 31, 2004, 313.3 billion yen of net cash was provided by financing activities (in the previous fiscal year, 93.1 billion yen of net cash was
procured through financing activities in all segments excluding the Financial Services segment. Although 23.1 billion yen in cash was used for the payment of dividends and 52.8 billion yen in commercial paper was repaid, 250.0 billion yen in euro yen convertible bonds (bonds with stock acquisition rights) were issued. In

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the Financial Services segment, due to factors such as a 129.9 billion yen increase in deposits from customers in the banking business, net cash provided by financing activities was 141.7 billion yen.
      Accounting for all these factors and the effect of exchange rate changes, the total outstanding balance of cash and cash equivalents at the end of the fiscal year increased 136.2 billion yen, or 19.1 percent, to 849.2 billion yen, compared with the end of the previous fiscal year. The total outstanding balance of cash and cash equivalents of all segments excluding the Financial Services segment increased 154.4 billion yen, or 35.2 percent, to 592.9 billion yen and for the Financial Services segment decreased 18.2 billion, or 6.6 percent, to 256.3 billion yen, compared with the previous fiscal year.
Condensed Statements of Cash Flows Separating Out the Financial Services Segment (Unaudited)
      The following schedule shows unaudited condensed statements of cash flow for the Financial Services segment and all other segments excluding the Financial Services segment as well as condensed consolidated statements of cash flow. These presentations are not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding the Financial Services segment are eliminated in the consolidated figures shown below.
                         
      All other segments    
    excluding  
  Financial Services Financial Services Consolidated
       
Fiscal Year Ended March 31 2003 2004 2003 2004 2003 2004
             
  (Yen in millions)
Net cash provided by operating activities  314,764   241,627   544,051   401,090   853,788   632,635 
                   
Net cash used in investing activities  (516,663)  (401,550)  (185,883)  (352,496)  (706,425)  (761,792)
                   
Net cash provided by (used in) financing activities  149,207   141,696   (251,247)  153,759   (93,134)  313,283 
                   
Effect of exchange rate changes on cash and cash equivalents          (24,971)  (47,973)  (24,971)  (47,973)
                   
Net increase (decrease) in cash and cash equivalents  (52,692)  (18,227)  81,950   154,380   29,258   136,153 
Cash and cash equivalents at beginning of the fiscal year  327,235   274,543   356,565   438,515   683,800   713,058 
                   
Cash and cash equivalents at end of the fiscal year  274,543   256,316   438,515   592,895   713,058   849,211 
                   
LIQUIDITY AND CAPITAL RESOURCES
      Sony’s financial policy is to secure adequate liquidity and financing for its operations and to maintain the strength of its balance sheet.
      Sony intends to continue both structural reform and investment for future growth in several segments. Sony believes that it can maintain sufficient liquidity and financial flexibility to satisfy its various capital needs, including the funding requirements that arise from this business strategy, working capital needs, repayment of existing debt, payment of dividend and all its other capital needs, through operating cash flows and cash and cash equivalents, its ability to procure necessary funds from the financial and capital markets, its commitment lines with banks, and other means.

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Condensed Statements of Cash Flows
          
  Fiscal Year Ended
  March 31
   
  2004 2005
     
  (Yen in millions)
Financial Services
        
 Net cash provided by operating activities  241,627   168,078 
 Net cash used in investing activities  (401,550)  (421,384)
 Net cash provided by financing activities  141,696   256,361 
       
 Net increase (decrease) in cash and cash equivalents  (18,227)  3,055 
 Cash and cash equivalents at beginning of the fiscal year  274,543   256,316 
       
 Cash and cash equivalents at end of the fiscal year  256,316   259,371 
       
          
  Fiscal Year Ended
  March 31
   
  2004 2005
     
  (Yen in millions)
Sony without Financial Services
        
 Net cash provided by operating activities  401,090   485,439 
 Net cash used in investing activities  (352,496)  (472,119)
 Net cash provided by (used in) financing activities  153,759   (95,373)
 Effect of exchange rate changes on cash and cash equivalents  (47,973)  8,890 
       
 Net increase (decrease) in cash and cash equivalents  154,380   (73,163)
 Cash and cash equivalents at beginning of the fiscal year  438,515   592,895 
       
 Cash and cash equivalents at end of the fiscal year  592,895   519,732 
       

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  Fiscal Year Ended
  March 31
   
  2004 2005
     
  (Yen in millions)
Consolidated
        
 Net cash provided by operating activities  632,635   646,997 
 Net cash used in investing activities  (761,792)  (931,172)
 Net cash provided by financing activities  313,283   205,177 
 Effect of exchange rate changes on cash and cash equivalents  (47,973)  8,890 
       
 Net increase (decrease) in cash and cash equivalents  136,153   (70,108)
 Cash and cash equivalents at beginning of the fiscal year  713,058   849,211 
       
 Cash and cash equivalents at end of the fiscal year  849,211   779,103 
       
LIQUIDITY AND CAPITAL RESOURCES
      Sony’s financial policy is to secure adequate liquidity, to ensure the smooth financing of its operations and to maintain the strength of its balance sheet.
      Sony intends to continue both structural reform and various investments for future growth. Sony believes that it can maintain sufficient liquidity and financial flexibility to satisfy its various capital needs, including funding requirements that arise from its business strategy, working capital needs, repayment of existing debt, payment of dividends and all its other capital needs, through cash flows and cash and cash equivalents, its ability to procure necessary funds from the financial and capital markets, its commitment lines with banks, and other means.
Market Access
      Sony Corporation and SGTS, a finance subsidiary in the U.K., procure funds from the financial and capital markets.
      In order to meet long-term funding requirements, Sony Corporation utilizes its access to global equity and bond markets and did not issue any stock or bonds during the fiscal year. Sony has a shelf registration of 300 billion yen in the Japanese domestic bond market, of which no bonds were issued as of March 31, 2005.
      Sony Corporation and SGTS, a finance subsidiary in the U.K., procure funds from the financial and capital markets.
      In order to meet long-term funding requirements, Sony Corporation utilizes its access to global equity and bond markets. During the fiscal year ended March 31, 2006, based on a bond shelf registration filed in Japan, Sony issued three series of straight bonds totaling 120 billion yen in September 2005 for the purpose of debt redemption, and another three series of straight bonds totaling 100 billion yen in February 2006 for the redemption bonds maturing during the fiscal year ending March 31, 2007, respectively. As the total amount of shelf registrations outstanding decreased after these bond issues, Sony filed a new shelf registration of 300 billion yen in April 2006, which is effective for two years.
      In order to meet the working capital requirements of Sony, SGTS maintains commercial paper (“CP”) programs and a medium-term note (“MTN”) program. SGTS maintains CP programs for the U.S., Euro and Japanese CP markets. As of March 31, 2005, the total amount of these CP programs was 1,251.5 billion yen. During the fiscal year ended March 31, 2005, the largest month-end outstanding balance of CP at SGTS was 122.5 billion yen in November 2004. There was no outstanding balance of CP as of March 31, 2005.
      SGTS maintains a Euro MTN program of whose total program amount as of March 31, 2005 was 536.8 billion yen. There was no outstanding balance as of March 31, 2005. Sony Capital Corporation (“SCC”), a Sony finance subsidiary in the U.S., had an outstanding MTN balance of approximately 58.8 billion yen as of March 31, 2006, the total amount of these CP programs was 1,321.9 billion yen. During the fiscal year ended March 31, 2006, the largest month-end outstanding balance of CP was 111.4 billion yen in September 2005. There was no outstanding balance of CP as of March 31, 2006.
      SGTS maintains a Euro MTN program of whose amount as of March 31, 2006 was 587.1 billion yen. There was no outstanding balance as of March 31, 2006. Sony Capital Corporation (“SCC”), a Sony finance subsidiary in the U.S., had an outstanding MTN balance of approximately 58.7 billion yen as of March 31, 2006. However, Sony does not intend to utilize SCC’s program for future financing requirements as SCC’s financing function was integrated into that of SGTS.
Liquidity Management
      Sony defines its liquidity sources as the amount of cash, cash equivalents (“cash balance”), and committed lines of credit contracted with financial institutions. Working capital needs of Sony shows general seasonality to grow significantly in the third quarter (from October to December). In Sony’s liquidity management, it is basic policy to secure sufficient liquidity throughout the relevant fiscal year, covering such factors as short-term cash flow volatility mentioned above, repayments for debts whose due date come within the fiscal year, and possible downward earnings risk due to business environment change.
      Sony has a policy to keep more than a certain level of cash balance to absorb any working capital needs daily and monthly. The cash balance on March 31, 2005, was 523.8 billion yen. A short-term shortage in the cash balance is financed by the issuance of CP. However, Sony controls the outstanding CP amount through internal limits as part of its short-term debt risk management strategy. In the fiscal year ended March 31, 2005, there was no outstanding CP amount.
      As part of its additional liquidity sources, Sony has a total of 868.7 billion yen in committed lines of credit, of which the unused amount was approximately 863.9 billion yen as of March 31, 2005. Major committed lines of credit include 574.3 billion yen of the Global Commitment Facilities contracted with a syndicate of global banks, and 250 billion yen of committed lines of credit contracted with a syndicate of Japanese banks. There has been no major change since the last fiscal year in terms of the total amount and composition of the committed lines of credit. Sony uses these lines for general corporate purposes, including the support of commercial paper programs and for emergency purposes. There are no financial covenants in any of Sony’s material financial agreements that would cause an acceleration of the obligation in the event of a downgrade in Sony’s credit ratings. However, a downgrade in Sony’s credit ratings could increase the cost of borrowings. There are no restrictions on how Sony’s borrowings can be used except that some borrowings may not be used to acquire securities listed on a U.S. exchange or traded over-the-counter
      Sony’s working capital needs grow significantly in the third quarter (from October to December) as a result of the general seasonality to Sony’s business. Sony’s basic liquidity management policy is to secure sufficient liquidity throughout the relevant fiscal year, covering such factors as short-term cash flow volatility

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mentioned above, repayments for debts whose due date fall within a year, and possible downward earnings risk due to changes in the business environment.
      Sony defines its liquidity sources as the amount of cash, cash equivalents (“cash balance”), and committed lines of credit contracted with financial institutions. Regarding its cash balance, Sony’s policy is to maintain more than a certain level of cash balance to absorb any working capital needs daily and monthly. The balance of cash and marketable securities on March 31, 2006, was 589.5 billion yen. A short-term shortage in the cash balance is financed by the issuance of CP. However, Sony controls the outstanding CP amount through internal limits as part of its short-term debt risk management strategy. In the fiscal year ended March 31, 2006, there was no outstanding CP amount.
      As part of its additional liquidity sources, Sony has a total of 683.4 billion yen in committed lines of credit with various financial institutions, of which the unused amount was 676.4 billion yen as of March 31, 2006. Major committed lines of credit include a total of 502.6 billion yen of Global Commitment Facilities contracted with a syndicate of global banks, and a 150 billion yen of committed line of credit contracted with Japanese financial institutions. During the fiscal year ended March 31, 2006, Sony reorganized the total amount and composition of terms to maturity of both facilities. With regards to the Global Commitment Facilities, as of March 31, 2005, Sony had two facilities consisting of a5-year contract (amount as of March 31, 2005 is 459.4 billion yen, maturity March 2009) and a364-day contract (amount as of March 31, 2005 is 114.9 billion yen) totaling 574.3 billion yen. During the fiscal year ended March 31, 2006, the364-day portion was terminated. With regards to the committed line with Japanese financial institutions, as of March 31, 2005, Sony had two facilities consisting of a 100 billion yen3-year contract and a 150 billion yen364-day contract, totaling 250 billion yen. During the fiscal year ended March 31, 2006, upon expiry of the3-year contract, Sony newly entered into a 150 billion yen3-year contract (maturing in July 2008) while the364-day contract was terminated. As a result, although the total amount of the facilities has been reduced by 185.3 billion yen compared with the fiscal year ended March 31, 2005, Sony believes it maintains long-term secured and sufficient liquidity. Sony uses these lines for general corporate purposes, including the support of CP programs and for emergency purposes. There are no financial covenants in any of Sony’s material financial agreements that would cause an acceleration of the obligation in the event of a downgrade in Sony’s credit ratings. However, a downgrade in Sony’s credit ratings could increase the cost of borrowings. There are no restrictions on how Sony’s borrowings can be used except that some borrowings may not be used to acquire securities listed on a U.S. exchange or tradedover-the-counter in U.S., and use of such borrowings must comply with the rules and regulations issued by authorities such as the Board of Governors of the Federal Reserve Board.
Ratings
      Sony considers it to be one of management’s top priorities to maintain a stable and appropriate credit rating in order to ensure financial flexibility for liquidity and capital management, and to continue to maintain adequate access to sufficient funding resources in the financial and capital markets.

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      In order to facilitate access to global capital markets, Sony obtains credit ratings from two rating agencies, Moody’s Investors Service (“Moody’s”) and Standard and Poor’s Rating Services (“S&P”). In addition, Sony maintains a rating from Rating and Investment Information, Inc. (“R&I”), a rating agency in Japan, for access to the Japanese capital market.
      Sony’s current debt ratings from each agency are noted below:
 
Moody’sS&PR&I
Long-term debtA2 (Outlook: Stable)A- Outlook: Stable)AA- (Outlook: Stable)
Short-term debtP-1A-2a-1+
      S&P downgraded Sony’s long-term debt rating from A to A- and short-term debt rating from A-1 to A-2 in October 2005, R&I downgraded Sony’s long-term debt rating from AA to AA- in November 2005 and Moody’s downgraded Sony’s long-term debt rating from A1 to A2 in December 2005, respectively. Sony’s short-term debt rating from Moody’s and R&I have been unaffected. These downgrades of debt ratings

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reflected rating agencies’ concern mainly of low profitability in the Electronics segment and the low level of Sony’s cash flows. The outlook after the downgrades of long-term debt ratings from the three agencies is stable. Despite these downgrades of debt ratings, Sony believes its access to the global capital markets and ability to issue CP for its working capital needs have not been restricted.
Moody’sS&PR&I
Long-term debtA1 (Outlook: Negative)A (Outlook: Negative)AA
Short-term debtP-1A-1a-1+
      On November 22, 2004, S&P downgraded Sony’s long-term debt rating from A+ to A (outlook: negative). This action reflected the concerns of S&P that it is uncertain if Sony will strengthen and stabilize its profitability particularly in the electronics business, under the severe competition and deflationary pressures. Sony’s short-term debt rating from S&P has been unaffected. Despite the downgrading of Sony’s long-term debt rating by S&P, Sony believes its access to the global capital markets and ability to issue CP for its working capital needs has not been limited.
Cash Management
      Sony is centralizing and working to make more efficient its global cash management activities through SGTS. The excess or shortage of cash at most of Sony’s subsidiaries is invested or funded by SGTS after having been netted out, although Sony recognizes that fund transfers are limited in certain countries and geographical areas due to restrictions on capital transactions. In order to pursue more efficient cash management, Sony manages uneven cash distribution among its subsidiaries directly or indirectly through SGTS so that Sony can reduce unnecessary cash and cash equivalents as well as borrowings as much as possible.
      The above description covers liquidity and capital resources for consolidated Sony excluding the Financial Services segment which secure liquidity on their own.
Financial Services segment
      In the Financial Services segment, the management of SFH, Sony Life, Sony Assurance and Sony Bank recognize the importance of securing sufficient liquidity to cover the payment obligations that they take on as a result of their ordinary course of business, and these companies abide by the regulations imposed by regulatory authorities and establish and operate under company guidelines that comply with these regulations. Their purpose in doing so is to maintain sufficient cash and cash equivalents and secure sufficient means to pay their obligations. For instance, Sony Life’s cash inflows come mainly from policyholders’ insurance premiums and Sony Life keeps sufficient liquidity in the form of investments primarily in various securities. Sony Bank, on the other hand, uses its cash inflows, which come mainly from customers’ deposits in local or foreign currencies, in order to offer housing loans to individuals or to make bond investments, and establish a necessary level of liquidity for the smooth settlement of transactions.
      Sony Life currently obtains ratings from four rating agencies: A+ by S&P both for long-term local currency issuer ratings and insurance and finance capability ratings, A+ by AM Best Corporation for insurance and finance capability ratings, and AA by R&I and the Japan Credit Rating Agency Ltd for insurance claim payment capabilities ratings.
      In the Financial Services segment, the management of SFH, Sony Life, Sony Assurance and Sony Bank recognize the importance of securing sufficient liquidity to cover the payment obligations that they take on as a result of their ordinary course of business, and these companies abide by the regulations imposed by regulatory authorities and establish and operate under company guidelines that comply with these regulations. Their purpose in doing so is to maintain sufficient cash and cash equivalents and secure sufficient means to pay their obligations. For instance, Sony Life’s cash inflows come mainly from policyholders’ insurance premiums and Sony Life keeps sufficient liquidity in the form of investments primarily in various securities. Sony Bank, on the other hand, uses its cash inflows, which come mainly from customers’ deposits in local or foreign currencies, in order to offer mortgage loans to individuals or to make bond investments, and establish a necessary level of liquidity for the smooth settlement of transactions.
      Sony Life currently obtains ratings from five rating agencies: A+ by S&P for long-term counterparty and insurer financial strength rating, Aa3 by Moody’s for insurance financial strength rating, A+ by AM Best Company Inc. for financial strength rating, and AA by R&I for insurance claims paying ability and AA by the Japan Credit Rating Agency Ltd for ability to pay insurance claims. Sony Bank obtained an A-/ A-2 rating from S&P for its long-term/short-term local/foreign currency issuer ratings.
RESEARCH AND DEVELOPMENT
      In its mid-term corporate strategy announced on September 22, 2005, Sony stressed that the most pressing issue confronting the company today is the revitalization of its electronics business. The strengthening of the competitiveness of Sony’s technologies and its products is an important element of both the revitalization of the Electronics business and the company’s growth strategy, and Sony considers research and development activities that support this competitiveness will remain pivotal to its mid- to long term strategy.
      Research and Development is focused in three key domains: a common development platform technology for home and mobile electronics; semiconductor and device technology essential for product differentiation and for creating added-value to products; and software technology.
      Reflecting Sony’s mid-term corporate strategy, in October 2005, the company established the Display Device Development Group, to accelerate the development of organic light-emitting diode (OLED) displays, and the Technology Development Group, to strengthen software development.
      Moreover, Sony continues to strengthen the fundamental research and development structure at three of its corporate laboratories, Information Technology Laboratories (communication and security technologies), Material Laboratories (material and device technologies) and A3 Laboratories (signal processing technologies).

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      Research and development costs for the fiscal year ended March 31, 2006 increased 29.8 billion yen, or 5.9 percent, to 531.8 billion yen, compared with the previous fiscal year. The ratio of research and development costs to net sales (which excludes Financial service revenue and other operating revenue) increased from 7.6 percent to 7.9 percent. The bulk of research and development costs were incurred in the Electronics and Game segments. Expenses in the Electronics segment decreased 15.2 billion yen, or 3.5 percent, to 418.1 billion yen, whereas expenses in the Game segment increased 40.2 billion yen, or 58.7 percent, to 108.7 billion yen. In the Electronics segment, approximately 64 percent of expenses were for the development of new product prototypes while the remaining 36 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications, displays and next generation optical discs. In addition, within the Game segment, there was an increase primarily of hardware-related research and development costs associated with PS3.
      Research and development costs for the fiscal year ended March 31, 2005 decreased 12.5 billion yen, or 2.4 percent, to 502.0 billion yen, compared with the previous fiscal year. The ratio of research and development costs to net sales increased from 7.5 percent to 7.6 percent. The bulk of research and development costs were incurred in the Electronics and Game segments. Expenses in the Electronics segment increased 2.4 billion yen, or 0.6 percent, to 433.3 billion yen, and expenses in the Game segment decreased 14.9 billion yen, or 17.9 percent, to 68.5 billion yen. In the Electronics segment, approximately 62 percent of expenses were for the development of new product prototypes while the remaining 38 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications, displays and next generation optical discs. There was an increase in research and development costs related to semiconductor process technology associated with the transfer of Sony Computer Entertainment’s semiconductor manufacturing operations from the Game segment to the Electronics segment. However, the stringent selection of research and development activities resulted in a small increase in research and development expenses within the Electronics segment. Research and development expenses in the Game segment remained high due to the research and development associated with PSP and PS3.
      Research and development costs for the fiscal year ended March 31, 2004 were 514.5 billion yen. The bulk of research and development costs were incurred in the Electronics and Game segments; expenses in the Electronics segment were 431.0 billion yen, and expenses in the Game segment were 83.4 billion yen. In the Electronics segment, approximately 62 percent of expenses were for the development of new product prototypes while the remaining approximately 38 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications, displays and next generation optical discs.
RESEARCH AND DEVELOPMENT
      Recognizing that research and development are indispensable for business growth, Sony has established semiconductors, displays, and optical technologies, and related devices, as focus areas for research and development and is devoting its energies to the development of a variety of strategic devices and innovative new products as part of research and development activities within the Network Companies and business

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groups. Moreover, a Technology Round Table has been set up to facilitate the selection, consolidation and convergence of themes for research and development, for the sharing and validation of research and development roadmaps and to frame research and development strategy. In addition, while continually endeavoring to improve product quality, Sony is also striving to develop products that are even more environmentally-friendly. During the fiscal year ended March 31, 2005, Sony received a special commendation and award from the Ministry of Agriculture, Forestry and Fisheries of Japan for excellence in the utilization of biomass as a result of Sony’s “technological development and proactive implementation of vegetable-based plastics in home electronic appliances.” Sony continues to strengthen the basic research and development structure at two of its corporate laboratories, the Material Laboratories and the Information Technology Laboratories. These laboratories closely collaborate with the research and development activities carried out by the network companies, with the aim of forging new future markets. In addition, Sony operates three independent research laboratories; Sony Computer Science Laboratories, Inc. (focusing on fundamental research and user interface research); Sony-Kihara Research Center, Inc. (focusing on three-dimensional computer graphics and image processing technologies); and Sony Intelligence Dynamics Laboratories, Inc.
      Research and development costs for the fiscal year ended March 31, 2005 decreased 12.5 billion yen, or 2.4 percent, to 502.0 billion yen, compared with the previous fiscal year. The ratio of research and development costs to sales (excluding the Financial Services segment) increased from 7.5 percent to 7.6 percent. The bulk of research and development costs were incurred in the Electronics and Game segments. Expenses in the Electronics segment increased 2.4 billion yen, or 0.5 percent, to 432.8 billion yen, and expenses in the Game segment decreased 14.9 billion yen, or 17.9 percent, to 68.5 billion yen. In the Electronics segment, approximately 62 percent of expenses were for the development of new product prototypes while the remaining 38 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications, displays and next generation optical discs. There was an increase in research and development costs related to semiconductor process technology associated with the transfer of Sony Computer Entertainment’s semiconductor manufacturing operations from the Game segment to the Electronics segment. However, the stringent selection of research and development activities resulted in a small increase in research and development expenses within the Electronics segment. Research and development expenses in the Game segment remained high due to the research and development associated with PlayStation Portable and PLAYSTATION 3.
      Research and development costs for the fiscal year ended March 31, 2004 increased 71.4 billion yen, or 16 percent, to 514.5 billion yen, compared with the previous fiscal year. The ratio of research and development costs to sales (excluding the Financial Services segment) increased from 6.4 percent to 7.5 percent. The bulk of research and development costs were incurred in the Electronics and Game segments. Expenses in the Electronics segment increased 49.2 billion yen, or 12.9 percent, to 430.5 billion yen, and expenses in the Game segment increased 21.9 billion yen, or 35.7 percent, to 83.4 billion yen. In the Electronics segment, approximately 62 percent of expenses were for the development of new product prototypes while the remaining approximately 38 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications, displays and next generation optical discs. Research and development costs in the Game segment increased primarily in the semiconductor and hardware fields, with network technology accounting for part of the increase in the hardware area.
      Research and development costs for the fiscal year ended March 31, 2003 were 443.1 billion yen. The bulk of research and development costs were incurred in the Electronics and Game segments; expenses in the Electronics segment were 381.2 billion yen, and expenses in the Game segment increased 61.5 billion yen. In the Electronics segment, approximately 66 percent of expenses were for the development of new product prototypes while the remaining approximately 34 percent were for the development of mid- to long-term new technologies in such areas as semiconductors, communications, and displays.
TREND INFORMATION
      This section including theForecast of Consolidated Results, contains forward-looking statements about the possible future performance of Sony and should be read in light of the cautionary statement on that subject, which appears on the inside front cover page and which applies to this entire document.

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Issues Facing Sony and Management’s Response to those Issues
Issues Facing Sony and Management’s Response to those Issues
      Competition in many of Sony’s business segments continues to intensify and price erosion, especially in the Electronics segment, remains persistent. Competition has intensified due to the penetration of broadband, which has led to an augmentation of network infrastructure, making it easier for companies in other sectors to enter the markets in which Sony competes.
      In response to these challenges, overSony has been undertaking initiatives to improve its competitiveness and strengthen the three fiscal years ending March 31, 2006, Sony is implementing Transformation 60, a series of fundamental reforms aimed at improving operational profitability and competitiveness in anticipation of future growth. Through greater focus of management resources on strategic businesses, accelerated reformquality of its manufacturing platform, headcount reductions in administrative (including corporate) and sales functions and reductionsmanagement, such as a reduction in the costnumber of non-production materials, Sony intends to reduce fixed costs.business categories and the number of models, a rationalization of manufacturing sites and the creation of a more efficient administrative structure, as well as the sale of non-core assets (See “Restructuring” in “Item 5.Operating and Financial Review and Prospects” for more detailed information about restructuring). This plan, developed in consultation with Sony’s stakeholders both inside and outside the company, moved to strengthen Sony’s competitiveness in three core sectors — Electronics, Game and Entertainment — through a balanced mix of restructuring and growth initiatives combined with a new organizational structure. In particular, it is the revitalization of

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Electronics that management regards as the most pressing issue confronting Sony also aims to lay the seeds for future growth through strategic investments in research and development, astoday. As well as aggressive capital expendituresreorganizing its Electronics business to place centralized decision-making authority over key areas under the Electronics CEO, Sony is implementing reorganization initiatives to strengthen horizontal coordination in the areakey areas of semiconductors.product planning, technology, procurement, manufacturing, and sales and marketing. For Sony’s growth strategy in Electronics, resources will be focused on the development and commercialization of high-definition products, mobile products and advanced semiconductors and other key devices that can further differentiate these products, targeting enhanced competitiveness and improved profitability.
      In addition to this cost-cutting and investment for growth, each of Sony’s business segments grappled with issues specific to that segment. Below is a description of the issues management believes each segment continues to face and an explanation as to how each segment is approaching those issues.
Electronics
Electronics
      Although the Electronics segment continues to hold a very strong position in the worldwide consumer audio visual products market, that position has become increasingly threatened as a result of the entrance of new manufacturers and distributors. These new entrants are threatening Sony’s position due to the industry shift from analog to digital technology. In the analog era, complicated functionality of electronics products was made possible through the combination of several complex parts, and Sony held a competitive advantage in the design and manufacture of those parts as a result of its accumulated expertise. In the digital era, however, complicated functionality has become concentrated on semiconductors and other key digital devices. Since these semiconductors and key devices are able to be mass produced, they have become readily available to new market entrants, and the functionality that once commanded a high premium has become more affordable. This has led to intense price erosion in the end-user consumer audio visual products market. To respond to these challenges, Sony is striving to keep pace with price erosion by reducing its manufacturing and other costs. It is seeking to maintain the premium pricing it enjoys on many of itsend-user products by adding functionality to those products and developing new applications and ways of use that are then communicatedappeal to the consumer. In addition, it is taking steps to increase its competitive edge by developing high value-added semiconductors and other digital key devicesin-house. By increasingenhancing the ratioin-house production of key devices, produced in-house, Sony aims to capture the value that has become increasingly concentrated in thoseincorporate added-value into these key devices.
      In the area of semiconductors, in the fiscal years ended March 31, 20042005 and 2005,2006, Sony carried out 175150 billion yen and 150140 billion yen, respectively, of capital expenditure mainly on system large scale integrations (“LSI”) and CCDs. Of this, Sony invested 69 billion yenThese totals also include Sony’s investment in the fiscal year ended March 31, 2004 and invested 90 billion yen in the fiscal year ended March 31, 2005 on semiconductor fabrication equipment built at the 65 nanometer level of process technology.technology level. Chips that will be manufactured using this equipment will be some of the most highly advanced on the market, and will include system LSI, in particular the newCell microprocessor, for the broadband era, Cell, as well as other system LSI foranticipated use in the next generation computer entertainment system, PLAYSTATION 3 and a variety of futurePS3, as well as digital consumer electronics products.products for the broadband era. Over the last five years, Sony, began developing Cell together withSony Computer Entertainment, IBM Corporation (“IBM”) and Toshiba Corporation (“Toshiba”) have carried out joint development focused on 90 and 65 nanometer process technology for utilization in the springdesign and manufacturing of 2001. In July 2004,the Cell microprocessor. Moreover, in order2006 Sony Corporation, IBM, and Toshiba concluded a new joint development agreement to establishbegin a more efficientnew5-year alliance for the research and coordinateddevelopment of advanced semiconductor supply structure, Sony has integrated its semiconductor manufacturing business by transferring Sony Computer Entertainment’s semiconductor manufacturing operation from the Game segment to the semiconductor category within the Electronics segment.technology.
      In the area of other key devices, Sony invested in 7th generation amorphous TFT LCD panel production equipment, through a one billion U.S. dollar investment in S-LCD, a Sony’s joint venture with Samsung Electronics Co., Ltd. based in South Korea. ThisKorea, started production of 7th generation amorphous TFT LCD panel (glass panel size: approximately 1,870mm × 2,200mm) in April 2005 and since October 2005 has been producing 60,000 sheets a month. In July 2006,S-LCD increased its production capacity to 75,000 panels a month, and further investment reflects Sony’s beliefhas been committed that demand forwill raise its production capacity to 90,000 panels at the start of calendar 2007. The total amount of these new investments, to be self-financed byS-LCD, is approximately 10 billion yen and approximately 28 billion yen, respectively.
      In July 2006, Sony and Samsung signed the final contract regarding the manufacturing of 8th generation TFT LCD televisions willpanels (glass panel size: approximately 2,200mm × 2,500mm) at theS-LCD joint venture. The total amount of the investment is expected to be approximately 1.9 billion U.S. dollars (approximately

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continue to increase rapidly. Samsung holds 50 percent plus one share of the equity of the joint venture while Sony holds 50 percent minus one share of the equity of the joint venture. The President and CEO comes from Samsung while the CFO comes from Sony. Production of LCD panels began in April 2005. Expectedwhich will be borne by Sony), targeting a production capacity is 60,000 sheets perof 50,000 panels a month at the 7th generation (1,870 mm x 2,200 mm) level of technology.from fall, 2007.
Game
Game
      In the Game segment, although it is anticipated that the size of the PS2 hasbusiness, six years into its business cycle after its domestic launch in Japan in March 2000, will begin to contract, SCE will endeavor to maintain a continued high share of the global game console market and the PS2 business, particularly the PS2 software business, remains in its harvest stage. However, production shipment units offor both PS2 hardware are expectedand software. Furthermore, through the addition of software and hardware system upgrades and new peripherals, which will work in tandem with PSP software to decrease inpropose new ways of enjoying the fiscal year ending March 31, 2006.handheld, SCE will promote further penetration of the platform. In order to ensure future growth inaddition, the Game segment, Sony is investing, as described above, in the research and development of cutting-edge microprocessors and other LSIs that will be used in the next generationnew PS3 computer entertainment system, PLAYSTATION 3. Furthermore, Sonyplatform is workingscheduled to develop a new market through its introductionlaunch in November 2006. Through the provision of PlayStation Portable, a new handheld video game system on which a variety of content can be enjoyed. PlayStation Portable was introduced in Japan and U.S. in December 2004 and March 2005, respectively andan appealing softwareline-up, SCE will be introduced in Europe in September 2005.
Music
      Withinpromote the music industry, album sales over the past several years have decreased due to piracy and competition from other entertainment sectors. One way Sony is working to combat digital piracy and generate profits is through the digital distribution of content, is through its launch of the Connect music store, a digital downloading service, which is now classified as partPS3 platform (See “Game” in“Operating Results for the Fiscal Year Ended March 31, 2006 compared with the Fiscal Year Ended March 31, 2005” within “Item 5.Operating and Financial Review and Prospects” for more detailed information regarding the impact of the Other segment. As part of an effort to achieve significant operational efficiencies, Sony merged its recorded music business, excluding its recorded music business in Japan, with the recorded music business of Bertelsmann AG in August 2004, forming the joint venture SONY BMG. The newly formed company is 50 percent owned by each parent company and is accounted for by Sony under the equity method.PS3 launch).
Pictures
Pictures
      In the Pictures segment, Sony faces intense competition, rising advertising and promotion expenses and a growing trend toward digital piracy. In addition, the DVD format is nine years old and is showing signs of maturation. To meet these challenges, Sony is working to distribute a diversified portfolio of motion pictures with broad worldwide appeal on existing and capitalize on the expanding DVDnew home entertainment market, which is becoming a more significant source of revenuesformats, including Blu-ray, and profits. One of the ways that Sony is working to distribute a diversified portfolio of motion pictures and capitalize on the expanding DVD home entertainment market is through its participation in the acquisition of MGM. In conjunction with the transaction, SPE entered into agreements to co-finance and produce new motion pictures with MGM and to distribute MGM’s existing film and television content in, among other markets, the DVD home entertainment market.emerging platforms, including digital download.
Financial Services
Financial Services
      In the Financial Services segment, the value of assets accumulated by the businesses in the segment has grown continuously over the past several fiscal years, resulting in a large portion (approximately 4043 percent) of Sony’s total assets being accounted for by the Financial Services segment. To strengthen asset management and risk management in parallel with this growing asset value, enhance disclosure of business details, and offer customers integrated financial services tailored to their individual needs, in April 2004 Sony established Sony Financial Holdings Inc., a holding company comprised ofoverseeing Sony Life, Sony Assurance and Sony Bank, with the aim of both increasing the synergies between these businesses and targeting an initial public offering duringat some point in the fiscal year ending March 31, 2007.2008 or subsequent fiscal year thereafter, as deemed appropriate by Sony after taking into account equity market conditions.
Forecast of Consolidated Results
      Factors which may affect Sony’s financial performance include the following: market conditions, including general economic conditions, in major areas where Sony conducts its businesses, levels of consumer

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spending, foreign exchange fluctuations, Sony’s ability to continue to design, develop, manufacture, sell, and win acceptance of its products and services, Sony’s ability to continue to implement personnel reductions and other business reorganization initiatives, Sony’s ability to implement its network strategy, and implement successful sales and distribution strategies in the light of the Internet and other technological developments, Sony’s ability to devote sufficient resources to research and development, and capital expenditures, and the success of Sony’s joint ventures and alliances. Risks and uncertainties also include the impact of any future events with material unforeseen impacts. Refer also to the “Cautionary Statement”.
      Regarding the forecast of consolidated results for the fiscal year ending March 31, 2006, sales and operating revenue, operating income, and income before income taxes are expected to increase compared with the fiscal year ended March 31, 2005. Net income is expected to decrease. This forecast assumes that the yen for the fiscal year ending March 31, 2006 will strengthen against the U.S. dollar and the euro compared with the fiscal year ended March 31, 2005.
      During the fiscal year ending March 31, 2006, restructuring charges, primarily in the Electronics segment, of approximately 72 billion yen are expected to be incurred across Sony as a whole. 90 billion yen of restructuring charges were recorded in the fiscal year ended March 31, 2005.
      The forecast for operating income and income before income taxes reflects an estimated gain of approximately 60 billion yen related to the transfer to the Japanese Government of the substitutional portion, the benefit obligation related to past employee service, of Sony’s Employee Pension Fund. Furthermore, 35 billion yen of this estimated gain is reflected in the forecast for net income after deductions for the effect of income taxes.
      In June 6, 2005, SCN sold 17,935 shares of So-Net M3 Inc., at 694,600 yen per share with a total value of 12,458 million yen. As a result of this sale, Sony records approximately 11.9 billion yen gain on the sale of its stock for the year ending March 31, 2006, and Sony’s ownership interest has been reduced from 74.8 percent to 60.8 percent.
      As of March 31, 2005, Sony had deferred tax assets on tax loss carry forwards in relation to Japanese local income taxes totaling 77.5 billion yen. However, there is a possibility that, depending on future operating performance, Sony may establish a valuation allowance against part or all of its deferred tax assets that would be charged to income as an increase in tax expense. However, the forecast above does not include this possibility.
      The forecast for each business segment (excluding the anticipated gain from the transfer of the substitutional portion of Sony’s Employee Pension Fund) is as follows:
Electronics
      Sales are expected to increase primarily due to an increase in the sales of products such as flat panel televisions and LCD rear projection televisions. With regard to operating performance, although an improvement is expected due to the increase in sales and a reduction in fixed costs relating to restructuring implemented during the previous fiscal year, a decline in unit prices, appreciation of the yen against the U.S. dollar and euro and increase in both depreciation and amortization and research and development costs are also anticipated. An improvement in operating performance is expected, reflecting the abovementioned factors, as well as an anticipated reduction in restructuring charges.
Game
      Sales are expected to increase due to the contribution from both PlayStation Portable hardware and software. Although PS2 and PlayStation Portable are expected to contribute to operating income, increased research and development costs primarily for PLAYSTATION 3 are expected to leave operating income relatively unchanged.

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Music
      Due to the establishment of SONY BMG (Refer to “Business Segment Information” in “Operating Results”above) sales are expected to decrease. A small increase in operating income is anticipated.
Pictures
      Although sales are expected to increase due to the impact of SPE’s agreements with MGM, operating income is expected to decrease compared to the fiscal year ended March 31, 2005, in whichSpider-Man 2 was a substantial contributor.
Financial Services
      Although revenue is expected to continue to grow mainly due to an increase in revenue from insurance premiums at Sony Life, a small decrease is expected in operating income due to the conservative estimation of insurance claim payments.
Capital Expenditures
      In the fiscal year ending March 31, 2006, capital expenditures (additions to fixed assets) are expected to be 410 billion yen, an increase of 15 percent compared with the fiscal year ended March 31, 2005. Approximately 90 percent of the amount is expected to be spent in the Electronics segment. Of this amount, capital expenditures on semiconductors during the fiscal year are expected to amount to 160 billion yen (actual amount in the fiscal year ended March 31, 2005 was 150 billion yen). For an explanation regarding fund procurement, refer to “Liquidity and Capital Resources” above.
Depreciation and Amortization
      In the fiscal year ending March 31, 2006, expenses for depreciation and amortization, which includes the amortization of intangible assets and the amortization of deferred insurance acquisition costs, are expected to be 390 billion yen, an increase of 5 percent compared with the fiscal year ended March 31, 2005. Both expenses for the amortization of deferred insurance acquisition costs in the Financial Services segment and expenses for depreciation and amortization in the Electronics segment are expected to increase.
Research and Development
      Sony expects research and development costs (total of expenses for the development of new product prototypes and expenses for the development of mid-to long-term new technologies) for the fiscal year ending March 31, 2006 to be 520 billion yen, a 4 percent increase compared with the fiscal year ended March 31, 2005. Research and development costs for both the Electronics and Game segments are expected to increase.
CRITICAL ACCOUNTING POLICIES
      The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, Sony evaluates its estimates which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of these evaluations form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. Sony considers an accounting policy to be critical if it is important to its financial condition and results, and requires significant judgments and estimates on the part of management in its application. Sony believes that the following represent the critical accounting policies of the company.

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Investments
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

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regularly evaluates its investment portfolio to identify other-than-temporary impairments of individual securities. Factors that are considered by Sony in determining whether an other-than-temporary decline in value has occurred include: the length of time and extent to which the market value of the security has been less than its original cost, the financial condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors affecting the market value, deterioration of credit condition of the issuers, sovereign risk, and ability to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value.
      In evaluating the factors for available-for-sale securities whose fair values are readily determinable, management presumes a decline in value to be other-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally a period of up to six to twelve months). This criteria is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20%20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value is other-than-temporary.
      The assessment of whether a decline in the value of an investment is other-than-temporary often requires management judgment based on evaluation of relevant factors. Those factors include business plans and future cash flows of the issuer of the security, the regulatory, economic or technological environment of the investee, and the general market condition of either the geographic area or the industry in which the investee operates. Accordingly, it is possible that investments in Sony’s portfolio that have had a decline in value that are currently believed to be temporary may determine to be other-than-temporary in the future based on Sony’s evaluation of additional information such as continued poor operating results, future broad declines in value of worldwide equity markets or circumstances in market interest rate fluctuations. As a result, unrealized losses recorded for investments may be recognized into income in future periods.
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. CRT TV display CRTs)displays) or entity (e.g. semiconductor manufacturing division in the U.S.). If the carrying value of the asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset exceeds its fair value. Fair value is determined using the present value of estimated net cash flows or comparable market values.
      Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business assumptions could negatively affect the valuations of those long-lived assets. These unforeseen changes include a possible further decline in demand for TV display CRTs due to a shift in demand from CRT displays to LCD and plasma panel displays.
      In the fiscal year ended March 31, 2003, Sony recorded impairment charges for long-lived assets totaling 12.4 billion yen. This included 8.1 billion yen for the impairment of semiconductor and computer display CRT manufacturing equipment to be abandoned or to be sold in connection with certain restructuring activities in the Electronics segment. It also included 2.7 billion yen for the impairment of a CD manufacturing facility in the U.S., the fair value of which was estimated by using methods such as a survey of the local real estate market.

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      In the fiscal year ended March 31, 2004, Sony recorded impairment charges for long-lived assets totaling 16.1 billion yen. ThisIt included 5.3 billion yen for the impairment of long-lived assets such as semiconductor and CRT 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 segmentbusiness such as a certain CD manufacturing facility to be abandoned or sold and a recording studio and equipment to be held and used in Japan. Fair value of these assets was determined using estimated future discounted cash flows which were 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. ThisIt included 7.5 billion yen for the impairment of long-lived assets of CRT TV display manufacturing facilities to be held and used in Europe in connection with certain restructuring activities in the Electronics segment. Fair value of these assets was determined using estimated future discounted cash flows which were based on the best information available.

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Goodwill      In the fiscal year ended March 31, 2006, Sony recorded impairment charges for long-lived assets totaling 59.8 billion yen. It included 25.5 billion yen for the impairment of long-lived assets of CRT TV display manufacturing facilities to be held and Other Intangible Assetsused in the U.S. in connection with certain restructuring activities in the Electronics segment. Fair value of these assets was determined using estimated future discounted cash flows which were based on the best information available. The impairment charge also included 8.5 billion yen for the impairment of long-lived assets of the Metreon, an entertainment complex to be held for sale in the U.S. in connection with restructuring activities ofnon-core businesses in All Other. The impairment charge was based on the negotiated sales price of the complex.
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 during the fourth quarter of fiscal year on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of these assets below their carrying value.amount. Such an event would include unfavorable variances from established business plans, significant changes in forecasted results or volatility inherent to external markets and industries, which are periodically reviewed by management. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit (generally, Sony’s(Sony’s operating segments or one level below the operating segments) with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Other intangible assets are tested for impairment by comparing the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
      Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. These estimates and assumptions could significantly impact whether or not an impairment charge is recognized as well as the magnitude of any such charge. In its impairment review, Sony performs internal valuation analyses or utilizes third-party valuations when management believes it to be appropriate, and considers other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flow analysis. This approach uses significant estimates and assumptions including projected future cash flows, the timing of such cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. During the fourth quarter of the fiscal year ended March 31, 2005,2006, Sony performed the annual impairment analysistest for goodwill and norecorded an impairment loss has been recognized.of 0.5 billion yen in a reporting unit in All Other. This impairment charge reflected the overall decline in the fair value of a subsidiary. The fair value of the subsidiary was estimated principally using the expected present value of future cash flows.
      Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business

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assumptions could negatively affect the valuations, which may result in Sony recognizing impairment charges

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for goodwill and other intangible assets in the future. In order to evaluate the sensitivity of the fair value calculations on the impairment analysis, Sony applied a hypothetical 10%10 percent decrease to the fair value of each reporting unit. As of March 31, 2005,2006, a 10%10 percent hypothetical decrease to the fair value of each reporting units would not have resulted in a material impairment 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, or at the time when events occur or circumstances change and these events or changes could have a significant effect on these critical assumptions. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods. Therefore, actual results generally affect recognized expensescosts and the recorded obligations for pensions in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect Sony’s pension obligations and future expenses.costs.
      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%10 percent of those of the aggregate of the Japanese pension plans.
      To determine the benefit obligation of the Japanese pension plans, Sony used a discount rate of 2.3%2.2 percent for its Japanese pension plans as of March 31, 2005.2006. The discount rate was determined by using currently available information about rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefit obligation.obligation in consideration of amounts and timing of cash outflows for expected benefit payments. Such available information about rates of returns is collected from Bloomberg and credit rating agencies. The 2.3%2.2 percent discount rate represents a 10 basis point decrease from the 2.4%2.3 percent discount rate used for fiscal year ended March 31, 20042005. The reduction of the average duration of benefit payments in consideration of amounts and reflects current market interest rate conditions.timing of cash outflows for expected benefit payments is mainly due to the fact that more retiring employees selectedlump-sum amounts instead of monthly pension payments. For Japanese pension plans, a 10 basis point decrease in the discount rate would increase pension costs by approximately 1.20.8 billion yen for the fiscal year ending March 31, 2006.2007.
      To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as historical and expected long-term rates of return on various categories of plan assets. For Japanese pension plans, the expected long-term rate of return on pension plan assets was 4.0%3.2 percent and 3.2%3.5 percent as of March 31, 20042005 and 20052006 respectively. The actual lossgain on pension plan assets for the fiscal year ended March 31, 20052006 was 0.1%.10.6 percent. Actual results that differ from the expected return on plan assets are accumulated and amortized as a component of pension costs over the average future service period, thereby reducing the year-to-year volatility in pension costs. As of March 31, 20042005 and 2005,2006, Sony had unrecognized actuarial losses of 328.5322.2 billion yen and 322.2169.9 billion yen, respectively, including losses related to plan assets. As a result of the transfer to the Japanese government of the substitutional portion, unrecognized actuarial losses related to the substitutional portion was recognized as a settlement loss. Therefore unrecognized actuarial losses were reduced. The unrecognized actuarial losses reflect the overall unfavorable performance of equity marketsreturn on investment over the past several years and will result in an increase in pension costs as they are recognized.
      Sony recorded a liability for the unfunded accumulated benefit obligation for Japanese pension plans of 149.4128.6 billion yen and 128.635.8 billion yen as of March 31, 20042005 and 2005,2006, respectively. This liability represents the excess of the accumulated benefit obligation under Sony’s qualified defined benefit pension plans over the fair value of the plans’ assets. This liability was established by a charge to stockholders’ equity, resulting in no impact to the accompanying consolidated statements of income.

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      The following table illustrates the sensitivity to a change in the discount rate and the expected return on pension plan assets, while holding all other assumptions constant, for Japanese pension plans as of March 31, 2005:2006. As benefit obligation and plan assets decreased due to the transfer to the government of the substitutional portion, the sensitivity also decreased.
         
  Pre-Tax Pension Equity
Change in Assumption PBOExpenseCosts (Net of Tax)
      
  (Yen in billions)
25 basis point increase/decrease in discount rate -/+45.024.7 -/+3.02.0  +/-1.8-1.2 
25 basis point increase/decrease in expected return on assets — -/+1.31.2  +/-0.8-0.7 
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, because realization of deferred tax assets is dependent on whether each tax-filing unit generates sufficient taxable income. The estimates and assumptions used in determining future taxable income are consistent with those used in Sony’s approved forecasts of future operations. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, less valuation allowance, will be realized.
      Sony applied to file its corporate income tax return under the consolidated tax filing system in Japan beginning with the fiscal year ended March 31, 2004. Under the consolidated tax filing system, the tax-filing unit consists of Sony Corporation, the ultimate parent company of the Sony Group, and its wholly owned Japanese subsidiaries. The eventual ability to realize the tax benefit of its deferred tax assets is dependent on whether the tax-filing unit as a whole will be able to generate sufficient taxable income in the future. In addition, Sony is subject to local income taxes in Japan. For purposes of local income taxes, each entity is taxed as a stand alone tax filing unit. The eventual ability to realize the tax benefit of deferred tax assets for local income taxes is dependent on whether Sony Corporation and each subsidiary will be able to generate sufficient taxable income in the future. As of March 31, 2005, Sony Corporation had deferred tax assets for local income taxes totaling 77.5 billion yen. The eventual ability to realize the tax benefit of its deferred tax assets is dependent on whether Sony Corporation will be able to generate sufficient taxable income in the future. Management believes that Sony Corporation’s historical results, when evaluated in connection with relevant qualitative factors and available information concerning its business and industry, provided substantial positive evidence, which outweighs the negative evidence available. However, under recent conditions, management considers that it is possible that Sony Corporation’s future results may yield sufficient negative evidence to support the future determination that it is more likely than not that Sony Corporation will not realize the tax benefit of all these deferred tax assets. If this is the case, subject to review of relevant qualitative factors and uncertainties, Sony may establish a valuation allowance against part or all of the deferred tax assets of Sony Corporation. Such valuation allowances would be charged to income as an increase in tax expense.
Film Accounting
Film accounting
      An aspect of film accounting that requires the exercise of judgment relates to the process of estimating the total revenues to be received throughout a film’s life cycle. Such estimate of a film’s ultimate revenue is important for two reasons. First, while a film is being produced and the related costs are being capitalized, it is necessary for management to estimate the ultimate revenue, less additional costs to be incurred, including exploitation costs which are expensed as incurred, in order to determine whether the value of a film has been impaired and thus requires an immediate write off of unrecoverable film costs. Second, the amount of film costs recognized as cost of sales for a given film as it is exhibited in various markets throughout its life cycle is based upon the proportion that current period actual revenues bear to the estimated ultimate total revenues.

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      Management bases its estimates of ultimate revenue for each film on several factors including the historical performance of similar genre films, the star power of the lead actors and actresses, the expected number of theaters at which the film will be released, anticipated performance in the home entertainment, television and other ancillary markets, and agreements for future sales. Management updates such estimates based on the actual results to date of each film. For example, a film that has resulted in lower than expected theatrical revenues in its initial weeks of release would generally have its theatrical, home entertainment and television distribution ultimate revenues adjusted downward; a failure to do so would result in the understatement of amortized film costs for the period. Since the total film cost to be amortized for a given film is fixed, the estimate of ultimate revenues impacts only the timing of film cost amortization.
Future Insurance Policy Benefits
Future insurance policy benefits
      Liabilities for future insurance policy benefits are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities are computed by the net level premium method based upon estimates as to future investment yield, mortality, morbidity, mortality, withdrawals and other factors. Future policy benefits are computed using interest rates ranging from approximately 1.30%0.90 percent to 5.20%.5.10 percent. Mortality, morbidity and withdrawal assumptions for all policies are based on either the life insurance subsidiary’s own experience or various actuarial tables. Generally these assumptions are “locked-in”“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.

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RECENTLY ADOPTED ACCOUNTING STANDARDS
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts
      In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued the Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”.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.restated. 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 beforeas a result of adopting EITF Issue No. 04-8.
Employers’ Disclosures about Pensions and Other Postretirement Benefits
      In December 2003, the Financial Accounting Standards Board (“FASB”) issued FAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“FAS No. 132(R)”), which revised FAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, an amendment of FAS No. 87, “Employers’ Accounting for Pensions”, FAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and FAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. FAS No. 132(R) revised employers’ disclosures about pension plans and other postretirement benefit plans. It did not change the measurement or recognition of those plans required by FAS No. 87, 88 and 106. While retaining the disclosure requirements of FAS No. 132, FAS No. 132(R) requires additional disclosures about assets, obligations and cash flows. The provisions of FAS No. 132(R) were generally effective for financial statements with fiscal years ending after December 15, 2003, excluding the disclosure of certain information about foreign plans. The information about foreign plans is effective for fiscal years ending after June 15, 2004. In accordance with FAS No. 132(R), Consolidated Financial Statements Note 14, Pension and severance plans, has been expanded to include the new disclosures.
Consolidation of Variable Interest Entities
      In January 2003, the FASBFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARBAccounting Research Bulletin (“ARB”) No. 51”. FIN No. 46 addresses consolidation by a primary beneficiary of a variable interest entity (“VIE”). Sony early adopted the provisions of FIN No. 46 on July 1, 2003. As a result of adopting the original FIN No. 46, Sony recognized a one-time charge with no tax effect of 2.1 billion yen as a cumulative effect of accounting change in the consolidated statement of income, and Sony’s assets and liabilities increased by 95.3 billion yen and 98.0 billion yen, respectively. These increases were treated as non-cash transactions in the consolidated statement of cash flows. In addition, cash and cash equivalents increased by 1.5 billion yen. See Note 22 of Notes to Consolidated Financial Statements for further discussion on the VIEs that are used by Sony.
      In December 2003, the FASB issued revised FIN No. 46 (“FIN No. 46R”), which replaced FIN No. 46. Sony subsequently early adopted the provisions of FIN No. 46R46 R, which replaced FIN No. 46, upon its issuance.issuance in December 2003. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or impact the way Sony had previously accounted for VIEs.
Exchanges of Nonmonetary Assets
      In December 2004, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of Accounting Principle Board Opinion (“APB”) No. 29”. This statement requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. This statement is effective for nonmonetary asset exchanges that have occurred in the fiscal periods beginning after June 15, 2005. Sony adopted FAS No. 153 on July 1, 2005. The adoption of FAS No. 153 did not have a material impact on Sony’s results of operations and financial position.

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Accounting for Conditional Asset Retirement Obligations
      In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations — an Interpretation of FAS No. 143”. FIN No. 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective no later than the end of fiscal years ending after December 15, 2005. Sony adopted FIN No. 47 on March 31, 2006. The adoption of FIN No. 47 did not have a material impact on Sony’s results of operations and financial position.
Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds
      In September 2004, the EITF issued EITF Issue No. 04-10, “Applying Paragraph 19 of FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds.” EITF Issue No. 04-10 clarifies how an enterprise should evaluate the aggregation criteria in paragraph 17 of FAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with paragraph 19 of FAS No. 131. EITF Issue No. 04-10 is effective for fiscal years ending after September 15, 2005. Sony adopted EITF Issue No. 04-10 during the fiscal year ended March 31, 2006. The adoption of EITF Issue No. 04-10 did not have an impact on Sony’s results of operation and financial position.
RECENT PRONOUNCEMENTS
Accounting for Stock-Based Compensation
      In December 2004, the FASB issued FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123(R)”). This statement requires the use of the fair value based method of accounting for employee stock-based compensation and eliminates the alternative use of the intrinsic value method prescribed by Accounting Principle Board Opinion (“APB”)APB No. 25, “Accounting for Stock Issued to Employees.”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 in Note 2 of Notes to the Consolidated Financial Statements Note 2(2)(2) Significant accounting policies — Stock-based compensation. This statement shall be effective for fiscal years beginning after June 15, 2005, with early adoption encouraged during the fiscal years beginning after the date this statement is issued. The options for transition methods prescribed inSony adopted FAS No. 123(R) include either the modified prospective or the modified retrospective methods.on April 1, 2006. Sony intends to adopthas elected the modified prospective method of transition prescribed in FAS No. 123(R), 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 evaluatingAs of March 31, 2006, the impactaggregate value of adopting this new pronouncement. However,the unvested stock acquisition rights was 4.4 billion yen. Sony expects that the total expenses to be recorded in the future periods will be consistent with the pro forma information shown in Note 2 of Notes to the Consolidated Financial Statements Note 2(2)(2) Significant accounting policies — Stock-based compensation.
Inventory Costs
      In November 2004, the FASB issued FAS No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin (“ARB”)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 inventorythe costs of conversion be based on the normal capacity of the production facilities. This statement shall be effective for fiscal years beginning after June 15, 2005, with early adoption encouraged during the fiscal years beginning after the date this statement is issued.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.

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Exchanges of Nonmonetary AssetsDerivative instruments and hedging activities
      In December 2004,February 2006, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets,155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of APB OpinionFAS No. 29.”133 and FAS No. 140. This statement requirespermits an entity to elect fair value remeasurement for any hybrid financial instrument (with changes in fair value recognized in earnings) if the hybrid instrument contains an embedded derivative that exchanges of productive assetswould otherwise be required to be bifurcated and accounted for separately under FAS No. 133. The election to measure the hybrid instrument at fair value unless fair value cannotis made on an instrument-by-instrument basis and is irreversible. The statement will be reasonably determinedeffective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the transaction lacks commercial substance.beginning of an entity’s fiscal years beginning after September 15, 2006, with earlier adoption permitted as of the beginning of fiscal year, provided that financial statements for any interim period of that fiscal year have not been issued. The adoption of FAS No. 155 is not expected to have a material impact on Sony’s results of operations and financial position.
Accounting for Servicing of Financial Assets
      In March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140”. This statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement shall be effective for nonmonetary asset exchanges occurring in the fiscal periodsyears beginning after JuneSeptember 15, 2005, with early adoption during the fiscal periods beginning after the date this statement is issued encouraged.2006. Sony is currently evaluating the impact of adopting this new pronouncement.
Accounting for Uncertainty in Income Taxes
      In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. Early application of the provisions of this Interpretation is encouraged if financial statements have not been issued, including interim financial statements, in the period this Interpretation is adopted. Sony is currently evaluating the impact of adopting this Interpretation.
Item 6.Directors, Senior Management and Employees
Directors and Senior Management
      Set forth below are the current Sony Corporationmembers of the Board of Directors and Corporate Executive Officers of Sony Corporation, their date of birth, the year in which they were first elected, their current position at Sony, prior positions, and other principal business activities outside Sony as of June 21, 2005.July 31, 2006.

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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:
2000Chairman and Chief Executive Officer, Representative Director, Sony Corporation
1999President and Representative Director, Chief Executive Officer, Sony Corporation
1995President and Representative Director, Chief Operating Officer, Sony Corporation
1990Senior General Manager, Advertising & Marketing Communication Strategy Group, Sony Corporation
1989Director, Sony Corporation
1988Senior General Manager, Home Video Group, Sony Corporation
1960Entered Sony Corporation
Principal Business Activities Outside Sony: Director of Nestlé S.A., Switzerland

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Kunitake Ando
Date of Birth: January 1, 1942
Director (Member of the Board) Since: 2000 (and from 1994 through 1997)
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:
2003President and Group Chief Operating Officer, Representative Corporate Executive Officer, Sony Corporation
2000President and Chief Operating Officer, Representative Director, Sony Corporation
1999President and Chief Operating Officer, Personal IT Network Company, Sony Corporation
1998Corporate Senior Vice President, Sony Corporation
1997Corporate Vice President (resigns as Director), Sony Corporation
1994Director, Sony Corporation
1990President and Chief Operating Officer, Sony Engineering and Manufacturing of America
1985Deputy President, Sony Prudential Life Insurance Co., Ltd.
1969Entered Sony Corporation
Principal Business Activities Outside Sony: None
Teruo Masaki
Date of Birth: August 7, 1943
Director (Member of the Board) Since: 1999
Corporate Executive Officer Since: 2003
Current Positions: Executive Deputy President and Group General Counsel
Prior Positions:
2000Corporate Senior Executive Vice President, Director, Sony Corporation
1999Senior Managing Director, Sony Corporation
1997Executive Vice President, Sony Corporation of America
1991Deputy Senior General Manager, Legal and Intellectual Property Group, Sony Corporation
1971Entered Sony Corporation
Principal Business Activities Outside Sony: None
 
Sir Howard Stringer
Date of Birth: February 19, 1942
Director (Member of the Board) Since: 1999
Corporate Executive Officer Since: 2003
Current Positions: Vice Chairman and Sony Group Americas Representative, Chief Operating Officer in
charge of Game Business Group and Entertainment Business Group, Officer in
charge of Connect Company, Sony Corporation
Current Positions within Sony:Chairman and Chief Executive
Officer, Representative Corporate Executive Officer Chairman and Chief Executive Officer, Sony Corporation of America
Chairman, Sony Electronics Inc. (a U.S. subsidiaryMember of Sony Corporation)the Nominating Committee
    
Prior Positions:
2003Vice Chairman, Chief Operating Officer in charge of Entertainment Business Group, Sony Corporation
 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 KutaragiRyoji Chubachi
Date of Birth: August 2, 1950September 4, 1947
Director (Member of the Board) Since: 20002005
Corporate Executive Officer Since: 2004
Current Positions:Positions within Sony: GroupPresident, Representative Corporate Executive Officer, Sony Corporation President and GroupElectronics Chief Executive Officer
Officer, Sony Computer Entertainment Inc.Member of the Nominating Committee
    
Prior Positions:
 2004 Chief Operating Officer in charge of Game BusinessMicro Systems Network Company (“MSNC”) and Engineering, Manufacturing and Customer Services (“EMCS”), President, Production Strategy Group, and Home Electronics Network CompanySony Corporation Executive Deputy President, Corporate Executive Officer, Sony Corporation
 2003 Executive DeputyVice 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,MSNC, Sony Corporation
 20002002 Director,NC President, Core Technology & Network Company (“CNC”), Sony Corporation
2002Corporate Senior Vice President, Sony Corporation
 1999 ExecutiveCorporate Vice President, Sony Computer Entertainment Inc.
1991Manager, PS Project, Video Disc Player Group,President, Recording Media Company, CNC, Senior Vice President, CNC, Sony Corporation
 19751977 Entered Sony Corporation
Principal Business Activities Outside Sony: None

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Teruhisa Tokunaka
Katsumi Ihara
Date of Birth: August 9, 1945September 24, 1950
Director (Member of the Board) Since: 19992005
Corporate Executive Officer Since: 2004
Current Positions within Sony: Executive Deputy President, Representative Corporate Executive Officer Officer in charge of Procurement Strategies and TV & Video Business
Prior Positions:
2005NC President of Home Electronics Network Company, Sony Corporation
2004Executive Deputy President and Group Chief Strategy Officer & Group Chief Financial Officer, Sony Corporation
2001 Group Executive Officer, Sony Corporation President, RepresentativeSony Ericsson Mobile Communications AB
2000Corporate Senior Vice President, NC President, Personal IT Network Company, Sony Corporation
1997Corporate Vice President, Sony Corporation
1996President, Home A&V Products Company, Sony Corporation
1981Entered Sony Corporation
1973Entered Mitsui Knowledge Industry Co., Ltd.
Principal Business Activities Outside Sony: None
Akishige Okada
Date of Birth: April 9, 1938
Outside Director (Member of the Board) Since: 2002
Current Position within Sony: Chairman of the Compensation Committee
Principal Business Activities Outside Sony:Advisor, Sumitomo Mitsui Banking Corporation
Sony Financial Holdings Inc.Director, Daicel Chemical Industries, Ltd.
Director, Mitsui & Co., Ltd.
Auditor, Toyota Motor Corporation
Auditor, Mitsui Fudosan Co., Ltd.
    
Prior Positions:
 20032002 Chairman of the Board (Representative Director), Sumitomo Mitsui Financial Group, Inc.
2001Chairman of the Board (Representative Director), Sumitomo Mitsui Banking Corporation
Hirobumi Kawano
Date of Birth: January 1, 1946
Outside Director (Member of the Board) Since: 2003
Current Position within Sony: Vice Chairman of the Board
Member of the Nominating Committee
Principal Business Activities Outside Sony: Senior Vice President, JFE Steel Corporation
Prior Positions:
1999Director-General, Agency for Natural Resources and Energy, Ministry of International Trade and Industry (“MITI”) (later renamed the Ministry of Economy, Trade and Industry)
1998Director-General, Basic Industries Bureau, MITI
1996Director-General, Machinery and Information Industries Policy, Machinery and Information Industries Bureau, MITI
1995Director-General, Petroleum Department, Agency of Natural Resources and Energy, MITI

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Yotaro Kobayashi
Date of Birth: April 25, 1933
Outside Director (Member of the Board) Since: 2003
Current Position within Sony: Chairman of the Board and Chairman of the Nominating Committee
Principal Business Activities Outside Sony:Chief Strategy Officer, Representative Corporate Advisor, Fuji Xerox Co., Ltd.
Director, Callaway Golf Company
Director, Nippon Telegraph and Telephone Corporation
Prior Positions:
1999Chairman of the Board, Fuji Xerox Co., Ltd.
1992Chairman and Chief Executive Officer, Fuji Xerox Co., Ltd.
1987Director, Xerox Corporation
1978President and Chief Executive Officer, in chargeFuji Xerox Co., Ltd.
Sakie T. Fukushima
Date of Network ApplicationBirth: September 10, 1949
Outside Director (Member of the Board) Since: 2003
Current Position within Sony: Member of the Audit Committee
Principal Business Activities Outside Sony:Representative Director & Content Service Sector, Personal Solutions Business Group, SonyRegional Managing Director — Japan, Korn/ Ferry International
Member, Board of Directors, Korn/ Ferry International, U.S.A.
Director, Benesse Corporation
Prior Position:
 2000 Managing Director, Korn/ Ferry International — Japan
Yoshihiko Miyauchi
Date of Birth: September 13, 1935
Outside Director (Member of the Board) Since: 2003
Current Position within Sony: Member of the Compensation Committee
Principal Business Activities Outside Sony:Director, Representative Executive Officer,
Chairman and Chief Executive Officer, ORIX Corporation Director, Showa Shell Sekiyu K.K
Director, Daikyo Incorporated Director, Sojitz Corporation
Director, Access Co., Ltd.
Prior Positions:
2000Representative Director, Chairman and Chief Executive Officer, ORIX Corporation
1980Representative Director, President, ORIX Corporation

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Yoshiaki Yamauchi
Date of Birth: June 30, 1937
Outside Director (Member of the Board) Since: 2003
Current Position within Sony: Chairman of the Audit Committee
Principal Business Activities Outside Sony:Director, Sumitomo Mitsui Financial Group, Inc.
Director, Sumitomo Mitsui Banking Corporation
Director, Amana Inc.
Statutory Auditor, Stanley Electric Co., Ltd.
Deputy President, ARI Research Institute
Prior Positions:
1999Director, Sumitomo Banking Corporation
1993Executive Director, Asahi & Co.
1991President, Inoue Saito Eiwa Audit Corporation
1986President, Eiwa Audit Corporation
Country Managing Partner — Japan, Arthur Andersen & Co.
Sir Peter Bonfield
Date of Birth: June 3, 1944
Outside Director (Member of the Board) Since: 2005
Current Position within Sony: Member of the Nominating Committee
Principal Business Activities Outside Sony:Member of the Board, AstraZeneca plc, U.K.
Member of Audit Committee and the Board, Telefonaktiebolaget LM Ericsson, Sweden
Member of the Board, Mentor Graphics, Inc.
Member of the Board and Chairman of Audit Committee, Taiwan Semiconductor Manufacturing Company Ltd.
Prior Positions:
1996Chief FinancialExecutive Officer, RepresentativeBritish Telecom plc
1986Chairman, ICL plc, U.K.
1984Managing Director,
Sony ICL plc, U.K.
Fueo Sumita
Date of Birth: May 24, 1938
Outside Director (Member of the Board) Since: 2005
Current Position within Sony: Member of the Audit Committee
Principal Business Activities Outside Sony: Chief of Sumita Accounting Office
Prior Positions:
2002Executive Vice President, Kawada Corporation
2001Vice Chairman, Ernst & Young ShinNihon
2000Deputy Director, Ohta-Showa Century Audit Corporation
 1999 Senior Managing Director and Chief Financial Officer, SonyChairman, Century Audit Corporation
 1995President, Sony Computer Entertainment Inc.
19891985 Deputy Senior General Manager, Corporate Strategy Group, Sony CorporationAccounting Dept., Hitachi, Ltd.

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1969Fujio Cho
Date of Birth: February 2, 1937
Outside Director (Member of the Board) Since: 2006
Current Position within Sony: Member of the Compensation Committee
 Entered Sony Corporation
Principal Business Activities Outside Sony: NoneChairman, Toyota Motor Corporation
Director, Central Japan Railway Company
Auditor, Denso Corporation
Prior Positions:
1999President, Toyota Motor Corporation
Ned Lautenbach
Date of Birth: February 2, 1944
Outside Director (Member of the Board) Since: 2006
Principal Business Activities Outside Sony:Operating Partner, Clayton, Dubilier & Rice, Inc.
Member of the Board, Fidelity Investments
Member of the Board, Eaton Corporation
Prior Positions:
1998Senior Vice President & Group Executive, IBM Worldwide Sales & Services, International Business Machines Corporation
 
Göran Lindahl
Date of Birth: April 28, 1945
Director (Member of the Board) Since: 2001
Current Position within Sony: Member of the Compensation Committee
Prior Positions:
 2003 Corporate Executive Officer, Sony Group Europe Representative, Chairman of Sony Group in Europe
 2001 Director, Sony Corporation
 1999 Director, Telefonaktiebolaget LM Ericsson, Sweden
 1997 President and Chief Executive Officer, Asea Brown Boveri Ltd., Switzerland
 1985 President, ASEA Transmission AB, Sweden
 1983 President, ASEA Transformers AB, Sweden
Principal Business Activities Outside Sony: Director, Anglo American Plc, U.K.

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

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Hirobumi Kawano
Date of Birth: January 1, 1946
Outside Director (Member of the Board) Since: 2003
Current Position: Vice Chairman of the Board
Prior Positions:
1999Director-General, Agency for Natural Resources and Energy, Ministry of International Trade and Industry (“MITI”) (later renamed the Ministry of Economy, Trade and Industry (METI))
1998Director-General, Basic Industries Bureau, MITI
1996Director-General, Machinery and Information Industries Policy, Machinery and Information Industries Bureau, MITI
1995Director-General, Petroleum Department, Agency of Natural Resources and Energy, MITI
1993Director, General Coordination Division, Minister’s Secretariat, MITI
1992Director, General Industrial Machinery Division, Machinery and Information Industries Bureau, MITI
1989Director, Americas-Oceania Division, International Trade Policy Bureau, MITI
1969Entered MITI
Principal Business Activities Outside Sony: 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:
1996Director, ABB Ltd., Switzerland
1978President and Chief Executive Officer, Fuji Xerox Co., Ltd.
Principal Business Activities Outside Sony:
Chairman of the Board, Fuji Xerox Co., Ltd.
Director, Callaway Golf Company
Director, Nippon Telegraph and Telephone Corporation
Carlos Ghosn
Date of Birth: March 9, 1954
Outside Director (Member of the Board) Since: 2003
Prior Positions:
1990Chairman, President and Chief Executive Officer, Michelin North America Inc.
1985Chief Operating Officer, Michelin — Brazil
Principal Business Activities Outside Sony:
President and Chief Executive Officer, Nissan Motor Co., Ltd.
Director, Alcoa Inc., U.S.A.
President and Chief Executive Officer, Renault S.A., France

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Sakie T. Fukushima
Date of Birth: September 10, 1949
Outside Director (Member of the Board) Since: 2003
Prior Position:
2000Managing Director, Korn/Ferry International — Japan
Principal Business Activities Outside Sony:
Member, Board of Directors, Korn/ Ferry International, U.S.A.
Director, Kao Corporation
Advisory Board Member, All Nippon Airways Co., Ltd.
Yoshihiko Miyauchi
Date of Birth: September 13, 1935
Outside Director (Member of the Board) Since: 2003
Prior Positions:
2000Representative Director, Chairman and Chief Executive Officer, ORIX Corporation
1980Representative Director, President, ORIX Corporation
Principal Business Activities Outside Sony:
Director, Representative Executive Officer, Chairman and
Group Chief Executive Officer, ORIX Corporation
Director, Aozora Bank Ltd.
Director, Fuji Xerox Co., Ltd.
Director, Showa Shell Sekiyu K.K.
Director, Daikyo Incorporated
Yoshiaki Yamauchi
Date of Birth: June 30, 1937
Outside Director (Member of the Board) Since: 2003
Current Position: Chairman of the Audit Committee
Prior Positions:
1999Director, Sumitomo Banking Corporation
1993Executive Director, Asahi & Co.
1991President, Inoue Saito Eiwa Audit Corporation
1986President, 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:
     2004Chief Operating Officer in charge of Micro Systems Network Company (MSNC) and Engineering, Manufacturing and Customer Services (“EMCS”), President, Production Strategy Group, Sony Corporation
     2003Executive Vice President, Executive Officer, NC President, MSNC, Sony Corporation
     2002NC President, Core Technology & Network Company (“CNC”), Sony Corporation
     2002Corporate Senior Vice President, Sony Corporation
     1999Corporate Vice President, President, Recording Media Company, CNC, Senior Vice President, CNC, Sony Corporation
     1977Entered 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:
     2001Group Executive Officer, Sony Corporation
President, Sony Ericsson Mobile Communications AB
     2000Corporate Senior Vice President, NC President, Personal IT Network Company,
Sony Corporation
     1997Corporate Vice President, Sony Corporation
     1996President, Home A&V Products Company, Sony Corporation
     1981Entered Sony Corporation
     1973Entered 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:
     1996Chief Executive Officer, British Telecom plc
     1986Chairman, ICL plc
     1984Managing 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:
     2002Executive Vice President, Kawada Corp.
     2001Vice Chairman, Ernst & Young ShinNihon
     2000Deputy Director, Ohta-Showa Century Audit Corp.
     1999 Chairman Century Audit Corp.
     1985Deputy General Manager, Corporate Accounting Dept.and Chief Executive Officer, LivSafe AB, Sweden
Chairman and Chief Executive Officer, LivSafe, Inc., Hitachi, Ltd.
   Principal Business Activities Outside Sony:
Chief of Sumita Accounting OfficeU.S.A.
Director, iGATE Corporation, U.S.A.
Director, INGKA Holding B.V., Netherlands

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Corporate Executive Officers
      In addition to Messrs. Idei, Ando, Masaki, Stringer, Chubachi and Ihara, the sevenfour individuals set forth below are the current Corporate Executive Officers of Sony Corporation as of June 21, 2005.July 31, 2006. Refer to “Board Practices” below.

93

Shizuo Takashino
Date of Birth: September 2, 1943
Corporate Executive Officer Since: 2003
Current Positions:Executive Deputy President & Sony Group China Representative, President, China
Design & Engineering Group, Sony China Limited, Chief Operating Officer in
charge of Information Technology & Communications Network Company, Personal
Audio Visual Network Company, Professional Solutions Network Company
    
Nobuyuki Oneda
Date of Birth: May 6, 1945
Corporate Executive Officer Since: 2004
Current Positions within Sony: Executive Vice President and Chief Financial Officer
Prior Positions:
2004Senior Vice President, Officer in charge of Corporate Planning & Control, Accounting and Information Systems, Sony Corporation
2003Senior Vice President, Executive Officer, Sony Corporation
2002Officer and Chief Financial Officer, Network Application & Content Service Sector, Sony Corporation
Corporate Senior Vice President, Sony Corporation
 2000 NCDeputy President Broadband Solutions Network Company,and Chief Financial Officer, Sony Electronics Inc.
Group Executive Officer, Sony Corporation
 1999 Senior Executive Vice President Corporate Executiveand Chief Financial Officer, Chief Operating Officer,
NC President, Home Network Company, Sony Corporation
1997Corporate Senior Vice President, (resigned as Director),Electronics Inc. (a U.S. subsidiary of Sony CorporationCorporation)
 1996 President, Personal A&V Products Company,General Manager, Corporate Planning & Control Department, Sony Corporation
 1995Executive Vice President, Consumer A&V Products Company, Sony Corporation
1995Director, Sony Corporation
1990Senior General Manager, General Audio Group, Sony Corporation
19621969 Entered Sony Corporation
Principal Business Activities Outside Sony: None
 
Keiji Kimura
Date of Birth: April 4, 1952
Corporate Executive Officer Since: 2004
Current Positions: Senior
Current Positions within Sony:Executive Vice President, NC President, Information Technology &
Communications Network Company, Officer in charge of Connect CompanyTechnology Strategies and Intellectual Property
    
Prior Positions:
2005NC President, Information Technology & Communications Network Company, Sony Corporation
2004Senior Executive Vice President, Corporate Executive Officer, Sony Corporation
 2003 Senior Vice President, Executive Officer, Sony Corporation
 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

9492

   
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:
2003Senior Vice President and Electronics Chief Marketing Officer, Executive Officer,
Sony Corporation
2000Group Executive Officer, Sony Corporation President and Chief Operating Officer,
Sony Electronics Inc.
2000President, Consumer Electronics Group, Sony Electronics Inc.
1998President, Consumer Products Marketing Group, Sony Electronics Inc.
1996Senior Vice President, Home A/ V Division, Consumer AV Group, Sony Electronics Inc. (a U.S. subsidiary of Sony Corporation)
1972Entered Sony Corporation
Principal Business Activities Outside Sony: None
Takao Yuhara
Date of Birth: June 7, 1946
Corporate Executive Officer Since: 2003
Current Positions: Senior Vice President, Officer in charge of Finance and Investor Relations
Prior Positions:
2003Group Chief Financial Officer, Sony Corporation
2001Senior General Manager, Corporate Planning & Control, Global Hub, Sony Corporation
1999Senior Vice President, Corporate Planning & Control, Group HQ, Sony Corporation
1996Vice President, Display Company, General Manager, Planning & Control Department, Display Company, Sony Corporation
1995General Manager, Planning & Control Department, Display Device Division, Component Company, Sony Corporation
1971Entered Sony Corporation
1969Entered Nippon Chemical Industrial Co., Ltd.
Principal Business Activities Outside Sony: None

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:
2003Senior Vice President, Executive Officer, Sony Corporation
2002Officer and Chief Financial Officer, Network Application & Content Service Sector,
Sony Corporation, Corporate Senior Vice President, Sony Corporation
2000Deputy President, and Chief Financial Officer, Sony Electronics Inc. Group Executive Officer, Sony Corporation
1999Executive Vice President and Chief Financial Officer, Sony Electronics Inc.
(a U.S. subsidiary of Sony Corporation)
1996General Manager, Corporate Planning & Control Department, Sony Corporation
1969Entered 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:
2003Vice President, Executive Officer, Sony Corporation
1998Representative Director and President, Sony Service Corporation
1997Senior Vice President, Recording Media & Energy Company, Sony Corporation
1989General Manager, Human Resources, Human Resources Development, Sony Corporation
1970Entered Sony Corporation
Principal Business Activities Outside Sony: None
 
Nicole Seligman
Date of Birth: October 25, 1956
Corporate Executive Officer Since: 2003
Current Positions: Group Deputy
Current Positions within Sony:Executive Vice President and General Counsel Sony Corporation
Executive Vice President and General Counsel, Sony Corporation of America
    
Prior Positions:
2003Group Deputy General Counsel, Sony Corporation
 2000 Entered Sony Corporation of America as Executive Vice President and General Counsel
 1992 Partner, Williams & Connolly LLP
 1985 Entered Williams & Connolly LLP
 1978 Associate Editorial Page Editor for The Asian Wall Street Journal, Hong Kong
Principal Business Activities Outside Sony: None
Candidates for Corporate Executive Officer as of June 22, 2005
      As of June 22, 2005, Messrs. Idei, Ando, Takashino, Masaki, Nishida, Yuhara and Kirihara are scheduled to resign from the position of Corporate Executive Officer. In addition to Messrs. Stringer, Chubachi, Ihara, Oneda and Kimura, and Ms. Seligman, the following candidate has been selected for the position of Corporate Executive Officer. These appointments are subject to approval by the Board of Directors at the Board of Directors meeting to be held on June 22, 2005.

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Yutaka Nakagawa
Date of Birth: December 4, 1945
Current Positions:Positions within Sony: Executive Vice President, Executive Officer NC President, Personal Audio Visual
Network Company, President, Personalin charge of Products Strategies, Digital Imaging Business and Audio Business Group
    
Prior Positions:
2005NC President, Personal Audio Visual Network Company, Sony Corporation
 2003 Deputy President, Micro Systems Network Company, President, Energy Company, MSNC, Sony Corporation
 1999 Corporate Senior Vice President, Sony Corporation
 1998 President, Personal and Mobile Communication Company, Sony Corporation
 1997 Corporate Vice President, Sony Corporation
 1992 General Manager, Camcorder Products Division, Personal Video Group, Sony Corporation
 1968 Entered Sony Corporation
Principal Business Activities Outside Sony: None
      All of the aforementioned persons, with the exception of Messrs. Nakatani, Okada, Kawano, Kobayashi, Ghosn, Miyauchi, Yamauchi, Bonfield, and Sumita, Lindahl, Cho, Lautenbach and Ms. Fukushima, are or will be, engaged on a full-time basis by Sony. There is no family relationship between any of the persons named above. There is no arrangement or understanding with major shareholders, customers, suppliers, or others pursuant to which any person named above was selected as a Director or a Corporate Executive Officer.
Compensation
      The aggregate amount of remuneration, including bonuses paid and benefits in kind granted by Sony during the fiscal year ended March 31, 20052006 to all Directors and Corporate Executive Officers (refer to “Board Practices” below) of Sony Corporation who served during the fiscal year ended March 31, 2005,2006, as a group (28(29 people), totaled 2,7482,666 million yen. Also, as a part of Sony’s incentive compensation arrangements, Sony Corporation issued stock acquisition rights during the fiscal year ended March 31, 2005.2006. The stock acquisition rights, which represent rights to subscribe for shares of common stock of Sony Corporation, have been granted to the Directors, Corporate Executive Officers, Executive Officers,Corporate Executives, Group Executive Officers,Executives, and selected employees. The stock acquisition rights generally vest ratably up to three years from the date of grant and are generally exercisable up to ten years from the date of grant. The portion of those stock acquisition rights which was granted by Sony during the fiscal year ended March 31, 20052006 to the Directors and Corporate Executive Officers as of May 31, 2005 confers rights to purchase a total number of 712,000605,200 shares of Sony Corporation’s Common Stock. The exercise price for these yen-denominated stock acquisition rights issued as of November 18, 200417, 2005 was 3,782

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4,060 yen per share, and the exercise price for these U.S. dollar-denominated stock acquisition rights issued as of March 31,November 17, 2005 was 40.3434.14 U.S. dollars.
      Regarding the above compensation plans, refer to Note 16 of Notes to Consolidated Financial Statements.
      The aggregateIn the fiscal year ended March 31, 2006, the retirement allowance scheme was terminated and a new stock-based retirement remuneration (phantom restricted stock plan) was introduced. With the introduction of this plan, there was no amount accrued forlump-sum severance indemnities by Sony during the fiscal year ended March 31, 20052006 for all Directors and Corporate Executive Officers of Sony Corporation as of MayMarch 31, 2005,2006, as a group (26(14 people),.
      Under this new plan, points fixed every year by the Compensation Committee shall be granted to Directors and Corporate Executive Officers every year during his/her tenure in office, and at the time of resignation, the remuneration amount shall be calculated by multiplying Sony’s common stock price by accumulated points. The resigning Directors and Corporate Executive Officers shall purchase Sony’s common stock with this remuneration. The aggregate number of points granted to Directors and Corporate Executive Officers of Sony Corporation as of March 31, 2006, as a group (14 people) totaled 320 million yen.27,900 points.
Board Practices
      Sony has adopted a corporate governance system called the “Company with Committees” corporate governance system under the Japanese Commercial Code (Shoho)Company Law (Kaishaho) and related legislation (including(collectively the Law for Special Exceptions to the Commercial Code concerning Audit, etc. ofKabushiki Kaisha,collectively the “Commercial Code”“Company Law”). Under this system, Sony Corporation has three committees: the Nominating Committee, the Audit Committee and the Compensation Committee. Under the Commercial Code,Company Law, each committee is required to consist of not less than three Directors, the majority of whom must be outside Directors. Under the committee system, Directors as such have no power to execute the business of Sony Corporation except for limited circumstances as permitted by law. The Board of Directors must elect Corporate Executive Officers (Shikko-

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yaku)(Shikko-yaku), who are responsible for the execution of the business of Sony Corporation. A summary of the new governance system adopted by Sony Corporation is set forth below.
      The Board of Directors determines the fundamental management policy and other important matters related to the management of Sony and oversees the performance of the duties of Directors and Corporate Executive Officers. Under the Commercial Code,Company Law, all Directors must be elected at the General Meeting of Shareholders from the candidates determined by the Nominating Committee. Under the Commercial Code,Company Law, the terms of office of Directors expire at the conclusion of the General Meeting of Shareholders held with respect to the last closing of accountsbusiness year ending within one year after their assumption of office.election. Directors may serve any number of consecutive terms;terms although, under the RegulationsCharter of the Board of Directors of Sony Corporation, outside Directors may not be reelected more than five times without the consent of all Directors.
      The Nominating Committee, which pursuant to the RegulationsCharter of the Board of Directors of Sony Corporation consists of five or more Directors, determines the content of proposals to be submitted for approval at the General Meeting of Shareholders regarding the appointment and dismissal of Directors. As stated above, under the Commercial Code,Company Law, a majority of the members of the Nominating Committee must be outside Directors. In order to qualify as an outside Director under the Commercial Code,Company Law, a Director must be a person (i) who is not a director of Sony Corporation or any of its subsidiaries engaged in the business operations of Sony Corporation or such subsidiary, as the case may be, or a corporate executive officer or general manager or other employee of Sony Corporation or any of its subsidiaries, and (ii) who has never been a director of Sony Corporation or any of its subsidiaries engaged in the business operations of Sony Corporation or such subsidiary, as the case may be, or a corporate executive officer aor general manager or another employee of Sony Corporation or of any of its subsidiaries and is not a director who is also engaged in the business or a corporate executive officer of such a subsidiary or a general manager or an employee of Sony Corporation or of any subsidiary of Sony Corporation.subsidiaries. Under the RegulationsCharter of the Board of Directors of Sony Corporation, two or more members of the Nominating Committee must concurrently be Corporate Executive Officers. The Nominating Committee is composed of the following members as of June 21, 2005:July 31, 2006: Yotaro Kobayashi, who is the Chairman of the Nominating Committee and an outside Director; Hirobumi Kawano and Carlos Ghosn,Peter Bonfield who are outside Directors; and Nobuyuki IdeiHoward Stringer and Kunitake Ando,Ryoji Chubachi, who are Corporate Executive Officers. During the fiscal year ended March 31, 2005, the Nominating Committee held seven meetings.

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      Under the RegulationsCharter of the Board of Directors of Sony Corporation, the Audit Committee must consist of three or more Directors, a majority of whom, as stated above, must be outside Directors. In addition, under the Commercial Code,Company Law, a member of the Audit Committee may not concurrently be a Corporate Executive Officer, a general managerdirector of Sony Corporation or any other employeeof its subsidiaries who is engaged in the business operations of Sony Corporation or such subsidiary, as the case may be, or a corporate executive officer of Sony Corporation or any of its subsidiaries, or a director who is engaged in the businessan accounting counselor, general manager or other employee of any of such subsidiaries. Each memberFurther, under the Charter of the Board of Directors of Sony Corporation, members of the Audit Committee hasmust meet the statutory dutyindependence and other equivalent requirements of U.S. securities laws and regulations to examinethe extent applicable to Sony Corporation. The Audit Committee’s primary responsibility is to audit the consolidated and non-consolidated financial statements and business (annual) reports to be submitted by the Board of Directors at the General Meeting of Shareholders. The Audit Committee operates under regulations adopted by the Board of Directors. The Audit Committee’s primary responsibility isShareholders; to audit the executionperformance of duties by Directors and Corporate Executive Officers with(with regard to preparation process of financial statements, disclosure controls and procedures, internal controls, compliance structure, risk management structure, internal audit structure, whistleblower protectionsinternal hotline system and other matters;matters), in each case pursuant to the Company Law; and to propose appointment/dismissal or non-reappointment of, approve the compensation of, and oversee and evaluate the work of Sony’s independent auditors. Under the Commercial Code,Company Law, the Audit Committee has a statutory duty to prepare and submit its audit report to the Corporate Executive Officer designated by the Board of Directors each year. A member of the Audit Committee may note his or her opinion in the audit report if it is different from the opinion of the Audit Committee that is expressed in the audit report.
      The Audit Committee discusses with Sony Corporation’s independent auditor, ChuoAoyama PricewaterhouseCoopers, the scope and results of their audits by the independent auditor including their evaluation of Sony Corporation’s internal controls, compatibility with Generally Accepted Accounting Principles in the U.S., and the overall quality of financial reporting. The Audit Committee ensuresmakes an assessment of the independence of ChuoAoyama PricewaterhouseCoopers by overseeing their activities through regular communications and discussions with ChuoAoyama PricewaterhouseCoopers, as well as making pre-approval ofand shall pre-approve audit and non-audit services to be provided. The Audit Committee is composed of the following members as of June 21, 2005:July 31, 2006: Yoshiaki Yamauchi, who is the Chairman of the Audit Committee and an outside Director; and Sakie T. Fukushima and Fueo Sumita, who is anare also outside Director; and Akihisa Ohnishi, who is a Director and full-time member of the Audit Committee.Directors. Both Yoshiaki Yamauchi and Akihisa OhnishiFueo Sumita are “audit committee financial experts” within the meaning of Item 16A of this report. The Audit Committee held 15 meetings in the fiscal year ended March 31, 2005.

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      As required by the Commercial Code,Company Law, the Compensation Committee determines the compensation, bonus and any other benefits (including equity-related rights or options given for the purpose of stock incentive options) to be received by each Director and Corporate Executive Officer.Officer in consideration of the execution of their duties. In addition to such statutory duties, the Compensation Committee determinessets policy on the composition of individual compensation to be received by each Executive Officer andother senior management of Sony Group Executive Officer,(Directors or other officers of Sony Group companies whose appointment is subject to approval by the CEO of Sony Corporation), and also proposessubmits proposals to the Board of Directors stock option plans (involvingregarding the issuance of sharestock acquisition rights for the purpose of granting stock options and other forms of stock price based compensation)price-based compensation utilizing shares etc. of Sony Group, as individual compensation to be granted to Directors, officers and employees of Sony.the aforementioned senior management. Under the RegulationsCharter of the Board of Directors, the Compensation Committee shall consist of three or more Directors, and as a general rule, at least one or more members mustmember shall concurrently serve as Corporate Executive Officers.Officer; provided, however, that a Director who is the CEO (Chief Executive Officer), or the COO (Chief Operating Officer) of Sony Group or in any equivalent position shall not be a member of the Compensation Committee. As stated above, a majority of the members of the Compensation Committee must be outside Directors. The Compensation Committee is composed of the following members as of June 21, 2005:July 31, 2006: Akishige Okada, who is the Chairman of the Compensation Committee and an outside Director; and Yoshihiko Miyauchi and Fujio Cho, who is anare also outside Director;Directors, and Teruo Masaki,Göran Lindahl, who iswas a Corporate Executive Officer.Officer of Sony Group.
      During the fiscal year ended March 31, 2005,2006, the Board of Directors met 8 times. The Nominating Committee met 5 times, the Audit Committee 11 times and the Compensation Committee held seven meetings.7 times. In the fiscal year ended March 31, 2006, each incumbent Director attended at least 75 percent of the aggregate

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number of meetings of the Board and Committees on which he/she served (during the period that he/she served).
      No Directors have service contracts with Sony providing for benefits upon termination of service as a Director.
      Under the Commercial CodeCompany Law and the Articles of Incorporation of Sony Corporation, Sony Corporation may, by a resolution of the Board of Directors, exempt Directors from liabilities to Sony Corporation to the extent permitted by law arising in connection with their failure to performexecute their duties. In addition,Accordingly, Sony Corporation has entered into a liability limitation agreement with each outside Director whichthat limits the maximum amount of their liabilities owed to Sony Corporation arising in connection with their failure to performexecute their duties to the greater of either 30 million yen or an amount equal to the aggregate sum of the amounts prescribed in each item of Article 425, Paragraph 19 of Article 2661 of the Commercial Code (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).Law.
      The Board of Directors must appoint one or more Corporate Executive Officers who are authorized to determine matters delegated to them by the Board of Directors. The Corporate Executive Officers are responsible for conducting all the business operations of Sony within the scope of authority delegated by the Board of Directors. As of June 21, 2005,July 31, 2006, there are 137 Corporate Executive Officers, some of whom are also Directors. Significant decision-making authority has been delegated to the Group CEO and also to each Corporate Executive Officer with regard to investments, strategic alliances and other actions related to the execution of business operations. Sony Corporation believes that this significant delegation enables Sony to be managed in a more dynamic and responsive manner than in the past.manner. The terms of office of Corporate Executive Officers must expire at the conclusion of the first meeting of the Board of Directors held immediately after the conclusion of the General Meeting of Shareholders held with respect to the last closing of accountsbusiness year ending within one year after their assumption of office.election. From among the Corporate Executive Officers who as a general rule are also Directors, the Board of Directors mustshall elect one or more Representative Corporate Executive Officers. Each Representative Corporate Executive Officer has the statutory authority to represent Sony Corporation in the conduct of its affairs.
(Reference)
At a Board meeting held on April 26, 2006, the Board of Directors reaffirmed the existing internal control and governance framework and determined to continue to evaluate and improve such framework going forward, as appropriate. This determination met the requirements of the Japanese Company Law.
Detail of the determination is posted on the following website:
http://www.sony.net/ SonyInfo/ IR/library/control.html
For an explanation as to the significant differences between the New York Stock Exchange’s corporate governance standards and Sony’s corporate governance practices, please visit us on the Internet at:
http://www.sony.net/ SonyInfo/ IR/ NYSEGovernance.html
Employees
      As of March 31, 2005,2006, Sony had approximately 151,400 employees.158,500 employees, an increase of approximately 7,000 employees from the end of March 2005. Although employees increased at manufacturing facilitiesthere was a reduction 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-EastSoutheast Asia, and a decrease in the total number of employees increased as a result of Sony combining its recorded music business outside Japan with the recorded music businessa significant increase in employees at manufacturing facilities in East Asia excluding Japan. As 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 3,600Sony had approximately 151,400 employees, in Japan who left Sony mainly through the program ona decrease of approximately 10,600 from March 31, 2004. As of March 31, 2005, approximately 62,300 employees were located in Japan and approximately 89,100 outside Japan, and approximately 16 percent were members of labor unions.

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      The fiscal year-end totals for the fiscal years ended March 31, 2006 and 2005 include approximately 1,200 employees in Japan who left Sony mainly through the early retirement program as of March 31, 2006 and 2,000 employees in Japan who left Sony mainly through the program as of March 31, 2005. As of March 31, 2004, Sony had2006, approximately 162,000 employees, an increase of approximately 900 from March 31, 2003. As of March 31, 2004, approximately 65,60061,600 employees were located in Japan and approximately 96,40096,900 outside Japan, and approximately 1319 percent were members of labor unions.

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      The following table shows the number of employees by segment as of March 31, 2003, 2004, 2005 and 2005.2006.
Number of Employees by Segment
                       
 March 31  March 31
     
 2003 2004 2005  2004 2005 2006
             
ElectronicsElectronics  128,000  127,100  123,600 Electronics  128,000  124,500  130,800 
GameGame  4,400  4,800  4,300 Game  4,800  4,300  4,700 
Music  8,400  6,600  2,100 
PicturesPictures  5,700  6,200  5,900 Pictures  6,200  5,900  6,900 
Financial ServicesFinancial Services  6,600  6,700  6,800 Financial Services  6,700  6,800  6,500 
Other  7,300  8,300  6,800 
All OtherAll Other  14,000  8,000  7,400 
Unallocated — Corporate employeesUnallocated — Corporate employees  700  2,300  1,900 Unallocated — Corporate employees  2,300  1,900  2,200 
               
Total  161,100  162,000  151,400 Total  162,000  151,400  158,500 
               
      In addition, the average number of employees for the fiscal years ended March 31, 2003, 2004, 2005 and 2005,2006 calculated by averaging the total number of employees at the end of each quarter, was 165,300, 165,300154,200 and 154,200156,200 respectively.
      Sony generally considers its labor relations to be good. Only a few manufacturing facilities have labor unions and, of these, only a few have union contracts.
      Regarding labor relations in the Electronics segment by area, in Asia, where Sony operates many manufacturing facilities, only a few manufacturing facilities have labor unions that have union contracts. In May 2003, Sony completed negotiations with a labor union regarding the terms of severance for employees who had been working at a manufacturing facility in Indonesia which was closed in the second half of the fiscal year ended March 31, 2003. The outcome of these negotiations did not have a significant impact on Sony’s consolidated financial results.
In the U.S., no manufacturing facilities have labor unions. In Mexico, one manufacturing facility has a labor union that has a union contract, but labor relations are good and there have been no significant problems in renegotiating the contract. In Europe, Sony maintains good labor relations with the Work Councils in each country, and, while some employees belong to unions, they are not eligible for union contracts.
      In the Music segment, as a result of the establishment of SONY BMG, 6,000 non-unionized employees of Sony Music’s disc manufacturing and distribution operations have now been reclassified to the Electronics segment and 3,600 employees of Sony Music Entertainment Inc. (“SMEI”)’s recorded music business, a certain number of whom were represented by labor unions, are now no longer employees of Sony’s consolidated subsidiaries. As the approximately 300 remaining employees of SMEI’s music publishing business still classified within the Music segment are non-unionized, there are no labor unions within the Music segment with union contracts.
      In the Pictures segment, Sony also generally considers its labor relations to be good. A number of Pictures’ subsidiaries are signatories to union contracts. During the fiscal year ended March 31, 2005,2006, renegotiations for new three-year agreements were successfully concluded with the International Alliance of Theatrical Stage Employees and Moving Picture Technicians, Artists and Allied Crafts for the West Coast Studio Local Agreements and the New York Local 52 and 161 Agreements, the British Columbia (Canada) Council of Unions and the Teamster Casting Directors Guildand the American Federation of America (“DGA”),Musicians Agreement negotiated last fiscal year was ratified by the its membership. Negotiations were also successfully concluded with the Screen Actors Guild (“SAG”), American Federation of Television and Radio Artists (“AFTRA”), Writers Guild of America (“WGA”), International Brotherhood of Teamsters (“IBT”), International Brotherhood of Electrical Workers (“IBEW”), Basic Craft Unions (“Basic Crafts”), and Office and Professional Employees International Union Local #174 (“Local #174”). On June 10, 2005, renegotiations for a new threetwo and one-halfa half year agreement were concludedcovering made-for-basic cable animation performers. Negotiations with the American Federation of Musicians (“AFM”). The tentative agreementSAG for made-for-basic cable live action performers commenced in January 2006 and are continuing. It is subject to ratification by the AFM membership.not anticipated that SAG negotiations will interrupt television production.

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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 MayJuly 31, 2005 (252006 (18 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 1,161 0.1 Directors and Corporate Executive Officers  47  0.005 
      Regarding compensation plans, following the amendments to the Commercial Code of Japan effective May 2002, Sony integrated different equity-related securities it had previously issued for the purpose of giving stock incentives into one unified stock option right. During the fiscal year ended March 31, 2005,2006, Sony granted

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stock acquisition rights, which represent rights to subscribe for shares of common stockCommon Stock of Sony Corporation, to Directors, Corporate Executive Officers, Executive Officers,Corporate Executives, Group Executive Officers,Executives, and selected employees. The stock acquisition rights generally vest ratably up to three years from the date of grant and are generally exercisable up to ten years from the date of grant. The following table shows the portion of those stock acquisition rights which were granted by Sony to Directors and Corporate Executive Officers as of MayJuly 31, 20052006 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 
(Fiscal 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) 
2006  430 34.14 U.S. dollars
2006  175 4,060 yen
2005 230    40.34 U.S. dollars  230 40.34 U.S. dollars
2005 482    3,782 yen  113 3,782 yen
2004 225    40.90 U.S. dollars  225 40.90 U.S. dollars
2004 444    4,101 yen  52 4,101 yen
2003 200    36.57 U.S. dollars  215 36.57 U.S. dollars
2003 345    5,396 yen  16 5,396 yen
      Prior to the introduction of stock acquisition rights, Sony had granted warrants, which represent rights to subscribe tofor Sony Corporation’s Common Stock, to Directors, Executive Officers, Group Executive Officers, and selected employees. The warrants generally vest ratably up to three years from the date of grant and are generally exercisable up to six years from the date of grant. The following table shows the portion of those warrants which were granted by Sony to current Directors and Corporate Executive Officers as of MayJuly 31, 20052006 and which were outstanding as of the same date. The exercise price per share has been adjusted for the two-for-one stock split effective on May 19, 2000 and is subject to anti-dilution adjustment.
            
Year granted Total number of shares  Total number of shares  
(Fiscal Year ended March 31) subject to warrants Exercise price per share subject to warrants Exercise price per share
        
 (In thousands) (Yen) (In thousands) (yen)
2000 153   7,167
2001 245 12,457  17  12,457 
2002 275   6,039  19  6,039 
      In addition, in order to provide equity-based compensation to selected executives at Sony’s U.S. subsidiaries, Sony Corporation has issued U.S. dollar-denominated Convertible Bonds (“CBs”) to a holding company in the U.S. and the holding company has sold the CBs to those executives. For the purpose of carrying out this plan, the holding company lent an amount equal to the principal amount of CBs to such executives for their purchase of the CBs until the date of conversion. The CBs generally vest ratably up to three years from the date of sale and are generally exercisable up to ten years from the date of sale. The

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following table shows the portion of those CBs which were held by current Directors and Corporate Executive Officers as of MayJuly 31, 20052006 and which were outstanding as of the same date.
            
Year issued Total number of shares  Total number of shares  
(Fiscal 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 sixten years from the date of grant. The following table shows the portion of those SARs which were granted by Sony

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to selected employees who are Directors and Corporate Executive Officers as of MayJuly 31, 20052006 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  
(Fiscal Year Ended March 31) subject to SARs Exercise price per share
(Fiscal Year ended March 31) subject to SARs Exercise price per share
        
 (In thousands) (Yen for the Japanese plan, (In thousands) (U.S. dollars)
 U.S. dollars for the U.S. plan)
The Japanese plan 
2000 10 7,445
The U.S. plan        
2002 10 44.00  10  44.00 
      Regarding the above compensation plans, refer to Note 16 of Notes to Consolidated Financial Statements.
Item 7.Major Shareholders and Related Party Transactions
Major Shareholders
      Dodge & Cox, an institutional investor based in San Francisco, California, filed a Schedule 13-G13-F with the SEC on February 10, 2005.August 9, 2006. According to this filing, Dodge & Cox owned 66,112,621 ADRs of Sony Corporation as of June 30, 2006. In addition, while Sony assumes no responsibility for the accuracy of this supplemental information, according to the website of Dodge & Cox, as of June 30, 2006, Dodge & Cox owned 10,837,600 shares of outstanding Sony Corporation Common Stock. As a result, it appears that in total, Dodge & Cox beneficially owned 49,551,14676,950,221 shares of outstanding Sony Corporation Common Stock representing 5.47.7 percent of the total. To the knowledge of Sony Corporation, there is no other significant change in the percentage ownership held by any major beneficial shareholders during the past three years. Major shareholders of Sony Corporation do not have different voting rights.
      As of March 31, 2005,2006, there were 997,211,2131,000,938,776 shares of Common Stock outstanding, of which 136,342,744145,074,404 shares were in the form of ADRs and 84,481,532120,852,878 shares were held of record in the form of Common Stock by residents in the U.S. The number of registered ADR holders was 7,209,7,134, and the number of registered holders of shares of Common Stock in the U.S. was 238.257.
      To the knowledge of Sony Corporation, it is not directly or indirectly owned or controlled by any other corporation, by any foreign government or by any other natural or legal person severally or jointly. As far as is known to Sony Corporation, there are no arrangements the operation of which may, at a subsequent date, result in a change in control of Sony Corporation.
Related Party Transactions
      In the ordinary course of business, Sony purchases materials, supplies, and services from numerous suppliers throughout the world, including firms with which certain members of the Board of Directors are affiliated. In addition, in the fiscal year ended March 31, 2005,2006, Sony entered into the following sales/purchase

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transactions with equity affiliates accounted for under the equity method: sales to Sony Ericsson Mobile Communications, AB (“Sony Ericsson”), a joint venture focused on mobile phone handsets, totaling 168.3143.2 billion yen; sales to Kyoshin Technosonic Co., Ltd. (“Kyoshin”), a joint venture focused on marketing semiconductors and other electronic components, totaling 63.648.6 billion yen; sales to SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”), a joint venture focused on recorded music business joint venture, totaling 19.133.1 billion yen; purchases from S-LCD Corporation (“S-LCD”), a joint venture with Samsung Electronics Co., Ltd. for the manufacture of amorphous TFT LCD panels, totaling 159.4 billion yen; purchases from Oita TS Semiconductor Corporation (“OTSS”), a semiconductor manufacturing joint venture in Japan, totaling 58.8 billion yen and purchases from S.T. Liquid Crystal Display Corp., a liquid crystal display (“LCD”) joint venture in Japan, totaling 66.8 billion yen; and purchases from Oita TS Semiconductor Corporation, a semiconductor manufacturing joint venture in Japan, totaling 25.452.5 billion yen. As of March 31, 2005,2006, Sony held notes and accounts receivable, trade due from Sony Ericsson, SONY BMG, and Kyoshin worth 25.927.4 billion yen, 11.36.5 billion yen, and 10.66.2 billion yen, respectively, in addition to notes and accounts payable, trade due to S-LCD and OTSS totaling 16.3 billion yen and 9.9 billion yen, respectively. Sony held advances to SONY BMG worth 16.015.8 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.

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      Sumitomo Mitsui Financial Group, Inc. and Sumitomo Mitsui Banking Corporation have performed and continue to perform commercial banking services for Sony. Akishige Okada, electedwho has served as a Sony Corporation Director effective as ofsince June 20, 2002, ishad been a Representative Director of Sumitomo Mitsui Financial Group, Inc. and Sumitomo Mitsui Banking Corporation.Corporation until June 28, 2005. Yoshiaki Yamauchi, electedwho has served as a Sony Corporation Director effective as ofsince June 20, 2003, is a Director of Sumitomo Mitsui Financial Group, Inc.
      As of April 1, 2004, Sony Computer Entertainment Inc. (“SCE”) became a wholly-owned subsidiary of Sony Corporation through a stock for stock exchange pursuant to Article 358 of the Japanese Commercial Code (Shoho), which does not require approval of such transactions at a General Meeting of Shareholders of Sony and Sumitomo Mitsui Banking Corporation. The stock for stock exchange ratio was determined based on the estimated equity values of SCE and Sony on a consolidated basis. Through the stock for stock exchange, Sony Corporation provided 1,000,000 shares of its common stock to an Executive Deputy President who was also a Corporate Executive Officer of Sony Corporation and who owned 100 shares of SCE’s common stock. This transaction did not have a material impact on Sony’s results of operations and financial position for the fiscal year ending March 31, 2005.
Interests of Experts and Counsel
      Not Applicable
Item 8.Financial Information
Consolidated Statements and Other Financial Information
      Refer to Consolidated Financial Statements and Notes to Consolidated Financial Statements.
Legal Proceedings
      Sony Corporation and certain of its subsidiaries are defendants in several pending legal proceedings. However, based upon the information currently available to Sony, management of Sony believes that damages from such legal proceedings, if any, would not have a material effect on Sony’s consolidated financial results and condition.
Dividend Policy
      Sony believes that continuously increasing corporate value and providing dividends are essential to rewarding shareholders. It is Sony’s policy to utilize retained earnings, after ensuring the perpetuation of stable dividends, to carry out various investments that contribute to an increase in corporate value such as those investments that ensure future growth and strengthen competitiveness.
      A fiscal year-end cash dividend of 12.5 yen per share of Sony Corporation Common Stock was approved at the Board of Directors meeting held on May 16, 200517, 2006 and was paid on June 1, 2005.2006. 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.
      RegardingAll shares of subsidiary tracking stock issued in Japan by Sony Corporation,shares of Subsidiary Tracking Stock, the economic value of which was intended to be linked with Sony Communication Network Corporation (“SCN”) has been workingCorporation’s economic value, were converted 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,shares of Sony Corporation will continue its policy of not paying dividends to shareholders of the subsidiary tracking stock.Common Stock on December 1, 2005.
Significant Changes
      No significant change has occurred since the date of the annual financial statements included in this annual report. Regarding subsequent events after the end of March 2005, refer to “Forecast of Consolidated Results” in “Item 5.Operating and Financial Review and Prospects.”

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Item 9.The Offer and Listing
Offer and Listing Details
      Not Applicable
Plan of Distribution
      Not Applicable
Markets
Trading Markets
      The principal trading markets for Sony Corporation’s ordinary shares are the Tokyo Stock Exchange (the “TSE”) in the form of Common Stock and the New York Stock Exchange (the “NYSE”) in the form of American Depositary Shares (“ADSs”) evidenced by American Depositary Receipts (“ADRs”). Each ADS represents one share of Common Stock.
      Sony Corporation’s Common Stock, with no par value per share, has been listed on the TSE since 1958, and is also listed on the London Stock Exchange in the United Kingdom and the Osaka Securities Exchange in Japan. In addition, Sony Corporation’s Common Stock is listedOctober 2005, due to the prevalence of borderless stock trading, and the fact that the trading volume of Sony’s shares on the following stock exchanges outside Japan:has been extremely low, the Board of Directors of Sony Corporation resolved to apply for delisting from the following exchanges: Pacific, Chicago, Toronto, London, Paris, Frankfurt, Düsseldorf, Brussels, Vienna, and Swiss. The delisting procedures of these stock exchanges was completed as of March 31, 2006.
      Sony Corporation’s ADRs have been traded in the U.S. since 1961 and have been listed on the NYSE since 1970 under the symbol “SNE.” Sony Corporation’s ADRs are issued and exchanged by JPMorgan Chase Bank, as Depositary.
      In June 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which iswas intended to be linked to the economic value of Sony Communication Network Corporation, a directly and indirectly wholly-ownedconsolidated subsidiary of Sony Corporation which is engaged in Internet-related services. The subsidiary tracking stock, totaling 3,072,000 shares, was issued at 3,300 yen per share and listed on the TSE. The shares were not offered or sold in the U.S. In October 2005, the Board of Directors of Sony Corporation decided to terminate all shares of subsidiary tracking stock with the method of compulsory conversion to shares of Sony’s common stock. All shares of subsidiary tracking stock were converted to shares of Sony’s common stock on December 1, 2005. Refer to “History and Development of the Company” in “Item 4.Information on the Company.”

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Trading on the TSE and NYSE
      The following table sets forth for the periods indicated the reported high and low sales prices per share of Sony Corporation’s Common Stock on the TSE and the reported high and low sales prices per share of Sony Corporation’s ADS on the NYSE.
                                
 Tokyo Stock New York Stock  Tokyo Stock New York Stock
 Exchange Price Exchange Price  Exchange Price Exchange Price
 Per Share of Per Share of  Per Share of Per Share of
 Common Stock ADS  Common Stock ADS
         
 High Low High Low  High Low High Low
                 
 (Yen) (U.S. dollars)  (Yen) (U.S. dollars)
Annual highs and lows*Annual highs and lows*             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, 2002  10,340  3,960  85.75  32.80 The fiscal year ended March 31, 2003  7,460  4,070  59.95  34.85 
The fiscal year ended March 31, 2003  7,460  4,070  59.95  34.85 The fiscal year ended March 31, 2004  4,670  2,720  42.81  23.16 
Quarterly highs and lows*Quarterly highs and lows*             Quarterly highs and lows*             
The fiscal year ended March 31, 2004             The fiscal year ended March 31, 2005             
 1st quarter  4,240  2,720  35.82  23.16  1st quarter  4,710  3,880  43.67  33.95 
 2nd quarter  4,450  3,350  38.30  28.33  2nd quarter  4,200  3,550  38.50  32.35 
 3rd quarter  4,280  3,490  38.04  32.42  3rd quarter  3,990  3,620  39.20  33.77 
 4th quarter  4,670  3,760  42.81  34.81  4th quarter  4,420  3,750  41.81  36.26 
The fiscal year ended March 31, 2005             The fiscal year ended March 31, 2006             
 1st quarter  4,710  3,880  43.67  33.95  1st quarter  4,410  3,770  40.79  34.38 
 2nd quarter  4,200  3,550  38.50  32.35  2nd quarter  4,100  3,660  36.74  32.38 
 3rd quarter  3,990  3,620  39.20  33.77  3rd quarter  5,020  3,710  41.30  31.80 
 4th quarter  4,420  3,750  41.81  36.26  4th quarter  6,040  4,700  51.16  40.90 
Monthly highs and lows*Monthly highs and lows*             Monthly highs and lows*             
2004             2006             
 December  3,990  3,670  38.76  35.75  January  6,040  4,700  51.16  40.90 
2005              February  5,970  5,240  49.95  45.57 
 January  4,090  3,750  39.53  36.26  March  5,660  5,220  48.01  44.39 
 February  4,010  3,770  38.31  36.46  April  6,200  5,420  52.29  45.70 
 March  4,420  3,960  41.81  37.85  May  5,750  5,000  50.88  44.75 
 April  4,410  3,830  40.79  35.77  June  5,240  4,660  46.90  40.67 
 May  4,140  3,850  38.45  36.30  July  5,320  4,610  46.40  39.30 
 June (through June 20)  4,080  3,860  37.63  35.10  August (through August 30)  5,360  4,940  46.17  42.26 
* Stock price data are based on prices throughout the sessions for each corresponding period at each stock exchange.
      On June 20, 2005,August 30, 2006, the closing sales price per share of Sony Corporation’s Common Stock on the TSE was 3,8604,990 yen. On June 20, 2005,August 30, 2006, the closing sales price per share of Sony Corporation’s ADS on the NYSE was 35.3942.72 U.S. dollars.

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Selling Shareholders
      Not Applicable
Dilution
      Not Applicable
Expenses of the Issue
      Not Applicable
Item 10.Additional Information
Share Capital
      Not applicable
Memorandum and Articles of Association
Organization
      Sony Corporation is a joint stock corporation(Kabushiki Kaisha)incorporated in Japan under the Commercial CodeCompany Law(Shoho)(Kaishaho)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 theThe Articles of Incorporation of Sony Corporation providesprovide that its purpose is to engage in the following business activities:
 (i)manufacture and sale of electronic and electrical machines and equipment, medical instruments, optical instruments and other equipment, machines and instruments;
 
 (ii)planning, production and sale of audio-visual software and computer software programs;
 
 (iii)manufacture and sale of metal industrial products, chemical industrial products and ceramic industrial products, textile products, paper products and wood-crafted articles, daily necessities, foodstuffs and toys, transportation machines, equipment, petroleum and coal products;
 
 (iv)real estate activities, construction business, transportation business and warehousing business;
 
 (v)publishing business and printing business;
 
 (vi)advertising agency business, insurance agency business, broadcasting enterprise, recreation business such as travel, management of sporting facilities, etc. and other service enterprises;
 
 (vii)financial business;
 
 (viii)Type I and Type II telecommunications business under the Telecommunications Business Law;
 
 (ix)investing in stocks and bonds, etc.;
 
 (x)manufacture, sale, export and import of products which are incidental to or related to those mentioned above;
 
 (xi)rendering of services related to those mentioned above;
 
 (xii)investment in businesses mentioned above operated by other companies or persons; and
 
 (xiii)all businesses which are incidental to or related to those mentioned above.

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Directors
      Under the Commercial Code (including theCompany Law, for Special Exceptions to the Commercial Code concerning Audit, etc. ofKabushiki-Kaisha, collectively the “Commercial Code”), Directors have no power to execute the business of Sony Corporation except in limited circumstances as permitted by law. If a Director also serves concurrently as a Corporate Executive Officer, then he or she can execute the business of Sony Corporation in the capacity of Corporate Executive Officer. Under the Commercial Code,Company Law, Directors must refrain from engaging in any business competing with Sony Corporation unless approved by the Board of Directors, and any Director who has a material interest in the subject matter of a resolution to be taken by the Board of Directors cannot vote on such resolution. The amount of remuneration to each Director is determined by the Compensation Committee, which consists of Directors, the majority of whom are outside Directors (Refer 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, neitherNeither the Commercial CodeCompany Law nor Sony Corporation’s Articles of Incorporation make a special provision as to the borrowing powers exercisable by Directors (subject to requisite internal authorizations as required by the Company Law), their retirement age, or a requirement to hold any shares of capital stock of Sony Corporation.
      The Commercial Code specifically requires a resolution of the Board ofFor more information on 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 see “Board Practices” in “Item 6.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;Senior Management 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.Employees.”
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 asUnless indicated 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 CodeCompany Law, which came into effect on May 1, 2006, and related legislation.
      A bill to modernizeAll issued shares are fully-paid and make overall amendments to the Commercial Codenon-assessable, and are in registered form. Transfer of shares is effected 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 halfdelivery of 2005 and will come into effect within one year and half after its promulgation, and currently, it is expected that it will take effectshare certificates, but 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.
      Mitsubishi UFJ Trust Bank Limitedand Banking Corporation is the transfer agent for Sony Corporation’s capital stock. As such, it keeps Sony Corporation’s registers of shareholders and beneficial shareholders in its office at 4-3,4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo and records transfers of shares upon presentation of the certificates representing the transferred shares.

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

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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.void. The transfer of such shares will be effected through entry in the books maintained under the new central clearing system.
(Authorized capital)
      Article 5 ofUnder the Articles of Incorporation of Sony Corporation, provides that Sony Corporation may only issue both shares of Common Stock and shares of subsidiary tracking stock. Subsidiary tracking stock is stock which dividend rights track the dividend rights of a particular subsidiary of Sony Corporation. The rights of the holders of such stock may be different from those of the holders of Sony Corporation’s Common Stock in certain other respects such as rights to receive residual assets in the event of liquidation of Sony Corporation.
      Paragraph 2 of Article 5 ofStock. Sony Corporation’s Articles of Incorporation providesprovide that the total number of shares authorized to be issued by Sony Corporation is 3.6 billion shares, of which 3.5 billion shares shall be Common Stock and 100 million shares shall be subsidiary tracking stock. If shares of Common Stock are retired or shares of subsidiary tracking stock are either retired or converted into shares 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.shares.
      All shares of capital stock of Sony Corporation have no par value.
(Dividends)(Distribution of Surplus)
DividendsDistribution of Surplus — General
      The ArticlesUnder the Company Law, distributions of Incorporationcash or other assets by joint stock corporations to their shareholders, so called “dividends”, are referred to as “distributions of Surplus” (“Surplus” is defined in “— Restriction on distributions of Surplus”). Sony Corporation provide that the accounts shall be closed on March 31may make distributions of each year. Year-end cash dividends, if any, shall be paidSurplus to shareholders beneficial shareholders and pledgeesany number of record as of the end of such day. After the close of the fiscal period, a Corporate Executive Officer designated by the Board of Directors prepares, among other things, a proposed allocation of profits for dividends and other purposes; this proposal is submitted to the Audit Committee and to independent certified public accountants and then submitted for approval to the Board of Directors. If each independent certified accountant states in his or her audit report the opinion that the financial statements prepared by such Corporate Executive Officer and proposed allocation of profits are in accordance with relevant laws and the Articles of Incorporation, and if the Audit Committee does not state in its audit report any objection to such independent accountants’ opinion or an opinion that the proposed allocation of profits is significantly

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inappropriate, such proposal shall be deemed to be approved by the shareholders when approved by the Board of Directors.
      Under the New Company Law,times per business year, subject to certain limitations described in “— Restriction on the distributable surplus as described below, dividends, if any, may be paid to shareholders, beneficial shareholders, and pledgeesdistributions of record asSurplus.” Distributions 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 distributedSurplus are required in cash or in kind. In distributing dividends, Sony Corporation may determine the kind of assetsprinciple to be distributed, the book value of such assets, matters regarding allocation of such assets, and the effective date of such dividends,authorized by a resolution of a general meetingGeneral Meeting of shareholders. However,Shareholders, but Sony Corporation may generally determine such mattersshall authorize distributions of Surplus by a resolution of the Board of Directors if (a) the Articles of Incorporation of Sony Corporation so provide, (b) the term ofas long as 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 thenon-consolidated annual financial statements and certain documents of Sony Corporationfor the last business year present fairly its assets and profit or loss, as set forth in an ordinancerequired by ordinances 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 paymentJustice.
      Distributions of Surplus may be made in cash dividendsor 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 dividendskind in proportion to the number of shares of any specific classCommon Stock held by each shareholder.
Dividends — Interim cash dividends
      In addition to fiscal year-end cash dividends, A resolution of a General Meeting of Shareholders or the Board of Directors may by its resolution declareauthorizing 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 ofSurplus must specify the Board of Directors; provided, however, that such payment of interim dividends shall be limited to cash dividendskind 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, the manner of allocation of such assets to shareholders, does not exceed the Distributable Amount (as defined below) as atand the effective date of the distribution. If a distribution of Surplus is to be made in kind, Sony Corporation may, pursuant to a resolution of a General Meeting of Shareholders or (as the case may be) the Board of Directors, grant a right to the shareholders to require Sony Corporation to make such distribution in cash instead of surplus.in kind. If no such right is granted to shareholders, the relevant distribution of Surplus must be approved by a special resolution of a General Meeting of Shareholders (see “— Voting Rights” with respect to a “special resolution”).
      The amountUnder the Articles 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 AmountIncorporation of Sony Corporation, atyear-end dividends and interim dividends may be distributed to shareholders of record as of March 31 and September 30 each year, respectively, in proportion to the number of shares of Common Stock held by each shareholder following approval by the General Meeting of Shareholders or the Board of Directors. Sony Corporation is not obliged to pay any given time shall be the aggregate amountdividends unclaimed for a period of (a) the surplus, (b) the amount of profit as recorded for the periodfive years 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 prescriptionon which they first became payable.
      In Japan, the “ex-dividend”ex-dividend date and the record date for dividends precede the date of determination of the amount of the dividenddividends to be paid. The price of the shares of Common Stock generally goes ex-dividend on the third business day prior to the record date.

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Distribution of Surplus — Restriction on distribution of Surplus
      Under its ArticlesIn making a distribution of Incorporation,Surplus, Sony Corporation is not obligedmust, until the sum of its additional paid-in capital and legal reserve reaches one quarter of its stated capital, set aside in its additional paid-in capital and/or legal reserve an amount equal 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 lesserone-tenth of the amount of such deficit or theSurplus so distributed.
      The amount of such dividends, unless such Directors prove that they did not fail to exercise due careSurplus at any given time must be calculated in determining such interim dividends.
      Under the New Company Law, where dividends are paid out of the surplus, if the aggregate amount ofaccordance with the following items (1), (2) and (3) as atformula:
      A + B + C + D - (E + F + G)
      In 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:above formula:
 (1)“A”the book valuetotal amount of Sony Corporation’s treasury stock;other capital surplus and other retained earnings, each such amount being that appearing on the non-consolidated balance sheet as of the end of the last business year
 
 (2)“B”(if Sony Corporation transferredhas disposed of its treasury stock after the end of the last fiscalbusiness year) the transfer priceamount of the consideration for such treasury stock received by Sony Corporation less the book value thereof
“C”(if Sony Corporation has reduced its stated capital after the end of the last business year) the amount of such reduction less the portion thereof that has been transferred to additional paid-in capital or legal reserve (if any)
“D”(if Sony Corporation has reduced its additional paid-in capital or legal reserve after the end of the last business year) the amount of such reduction less the portion thereof that has been transferred to stated capital (if any)
“E”(if Sony Corporation has cancelled its treasury stock after the end of Sony Corporation’sthe last fiscal year;business year) the book value of such treasury stock
 
 (3)“F”(if Sony Corporation has distributed Surplus to its shareholders after the end of the last business year) the total book value of the Surplus so distributed
“G”certain other amounts set forth in ordinances of the Ministry of Justice, including (if Sony Corporation has reduced Surplus and increased its stated capital, additional paid-in capital or legal reserve after the end of the last business year) the amount of such reduction and (if Sony Corporation has distributed Surplus to the shareholders after the end of the last business year) the amount set aside in additional paid-in capital or legal reserve (if any) as provided forrequired by an ordinanceordinances of the Ministry of Justice.
      However, the Directors shall not be liable toThe aggregate book value of Surplus distributed by Sony Corporation may not exceed a prescribed distributable amount (the “Distributable Amount”), as calculated on the effective date of such distribution. The Distributable Amount at any given time shall be equal to the amount of Surplus less the aggregate of the followings:
(a)the book value of its treasury stock;
(b)the amount of consideration for any of treasury stock disposed of by Sony Corporation after the end of the last business year; and
(c)certain other amounts set forth in ordinances of the Ministry of Justice, including (if the sum of one-half of goodwill and the deferred assets exceeds the total of stated capital, additional paid-in capital and legal reserve, each such amount being that appearing on the non-consolidated balance sheet as of the end of the last business year) all or certain part of such exceeding amount as calculated in accordance with the ordinances of the Ministry of Justice.
      If Sony Corporation has become at its option a company with respect to which consolidated balance sheets should also be considered in the calculation of the Distributable Amount (renketsu haito kisei tekiyo kaisha), Sony Corporation shall further deduct from the amount of Surplus the excess amount, if any, of (x) the total amount of stockholders’ equity appearing on the non-consolidated balance sheet as of the end of the last business year and certain other amounts set forth by an ordinance of the Ministry of Justice over (y) the total amount of stockholders’ equity and certain other amounts set forth by an ordinance of the Ministry of Justice appearing on the consolidated balance sheet as of the end of the last business year.
      If Sony Corporation has prepared interim financial statements as described below, and if such interim financial statements have been approved by the Board of Directors or (if so required by the Company Law) by

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a General Meeting of Shareholders, then the Distributable Amount must be adjusted to take into account the amount of profit or loss, and the amount of consideration for any of the treasury stock disposed of by Sony Corporation, during the period in respect of which such interim financial statements have been prepared. Sony Corporation may prepare non-consolidated interim financial statements consisting of a balance sheet as of any date subsequent to the end of the last business year and an income statement for the distributionsperiod from the first day of surplus made pursuantthe current business year to the resolutiondate of such balance sheet. Interim financial statements so prepared by Sony Corporation must be audited by the Audit Committee and the independent auditor, as required by ordinances of the ordinary general meetingMinistry of shareholders.Justice.
(Stock Splits)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)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)
      The ordinary general meeting of shareholdersShareholders of Sony Corporation for each fiscalbusiness year is normally held in June of each year in Tokyo, Japan. In addition, Sony Corporation may hold an extraordinary general meetingExtraordinary General Meeting of shareholdersShareholders whenever necessary by giving notice thereof at least two weeks prior to the date set for the meeting.
      Notice of a shareholders’ meeting setting forth the place, time and purpose thereof must be mailed to each shareholder having voting rights (or, in the case of a non-resident shareholder, to such shareholder’s resident proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Under the Commercial Code,Company Law, such notice may be given to shareholders by electronic means, subject to obtaining consent by the relevant shareholders. The record date for an ordinary general meetingOrdinary General Meeting of shareholdersShareholders 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 meetingGeneral Meeting of shareholdersShareholders 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 meetingGeneral Meeting of shareholdersShareholders 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)      If the Articles of Incorporation so provide, any of the minimum voting rights or percentages, time periods and number of voting rights necessary for exercising the minority shareholder rights described above may be decreased or shortened.

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(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 shareholderor certain other entity 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).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

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or by the Articles of Incorporation of Sony Corporation, a resolution can be adopted at a general meetingGeneral Meeting of shareholdersShareholders 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;party other than its subsidiaries;
 
 (2)consolidation of shares;
 
 (3)any offering of new shares at a “specially favorable” price (or any offering of stock acquisition rights to 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 removalexemption of liability of a Director, (when the New Company Law becomes effective, the removal of a Director who is elected by cumulative voting);Corporate Executive Officer or independent auditor with certain exceptions;
 
 (5)the exemptiona reduction of liability of a Director or Corporate Executive Officerstated capital 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)(7)dissolution, merger, consolidation, or consolidationcorporate split with certain exceptions in which a shareholders’ resolution is not required;exceptions;
 
 (9)(8)the transfer of the whole or a material part of the business;
 
 (10)(9)the taking over of the whole of the business of any other corporation with certain exceptions in which a shareholders’ resolution is not required;exceptions; or
 
 (11)(10)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)
(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.

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      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)
(Liquidation rights)
      In the event of a liquidation of Sony Corporation, the assets remaining after payment of all debts, liquidation expenses and taxes will subject to the rights of the holders of subsidiary tracking stock discussed under “Subsidiary tracking stock —(Distribution of residual assets)” below, be distributed among the holders of shares of Common Stock in proportion to the respective numbers of shares of Common Stock held.
(Record date)
(Record date)
      As mentioned above, March 31 is the record date for Sony Corporation’s year-end dividends, if declared. So long as Sony Corporation maintains the unit share system, the shareholders and beneficial shareholders who are registered as the holders of one or more unit of stock in Sony Corporation’s register of shareholders and/or beneficial shareholders at the end of each March 31 are also entitled to exercise shareholders’ rights at the ordinary general meetingOrdinary General Meeting of shareholdersShareholders with respect to the fiscalbusiness 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
(Acquisition by Sony Corporation of its capital stock)
      Under the Company Law and the Articles 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 purposeIncorporation of dividends or rights offerings.
(Acquisition by Sony Corporation, of its capital stock)
Sony Corporation may acquire shares of Common Stock (i) by soliciting all the shareholders to offer to sell shares held by them (in this case, the certain terms of such acquisition, such as the total number of shares to be purchased and the total amount of consideration, shall be set by (as long as its own shares throughnon-consolidated annual financial statements and certain documents for the last business year present fairly its assets and profit or loss, as required by ordinances of the Ministry of Justice) a resolution of Board of Directors or an ordinary resolution of a General Meeting of Shareholders in advance, and acquisition shall be effected pursuant to a resolution of the Board of Directors), (ii) from a specific shareholder other than any of its subsidiaries (pursuant to a special resolution of a General Meeting of Shareholders), (iii) from any of its subsidiaries (pursuant to a determination by the CEO), or (iv) by way of purchase on any Japanese stock exchange on which suchSony Corporation’s shares of common stock are listed (pursuantor by way of tender offer (in either case pursuant to an ordinary resolution of an ordinary general meetinga General Meeting of shareholdersShareholders or a resolution of the Board of Directors), by way. In the case 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,(ii) above, 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/herSony Corporation that such other shareholder be included as a seller in the proposed purchase. However, underpurchase, provided that no such right will be available if the New Company Law, the acquisition of its own shares at apurchase price

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not exceeding the then market price or any other consideration to be provided under an ordinancereceived by the relevant specific shareholder will not exceed the last trading price of the Ministry of Justice willshares on the relevant stock exchange on the day immediately preceding the date on which the resolution mentioned in (ii) above was adopted (or, if there is no trading in the shares on the stock exchange or if the stock exchange is not triggeropen on such day, the right of any shareholder to be included as a seller of his/herprice at which the shares inare first traded on 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, thestock exchange thereafter).
      The total amount of the purchase price of shares of Common Stock may not exceed the sum of the amount of retained earnings available for year-end dividend payments after taking into account any reduction, if any, of the stated capital, additional paid-in capital or legal reserve (if such reduction of the stated capital, additional paid-in capital or legal reserve has been authorized pursuant to a resolution of the relevant 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 itemsDistributable Amount, as described in (i) through (v) to “Dividends“— Distributions of Surplus — Distributable amount” above, Sony Corporation may not acquire such shares. Under the New Company Law, the restrictionRestriction on the sourcedistributions 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)Surplus.”.
      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

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those applicable to the issuance of new shares, as described in “(Issue of additional shares and pre-emptive rights)” above. Sony Corporation may also utilize its treasury stock for the purpose of transfer to any person upon exercise of stock acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through exchange of treasury stock for shares or assets of the acquired company.
(Unit share system)
(Unit share system)
      The Articles of Incorporation of Sony Corporation provide that 100 shares constitute one “unit” of shares of stock. The Board of Directors or the Corporate Executive Officer to whom the authority to make such a determination has been delegated by a resolution of the Board of Directors is permitted to amend the Articles of Incorporation to reduce the number of shares that constitute a unit or to abolish the unit share system entirely. The number of shares constituting one unit cannot exceed 1,000 shares or one-two hundredth (1/200) of the aggregate number of all issued shares.
      Under the unit share system, shareholders have one voting right for each unit of stock that they hold. Any number of shares less than one full unit have noneither voting rights nor rights related to voting rights. The Articles of Incorporation and Share Handling Regulations of Sony Corporation provide that no share certificates mayshall be issued with respect to any number of shares constituting less than one full unit, unless Sony Corporation deems the issue of such share certificates to be necessary for any shareholder(s). As the transfer of shares normally requires delivery of the certificates, therefor, fractions of a unit for which no share certificate has been issued are not transferable.
      Except as otherwise described above, Moreover, holders of the shares constituting less than one full unit will have allno other shareholder rights if Sony Corporation’s Articles of Incorporation so provide, except that such holders may not be deprived of certain rights specified in the rights grantedCompany Law or an ordinance of the Ministry of Justice, including the right to shareholders under the Commercial Code.receive distribution of Surplus.
      A holder of shares constituting less than one full unit may require Sony Corporation to purchase such Shares at their market value in accordance with the provisions of the Share Handling Regulations of Sony Corporation.
      The Articles of Incorporation of Sony Corporation provide that a holder of shares constituting less than one full unit may request Sony Corporation to sell to such holder such amount of shares which will, when added together with the shares constituting less than one full unit, constitute one full unit of stock. Such

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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)
(Sale by Sony Corporation of shares held by shareholders whose location is unknown)
      Sony Corporation is not required to send a notice to a shareholder if a notice to such shareholder fails to arrive at the registered address of the shareholder in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation continuously for five years or more.
      In addition, Sony Corporation may sell or otherwise dispose of shares of capital stock for which the location of the shareholder is unknown. Generally, if (i) notices to a shareholder fail to arrive continuously for five years or more at the shareholder’s registered address in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation, and (ii) the shareholder fails to receive dividendsdistributions of

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Surplus on the shares continuously for five years or more at the address registered in Sony Corporation’s register of shareholders or at the address otherwise notified to Sony Corporation, Sony Corporation may sell or otherwise dispose of the shareholder’s shares at the then market price of the shares by a determination of 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 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 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-counterover-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.listed.
      Except for the general limitation under Japanese anti-trust and anti-monopoly regulations against holding of shares of capital stock of a Japanese corporation which leads or may lead to a restraint of trade or monopoly, and except for general limitations under the Commercial CodeCompany Law or Sony Corporation’s Articles of Incorporation on the rights of shareholders applicable regardless of residence or nationality, there is no limitation under Japanese laws and regulations applicable to Sony Corporation or under its Articles of Incorporation on the rights of non-resident or foreign shareholders to hold or exercise voting rights on the shares of capital stock of Sony Corporation.
      There is no provision in Sony Corporation’s Articles of Incorporation orby-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.

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      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.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-counterover-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 itsand does not take into account any specific individual circumstances.circumstances of any particular investor. 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 underin accordance with 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

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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 and through which the U.S. holder carries on or has carried on business 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 are, in themselves aregeneral, not subject to Japanese income tax.a taxable event.
      In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of Japanese withholding tax or allowing exemption from Japanese withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to non-residents of Japan or non-Japanese corporations is generally 20 percent. Withpercent, provided, with respect to dividends paid on listed shares issued by a Japanese corporation (such as the shares of Common Stock of Sony Corporation) to any non-resident corporate or individual shareholders (including those shareholders who are non-Japanese corporations or non-residents of Japan, such as non-resident Holders), except for other than any individual shareholder who holds 5 percent or more of the total shares issued by the relevant Japanese corporation, the aforementioned 20 percent withholding tax rate is reduced to (i) 7 percent for dividends due and payable on or before 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 whichthat 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 limitedreduced to 10 percent of the gross amount actually distributed, and Japanese withholding tax with respect to dividends paid by a Japanese corporation to a U.S. holder that is a pension fund is exempt from Japanese taxation by way of withholding or otherwise unless such dividends are derived from the carrying on of a business, directly or indirectly, by such pension fund.
      If the maximum tax rate provided for in the income tax treaty applicable to dividends paid by Sony Corporation to any particular non-resident Holder is lower than the withholding tax rate otherwise applicable under Japanese tax law or any particular non-resident Holder is exempt from Japanese income tax with respect to such dividends under the income tax treaty applicable to such particular non-resident Holder, such non-resident Holder is required to submit an Application Form for Income Tax Convention Regarding Relief

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from Japanese Income Tax on Dividends (together with any other required forms and documents) in advance through Sony Corporation to the relevant tax authority before the payment of dividends. A standing proxy for non-resident Holders of a Japanese corporation may provide this application service. With respect to ADSs, this reduced rate or exemption is applicable if the Depositary or its agent submits two Application Forms (one before payment of dividends and the other within eight months after Sony Corporation’s fiscal year-end or semi-fiscal year-end). To claim this reduced rate or exemption, a non-resident Holder of ADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide

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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 tax 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, 20092011 with respect to the ADSs or Common Stock will be subject to taxation at a maximum rate of 15 percent if the dividends are “qualified dividends.” Dividends paid on the Common Stock or ADSs will be treated as qualified dividends if 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 20042005 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 20052006 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, afternon-U.S. taxes, is insubstantial. Holders of Ads and Common Stock should consult their own tax advisors regarding the implications of these rules in light of their particular circumstances.

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      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, 20092011 generally is subject to taxation at a maximum rate of 15 percent. The net long-term capital gain recognized by an individual holder before May 6, 2003 or after December 31, 20082010 generally is subject to taxation at a maximum rate of 20 percent.
Dividends and Paying Agent
      Not Applicable
Statement by Experts
      Not Applicable
Documents on Display
      It is possible to read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth100 F Street, NW,N.E., Washington, D.C. 20549. Please call the SEC at1-800-SEC-0330 for further information on the public reference rooms and their copy charges. You can also access the documents at the SEC’s home page (http://www.sec.gov/index.html).
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, eurosEuros or other currencies have through the normal course of Sony’s worldwide business. Interest rate swap agreements and currency swap agreements are utilized to diversify funding conditions or to reduce funding costs, 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 receivablesreceivable or accounts payablespayable 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-marketmark-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

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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, 20052006 indicate the potential maximum loss in fair value as predicted by the VaR analysis resulting from market fluctuations in one day at a 95%95 percent confidence level. The VaR of currency exchange rate risk principally consists of risks arising from the volatility of the exchange rates between the yen and U.S. dollar and between the yen and the euro,Euro, the currencies in which a significant amount of financial assets and liabilities and derivative transactions are maintained on a consolidated basis. The VaR of interest rate risk and stock price risk consists of risks arising from the volatility of the interest rates and stock prices against tradinginvested securities and derivatives transactions in the Financial Services segment.
      The net VaR for Sony’s entire portfolio is smaller than the simple aggregate of VaR for each component of market risk. This is due to the fact that market risk factors such as currency exchange rates, interest rates, and stock prices are not completely independent, and potential profits and losses arising from each market risk may to some degree be mutually offsetting.
      The disclosed VaR amounts simply representsrepresent 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, June 30, September 30, December 31, March 31,
 2004 2004 2004 2005 2005 2005 2005 2006
                
 (Yen in billions) (Yen in billions)
Net VaR  3.5  1.7  2.3  1.9   1.9  3.4  5.8  4.5 
VaR of currency exchange rate risk  1.1  0.8  0.7  0.6   0.8  1.0  1.0  1.2 
VaR of interest rate risk  0.2  0.1  0.1  0.1   0.1  0.1  0.4  0.1 
VaR of stock price risk  3.1  1.5  2.1  1.7   1.9  3.1  6.3  4.3 
Financial Services
                      
 June 30, September 30, December 30, March 31, June 30, September 30, December 31, March 31,
 2004 2004 2004 2005 2005 2005 2005 2006
                
 (Yen in billions) (Yen in billions)
Net VaR  3.2  1.4  2.1  1.7   1.9  3.2  5.9  4.4 
VaR of currency exchange rate risk  0.2  0.2  0.2  0.2   0.4  0.5  0.7  0.6 
VaR of interest rate risk  0.2  0.1  0.1  0.1   0.1  0.1  0.4  0.1 
VaR of stock price risk  3.1  1.5  2.1  1.7   1.9  3.1  6.3  4.3 

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All other segments excluding Financial Services
                      
 June 30, September 30, December 30, March 31, June 30, September 30, December 31, March 31,
 2004 2004 2004 2005 2005 2005 2005 2006
                
 (Yen in billions) (Yen in billions)
Net VaR  1.0  0.8  0.6  0.5   0.5  0.9  0.6  0.6 
VaR of currency exchange rate risk  1.0  0.8  0.6  0.5   0.5  0.9  0.6  0.6 
VaR of interest rate risk  0.0  0.0  0.0  0.0   0.0  0.0  0.0  0.0 
VaR of stock price risk  0.0  0.0  0.0��  0.0   0.0  0.0  0.0  0.0 

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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, a directly and indirectly wholly-owned subsidiary of Sony Corporation, which is engaged in Internet-related services. Regarding the rights of holders of Sony Corporation’s Common Stock and subsidiary tracking stock, refer to “Memorandum and Articles of Association” in “Item 10.Additional Information.”None
Item 15.Controls and Procedures
      Sony has carried out an evaluation under the supervision and with the participation of Sony’s management, including the Group Chief Executive Officer, Group Chief Strategy OfficerPresident, and Group Chief Financial Officer, of the effectiveness of the design and operation of Sony’s disclosure controls and procedures as of March 31, 2005.2006. 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 OfficerPresident and Group Chief Financial Officer have concluded that, as of March 31, 2005,2006, 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.required, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to Sony’s management, including the Chief Executive Officer, President, and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
      There has been no change in Sony’s internal control over financial reporting during the fiscal year ended March 31, 20052006 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 eachFueo Sumita both qualify as an “audit committee financial expert” as defined in this Item 16A. In addition, both are independent as defined under the New York Stock Exchange Corporate Governance Standards.
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, 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/compliance/qfhh7c000006e52h-att/ code of conduct.pdf

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Item 16C.     Principal Accountant Fees and Services
Item 16C.Principal Accountant Fees and Services
Audit and Non-Audit Fees
      ChuoAoyama PricewaterhouseCoopers is a membernetwork firm of PricewaterhouseCoopers in Japan. The following table presents fees for audit and other services rendered by PricewaterhouseCoopers for the fiscal years ended March 31, 20042005 and March 31, 2005.2006.
                
 March 31 March 31
    
 2004 2005 2005 2006
        
 (Yen in millions) (Yen in millions)
Audit Fees  2,118  1,939   1,939  2,180 
Audit-Related Fees(1)  284  570   570  206 
Tax Fees(2)  970  737   737  486 
All Other Fees(3)  150  68   68  12 
          
  3,522  3,314   3,314  2,884 
          
(1) Audit-Related Fees consist primarily of services related to the implementation of Sarbanes-Oxley Act Section 404 and employee benefit plan audits and due diligence related to mergers.audits.
 
(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, theSony’s 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.subsidiaries. The Audit Committee shall periodically review this policy with due regard to complyingfor compliance with laws and regulations of host countries where Sony is listed.
      Prior to the engagement of the independent auditor for the following fiscal year’s audit, management shall submit an application form to the Audit Committee for comprehensive pre-approval of all recurring services expected to be rendered during that year. In order to obtain comprehensive pre-approval, management shall provide sufficient information regarding each service so that each service can be classified into one of four categories (Audit, Audit-related, Tax, or All Other) as well as information regarding the fees expected to be budgeted for each service. Management shall describe each service in detail and indicate precisely and unambiguously the nature and scope of each particular service. Any additional services not contemplated in the application form shall require the Audit Committee’s separate pre-approval on an individual basis. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees, resulting from changes in the scope of services to be provided or from other circumstances. The Audit Committee may delegateChairman retains pre-approval authority toand evaluates items for approval on 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.weekly basis. The Audit Committee or its designee shall establish procedures to assure that the independent auditor is aware in a timely manner of the services that have been pre-approved.
      During the fiscal year ended March 31, 2006, in order to further enhance auditor independence, individual tax services, recruiting services and corporate tax services were added, at Sony’s initiative, to the list of prohibited services stipulated by U.S. Securities and Exchange Commission rules and related regulations. The Audit Committee has withheld approval regarding the rendering of these services except for instances where the services had already been pre-approved prior to the effective date June 23, 2005 and instances in

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which difficulties were encountered in finding an alternative service provider immediately or a brief transitional period has been needed.
Item 16D.     Exemptions From Listing Standards for Audit Committees
Item 16D.Exemptions From Listing Standards for Audit Committees
      Not applicable.
Item 16E.     Purchases of Equity Securities by the Issuer and Affiliated Purchasers
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, 2005.2006.
                                
     (c) Total Number (d) Maximum     (c) Total Number (d) Maximum
     of Shares Number of Shares     of Shares Number of Shares
 (a) Total   Purchased as Part that May Yet Be (a) Total   Purchased as Part that May Yet Be
 Number of (b) Average of Publicly Purchased Under Number of (b) Average of Publicly Purchased Under
 Shares Price Paid Announced Plans the Plans or Shares Price Paid Announced Plans the Plans or
Period Purchased per Share or Programs Programs Purchased per Share or Programs Programs
                
April 1st — 30th, 2005  5,532  4,461.48  N/A  N/A   7,133  4,262.23  N/A  N/A 
May 1st — 31st, 2005  3,448  4,087.27  N/A  N/A   3,540  4,008.09  N/A  N/A 
June 1st — 30th, 2005  7,476  4,040.85  N/A  N/A   7,844  3,923.01  N/A  N/A 
July 1st — 31st, 2005  7,284  4,021.33  N/A  N/A   7,451  3,885.16  N/A  N/A 
August 1st — 31st, 2005  4,464  3,752.49  N/A  N/A   6,770  3,728.61  N/A  N/A 
September 1st — 30th, 2005  6,530  3,837.16  N/A  N/A   5,240  3,906.85  N/A  N/A 
October 1st — 31st, 2005  7,131  3,772.45  N/A  N/A   5,921  3,784.80  N/A  N/A 
November 1st — 30th, 2005  12,726  3,749.51  N/A  N/A   6,505  4,022.68  N/A  N/A 
December 1st — 31st, 2005  21,959  3,874.00  N/A  N/A   15,143  4,450.79  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 
January 1st — 31st, 2006  8,171  4,914.34  N/A  N/A 
February 1st — 28th, 2006  9,242  5,669.85  N/A  N/A 
March 1st — 31st, 2006  6,489  5,466.27  N/A  N/A 
Total  104,885  3,960.99  N/A  N/A   89,449  4,405.06  N/A  N/A 
      Under the Commercial CodeCompany Law of Japan, a holder of shares constituting less than one full unit may require Sony Corporation to purchase such shares at their market value (See “Memorandum and Articles of Association — Capital stock —(Unit share system)” in “Item 10.Additional Information”). During the fiscal year ended March 31, 2005,2006, Sony Corporation purchased 104,88589,449 shares for a total purchase price of 415,448,110394,028,170 yen upon such requests from holders of shares constituting less than one full unit.

127119

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, 2005as amended (English Translation)
1.2 Share Handling Regulations, as amended (English Translation)
1.3Charter 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, 2005:2006: Incorporated by reference to “Business Overview and Organizational Structure” in “Item 4. Information on the Company”
12.1 Principal Executive Officer Certification Required byPursuant to 17 C.F.R. 240.13a-14(a)
12.2 Principal Financial Officer Certification Required byPursuant to 17 C.F.R. 240.13a-14(a)
1313.1 Chief Executive Officer Certification required by 18 U.S.C. Section 1350
Chief Financial Officer Certification required byPursuant to 18 U.S.C. Section 1350
15.1 Consent of ChuoAoyama PricewaterhouseCoopers

128120

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 IharaNobuyuki Oneda
  
 (Signature)
 Katsumi IharaNobuyuki Oneda
 Executive DeputyVice President
 Group Chief Strategy Officer &
Group Chief Financial Officer
Date: June 21, 2005August 31, 2006

129121

Consolidated Financial Statements
Sony Corporation and Consolidated Subsidiaries
March 31, 20052006

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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, 20042005 and 20052006
  F-4 
 Consolidated Statements of Income for the years ended March 31, 2003, 2004, 2005 and 20052006
  F-6 
 Consolidated Statements of Cash Flows for the years ended March 31, 2003, 2004, 2005 and 20052006
  F-8 
 Consolidated Statements of Changes in Stockholders’ Equity for the years ended March 31, 2003, 2004, 2005 and 20052006
  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, 2003, 2004, 2005 and 20052006 — Valuation and Qualifying Accounts
  F-75F-78 
      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, 20042005 and 2005,2006, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2005,2006, 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
Tokyo, Japan
May 27, 200526, 2006

F-2

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F-3

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSHEETS
                  
 Year Ended March 31  March 31
     
 2004 2005  2005 2006
         
 (Yen in millions)  (Yen in millions)
ASSETS
Current assets:
Current assets:
       
Current assets:
       
Cash and cash equivalentsCash and cash equivalents  849,211  779,103 Cash and cash equivalents  779,103  703,098 
Time deposits  4,662  1,492 
Marketable securitiesMarketable securities  274,748  460,202 Marketable securities  460,202  536,968 
Notes and accounts receivable, tradeNotes and accounts receivable, trade  1,123,863  1,113,071 Notes and accounts receivable, trade  1,113,071  1,075,071 
Allowance for doubtful accounts and sales returnsAllowance for doubtful accounts and sales returns  (112,674)  (87,709)Allowance for doubtful accounts and sales returns  (87,709)  (89,563)
InventoriesInventories  666,507  631,349 Inventories  631,349  804,724 
Deferred income taxesDeferred income taxes  125,532  141,154 Deferred income taxes  141,154  221,311 
Prepaid expenses and other current assetsPrepaid expenses and other current assets  431,506  517,509 Prepaid expenses and other current assets  519,001  517,915 
           
Total current assets  3,363,355  3,556,171 Total current assets  3,556,171  3,769,524 
           
Film costsFilm costs  256,740  278,961 Film costs  278,961  360,372 
           
Investments and advances:
Investments and advances:
       
Investments and advances:
       
Affiliated companiesAffiliated companies  86,253  252,905 Affiliated companies  252,905  285,870 
Securities investments and otherSecurities investments and other  2,426,697  2,492,784 Securities investments and other  2,492,784  3,234,037 
           
  2,512,950  2,745,689    2,745,689  3,519,907 
           
Property, plant and equipment
Property, plant and equipment
       
Property, plant and equipment
       
LandLand  189,785  182,900 Land  182,900  178,844 
BuildingsBuildings  930,983  925,796 Buildings  925,796  926,783 
Machinery and equipmentMachinery and equipment  2,053,085  2,192,038 Machinery and equipment  2,192,038  2,327,676 
Construction in progressConstruction in progress  98,480  92,611 Construction in progress  92,611  116,149 
           
  3,272,333  3,393,345    3,393,345  3,549,452 
Less — Accumulated depreciationLess — Accumulated depreciation  1,907,289  2,020,946 Less — Accumulated depreciation  2,020,946  2,160,905 
           
  1,365,044  1,372,399    1,372,399  1,388,547 
           
Other assets:
Other assets:
       
Other assets:
       
Intangibles, netIntangibles, net  248,010  187,024 Intangibles, net  187,024  207,034 
GoodwillGoodwill  277,870  283,923 Goodwill  283,923  299,024 
Deferred insurance acquisition costsDeferred insurance acquisition costs  349,194  374,805 Deferred insurance acquisition costs  374,805  383,156 
Deferred income taxesDeferred income taxes  203,203  240,396 Deferred income taxes  240,396  178,751 
OtherOther  514,296  459,732 Other  459,732  501,438 
           
  1,592,573  1,545,880    1,545,880  1,569,403 
           
Total assets:
Total assets:
  9,499,100  10,607,753 
  9,090,662  9,499,100       
     
(Continued on following page.)

F-4

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSHEETS — (Continued)
         
 Year Ended March 31
           
 2004 2005  2005 2006
         
 (Yen in millions)  (Yen in millions)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current liabilities:
       
Current liabilities:
       
Short-term borrowingsShort-term borrowings  91,260  63,396 Short-term borrowings  63,396  142,766 
Current portion of long-term debtCurrent portion of long-term debt  383,757  166,870 Current portion of long-term debt  166,870  193,555 
Notes and accounts payable, tradeNotes and accounts payable, trade  778,773  806,044 Notes and accounts payable, trade  806,044  813,332 
Accounts payable, other and accrued expensesAccounts payable, other and accrued expenses  812,175  746,466 Accounts payable, other and accrued expenses  746,466  854,886 
Accrued income and other taxesAccrued income and other taxes  57,913  55,651 Accrued income and other taxes  55,651  87,295 
Deposits from customers in the banking businessDeposits from customers in the banking business  378,851  546,718 Deposits from customers in the banking business  546,718  599,952 
OtherOther  479,486  424,223 Other  424,223  508,442 
           
Total current liabilities  2,982,215  2,809,368 Total current liabilities  2,809,368  3,200,228 
           
Long-term liabilities:
       
Long-term debtLong-term debt  777,649  678,992 Long-term debt  678,992  764,898 
Accrued pension and severance costsAccrued pension and severance costs  368,382  352,402 Accrued pension and severance costs  352,402  182,247 
Deferred income taxesDeferred income taxes  96,193  72,227 Deferred income taxes  72,227  216,497 
Future insurance policy benefits and otherFuture insurance policy benefits and other  2,178,626  2,464,295 Future insurance policy benefits and other  2,464,295  2,744,321 
OtherOther  286,737  227,631 Other  227,631  258,609 
           
  3,707,587  3,795,547 
Total liabilities:
Total liabilities:
  6,604,915    
           
Minority interest in consolidated subsidiaries
Minority interest in consolidated subsidiaries
  22,858  23,847 
Minority interest in consolidated subsidiaries
  23,847  37,101 
           
Stockholders’ equity:
Stockholders’ equity:
       
Stockholders’ equity:
       
Subsidiary tracking stock, no par value —Subsidiary tracking stock, no par value —       Subsidiary tracking stock, no par value —       
Authorized 100,000,000 shares, outstanding 3,072,000 shares  3,917  3,917 2005 — Authorized 100,000,000 shares, outstanding 3,072,000 shares  3,917  — 
Common stock, no par value —Common stock, no par value —       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    
2005 — Authorized 3,500,000,000 shares, outstanding 997,211,213 shares     617,792 2006 — Authorized 3,500,000,000 shares, outstanding 1,001,679,664 shares     624,124 
Additional paid-in capitalAdditional paid-in capital  992,817  1,134,222 Additional paid-in capital  1,134,222  1,136,638 
Retained earningsRetained earnings  1,367,060  1,506,082 Retained earnings  1,506,082  1,602,654 
Accumulated other comprehensive income —Accumulated other comprehensive income —       Accumulated other comprehensive income —       
Unrealized gains on securities  69,950  62,669 Unrealized gains on securities  62,669  100,804 
Unrealized losses on derivative instruments  (600)  (2,490)Unrealized losses on derivative instruments  (2,490)  (2,049)
Minimum pension liability adjustment  (89,261)  (90,030)Minimum pension liability adjustment  (90,030)  (39,824)
Foreign currency translation adjustments  (430,048)  (355,824)Foreign currency translation adjustments  (355,824)  (215,368)
           
  (449,959)  (385,675)   (385,675)  (156,437)
Treasury stock, at costTreasury stock, at cost       Treasury stock, at cost       
Subsidiary tracking stock       Subsidiary tracking stock       
(2004 — 0 shares, 2005 — 32 shares)  —  (0)2005 — 32 shares  (0)  — 
Common stock       Common stock       
(2004 — 2,468,258 shares, 2005 — 1,118,984 shares)  (12,183)  (6,000)2005 — 1,118,984 shares  (6,000)    
     2006 — 740,888 shares     (3,127)
  2,378,002  2,870,338       
        2,870,338  3,203,852 
     
Commitments and contingent liabilities
Commitments and contingent liabilities
       
Commitments and contingent liabilities
       
Total liabilities and stockholders’ equity:
Total liabilities and stockholders’ equity:
  9,499,100  10,607,753 
  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 Fiscal Year Ended March 31
    
 2003 2004 2005 2004 2005 2006
            
 (Yen in millions) (Yen in millions)
Sales and operating revenue:
                    
Net sales  6,916,042  6,883,478  6,565,010   6,883,478  6,565,010  6,692,776 
Financial service revenue  509,398  565,752  537,715   565,752  537,715  720,566 
Other operating revenue  48,193  47,161  56,891   47,161  56,891  62,094 
              
  7,473,633  7,496,391  7,159,616   7,496,391  7,159,616  7,475,436 
              
Costs and expenses:
                    
Cost of sales  4,979,421  5,058,205  5,000,112   5,058,205  5,000,112  5,151,397 
Selling, general and administrative  1,782,367  1,798,239  1,535,015   1,798,239  1,535,015  1,527,036 
Financial service expenses  486,464  505,550  482,576   505,550  482,576  531,809 
Loss on sale, disposal or impairment of assets, net  39,941  35,495  27,994   35,495  27,994  73,939 
              
  7,288,193  7,397,489  7,045,697   7,397,489  7,045,697  7,284,181 
              
Operating income
  185,440  98,902  113,919   98,902  113,919  191,255 
              
Other income:
                    
Interest and dividends  14,441  18,756  14,708   18,756  14,708  24,937 
Royalty income  32,375  34,244  31,709   34,244  31,709  35,161 
Foreign exchange gain, net  1,928  18,059  —   18,059  —  — 
Gain on sale of securities investments, net  72,552  11,774  5,437   11,774  5,437  9,645 
Gain on change in interest in subsidiaries and equity investees  —  4,870  16,322   4,870  16,322  60,834 
Other  36,232  34,587  29,447   34,587  29,447  23,039 
              
  157,528  122,290  97,623   122,290  97,623  153,616 
              
Other expenses:
                    
Interest  27,314  27,849  24,578   27,849  24,578  28,996 
Loss on devaluation of securities investments  23,198  16,481  3,715   16,481  3,715  3,878 
Foreign exchange loss, net  —  —  524   —  524  3,065 
Other  44,835  32,795  25,518   32,795  25,518  22,603 
              
  95,347  77,125  54,335   77,125  54,335  58,542 
              
Income before income taxes
  247,621  144,067  157,207   144,067  157,207  286,329 
              
Income taxes:
                    
Current  178,847  87,219  85,510   87,219  85,510  96,400 
Deferred  (98,016)  (34,445)  (69,466)  (34,445)  (69,466)  80,115 
              
  80,831  52,774  16,044   52,774  16,044  176,515 
              
(Continued on following page.)

F-6

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME — (Continued)
                        
 Year Ended March 31  Fiscal Year Ended March 31
     
 2003 2004 2005  2004 2005 2006
             
 (Yen in millions)  (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 minority interest, equity in net income of affiliated companies and cumulative effect of an accounting change
Income before minority interest, equity in net income of affiliated companies and cumulative effect of an accounting change
  91,293  141,163  109,814 
Minority interest in income (loss) of consolidated SubsidiariesMinority interest in income (loss) of consolidated Subsidiaries  2,379  1,651  (626)
Equity in net income of affiliated companiesEquity in net income of affiliated companies  1,714  29,039  13,176 
               
Income before cumulative effect of an accounting change
Income before cumulative effect of an accounting change
  115,519  90,628  168,551 
Income before cumulative effect of an accounting change
  90,628  168,551  123,616 
               
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)
Cumulative effect of an accounting changeCumulative 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
Net income
  115,519  88,511  163,838 
Net income
  88,511  163,838  123,616 
               
Per share data:
Per share data:
          
Per share data:
          
Common stockCommon stock          Common stock          
Income before cumulative effect of an accounting change          Income before cumulative effect of an accounting change          
  — Basic  125.74  98.26  180.96  — Basic  98.26  180.96  122.58 
  — Diluted  118.21  89.03  162.59  — Diluted  89.03  162.59  116.88 
Cumulative effect of an accounting change          Cumulative effect of an accounting change          
  — Basic  —  (2.29)  (5.06) — Basic  (2.29)  (5.06)  — 
  — Diluted  —  (2.03)  (4.52) — Diluted  (2.03)  (4.52)  — 
Net income          Net income          
  — Basic  125.74  95.97  175.90  — Basic  95.97  175.90  122.58 
  — Diluted  118.21  87.00  158.07  — Diluted  87.00  158.07  116.88 
Cash dividends  25.00  25.00  25.00 Cash dividends  25.00  25.00  25.00 
Subsidiary tracking stockSubsidiary tracking stock          Subsidiary tracking stock          
Net income (loss)          Net income (loss)          
  — Basic  (41.98)  (41.80)  17.21  — Basic  (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 
          
                 
  Fiscal Year Ended March 31
   
  2004 2005 2006
       
  (Yen in millions)
Cash flows from operating activities:
            
 Net income  88,511   163,838   123,616 
 Adjustments to reconcile net income to net cash provided by operating activities —            
  Depreciation and amortization, including amortization of deferred insurance acquisition costs  366,269   372,865   381,843 
  Amortization of film costs  305,786   276,320   286,655 
  Accrual for pension and severance costs, less payments  35,562   22,837   (7,563)
  Gain on the transfer to the Japanese Government of the substitutional portion of employee pension fund, net  —   —   (73,472)
  Loss on sale, disposal or impairment of assets, net  35,495   27,994   73,939 
  Gain on sale or loss on devaluation of securities investments, net  4,707   (1,722)  (5,767)
  Gain on evaluation of marketable securities held in the financial service business for trading purpose, net  (4,988)  (5,246)  (44,986)
  Gain on change in interest in subsidiaries and equity investees  (4,870)  (16,322)  (60,834)
  Deferred income taxes  (34,445)  (69,466)  80,115 
  Equity in net (income) losses of affiliated companies, net of dividends  1,732   (15,648)  9,794 
  Cumulative effect of an accounting change  2,117   4,713   — 
  Changes in assets and liabilities:            
   (Increase) decrease in notes and accounts receivable, trade  (63,010)  (22,056)  17,464 
   (Increase) decrease in inventories  (78,656)  34,128   (164,772)
   Increase in film costs  (299,843)  (294,272)  (339,697)
   Increase (decrease) in notes and accounts payable, trade  93,950   31,473   (9,078)
   Increase (decrease) in accrued income and other taxes  (46,067)  3   29,009 
   Increase in future insurance policy benefits and other  264,216   144,143   143,122 
   Increase in deferred insurance acquisition costs  (71,219)  (65,051)  (51,520)
   (Increase) decrease in marketable securities held in the financial service business for trading purpose  369   (26,096)  (35,346)
   Increase in other current assets  (34,991)  (29,699)  (8,792)
   Increase in other current liabilities  44,772   46,545   105,865 
  Other  27,238   67,716   (49,737)
          
    Net cash provided by operating activities  632,635   646,997   399,858 
      ��   
(Continued on following page.)

F-8

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
              
 Year Ended March 31
                
 2003 2004 2005  2004 2005 2006
             
 (Yen in millions)  (Yen in millions)
Cash flows from investing activities:
Cash flows from investing activities:
          
Cash flows from investing activities:
          
Payments for purchases of fixed assets  (427,344)  (453,445)  (462,473)
Payments for purchases of fixed assets  (275,285)  (427,344)  (453,445)Proceeds from sales of fixed assets  33,987  34,184  38,168 
Proceeds from sales of fixed assets  25,711  33,987  34,184 Payments for investments and advances by financial service Business  (1,167,945)  (1,309,092)  (1,368,158)
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)  (33,329)  (158,151)  (36,947)
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  791,188  923,593  857,376 
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)  35,521  25,849  24,527 
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 Proceeds from sales of subsidiaries’ and equity investees’ stocks  —  3,162  75,897 
Other  1,124  6,130  5,890 Other  6,130  2,728  346 
               
 Net cash used in investing activities  (706,425)  (761,792)  (931,172) Net cash used in investing activities  (761,792)  (931,172)  (871,264)
               
Cash flows from financing activities:
Cash flows from financing activities:
          
Cash flows from financing activities:
          
Proceeds from issuance of long-term debt  12,323  267,864  57,232 Proceeds from issuance of long-term debt  267,864  57,232  246,326 
Payments of long-term debt  (238,144)  (32,042)  (94,862)Payments of long-term debt  (32,042)  (94,862)  (138,773)
Increase (decrease) in short-term borrowings  (7,970)  (57,708)  11,397 Increase (decrease) in short-term borrowings  (57,708)  11,397  (11,045)
Increase in deposits from customers in the financial service business  142,023  129,874  294,352 Increase in deposits from customers in the financial service business  129,874  294,352  190,320 
Increase (decrease) in call money and bills sold in the banking business  24,700  30,300  (40,400)Increase (decrease) in call money and bills sold in the banking business  30,300  (40,400)  86,100 
Dividends paid  (22,871)  (23,106)  (22,978)Dividends paid  (23,106)  (22,978)  (24,810)
Other  (3,195)  (1,899)  436 Proceeds from issuance of stocks by subsidiaries  5,252  4,023  6,937 
       Other  (7,151)  (3,587)  4,809 
 Net cash provided by (used in) financing activities  (93,134)  313,283  205,177         
        Net cash provided by financing activities  313,283  205,177  359,864 
       
Effect of exchange rate changes on cash and cash equivalentsEffect of exchange rate changes on cash and cash equivalents  (24,971)  (47,973)  8,890 Effect of exchange rate changes on cash and cash equivalents  (47,973)  8,890  35,537 
               
Net increase (decrease) in cash and cash equivalentsNet increase (decrease) in cash and cash equivalents  29,258  136,153  (70,108)Net increase (decrease) in cash and cash equivalents  136,153  (70,108)  (76,005)
Cash and cash equivalents at beginning of the fiscal yearCash and cash equivalents at beginning of the fiscal year  683,800  713,058  849,211 Cash and cash equivalents at beginning of the fiscal year  713,058  849,211  779,103 
               
Cash and cash equivalents at end of the fiscal yearCash and cash equivalents at end of the fiscal year  713,058  849,211  779,103 Cash and cash equivalents at end of the fiscal year  849,211  779,103  703,098 
               
Supplemental data:
Supplemental data:
          
Supplemental data:
          
Cash paid during the year for —          
Cash paid during the fiscal year for —Cash paid during the fiscal year for —          
Income taxes  171,531  114,781  65,477  Income taxes  114,781  65,477  70,019 
Interest  22,216  22,571  18,187  Interest  22,571  18,187  24,651 
               
Non-cash investing and financing activities —Non-cash investing and financing activities —          Non-cash investing and financing activities —          
Conversion of convertible bonds  344  7,977  282,744  Conversion of convertible bonds  7,977  282,744  — 
Obtaining assets by entering into capital lease  9,034  18,298  19,049  Obtaining assets by entering into capital lease  18,298  19,049  19,682 
Contribution of Net assets into the Joint Venture with Bertelsmann AG  —  —  9,402  Contribution of net assets into the joint venture with Bertelsmann AG  —  9,402  — 
               
The accompanying notes are an integral part of these statements..statements.

F-9

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
                                                     
 Year Ended March 31  Fiscal Year Ended March 31
     
   Accumulated      Accumulated  
 Subsidiary   Additional   other Treasury    Subsidiary   Additional   other Treasury  
 tracking Common paid-in Retained comprehensive stock, at    tracking Common paid-in Retained comprehensive stock, at  
 stock stock capital earnings income cost Total  stock stock capital earnings income cost Total
                             
 (Yen in millions)  (Yen in millions)
Balance at March 31, 2002  3,917  472,189  968,223  1,209,262  (275,593)  (7,588)  2,370,410 
Balance at March 31, 2003Balance at March 31, 2003  3,917  472,361  984,196  1,301,740  (471,978)  (9,341)  2,280,895 
Conversion of convertible bondsConversion of convertible bonds     172  172           344 Conversion of convertible bonds     3,989  3,988           7,977 
Stock issued under exchange offeringStock issued under exchange offering        15,791           15,791 Stock issued under exchange offering        5,409           5,409 
Comprehensive income:Comprehensive income:                      Comprehensive income:                      
Net income           115,519        115,519 Net income           88,511        88,511 
Other comprehensive income, net of tax                      Other comprehensive income, net of tax —                      
 Unrealized gains on securities:                       Unrealized gains on securities:                      
 Unrealized holding gains or losses arising during the period              (9,627)     (9,627) Unrealized holding gains (losses) arising during the period              57,971     57,971 
 Less: Reclassification adjustment for gains or losses included in net income              4,288     4,288  Less: Reclassification adjustment included in net income              (5,679)     (5,679)
 Unrealized losses on derivative instruments:                       Unrealized losses on derivative instruments:                      
 Unrealized holding gains or losses arising during the period              (4,477)     (4,477) Unrealized holding gains (losses) arising during the period              7,537     7,537 
 Less: Reclassification adjustment for gains or losses included in net income              395     395  Less: Reclassification adjustment included in net income              (3,344)     (3,344)
 Minimum pension liability adjustment              (110,636)     (110,636) Minimum pension liability adjustment              93,415     93,415 
 Foreign currency translation adjustments:                       Foreign currency translation adjustments:                      
 Translation adjustments arising during the period              (83,993)     (83,993) Translation adjustments arising during the period              (129,113)     (129,113)
 Less: Reclassification adjustment for losses included in net income              7,665     7,665  Less: Reclassification adjustment included in net income              1,232     1,232 
                               
Total comprehensive income                    (80,866)Total comprehensive income                    110,530 
                               
Stock issue costs, net of taxStock issue costs, net of tax           (19)        (19)Stock issue costs, net of tax           (53)        (53)
Dividends declaredDividends declared           (23,022)        (23,022)Dividends declared           (23,138)        (23,138)
Purchase of treasury stockPurchase of treasury stock                 (1,817)  (1,817)Purchase of treasury stock                 (8,523)  (8,523)
Reissuance of treasury stockReissuance of treasury stock        10        64  74 Reissuance of treasury stock        (776)        5,681  4,905 
                               
Balance at March 31, 2003  3,917  472,361  984,196  1,301,740  (471,978)  (9,341)  2,280,895 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-10

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)
                                                    
 Year Ended March 31  Fiscal Year Ended March 31
     
   Accumulated      Accumulated  
 Subsidiary   Additional   other Treasury    Subsidiary   Additional   other Treasury  
 tracking Common paid-in Retained comprehensive stock, at    tracking Common paid-in Retained comprehensive stock, at  
 stock stock capital earnings income cost Total  stock stock capital earnings income cost Total
                             
 (Yen in millions)  (Yen in millions)
Balance at March 31, 2003  3,917  472,361  984,196  1,301,740  (471,978)  (9,341)  2,280,895 
Balance at March 31, 2004Balance at March 31, 2004  3,917  476,350  992,817  1,367,060  (449,959)  (12,183)  2,378,002 
Exercise of stock acquisition rightsExercise of stock acquisition rights     52  53           105 
Conversion of convertible bondsConversion of convertible bonds     3,989  3,988           7,977 Conversion of convertible bonds     141,390  141,354           282,744 
Stock issued under exchange offering        5,409           5,409 
Stock based compensationStock based compensation        340           340 
Comprehensive income:Comprehensive income:                      Comprehensive income:                      
Net income           88,511        88,511 
Other comprehensive income, net of tax —                      Net income           163,838        163,838 
 Unrealized gains on securities:                      Other comprehensive income, net of tax —                      
 Unrealized holding gains or losses arising during the period              57,971     57,971  Unrealized gains on securities:                      
 Less: Reclassification adjustment for gains or losses included in net income              (5,679)     (5,679) Unrealized holding gains (losses) arising during the period              5,643     5,643 
 Unrealized losses on derivative instruments:                       Less: Reclassification adjustment included in net income              (12,924)     (12,924)
 Unrealized holding gains or losses arising during the period              7,537     7,537  Unrealized losses on derivative instruments:                      
 Less: Reclassification adjustment for gains or losses included in net income              (3,344)     (3,344) Unrealized holding gains (losses) arising during the period              (209)     (209)
 Minimum pension liability adjustment              93,415     93,415  Less: Reclassification adjustment included in net income              (1,681)     (1,681)
 Foreign currency translation adjustments:                       Minimum pension liability adjustment              (769)     (769)
 Translation adjustments arising during the period              (129,113)     (129,113) Foreign currency translation adjustments:                      
 Less: Reclassification adjustment for losses included in net income              1,232     1,232  Translation adjustments arising during the period              74,224     74,224 
                               
Total comprehensive income                    110,530 Total comprehensive income                    228,122 
                               
Stock issue costs, net of taxStock issue costs, net of tax           (53)        (53)Stock issue costs, net of tax           (541)        (541)
Dividends declaredDividends declared           (23,138)        (23,138)Dividends declared           (24,030)        (24,030)
Purchase of treasury stockPurchase of treasury stock                 (8,523)  (8,523)Purchase of treasury stock                 (416)  (416)
Reissuance of treasury stockReissuance of treasury stock        (776)        5,681  4,905 Reissuance of treasury stock        (342)  (245)     6,599  6,012 
                               
Balance at March 31, 2005Balance at March 31, 2005  3,917  617,792  1,134,222  1,506,082  (385,675)  (6,000)  2,870,338 
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  Fiscal Year Ended March 31
     
   Accumulated      Accumulated  
 Subsidiary   Additional   other Treasury    Subsidiary   Additional   other Treasury  
 tracking Common paid-in Retained comprehensive stock, at    tracking Common paid-in Retained comprehensive stock, at  
 stock stock capital earnings income cost Total  stock stock capital earnings income cost Total
                             
 (Yen in millions)  (Yen in millions)
Balance at March 31, 2004  3,917  476,350  992,817  1,367,060  (449,959)  (12,183)  2,378,002 
Balance at March 31, 2005Balance at March 31, 2005  3,917  617,792  1,134,222  1,506,082  (385,675)  (6,000)  2,870,338 
Exercise of stock acquisition rightsExercise of stock acquisition rights     52  53           105 Exercise of stock acquisition rights     931  932           1,863 
Conversion of convertible bondsConversion of convertible bonds     141,390  141,354           282,744 Conversion of convertible bonds     1,484  1,484           2,968 
Stock based compensation        340           340 
Conversion of subsidiary tracking stockConversion of subsidiary tracking stock  (3,917)  3,917              — 
Comprehensive income:                      
Comprehensive income:                      
Net income           163,838        163,838 Net income           123,616        123,616 
Other comprehensive income, net of tax —                      Other comprehensive income, net of tax                      
 Unrealized gains on securities:                       Unrealized gains on securities:                      
 Unrealized holding gains or losses arising during the period              5,643     5,643  Unrealized holding gains (losses) arising during the period              79,630     79,630 
 Less: Reclassification adjustment for gains or losses included in net income              (12,924)     (12,924) Less: Reclassification adjustment included in net income              (41,495)     (41,495)
 Unrealized losses on derivative instruments:                       Unrealized losses on derivative instruments:                      
 Unrealized holding gains or losses arising during the period              (209)     (209) Unrealized holding gains (losses) arising during the period              7,865     7,865 
 Less: Reclassification adjustment for gains or losses included in net income              (1,681)     (1,681) Less: Reclassification adjustment included in net income              (7,424)     (7,424)
 Minimum pension liability adjustment              (769)     (769) Minimum pension liability adjustment              50,206     50,206 
 Foreign currency translation adjustments:                       Foreign currency translation adjustments:                      
 Translation adjustments arising during the period              74,224     74,224  Translation adjustments arising during the period              140,473     140,473 
                Less: Reclassification adjustment included in net income              (17)     (17)
Total comprehensive income                    228,122                 
               Total comprehensive income                    352,854 
               
Stock issue costs, net of taxStock issue costs, net of tax           (541)        (541)Stock issue costs, net of tax           (780)        (780)
Dividends declaredDividends declared           (24,030)        (24,030)Dividends declared           (24,968)        (24,968)
Purchase of treasury stockPurchase of treasury stock                 (416)  (416)Purchase of treasury stock                 (394)  (394)
Reissuance of treasury stockReissuance of treasury stock        (342)  (245)     6,599  6,012 Reissuance of treasury stock           (1,296)     3,267  1,971 
                               
Balance at March 31, 2006Balance at March 31, 2006  —  624,124  1,136,638  1,602,654  (156,437)  (3,127)  3,203,852 
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 
 5.5.Related party transactions  Related party transactionsF-25F-26 
 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 
 15.15.Stockholders’ equity  Stockholders’ equityF-46F-47 
 16.  Stock-based compensation plans  F-51 
 17.  Restructuring charges and asset impairments  F-54F-56 
 18.  Research and development costs, advertising costs and shipping and handling costs  F-59F-60 
 19.  Gain on change in interest in subsidiaries and equity investeesF-59
20.Income taxes  F-61 
 20.21.Income taxes  F-62
21.Reconciliation of the differences between basic and diluted net income per share (“EPS”)F-64
22.Variable interest entitiesF-65
23.Commitments and contingent liabilities  F-66 
 24.22.  Business segment informationVariable interest entities  F-68
23.Commitments and contingent liabilitiesF-69
24.Business segment informationF-72 

F-13

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Nature of operations
      Sony Corporation and its consolidated subsidiaries (hereinafter collectively referred to as “Sony”) are engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer and industrial markets. Sony also develops, produces, manufactures, and markets home-use game consoles and software. Sony’s principal manufacturing facilities are located in Japan, the United States of America, Europe, and Asia. Its electronic products are marketed throughout the world and game products are marketed mainly in Japan, the United States of America and Europe by sales subsidiaries and unaffiliated local distributors as well as direct sales via the Internet. Sony is engaged in the development, production, manufacture, 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 a non-life insurance subsidiaries,subsidiary, banking operations through a Japanese internet-based banking subsidiary and leasing and credit financing operations in Japan. In addition to the above, Sony is engaged in the development, production, manufacture, and distribution of recorded music, network service business including 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, SOP03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP03-1 on April 1, 2004. As a result of the adoption of SOP03-1, Sony’s operating income decreased by 5,156 million yen for the fiscal year ended March 31, 2005. Additionally, on April 1, 2004, Sony 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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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
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

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.restated. Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the fiscal year ended March 31, 2005 were decreased by 7.26 yen and 7.06 yen, respectively, compared to those beforeas a result of 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 FASBFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARBAccounting Research Bulletin (“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 subsequently early adopted the provisions of FIN No. 46R, which replaced FIN No. 46, upon its issuance.issuance in December 2003. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or impact the way Sony had previously accounted for VIEs.
Exchanges of Nonmonetary Assets -
      In December 2004, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of Accounting Principle Board Opinion (“APB”) No. 29”. This statement requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. This statement is effective for nonmonetary asset exchanges that have occurred in the fiscal periods beginning after June 15, 2005. Sony adopted FAS No. 153 on July 1, 2005. The adoption of FAS No. 153 did not have a material impact on Sony’s results of operations and financial position.
Accounting for Conditional Asset Retirement Obligations - -
      In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations — an Interpretation of FAS No. 143”. FIN No. 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective no later than the end of fiscal years ending after December 15, 2005. Sony adopted FIN No. 47 on March 31, 2006. The adoption of FIN No. 47 did not have a material impact on Sony’s results of operations and financial position.
Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds -
      In September 2004, the EITF issued EITF Issue No. 04-10, “Applying Paragraph 19 of FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds”. EITF Issue

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(2)     Significant accounting policies:No. 04-10 clarifies how an enterprise should evaluate the aggregation criteria in paragraph 17 of FAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with paragraph 19 of FAS No. 131. EITF Issue No. 04-10 is effective for fiscal years ending after September 15, 2005. Sony adopted EITF Issue No. 04-10 during the fiscal year ended March 31, 2006. The adoption of EITF Issue No. 04-10 did not have an impact on Sony’s results of operation and financial position.
(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 orstart-up/development stage entity, or where the entity’s ability to continue in existence is in question), the transaction is accounted for as a capital transaction.
      The excess of the cost over the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for on an equity basis is allocated to identifiable assets and liabilities based on fair values at the date of acquisition. The unassigned residual value of the excess of the cost over 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.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      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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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
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-maturityheld-to-maturity are carried at amortized cost. Individual securities classified as either available-for-sale or held-to-maturityheld-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 -
      Inventories in electronics game and musicgame as well as non-film inventories for pictures are valued at cost, not in excess of market, cost being determined on the “average cost” basis except for the cost of finished products carried by certain subsidiary companies in electronics which is determined on the “first-in,“first-in, first-out” basis.
Film costs -
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 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.

F-17

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill and other intangible assets -
Goodwill and other intangible assets -
      Goodwill and certain other intangible assets that are determined to have an indefinite life are not amortized and are tested for impairment during the fourth quarter of fiscal year 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 with finite lives that are determined not to have an indefinite life mainly consist of artist contracts, music catalogs, acquired patent rights and software to be sold, leased or otherwise marketed. Artist contracts and music catalogs are amortized on a straight-line basis over a period of up10 to 40 years. Acquired patent rights and software to be sold, leased or otherwise marketed are amortized on a straight-line basis over 3 to 10 years.
Accounting for computer software to be sold -
Accounting for computer software to be sold -
      Sony accounts for software development costs in accordance with FAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”.
      In the Electronics 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 -
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 -
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 -
Future insurance policy benefits -
      Liabilities for future insurance policy benefits are primarily comprised of the present value of estimated future payments to policyholders. These liabilities are computed by the net level premium method based upon the assumptions such as future investment yield, morbidity, mortality and withdrawals. These assumptions are

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
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 - -
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 -
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, “Accounting for Derivative Instruments and Hedging Activities”, the derivative financial instruments held by Sony are classified and accounted as below.
Fair value hedges
Fair value hedges
      Changes in the fair value of derivatives designated and effective as fair value hedges for recognized assets or liabilities or unrecognized firm commitments are recognized in earnings as offsets to changes in the fair value of the related hedged assets or liabilities.
Cash flow hedges
Cash flow hedges
      Changes in the fair value of derivatives designated and effective as cash flow hedges for forecasted transactions or exposures associated with recognized assets or liabilities are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Changes in the fair value of the ineffective portion are recognized in current period earnings.
Derivatives not designated as hedges
Derivatives not designated as hedges
      Changes in the fair value of derivatives that are not designated as hedges under FAS No. 133 are recognized in current period earnings.
      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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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
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 -
Stock-based compensation -
      Sony applies Accounting Principle Board Opinion (“APB”)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 Fiscal Year Ended March 31
    
 2003 2004 2005 2004 2005 2006
            
 (Yen in millions) (Yen in millions)
Income before cumulative effect of an accounting change allocated to common stock:                    
As reported  115,648  90,756  168,498   90,756  168,498  122,308 
Deduct: Total stock-based compensation expense determined under the fair value based method, net of related tax effects  (7,008)  (6,334)  (4,690)  (6,334)  (4,690)  (4,182)
              
Pro forma  108,640  84,422  163,808   84,422  163,808  118,126 
              
Net income allocated to common stock:                    
As reported  115,648  88,639  163,785   88,639  163,785  122,308 
Deduct: Total stock-based compensation expense determined under the fair value based method, net of related tax effects  (7,008)  (6,334)  (4,690)  (6,334)  (4,690)  (4,182)
              
Pro forma  108,640  82,305  159,095   82,305  159,095  118,126 
              

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                      
 Year Ended March 31  Fiscal Year Ended March 31
     
 2003 2004 2005  2004 2005 2006
             
 (Yen)  (Yen)
Income before cumulative effect of an accounting change allocated to common stock:Income before cumulative effect of an accounting change allocated to common stock:          Income before cumulative effect of an accounting change allocated to common stock:          
— Basic EPS:— Basic EPS:          — Basic EPS:          
As reported  125.74  98.26  180.96 As reported  98.26  180.96  122.58 
Pro forma  118.12  91.40  175.92 Pro forma  91.40  175.92  118.39 
— Diluted EPS:— Diluted EPS:          — Diluted EPS:          
As reported  118.21  89.03  162.59 As reported  89.03  162.59  116.88 
Pro forma  111.20  82.96  158.10 Pro forma  82.96  158.10  112.91 
Net income allocated to common stock:Net income allocated to common stock:          Net income allocated to common stock:          
— Basic EPS:— Basic EPS:          — Basic EPS:          
As reported  125.74  95.97  175.90 As reported  95.97  175.90  122.58 
Pro forma  118.12  89.11  170.86 Pro forma  89.11  170.86  118.39 
— Diluted EPS:— Diluted EPS:          — Diluted EPS:          
As reported  118.21  87.00  158.07 As reported  87.00  158.07  116.88 
Pro forma  111.20  80.94  153.58 Pro forma  80.94  153.58  112.91 
      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 -
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 -
      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 -
Revenue recognition -
      Revenues from electronics game and musicgame sales are recognized upon delivery which is considered to have occurred when the customer has taken title to the product and the risk and rewards of ownership have

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
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

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 -
Accounting for consideration given to a customer or a reseller -
      In accordance with EITF Issue No. 01-09,01-9, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products”, cash consideration given to a customer or a reseller including payments for buydowns, slotting fees and cooperative advertising programs, is accounted for as a reduction of revenue unless Sony receives an identifiable benefit (goods or services) in exchange for the consideration, can reasonably estimate the fair value of 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 fiscal years ended March 31, 2003, 2004, 2005 and 2005,2006, 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, 27,946 million yen and 27,94629,489 million yen, respectively.
Cost of sales -
Cost of sales -
      Costs classified as cost of sales relate to the producing and manufacturing of products and include such items as material cost, subcontractor cost, depreciation of fixed assets, amortization of intangible assets, personnel expenses, research and development costs, and amortization of film cost related to theatrical and television products.
Research and development costs -
Research and development costs -
      Research and development costs are expensed as incurred.
Selling, general and administrative -
Selling, general and administrative -
      Costs classified as selling expense relate to the promoting and selling of products and include such items as advertising, promotion, shipping, and warranty expenses.
      General and administrative expenses include operating items such as officer’s salaries, personnel expenses, depreciation of fixed assets, office rental for sales, marketing and administrative divisions, a provision for doubtful accounts and amortization of intangible assets.
      Selling, general and administrative expenses are expensed as incurred.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Selling, general and administrative expenses are expensed as incurred.
Financial service expenses -
Financial service expenses -
      Financial service expenses include a provision for policy reserves and amortization of deferred insurance acquisition cost, and all other operating costs such as personnel expenses, depreciation of fixed assets, and office rental of subsidiaries in the Financial Services segment.
Advertising costs -
Advertising costs -
      Advertising costs are expensed when the advertisement or commercial appears in the selected media, except for advertising costs for acquiring new insurance policies which are deferred and amortized as part of insurance acquisition costs.
Shipping and handling costs -
Shipping and handling costs -
      The majority of shipping and handling, warehousing and internal transfer costs for finished goods are included in selling, general and administrative expenses. An exception to this is in the Pictures 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, amountsAmounts paid by customers for shipping and handling costs are included in net sales.
Income taxes -
Income taxes -
      The provision for income taxes is computed based on the pretax income included in the consolidated statements of income. 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.jurisdiction.
Net income per share -
Net income per share -
      Prior to December 1, 2005, Sony calculatescalculated and presentspresented per share data separately for Sony’s common stock and for the subsidiary tracking stock by the “two-class” method based on FAS No. 128. TheAs the holders of the subsidiary tracking stock havehad the right to participate in earnings, together with common stockholders. Accordingly, Sony calculates per share data by the “two-class” method based on FAS No. 128. Understockholders, under this method, basic net income per share (“EPS”) for each class of stock iswas calculated based on the earnings allocated to each class of stock for the applicable period, divided by the weighted-average number of outstanding shares in each class during the applicable period.
      The earnings allocated to the subsidiary tracking stock arewere determined based on the subsidiary tracking stock holders’ economic interest in the targeted subsidiary’s earnings available for dividends. As defined by Sony Corporation’s articles of incorporation, the amount distributable to the subsidiary tracking stock holders iswas based on the declared dividends of the targeted subsidiary, which maymight only be declared from the amounts available for dividends of the targeted subsidiary. The targeted subsidiary’s earnings available for dividends are,were, as stipulated by the Japanese Commercial Code, not including those of the targeted subsidiary’s subsidiaries. If the targeted subsidiary hashad accumulated losses, a change in accumulated losses iswas also allocated to the subsidiary tracking stock. The subsidiary tracking stock holders’ economic interest iswas calculated as the number of the subsidiary tracking stock outstanding (3,072,000 sharesdivided by the number of the targeted subsidiary’s common stock outstanding subject to multiplying by the Standard Ratio (tracking stock: subsidiary’s common stock = 1: 100, as defined in the articles of March 31, 2005) divided byincorporation). The earnings allocated to the

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
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 arewere calculated by subtracting the earnings allocated to the subsidiary tracking stock from Sony’s net income for the period.
      On October 26, 2005, the Board of Directors of Sony Corporation decided to terminate all shares of subsidiary tracking stock and convert such shares to shares of Sony common stock at a conversion rate of 1.114 share of Sony common stock per share of subsidiary tracking stock. All shares of subsidiary tracking stock were converted to shares of Sony common stock on December 1, 2005. As a result of the conversion, for the fiscal year ended March 31, 2006, Sony calculated per share data separately for Sony’s common stock and for the subsidiary tracking stock by the “two-class” method based on FAS No. 128, but did not present per share data for the subsidiary tracking stock. The earnings allocated to common stock for the fiscal year ended March 31, 2006 were calculated by subtracting the earnings allocated to the subsidiary tracking stock for the eight months ended November 30, 2005.
      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 to 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 inSony adopted FAS No. 123(R) include either the modified prospective or the modified retrospective methods.on April 1, 2006. Sony intends to adopthas elected the modified prospective method of transition prescribed in FAS No. 123(R), which requires that compensation expense be recorded for all unvested stock acquisition rights as the requisite service is rendered beginning with the first period of adoption. Sony is currently evaluatingAs of March 31, 2006, the impactaggregate value of adopting this new pronouncement. However,the unvested stock acquisition rights was 4,402 million yen. Sony expects that the total expenses to be recorded in the future periods will be consistent with the pro forma information shown above in (2) Significant accounting policies — Stock-based compensation.
Inventory Costs -
Inventory Costs -
      In November 2004, the FASB issued FAS No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin (“ARB”)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 inventorythe costs of conversion 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 -
Derivative instruments and hedging activities -
      In December 2004,February 2006, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets,155, “Accounting for Certain Hybrid Financial Instruments”, an amendment of APB OpinionFAS No. 29”.133 and FAS No. 140. This statement requires that exchanges of productive assets be accounted for atpermits an entity to elect fair value unless fair value cannot be reasonably determined orremeasurement for any hybrid financial instrument if the transaction lacks commercial substance. Thishybrid instrument contains an embedded

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
derivative that would otherwise be required to be bifurcated and accounted for separately under FAS No. 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. The statement will be effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s fiscal years beginning after September 15, 2006, with earlier adoption permitted as of the beginning of fiscal year, provided that financial statements for any interim period of that fiscal year have not been issued. The adoption of FAS No. 155 is not expected to have material impact on Sony’s results of operations and financial position.
Accounting for Servicing of Financial Assets -
      In March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140”. This statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement shall be effective for nonmonetary asset exchanges occurring in the fiscal periodsyears beginning after JuneSeptember 15, 2005, with early adoption during the fiscal periods beginning after the date this statement is issued encouraged.2006. Sony is currently evaluating the impact of adopting this new pronouncement.
(4)Reclassifications:
      Certain reclassifications of the financial statements for the fiscal years ended March 31, 20032004 and 20042005 have been made to conform to the presentation for the fiscal year ended March 31, 2005.2006.
3.Inventories
      Inventories comprise the following:
                
 March 31 March 31
    
 2004 2005 2005 2006
        
 (Yen in millions) (Yen in millions)
Finished products  427,877  405,616   405,616  534,766 
Work in process  98,607  93,181   93,181  123,381 
Raw materials, purchased components and supplies  140,023  132,552   132,552  146,577 
          
  666,507  631,349   631,349  804,724 
          
4.Film costs
      Film costs comprise the following:
                  
 March 31  March 31
     
 2004 2005  2005 2006
         
 (Yen in millions)  (Yen in millions)
Theatrical:Theatrical:       Theatrical:       
Released (including acquired film libraries)  136,057  119,438 Released (including acquired film libraries)  119,438  153,992 
Completed not released  7,946  11,358 Completed not released  11,358  13,377 
In production and development  79,198  118,271 In production and development  118,271  156,019 
Television licensing:Television licensing:       Television licensing:       
Released (including acquired film libraries)  33,378  29,894 Released (including acquired film libraries)  29,894  36,918 
In production and development  161  0 In production and development  —  66 
           
  256,740  278,961    278,961  360,372 
           

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Sony estimates that approximately 88% of unamortized costs of released films (excluding amounts allocated to acquired film libraries) at March 31, 20052006 will be amortized within the next three years. Approximately 94,790102,207 million yen of released film costs are expected to be amortized during the next twelve months. As of March 31, 2005,2006, unamortized acquired film libraries of approximately 12,37110,820 million yen remained to be amortized on a straight-line basis over an average of the remaining life of 54 years. Approximately 108,833137,400 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

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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 EntertainmentMUSIC ENTERTAINMENT (“SONY BMG”) (50%), S-LCD Corporation (“S-LCD”) (50% minus 1 share), ST Liquid Crystal Display Corporation (50%), InterTrust Technologies Corporation (49.5%), MGM Holdings, Inc. (“MGM Holdings”) (20%), bit Wallet, Inc (34.6%), and 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  March 31
     
 2004 2005  2005 2006
         
 (Yen in millions)  (Yen in millions)
Current assetsCurrent assets  433,154  942,328 Current assets  942,328  991,440 
Property, plant and equipmentProperty, plant and equipment  94,130  361,406 Property, plant and equipment  361,406  376,155 
Other assetsOther assets  57,756  250,245 Other assets  250,245  903,873 
           
Total assets  585,040  1,553,979 Total assets  1,553,979  2,271,468 
           
Current liabilitiesCurrent liabilities  397,242  876,430 Current liabilities  876,430  1,009,895 
Long-term liabilitiesLong-term liabilities  27,639  115,999 Long-term liabilities  115,999  660,504 
Stockholders’ equityStockholders’ equity  160,159  561,550 Stockholders’ equity  561,550  601,069 
           
Total liabilities and stockholders’ equity  585,040  1,553,979 Total liabilities and stockholders’ equity  1,553,979  2,271,468 
           
Number of companies at end of the fiscal yearNumber of companies at end of the fiscal year  66  56 Number of companies at end of the fiscal year  56  58 
                      
 Year Ended March 31 Fiscal Year Ended March 31
    
 2003 2004 2005 2004 2005 2006
            
 (Yen in millions) (Yen in millions)
Sales and revenue  785,697  1,009,005  1,473,273   1,009,005  1,473,273  2,357,172 
Gross profit  140,078  231,083  477,796   231,083  477,796  668,226 
Net income (loss)  (81,422)  11,323  63,404 
Net income  11,323  63,404  32,982 
      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.

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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 fiscal 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

F-26

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $12.0012.00 U.S. dollars in cash per MGM share, for a total purchase price of approximately $5.0 billion. As part of this transaction,5.0 billion U.S. dollars. In conjunction with the acquisition, Sony Pictures Entertainment (“SPE”) willentered into agreements to co-finance and produce new motion pictures with MGM, as well asand to distribute MGM’s existing film and television contentscontent through SPE’s global distribution channels. MGM will continuecontinues to operate under the Metro-Goldwyn-Mayer name as a private company, headquartered in Los Angeles.Angeles, focused on new film production and distribution activities. As part of the acquisition, SCA invested $257257 million U.S. dollars for 20% of the total equity capital. However, based on the percentage ofcapital, which includes both common stock owned,and a significant amount of non-voting preferred stock with detachable common stock warrants. Though Sony will recordowns 20% of MGM Holdings’ total equity on a fully diluted basis as a result of the warrants dilution, Sony owns 45% of MGM’sthe total outstanding common stock and therefore, records 45% of MGM Holdings’ net income (loss) as equity in net income of affiliated companies.
      In September 2005, Sony sold 230,000 shares of Monex Beans Holdings, Inc. As a result of this sale, Sony’s ownership interest has been reduced from 20.1% to 10.3%. Therefore, Monex Beans Holdings, Inc. is no longer accounted for under the equity method. The financial position and operating results of Monex Beans Holdings, Inc. as of and for the fiscal year ended March 31, 2006 are not included in the above summarized combined financial information. See Note 19 for more information on this transaction.
      The proportionate share in the underlying net assets of the investee exceeded the carrying value of investments in affiliated companies by 42,731 million yen and 36,875 million yen at March 31, 2005 and 2006, respectively. These differences primarily relate to the differences in the carrying value of the net assets contributed by Sony and Bertelsmann AG upon the formation of SONY BMG in August 2004. The contribution of assets to SONY BMG was accounted for at book value. Acquisitions by Bertelsmann AG’s recorded music business shortly prior to the formation of SONY BMG resulted in goodwill comprising a significant portion of the assets contributed to SONY BMG by Bertelsmann AG, whereas Sony’s contributed assets had a lower historical basis. As a result, Sony’s carrying value of the investment in SONY BMG is below its 50% share of the underlying assets of SONY BMG. As the contributions for both Sony and Bertelsmann AG were recorded at historical book value by SONY BMG, there is a basis difference attributable to a non-depreciable asset which is not being amortized. Differences in the carrying value of Sony’s other equity investments and the proportionate share of the fair value of underlying net assets primarily relates to unamortizable goodwill.
      Affiliated companies accounted for under the equity method with an aggregate carrying amount of 6,08117,676 million yen and 17,6764,588 million yen at March 31, 20042005 and 2005,2006, were quoted on established markets at an aggregate value of 37,60395,246 million yen and 95,24634,462 million yen, respectively.

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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 March 31
    
 2004 2005 2005 2006
        
 (Yen in millions) (Yen in millions)
Accounts receivable, trade  62,359  50,062   50,062  44,837 
          
Advances  561  16,756   16,756  15,985 
          
Accounts payable, trade  13,547  15,225   15,225  40,507 
          
                     
 Year Ended March 31 Fiscal Year Ended March 31
    
 2003 2004 2005 2004 2005 2006
            
 (Yen in millions) (Yen in millions)
Sales  161,983  258,454  256,799   258,454  256,799  234,636 
              
Purchases  102,735  106,100  101,976   106,100  101,976  282,071 
              
      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 anthe then 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 fiscal year ended March 31, 2005.
      Dividends from affiliated companies accounted for under the equity method for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were 2,002 million yen, 3,446 million yen, and 13,391 million yen and 22,970 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

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for as sales 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. The initial sale of thethese receivables was in March 2005 in which Sony sold a total of 10,041 million yen. Sony sold a total of 146,193 million yen of receivables during the fiscal year ended March 31, 2006. 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.
      Through May 2005, Sony had set up an accounts receivable securitization program in the United States of America whereby Sony could sell interests in up to 500 million U.S. dollars of eligible trade accounts receivable, as defined. Through this program, Sony could 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 could sell receivables in which the agreed upon original due dates were no more than 90 days after the invoice dates. The value assigned to undivided interests retained in securitized trade receivables was based on the relative fair values of the interest retained and sold in the securitization. Sony had assumed that the fair value of the retained interest was equivalent to its carrying value as the receivables were short-term in nature,

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
high quality and had appropriate reserves for bad debt incidence. These securitization transactions were accounted for as a sale in accordance with FAS No. 140, because Sony had 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.
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-maturityheld-to-maturity securities are as follows:
                                                        
 March 31, 2004 March 31, 2005  March 31, 2005 March 31, 2006
         
   Gross Gross     Gross Gross      Gross Gross     Gross Gross  
   unrealized unrealized     unrealized unrealized      unrealized unrealized     unrealized unrealized  
 Cost gains losses Fair value Cost gains losses Fair value  Cost gains losses Fair value Cost gains losses Fair value
                                 
 (Yen in millions)  (Yen in millions)
Available-for-sale:Available-for-sale:                         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 Debt securities  2,090,605  58,161  (2,464)  2,146,302  2,522,864  17,021  (22,810)  2,517,075 
Equity securities  86,517  63,225  (1,886)  147,856  107,126  49,350  (814)  155,662 Equity securities  107,126  49,350  (814)  155,662  227,079  171,921  (1,589)  397,411 
Held-to-maturity securities  26,439  381  (28)  26,792  27,431  530  (13)  27,948 
Held-to-maturity SecuritiesHeld-to-maturity Securities  27,431  530  (13)  27,948  33,193  132  (221)  33,104 
                                   
 Total  2,051,629  119,528  (3,986)  2,167,171  2,225,162  108,041  (3,291)  2,329,912  Total  2,225,162  108,041  (3,291)  2,329,912  2,783,136  189,074  (24,620)  2,947,590 
                                   
      At March 31, 2005,2006, debt securities classified as available-for-sale securities and held-to-maturityheld-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, 613,035 million yen and 613,035524,268 million yen for the fiscal years ended March 31, 2003, 2004, 2005 and 2005,2006, respectively. On those sales, gross realized gains computed on the average cost basis were 3,570 million yen, 9,525 million yen, 24,080 million yen and 24,08068,096 million yen and gross realized losses were 3,125 million yen, 1,906 million yen, 5,940 million yen and 5,9403,143 million yen, respectively.
      Marketable securities classified as trading securities at March 31, 20042005 and 20052006 were 131,044315,946 million yen and 315,946401,561 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, 20042005 and 2005,2006, were 51,36748,877 million yen and 48,87759,575 million yen, respectively. A non-publicNon-public equity investment isinvestments are 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 ofFor the fiscal years ended March 31, 2004, also included separate account assets (Note 10)2005 and 2006, Sony booked 4,988 million yen, 5,696 million yen and 45,092 million yen of net unrealized gain on trading securities primarily 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”business.

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, 2005.2006.
                                               
 Less than 12 Months 12 months or more Total  Less than 12 Months 12 months or More Total
             
   Unrealized   Unrealized   Unrealized    Unrealized   Unrealized   Unrealized
 Fair value losses Fair value losses Fair value losses  Fair value losses Fair value losses Fair value losses
                         
 (Yen in millions)  (Yen in millions)
Available-for-sale:Available-for-sale:                   Available-for-sale:                   
Debt securities  242,388  (2,044)  41,523  (420)  283,911  (2,464)Debt securities  1,860,204  (22,590)  21,250  (220)  1,881,454  (22,810)
Equity securities  11,010  (457)  1,225  (357)  12,235  (814)Equity securities  266,946  (1,108)  17,495  (481)  284,441  (1,589)
Held-to-maturity securities  239  (0)  660  (13)  899  (13)
Held-to-maturity SecuritiesHeld-to-maturity Securities  20,278  (208)  629  (13)  20,907  (221)
                           
 Total  253,637  (2,501)  43,408  (790)  297,045  (3,291) Total  2,147,428  (23,906)  39,374  (714)  2,186,802  (24,620)
                           
      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, 2005,2006, 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. Certain of these leases have renewal and purchase options.
      An analysis of leased assets under capital leases is as follows:
                
 March 31 March 31
    
Class of property 2004 2005 2005 2006
        
 (Yen in millions) (Yen in millions)
Land  174  181   181  193 
Buildings  12,421  11,089   11,089  7,437 
Machinery, equipment and others  36,907  33,747   33,747  28,870 
Accumulated depreciation  (19,385)  (18,509)  (18,509)  (14,820)
          
  30,117  26,508   26,508  21,680 
          

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, 2005:2006:
          
 Yen in  Yen in
 millions  millions
     
Year ending March 31:    
Fiscal Year Ending March 31:Fiscal Year Ending March 31:    
2006  15,211 2007  18,322 
2007  11,062 2008  9,650 
2008  8,895 2009  5,325 
2009  10,873 2010  3,081 
2010  3,001 2011  2,149 
Later years  5,428 Later years  4,725 
       
Total minimum lease paymentsTotal minimum lease payments  54,470 Total minimum lease payments  43,252 
Less — Amount representing interestLess — Amount representing interest  14,169 Less — Amount representing interest  4,972 
       
Present value of net minimum lease paymentsPresent value of net minimum lease payments  40,301 Present value of net minimum lease payments  38,280 
Less — Current obligationsLess — Current obligations  11,713 Less — Current obligations  16,966 
       
Long-term capital lease obligationsLong-term capital lease obligations  28,588 Long-term capital lease obligations  21,314 
       
      Minimum lease payments have not been reduced by minimum sublease income of 11,48010,022 million yen due in the future under noncancelable subleases.
      Minimum rental expenses under operating leases for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were 94,364 million yen, 92,649 million yen, 81,391 million yen and 81,39180,014 million yen, respectively. Sublease rentals received under operating leases for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were 6,240 million yen, 2,923 million yen, 1,933 million yen and 1,9331,350 million yen, respectively. The total minimum rentals to be received in the future under noncancelable subleases as of March 31, 20052006 were 14,95421,843 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, 20052006 are as follows:
          
 Yen in  Yen in
 millions  millions
     
Year ending March 31:    
Fiscal Year Ending March 31:Fiscal Year Ending March 31:    
2006  38,182 2007  47,500 
2007  30,568 2008  34,715 
2008  22,993 2009  26,529 
2009  14,060 2010  16,320 
2010  10,496 2011  11,541 
Later years  53,652 Later years  58,932 
       
Total minimum future rentalsTotal minimum future rentals  169,951 Total minimum future rentals  195,537 
       
9.Goodwill and intangible assets
      Intangible assets acquired during the fiscal year ended March 31, 20052006 totaled 22,84436,237 million yen, which are subject to amortization and primarily consist of acquired patent rights of 6,6739,922 million yen and software to be sold, leased or otherwise marketed of 11,54617,653 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)
acquired patent rights and software to be sold, leased or otherwise marketed is 8 years and 3 years, respectively.
      Intangible assets subject to amortization comprise the following:
                              
 March 31 March 31
    
 2004 2005 2005 2006
        
 Gross   Gross   Gross   Gross  
 carrying Accumulated carrying Accumulated carrying Accumulated carrying Accumulated
 amount amortization amount amortization amount amortization amount amortization
                
 (Yen in millions) (Yen in millions)
Artist contracts  80,675  (68,300)  15,218  (11,094)  15,218  (11,094)  15,218  (12,218)
Music catalog  109,795  (47,610)  65,674  (19,641)  65,674  (19,641)  71,921  (24,012)
Acquired patent rights  52,996  (23,172)  55,173  (26,139)  55,173  (26,139)  67,467  (30,200)
Software to be sold, leased or otherwise marketed  31,983  (13,577)  31,907  (16,181)  31,907  (16,181)  40,007  (24,194)
Other  55,048  (27,422)  27,648  (11,625)  27,648  (11,625)  40,978  (15,133)
                  
Total  330,497  (180,081)  195,620  (84,680)  195,620  (84,680)  235,591  (105,757)
                  
      The aggregate amortization expenses for intangible assets for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 was 27,871 million yen, 28,866 million yen, 24,993 million yen and 24,99328,390 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 
      
  (Yen in
  millions)
   
Year Ending March 31,    
 2007  31,636 
 2008  24,862 
 2009  18,857 
 2010  15,593 
 2011  9,125 
      Total carrying amount of intangible assets having an indefinite life comprise the following:
                
 March 31 March 31
    
 2004 2005 2005 2006
        
 (Yen in millions) (Yen in millions)
Trademarks  57,384  57,195   57,195  58,195 
Distribution agreement  18,834  18,848   18,848  18,848 
          
  76,218  76,043   76,043  77,043 
          
      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 fiscal years ended March 31, 20042005 and 20052006 are as follows:
                                                 
         Financial           Financial All  
 Electronics Game Music Pictures Services Other Total Electronics Game Pictures Services Other Total
                          
 (Yen in millions) (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   52,236  110,362  70,789  —  44,483  277,870 
Reallocated from Music segment to Electronics segment  12,329  —  (12,329)  —  —  —  — 
Reallocated from Music business to Electronics segment  12,329  —  —  —  (12,329)  — 
Goodwill acquired during year  5,872  4,349  52  5,868  441  2,069  18,651   5,872  4,349  5,868  441  2,121  18,651 
Goodwill contributed to the Joint Venture with Bertelsmann AG  —  —  (15,626)  —  —  —  (15,626)  —  —  —  —  (15,626)  (15,626)
Other *  378  29  1,281  1,277  —  63  3,028   378  29  1,277  —  1,344  3,028 
                            
Balance at March 31, 2005  70,815  114,740  15,704  77,934  441  4,289  283,923   70,815  114,740  77,934  441  19,993  283,923 
Goodwill acquired during year  3,337  1,317  947  536  382  6,519 
Reallocated from Music business to Electronics segment  634  —  —  —  (634)  — 
Impairment losses  —  —  —  —  (534)  (534)
Other *  1,577  207  7,031  —  301  9,116 
                            
Balance at March 31, 2006  76,363  116,264  85,912  977  19,508  299,024 
             
* 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. Effective April 1, 2005, a similar change was made with respect to the Japan based disc manufacturing businesses and accordingly, Sony reallocated 634 million yen of goodwill from the Music segment to the Electronics segment. Consistent with the presentation of business segment information in Note 24, the Music segment is included within All Other.
      During the year ended March 31, 2006, Sony performed the annual impairment test for goodwill and recorded an impairment loss of 534 million yen in a reporting unit included in All Other. This impairment charge reflected the overall decline in the fair value of a subsidiary. The fair value of the subsidiary was estimated principally using the expected present value of future cash flows.
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

F-33

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 20042005 and 20052006 were 146,540153,228 million yen and 153,228229,543 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 fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were 450,363 million yen, 437,835 million yen, 426,774 million yen and 426,774453,496 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 fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were 21,269 million yen, 28,371 million yen, 35,454 million yen and 35,45442,743 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 fiscal years ended March 31, 2003, 2004, 2005 and 20052006 amounted to 44,578 million yen, 50,492 million yen, 47,120 million yen and 47,12042,933 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, morbidity mortality and withdrawals. Future policy benefits are computed using interest rates ranging from approximately 1.30%0.90% to 5.20%5.10%. Mortality, morbidity and withdrawal assumptions for all policies are based on either the subsidiary’s own experience or various actuarial tables. At March 31, 20042005 and 2005,2006, future insurance policy benefits amounted to 1,605,1781,782,850 million yen and 1,782,8501,901,716 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  March 31
     
 2004 2005  2005 2006
         
 (Yen in millions)  (Yen in millions)
Unsecured loans, principally from banks:Unsecured loans, principally from banks:       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    
with weighted-average interest rate of 2.79%     38,796 with weighted-average interest rate of 3.63%     32,066 
Secured call money:Secured call money:       Secured call money:       
with weighted-average interest rate of 0.01%  65,000  — with weighted-average interest rate of 0.01%  —  40,000 
Secured bills sold:Secured bills sold:       Secured bills sold:       
with weighted-average interest rate of 0.00%  —  24,600 with weighted-average interest rate of 0.00%  24,600    
     with weighted-average interest rate of 0.01%     70,700 
  91,260  63,396       
        63,396  142,766 
     
      At March 31, 2005,2006, marketable securities and securities investments with a book value of 27,433119,598 million yen were pledged as collateral for call money and 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  March 31
     
 2004 2005  2005 2006
         
 (Yen in millions)  (Yen in millions)
Secured loans, representing obligations to banks:Secured loans, representing obligations to banks:       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  — 
Due 2005 to 2008 with interest of 2.20% per annum     1,122 
Unsecured loans, representing obligations principally to banks:Unsecured loans, representing obligations principally to banks:       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    
Due 2005 to 2017 with interest ranging from 0.23% to 5.89% per annum     113,436 Due 2006 to 2015 with interest ranging from 0.13% to 5.89% per annum     128,148 
Medium-term notes of consolidated subsidiaries:Medium-term notes of consolidated subsidiaries:       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    
Due 2006 with interest ranging from 2.78% to 4.95% per annum     58,755 Due 2006 with interest of 4.95% per annum     58,698 
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 dateUnsecured 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 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 discountUnsecured 0.1% bonds, due 2005 with detachable warrants, net of unamortized discount  3,924  3,981 Unsecured 0.1% bonds, due 2005 with detachable warrants, net of unamortized discount  3,981  — 
Unsecured 1.55% bonds, due 2006 with detachable warrantsUnsecured 1.55% bonds, due 2006 with detachable warrants  12,000  12,000 Unsecured 1.55% bonds, due 2006 with detachable warrants  12,000  12,000 
Unsecured 0.9% bonds, due 2007 with detachable warrantsUnsecured 0.9% bonds, due 2007 with detachable warrants  7,300  7,300 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 0.9% bonds, due 2007 with detachable warrantsUnsecured 0.9% bonds, due 2007 with detachable warrants  150  150 
Unsecured 1.42% bonds, due 2005, net of unamortized discountUnsecured 1.42% bonds, due 2005, net of unamortized discount  99,994  99,998 Unsecured 1.42% bonds, due 2005, net of unamortized discount  99,998  — 
Unsecured 0.64% bonds, due 2006, net of unamortized discountUnsecured 0.64% bonds, due 2006, net of unamortized discount  99,994  99,996 Unsecured 0.64% bonds, due 2006, net of unamortized discount  99,996  99,999 
Unsecured 1.01% bonds, due 2010, net of unamortized discountUnsecured 1.01% bonds, due 2010, net of unamortized discount  —  39,996 
Unsecured 2.04% bonds, due 2010, net of unamortized discountUnsecured 2.04% bonds, due 2010, net of unamortized discount  49,981  49,984 Unsecured 2.04% bonds, due 2010, net of unamortized discount  49,984  49,987 
Unsecured 0.80% bonds, due 2010, net of unamortized discountUnsecured 0.80% bonds, due 2010, net of unamortized discount  —  49,991 
Unsecured 1.52% bonds, due 2011, net of unamortized discountUnsecured 1.52% bonds, due 2011, net of unamortized discount  49,996  49,997 Unsecured 1.52% bonds, due 2011, net of unamortized discount  49,997  49,997 
Unsecured 1.16% bonds, due 2012, net of unamortized discountUnsecured 1.16% bonds, due 2012, net of unamortized discount  —  39,981 
Unsecured 1.52% bonds, due 2013, net of unamortized discountUnsecured 1.52% bonds, due 2013, net of unamortized discount  —  34,997 
Unsecured 1.57% bonds, due 2015, net of unamortized discountUnsecured 1.57% bonds, due 2015, net of unamortized discount  —  29,980 
Unsecured 1.75% bonds, due 2015, net of unamortized discountUnsecured 1.75% bonds, due 2015, net of unamortized discount  —  24,993 
Unsecured 2.0% bonds, due 2005Unsecured 2.0% bonds, due 2005  15,000  15,000 Unsecured 2.0% bonds, due 2005  15,000  — 
Unsecured 1.99% bonds, due 2007Unsecured 1.99% bonds, due 2007  15,000  15,000 Unsecured 1.99% bonds, due 2007  15,000  15,000 
Unsecured 2.35% bonds, due 2010Unsecured 2.35% bonds, due 2010  4,900  4,900 Unsecured 2.35% bonds, due 2010  4,900  4,900 
Capital lease obligations:Capital lease obligations:       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    
Due 2005 to 2019 with interest ranging from 1.55% to 30.00% per annum     40,301 Due 2006 to 2019 with interest ranging from 1.45% to 16.00% per annum     38,280 
Guarantee deposits receivedGuarantee deposits received  21,775  23,942 Guarantee deposits received  23,942  24,056 
           
  1,161,406  845,862    845,862  958,453 
Less — Portion due within one yearLess — Portion due within one year  383,757  166,870 Less — Portion due within one year  166,870  193,555 
           
  777,649  678,992    678,992  764,898 
           
      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.

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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, 20052006 is as follows:
ExerciseNumber of shares per
Issued onExercisable duringpricewarrantStatus of exercise
(Yen)
August 23, 1999September 1, 2000 through August 22, 20057,167279 shares of common stock of Sony Corporation2,000 warrants outstanding
October 19, 2000November 1, 2001 through October 18, 200612,457100 shares of common stock of Sony Corporation9,600 warrants outstanding
December 21, 2001January 6, 2003 through December 20, 20076,039100 shares of common stock of Sony Corporation11,534 warrants outstanding
December 21, 2001June 20, 2002 through June 20, 20073,30075 shares of subsidiary tracking stock600 warrants outstanding
             
    Exercise price    
      Number of shares per  
Issued on Exercisable during Yen Dollars warrant Status of exercise
           
October 19, 2000 November 1, 2001 through October 18, 2006 12,457  106  100 shares of common stock of Sony Corporation 9,224 warrants outstanding
December 21, 2001 January 6, 2003 through December 20, 2007 6,039  52  100 shares of common stock of Sony Corporation 11,459 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
   (Yen in
2006  166,870 
Fiscal Year Ending March 31 millions)
  
2007  178,117   193,555 
2008  32,059   32,781 
2009  282,430   285,924 
2010  2,909   66,431 
2011  110,762 
At March 31, 2005,2006, Sony had unused committed lines of credit amounting to 863,956676,449 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 1,251,4501,321,940 million yen. There was no commercial paper outstanding at March 31, 2005.2006. 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 536,750587,100 million yen. At March 31, 2005,2006, the total outstanding balance of Medium Term Notes was 58,75558,698 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, 20042005 and 2005,2006, the balance of time deposits issued in amounts of 10 million yen or more were 55,16467,387 million yen and 67,38775,459 million yen, respectively.
At March 31, 2005,2006, 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.as follows:
     
  (Yen in
Fiscal Year Ending March 31 millions)
   
2008  30,568 
2009  20,657 
2010  200 
2011  6,637 
2012  38 
13.Financial instruments
(1) Derivative instruments and hedging activities:
(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

F-37

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 56 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 ratebond 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 the hedged items are reflected at fair value in the consolidated balance sheet. Changes in the fair value of the derivatives designated as fair value hedges as well as offsetting changes in the carrying value of the underlying hedged items are recognized in income.
      TheFor the fiscal years ended March 31, 2004 and 2005, the amount of ineffectiveness of these fair value hedges, that was reflected in earnings, was not material formaterial. For the yearsfiscal year ended March 31, 2003, 2004 and 2005.2006, these fair value hedges were fully effective. In addition, there were no amounts excluded from the assessment of hedge effectiveness of fair value hedges.
Cash flow hedges
      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 fiscal years ended March 31, 20032004 and 2004,2006, these cash flow hedges were fully effective. For the fiscal year ended March 31, 2005, the amount of ineffectiveness of these cash flow hedges that was reflected in earnings was not material. In addition, there were no amounts excluded from the assessment of hedge effectiveness of cash flow hedges. At March 31, 2005,2006, amounts related to derivatives qualifying as cash flow hedges amounted to a net reduction of equity of 2,4902,049 million yen. Within the next twelve months, 1,6151,453 million yen is expected to be reclassified from equity into earnings as loss. For the fiscal year ended March 31, 2005,2006, there were no forecasted transactions that failed to occur which resulted in the discontinuance of cash flow hedges.

F-38

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, interest rate and bond future contracts, stock price index option contracts, convertible rights included in convertible bonds and other.other derivatives. Changes in the fair value of derivatives not designated as hedges are recognized in income.
      A description of the purpose and classification of the derivative financial instruments held by Sony is as follows:
Foreign exchange forward contracts and foreign currency option contracts
      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-marketmarked-to-market with changes in value recognized in other income and expenses.
      Foreign exchange forward contracts and foreign currency option contracts held by certain subsidiaries in the Financial Services segment aremarked-to-market with changes in value recognized in financial service revenue.
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 their portfolio investments, which are marked-to-marketmarked-to-market with changes in value recognized in financial service revenue. Interest rate and currency swap agreements held by certain subsidiaries in the Financial Services segment are alsomarked-to-market with changes in value recognized in financial service revenue.

F-39

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      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-marketmarked-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 and bond future contracts
      Certain subsidiaries in the Financial Services segment have interest rate and bond future contracts as part of their portfolio investments, which are marked-to-marketmarked-to-market with changes in value recognized in financial service revenue.
Stock price index option contracts
      Certain subsidiaries in the Financial Services segment have stock price index option contracts as part of their portfolio investments, which aremarked-to-market with changes in value recognized in financial service revenue.
Embedded derivatives
      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-marketmarked-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

F-40

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
carried at amounts which approximate fair value. The summary also excludes debt and equity securities which are disclosed in Note 7.
                                             
 March 31 March 31
    
 2004 2005 2005 2006
        
 Notional Carrying Estimated Notional Carrying Estimated Notional Carrying Estimated Notional Carrying Estimated
 amount amount fair value amount amount fair value amount amount fair value amount amount fair value
                        
 (Yen in millions) (Yen in millions)
Long-term debt including the current portion  —  (1,161,406)  (1,235,669)  —  (845,862)  (856,321)  —  (845,862)  (856,321)  —  (958,453)  (981,006)
Foreign exchange forward contracts  1,348,157  (994)  (994)  1,545,814  (55)  (55)  1,545,814  (55)  (55)  1,489,213  1,184  1,184 
Currency option contracts purchased  375,582  10,781  10,781  428,261  1,646  1,646   428,261  1,646  1,646  457,380  2,540  2,540 
Currency option contracts written  124,925  (1,000)  (1,000)  146,506  (3,390)  (3,390)  146,506  (3,390)  (3,390)  163,746  (2,576)  (2,576)
Interest rate swap agreements  218,101  (4,229)  (4,229)  171,133  (4,417)  (4,417)  147,024  (2,968)  (2,968)  172,430  (165)  (165)
Interest rate and currency swap agreements  8,574  384  384  5,734  131  131   29,843  (1,318)  (1,318)  14,518  (488)  (488)
Interest rate future contracts  17,007  (9)  (9)  136,470  (92)  (92)  136,470  (92)  (92)  —  —  — 
Bond future contracts  7,225  45  45  13,934  111  111 
Stock price index option purchased  —  —  —  26,650  40  40 
Embedded derivatives  421,416  12,885  12,885  405,756  11,894  11,894   405,756  11,894  11,894  411,252  70,712  70,712 
      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

F-41

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 havehad contributory funded defined benefit pension plans which are pursuant to the Japanese Welfare Pension Insurance Law. The contributory pension plans coverLaw, which consisted of 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 payablewhich was established at the optiondiscretion 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.
each employer. 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,On September 20, 2005, the benefit obligation for past employee services related to the substitutional portion and the related government-specified portion of the plan assets have not beenwere transferred to the government. As a result of the transfer to the government of the substitutional portion, as of March 31, 2006, Sony Corporation and most of its subsidiaries in Japan maintain contributory funded defined benefit plans, which were established by succeeding the additional portion established at the discretion of each employer, pursuant to the Corporate Defined Benefit Pension Plan Law.
      Under the contributory pension plans, in general, the defined benefits 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.
      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. InFor the fiscal year ended March 31, 2006, in accordance with EITF Issue No. 03-2, no accountingSony recognized a government subsidy of 133,322 million yen which is the net of the amount of the accumulated benefit obligation settled and the plan assets transferred to the government. Sony also recognized a settlement loss of 59,850 million yen, the amount of which is the net of 100,253 million yen of unrecognized losses related to the substitutional portion and 40,403 million yen for the transfer was recorded for the year ended March 31, 2005.

F-41

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)derecognition of previously accrued salary progression. The net gain of 73,472 million yen is included in selling, general and administrative expenses.
      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.

F-42

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 fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were as follows:
Japanese plans:
                      
 Year Ended March 31 Fiscal Year Ended March 31
    
 2003 2004 2005 2004 2005 2006
            
 (Yen in millions) (Yen in millions)
Service cost  47,884  54,501  31,971   54,501  31,971  26,561 
Interest cost  20,857  19,489  21,364   19,489  21,364  16,504 
Expected return on plan assets  (25,726)  (22,812)  (16,120)  (22,812)  (16,120)  (17,290)
Amortization of net transition asset  (375)  (375)  (375)  (375)  (375)  (104)
Recognized actuarial loss  20,655  31,019  20,236   31,019  20,236  14,393 
Amortization of prior service cost  (939)  (939)  (7,216)  (939)  (7,216)  (10,229)
Gains on curtailments and settlements  (1,380)  —  (876)   —  (876)   — 
Settlement loss resulting from the transfer of the substitutional portion   —   —  59,850 
              
Net periodic benefit cost  60,976  80,883  48,984   80,883  48,984  89,685 
              
Foreign plans:
                    
 Year Ended March 31 Fiscal Year Ended March 31
    
 2003 2004 2005 2004 2005 2006
            
 (Yen in millions) (Yen in millions)
Service cost  13,954  11,252  6,419   11,252  6,419  6,852 
Interest cost  8,478  8,566  8,091   8,566  8,091  8,318 
Expected return on plan assets  (7,319)  (6,812)  (6,712)  (6,812)  (6,712)  (7,112)
Amortization of net transition asset  (47)  (27)  (18)  (27)  (18)  21 
Recognized actuarial loss  1,452  1,569  1,637   1,569  1,637  1,674 
Amortization of prior service cost  (208)  (117)  (114)  (117)  (114)  (240)
(Gains) losses on curtailments and settlements  (460)  5,574  1,713 
Losses on curtailments and settlements  5,574  1,713  915 
              
Net periodic benefit cost  15,850  20,005  11,016   20,005  11,016  10,428 
              

F-42F-43

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  Japanese plans Foreign plans
         
 March 31 March 31  March 31 March 31
         
 2004 2005 2004 2005  2005 2006 2005 2006
                 
 (Yen in millions) (Yen in millions)  (Yen in millions) (Yen in millions)
Change in benefit obligation:Change in benefit obligation:             Change in benefit obligation:             
Benefit obligation at beginning of the fiscal year  993,542  901,726  155,838  153,598 
Benefit obligation at beginning of the fiscal year  1,031,760  993,542  157,580  155,838 Service cost  31,971  26,561  6,419  6,852 
Service cost  54,501  31,971  11,252  6,419 Interest cost  21,364  16,504  8,091  8,318 
Interest cost  19,489  21,364  8,566  8,091 Plan participants’ contributions  2,111  —  873  609 
Plan participants’ contributions  5,802  2,111  644  873 Amendments  (120,873)  (11,522)  286  238 
Amendments  —  (120,873)  3,900  286 Actuarial (gain) loss  1,641  (3,200)  12,210  20,183 
Actuarial (gain) loss  (81,873)  1,641  431  12,210 Foreign currency exchange rate changes  —  —  14,288  17,506 
Foreign currency exchange rate changes  —  —  (17,082)  14,288 Curtailments and settlements  (2,988)  —  (628)  (4,465)
Curtailments and settlements  —  (2,988)  (66)  (628)Benefits paid  (25,042)  (18,630)  (11,639)  (8,670)
Benefits paid  (36,137)  (25,042)  (9,387)  (11,639)Divestiture  —  —  (32,140)  — 
Divestiture  —  —  —  (32,140)Transfer of the substitutional portion to the government  —  (291,570)  —  — 
                   
Benefit obligation at end of the fiscal year  993,542  901,726  155,838  153,598 Benefit obligation at end of the fiscal year  901,726  619,869  153,598  194,169 
                   
Change in plan assets:Change in plan assets:             Change in plan assets:             
Fair value of plan assets at beginning of the fiscal year  405,248  513,095  67,937  85,662 Fair value of plan assets at beginning of the fiscal year  513,095  534,451  85,662  92,025 
Actual return (loss) on plan assets  93,154  (354)  13,065  7,513 Actual return (loss) on plan assets  (354)  51,766  7,513  11,209 
Foreign currency exchange rate changes  —  —  (3,420)  3,517 Foreign currency exchange rate changes  —  —  3,517  5,059 
Employer contribution  23,243  34,581  16,475  18,406 Employer contribution  34,581  32,867  18,406  5,493 
Plan participants’ contributions  5,802  2,111  644  873 Plan participants’ contributions  2,111  —  873  609 
Curtailments and settlements  —  —  —  (112)Curtailments and settlements  —  —  (112)  (4,006)
Benefits paid  (14,352)  (14,982)  (9,039)  (11,168)Benefits paid  (14,982)  (11,911)  (11,168)  (5,995)
Divestiture  —  —  —  (12,666)Divestiture  —  —  (12,666)  — 
         Transfer of the substitutional portion to the government  —  (117,845)  —  — 
Fair value of plan assets at end of the fiscal year  513,095  534,451  85,662  92,025           
         Fair value of plan assets at end of the fiscal year  534,451  489,328  92,025  104,394 
         
      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.venture as of August 1, 2004.

F-43F-44

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
                                
 Japanese plans Foreign plans  Japanese plans Foreign plans
         
 March 31 March 31  March 31 March 31
         
 2004 2005 2004 2005  2005 2006 2005 2006
                 
 (Yen in millions) (Yen in millions)  (Yen in millions) (Yen in millions)
Funded statusFunded status  (480,447)  (367,275)  (70,176)  (61,573)Funded status  (367,275)  (130,541)  (61,573)  (89,775)
Unrecognized actuarial lossUnrecognized actuarial loss  328,467  322,237  27,550  37,383 Unrecognized actuarial loss  322,237  169,915  37,383  41,587 
Unrecognized net transition assetUnrecognized net transition asset  (479)  (104)  211  7 Unrecognized net transition asset  (104)   —  7  153 
Unrecognized prior service costUnrecognized prior service cost  (20,784)  (134,440)  (748)  (501)Unrecognized prior service cost  (134,440)  (135,733)  (501)  (911)
                   
Net amount recognizedNet amount recognized  (173,243)  (179,582)  (43,163)  (24,684)Net amount recognized  (179,582)  (96,359)  (24,684)  (48,946)
                   
Amounts recognized in the consolidated balance sheet consist of:Amounts recognized in the consolidated balance sheet consist of:             Amounts recognized in the consolidated balance sheet consist of:             
Prepaid benefit cost  —  1,795  2,609  1,351 Prepaid benefit cost  1,795  2,650  1,351  1,226 
Accrued pension and severance costs, including current portion  (322,677)  (309,957)  (61,452)  (42,934)Accrued pension and severance costs, including current portion  (309,957)  (134,849)  (42,934)  (70,986)
Intangibles  21,263  —  113  41 Intangibles   —   —  41  157 
Accumulated other comprehensive income  128,171  128,580  15,567  16,858 Accumulated other comprehensive income  128,580  35,840  16,858  20,657 
                   
Net amount recognized  (173,243)  (179,582)  (43,163)  (24,684)Net amount recognized  (179,582)  (96,359)  (24,684)  (48,946)
                   
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 
                 
  Japanese plans Foreign plans
     
  March 31 March 31
     
  2005 2006 2005 2006
         
  (Yen in millions) (Yen in millions)
Accumulated benefit obligation  835,420   613,055   121,176   143,031 
      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 Japanese plans Foreign plans
        
 March 31 March 31 March 31 March 31
        
 2004 2005 2004 2005 2005 2006 2005 2006
                
 (Yen in millions) (Yen in millions) (Yen in millions) (Yen in millions)
Projected benefit obligations  991,030  898,985  135,459  132,556   898,985  617,883  132,556  158,353 
Accumulated benefit obligations  830,362 �� 835,420  113,020  115,147   835,420  612,410  115,147  139,431 
Fair value of plan assets  512,720  533,926  74,167  86,070   533,926  488,588  86,070  99,798 
      Weighted-average assumptions used to determine benefit obligations as of March 31, 2003, 2004, 2005 and 20052006 were as follows:
Japanese plans:
                     
 March 31 March 31
    
 2003 2004 2005 2004 2005 2006
            
Discount rate  1.9%  2.4%  2.3%  2.4%  2.3%  2.2%
Rate of compensation increase  3.0  3.0  3.3   3.0  3.3  3.4 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign plans:
                     
 March 31 March 31
    
 2003 2004 2005 2004 2005 2006
            
Discount rate  6.3%  5.8%  5.5%  5.8%  5.5%  5.1%
Rate of compensation increase  4.1  4.0  3.3   4.0  3.3  3.7 
      Weighted-average assumptions used to determine net pension and severance costs for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were as follows:
Japanese plans:
            
          Fiscal Year Ended
 Year Ended March 31 March 31
    
 2003 2004 2005 2004 2005 2006
            
Discount rate  2.4%  1.9%  2.4%  1.9%  2.4%  2.3%
Expected return on plan assets  4.0  4.0  3.2   4.0  3.2  3.5 
Rate of compensation increase  3.0  3.0  3.3   3.0  3.3  3.4 
Foreign plans:
            
          Fiscal Year Ended
 Year Ended March 31 March 31
    
 2003 2004 2005 2004 2005 2006
            
Discount rate  6.6%  6.3%  5.8%  6.3%  5.8%  5.4%
Expected return on plan assets  8.1  8.3  7.8   8.3  7.8  7.8 
Rate of compensation increase  4.5  4.1  4.0   4.1  4.0  3.7 
      As required under FAS No. 87, “Employers’ Accounting for Pensions”, the assumptions are reviewed in accordance with changes in circumstances.
      To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as historical and expected long-term rate of returns on various categories of plan assets.
      Following FAS132(R)FAS No. 132®, “Employers’ Disclosure about Pensions and Other Postretirement Benefits”, the weighted-average rate of compensation increase is calculated based on the pay-related plans only. The point-based 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, 20042005 and 20052006 were as follows:
Japanese plans:
             
 March 31, March 31,
    
 2004 2005 2005 2006
        
Equity securities  39.0%  28.0%  28.0%  38.1%
Debt securities  14.7  34.7   34.7  47.7 
Cash  42.7  33.7   33.7  6.0 
Other  3.6  3.6   3.6  8.2 
          
Total  100%  100%  100%  100%
          

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign plans:
             
 March 31, March 31,
    
 2004 2005 2005 2006
        
Equity securities  63.2%  68.3%  68.3%  69.1%
Debt securities  26.6  23.4   23.4  20.8 
Real estate  3.2  4.0   4.0  6.8 
Other  7.0  4.3   4.3  3.3 
          
Total  100%  100%  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, 2005,2006, 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 andobligation.
      As a result from the related government-specifiedtransfer of the Japanese Government of the substitution portion of theSony’s Employee Pension Fund in September 2005, pension plan assets discussed above. Such transfer is expected to occur inof the year endingJapanese plans as of March 31, 2006.2006 decreased as compared to March 31, 2005.
      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 3533 billion yen to the Japanese plans and approximately 6 billion yen to the foreign plans forduring the fiscal year ending March 31, 2006.2007.
      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 
          
  Japanese plans Foreign plans
     
  (Yen in millions) (Yen in millions)
Fiscal Year Ending March 31,        
 2007  17,336   7,262 
 2008  19,081   6,764 
 2009  21,002   7,532 
 2010  25,400   8,326 
 2011  29,102   8,994 
 2012 — 2016  162,183   56,418 
15.Stockholders’ equity
     (1)     Subsidiary tracking stock:
     (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 havehad 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.

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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      On October 26, 2005, the Board of the following: 1) compulsory retirement in cash, 2) compulsory conversion to common stockDirectors of Sony Corporation or 3) compulsory exchange withdecided to terminate all shares of subsidiary tracking stock and convert such shares to shares of Sony common stock. All shares of subsidiary tracking stock were converted to shares of Sony common stock on December 1, 2005. As a result of SCN.
      Thethe conversion, the number of shares of Sony common stock to be issued upon conversion was calculated by multiplying the number of shares of subsidiary tracking stock issuedas of November 30, 2005, by 1.114, and outstanding at March 31, 2005 was 3,072,000. At March 31, 2005, 136,454the number of shares of the subsidiary trackingSony common stock wouldto be issued upon exercise of warrants and stock acquisition rights outstanding.conversion was 3,452,808.
(2)Common stock:
      Changes in the number of shares of common stock issued and outstanding during the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 have resulted from the following:
     
  Number of
shares
   
Balance at March 31, 2002919,744,355
Conversion of convertible bonds138,330
Stock issued under exchange offering2,502,491
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 
Conversion of convertible bonds484,200
Conversion of subsidiary tracking stock3,452,808
Exercise of stock acquisition rights531,443
Balance at March 31, 20061,001,679,664
    
      At March 31, 2005, 55,609,0852006, 58,976,132 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.

F-48

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      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 fiscal year ended March 31, 2005.2005 and 2006.
(3)Retained earnings:
      The amount of statutory retained earnings of Sony Corporation available for dividends to shareholders as of March 31, 20052006 was 557,856565,936 million yen. The appropriation of retained earnings for the fiscal year ended March 31, 20052006 including cash dividends for the six-month period ended March 31, 20052006 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, 200517, 2006 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 2,2612,724 million yen and 2,72413,557 million yen at March 31, 20042005 and 2005,2006, respectively.

F-49

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(4)Other comprehensive income:
      Other comprehensive income for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 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 
          
                
  Pre-tax Tax Net-of-tax
  amount expense amount
       
  (Yen in millions)
For the fiscal 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 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 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 included in net income  1,232   —   1,232 
          
   Other comprehensive income  117,443   (95,424)  22,019 
          
For the fiscal year ended March 31, 2005:            
 Unrealized gains on securities —            
  Unrealized holding gains (losses) arising during the period  7,184   (1,541)  5,643 
  Less: Reclassification adjustment included in net income  (18,140)  5,216   (12,924)
 Unrealized losses on derivative instruments —            
  Unrealized holding gains (losses) arising during the period  (2,015)  1,806   (209)
  Less: Reclassification adjustment included in net income  (2,848)  1,167   (1,681)
 Minimum pension liability adjustment  (1,700)  931   (769)
 Foreign currency translation adjustments — Translation adjustments arising during the period  76,585   (2,361)  74,224 
          
   Other comprehensive income  59,066   5,218   64,284 
          

F-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 
          
                
  Pre-tax Tax Net-of-tax
  amount expense amount
       
  (Yen in millions)
For the fiscal year ended March 31, 2006:            
 Unrealized gains on securities —            
  Unrealized holding gains (losses) arising during the period  125,263   (45,633)  79,630 
  Less: Reclassification adjustment included in net income  (64,953)  23,458   (41,495)
 Unrealized losses on derivative instruments —            
  Unrealized holding gains (losses) arising during the period  14,888   (7,023)  7,865 
  Less: Reclassification adjustment included in net income  (12,597)  5,173   (7,424)
 Minimum pension liability adjustment  88,941   (38,735)  50,206 
 Foreign currency translation adjustments —            
  Translation adjustments arising during the period  143,888   (3,415)  140,473 
  Less: Reclassification adjustment included in net income  (17)  —   (17)
          
   Other comprehensive income  295,413   (66,175)  229,238 
          
      During the fiscal years ended March 31, 20032004 and 2004, 7,6652006, losses of 1,232 million yen and 1,232gains of 17 million yen of foreign currency translation adjustments were transferred respectively from other comprehensive income and charged to net 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 selected 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 theselected directors, corporate executive officers and selected employees of Sony. By exercising a warrant, directors, corporate executive officers and selected employees can purchase the common stock or subsidiary tracking stock of Sony Corporation, the number of which is designated by each plan. The warrants generally vest ratably over a period of three years, and are exercisable up to six years from the date of grant.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Presented below is a summary of the activities regarding common stock warrants for the fiscal years shown:
                             
  Fiscal Year Ended March 31
   
  2004 2005 2006
       
    Weighted-   Weighted-   Weighted- Weighted-
    average   average   average average
  Number of exercise Number of exercise Number of exercise exercise
  Shares price Shares price Shares price price
               
    (Yen)   (Yen)   (Yen) (Dollars)
Outstanding at beginning of the fiscal year  3,190,292   8,132   3,190,292   8,132   2,626,300   8,533   72.93 
Expired  —   —   (563,992)  6,264   (558,000)  7,167   61.26 
                      
Outstanding at end of the fiscal year  3,190,292   8,132   2,626,300   8,533   2,068,300   8,901   76.08 
                      
Exercisable at end of the fiscal year  2,808,292   8,416   2,626,300   8,533   2,068,300   8,901   76.08 
                      
      There were no warrants granted or exercised during the fiscal years ended March 31, 2004, 2005 and 2006. At March 31, 2006, there were 1,145,900 and 922,400 shares outstanding under warrants with exercise prices of 6,039 yen and 12,457 yen and average remaining lives of 1.75 years and 0.58 years, respectively. The weighted average exercise price and remaining life of outstanding warrants was 8,901 yen and 1.23 years, respectively. All outstanding warrants were exercisable at March 31, 2006.
(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

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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.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Presented below is a summary of the activities regarding convertible bond plan for the fiscal years shown:
                             
  Fiscal Year Ended March 31
   
  2004 2005 2006
       
    Weighted-   Weighted-   Weighted- Weighted-
    average   average   average average
  Number of exercise Number of exercise Number of exercise exercise
  Shares price Shares price Shares price price
               
    (Yen)   (Yen)   (Yen) (Dollars)
Outstanding at beginning of the fiscal year  3,802,700   6,870   3,341,700   6,852   3,136,400   6,861   58.64 
Exercised  —   —   —   —   (484,200)  5,952   50.87 
Forfeited  (461,000)  6,943   (205,300)  6,668   (158,700)  7,989   68.28 
                      
Outstanding at end of the fiscal year  3,341,700   6,852   3,136,400   6,861   2,493,500   8,133   69.51 
                      
Exercisable at end of the fiscal year  2,614,700   7,042   2,923,300   6,952   2,493,500   8,133   69.51 
                      
      There were no shares granted under the convertible bond plan during the fiscal years ended March 31, 2004, 2005 and 2006. All shares under the convertible bond plan were exercisable as of March 31, 2006.
      A summary of convertible bond options outstanding and exercisable at March 31, 2006 is as follows:
                   
  Outstanding and Exercisable
   
    Weighted- Weighted- Weighted-
Exercise price Number of average average average
range Shares exercise price exercise price remaining life
         
(Yen)   (Yen) (Dollars) (Years)
5,952~10,000  2,117,200   7,229   61.79   3.96 
10,001~13,220  376,300   13,220   112.99   4.08 
              
5,952~13,220  2,493,500   8,133   69.51   3.98 
              
(3)Stock Acquisition Rights:
      During the fiscal year ended March 31, 2003, Sony adopted an equity-based compensation plan that issues common stock acquisition rights for the purpose of granting stock options to theselected directors, corporate executive officers and selected employees of Sony, and subsidiary tracking stock acquisition rights for the purpose of granting stock options to the directors and selected employees of Sony Communication Network Corporation, pursuant to the Commercial Code of Japan. The stock acquisition rights generally vest ratably over a period of three years and are exercisable up to ten years from the date of grant.
      Presented below is a summary of the 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 
                 

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Presented below is a summary of the activities regarding stock acquisition rights plan for the fiscal years shown:
                             
  Fiscal Year Ended March 31
   
  2004 2005 2006
       
    Weighted-   Weighted-   Weighted- Weighted-
    average   average   average average
  Number of exercise Number of exercise Number of exercise exercise
  Shares price Shares price Shares price price
               
    (Yen)   (Yen)   (Yen) (Dollars)
Outstanding at beginning of the fiscal year  2,647,900   4,845   5,173,600   4,424   7,350,500   4,288   36.65 
Granted  2,621,400   4,220   2,433,600   3,996   2,491,600   3,936   33.64 
Exercised  —   —   (27,400)  3,896   (364,800)  4,216   36.06 
Forfeited  (95,700)  3,896   (229,300)  4,419   (376,600)  4,441   37.96 
                      
Outstanding at end of the fiscal year  5,173,600   4,424   7,350,500   4,288   9,100,700   4,351   37.19 
                      
Exercisable at end of the fiscal year  430,900   5,291   1,674,000   4,652   3,136,200   4,629   39.56 
                      
A summary of subsidiary tracking stock warrants and stock acquisition rights outstanding and exercisable at March 31, 20052006 is as follows:
                                                
 Outstanding Exercisable Outstanding Exercisable
        
   Weighted- Weighted-   Weighted-   Weighted- Weighted- Weighted-   Weighted- Weighted-
Exercise price Number of average average Number of average Number of average average average Number of average average
range Shares exercise price remaining life Shares exercise price Shares exercise price exercise price remaining life Shares exercise price exercise price
                        
(Yen)   (Yen) (Years)   (Yen)   (Yen) (Dollars) (Years)   (Yen) (Dollars)
815~3,300  181,500  1,591  7.22  90,300  2,118 
3,782~5,396  9,100,700  4,351  37.19  8.38  3,136,200  4,629  39.56 
               
      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 fiscal years ended March 31, 2003, 2004, 2005 and 2006.
      As discussed in Notes 2 and 15, all shares of subsidiary tracking stock were converted to shares of Sony common stock on December 1, 2005. As a result of the conversion, all subsidiary tracking stock warrants and acquisition rights were converted to Sony common stock warrants and acquisition rights. In addition to the above tables, 166,643 shares were issued by the exercise of those warrants and acquisition rights. At March 31, 2006, there were no common stock warrants and acquisition rights outstanding which were granted by the conversion.
      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 in the fiscal year ended March 31, 2005 based on the fair value method of accounting for stock-based compensation using the Black-Scholes option-pricing model. 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 fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were 2,063, 1,413 yen, 1,085 yen and 1,085,1,585 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

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 Fiscal Year Ended March 31
    
Weighted-average assumptions 2003 2004 2005 2004 2005 2006
            
Risk-free interest rate  2.76%  2.18%  2.04%   2.18%  2.04%  2.90% 
Expected lives 4.23 years 3.67 years 3.54 years  3.67 years 3.54 years 6.14 years 
Expected volatility  47.33%  42.83%  35.56%   42.83%  35.56%  39.50% 
Expected dividend  0.47%  0.57%  0.62%   0.57%  0.62%  0.61% 
(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.
      The status of the SAR plans is summarized as follows:
                             
  Fiscal Year Ended March 31
   
  2004 2005 2006
       
    Weighted-   Weighted-   Weighted- Weighted-
  Number of average Number of average Number of average average
  SARs exercise price SARs exercise price SARs exercise price exercise price
               
    (Yen)   (Yen)   (Yen) (Dollars)
Outstanding at beginning of the fiscal year  2,343,028   6,341   1,526,568   6,424   865,084   7,436   63.56 
Exercised  —   —   (241,134)  3,955   (50,000)  5,020   42.91 
Expired or forfeited  (816,460)  5,494   (420,350)  5,855   (628,584)  7,338   62.72 
                      
Outstanding at end of the fiscal year  1,526,568   6,424   865,084   7,436   186,500   9,211   78.73 
                      
Exercisable at end of the fiscal year  1,462,391   6,421   856,156   7,455   186,500   9,211   78.73 
                      
      There were no SARs granted during the fiscal years ended March 31, 2004, 2005 and 2006. All SARs were exercisable as of March 31, 2006.
      A summary of SARs outstanding and exercisable at March 31, 2006 is as follows:
                   
  Outstanding and Exercisable
   
    Weighted- Weighted- Weighted-
Exercise price Number of average average average
range SARs exercise price exercise price remaining life
         
(Yen)   (Yen) (Dollars) (Years)
4,345~7,000  39,650   5,819   49.74   5.91 
7,001~10,000  100,525   9,143   78.15   1.73 
10,001~14,440  46,325   12,260   104.79   4.19 
              
4,345~14,440  186,500   9,211   78.73   3.23 
              

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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 thefiscal year ended March 31, 2004, Sony recognized 105 million yen of SARs compensation expense. For the fiscal year ended March 31, 2005, Sony recognized a reduction in SARs compensation expense of 74 million yen. For the fiscal year ended March 31, 2006, Sony recognized 70 million yen of SARs compensation expense.
17.Restructuring charges and asset impairments
      As part of its effort to improve the performance of the various businesses, Sony has undertaken a number of restructuring initiatives within theits Electronics Musicsegment, Pictures segment and Pictures segments.All Other. For the fiscal years ended March 31, 2003, 2004, 2005 and 2005,2006, Sony recorded total restructuring charges of 106,251 million yen, 168,091 million yen, 89,963 million yen and 89,963138,692 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 fiscal years ended March 31, 2003, 2004, 2005 and 2005,2006, Sony recorded total restructuring charges of 72,473143,589 million yen, 143,31083,227 million yen and 81,768125,802 million yen, respectively, within the Electronics segment. In addition to the above charges, the Electronics segment also reflects restructuring costs of 7,950 million yen and 2,122 million yen for the yearsfiscal year ended March 31, 2003 and 2004,

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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 segmentbusiness which is discussed below. These restructuring charges were formerly included within the Music segment but were reclassified to the Electronics segment. See Notes 5 andNote 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.follows:
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 downsizehas been downsizing 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 fiscal 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 fiscal year ended March 31, 2004 and no liability existed as of March 31, 2005.2006.
      In the fiscal year ended March 31, 2005, as part of this restructuring program, Sony recorded a non-cash impairment charge of 7,479 million yen for 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 fiscal year ended March 31, 2005 and no liability existed as of March 31, 2005.
Aiwa Co., Ltd. restructuring -2006.
      Due toIn the continued decline in the operating results of Aiwa, the restructuring program that was initiated in thefiscal year ended March 31, 2002 was accelerated and additional restructuring2006, Sony made a decision to discontinue certain CRT TV display manufacturing operations in the U.S. Restructuring charges of 23,007totaling 32,488 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-55F-56

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
related costs of 1,962 million yen and non-cash equipment impairment, disposal and other costs of 30,526 million yen. Of the total restructuring charges, 6,982 million yen was includedrecorded in selling, generalcost of sales, and administrative expenses, and 3,50425,506 million yen was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. 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. This phase of the restructuring program was completed in the fiscal year ended March 31, 20032006. The remaining liability balance as of March 31, 2006 was 3,852 million yen with a large portion of the liabilities to be paid during the fiscal year ending March 31, 2007.
      In the fiscal year ended March 31, 2006, as part of this restructuring program, Sony recorded a non-cash impairment charge of 2,856 million yen for CRT TV display manufacturing facilities located in Southeast Asia. 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 fiscal year ended March 31, 2006 and no liability existed as of March 31, 2003. Aiwa Co., Ltd.2006.
      The worldwide plan to rationalize production facilities of CRT TV display was merged into Sony Corporation as of December 1, 2002.substantially completed during the fiscal year ended March 31, 2006.
Closing of a semiconductor plant in the U.S. -
      Due to a significant decline in the business conditions of the U.S. semiconductor industry, Sony made a decision in the fourth quarter of the fiscal year ended March 31, 2003, to close a semiconductor plant in the U.S. This restructuring activity was substantially completed in the fiscal 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, 20052006 was 161152 million yen and will be substantially paid or settled through the fiscal year endedending March 31, 2006.2007.
      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 thefiscal 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 fiscal 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 sale, 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 theits Electronics segment. As a result of these programs, Sony recorded restructuring charges totaling 22,236115,149 million yen, 114,87050,960 million yen and 50,27645,116 million yen for the fiscal years ended March 31, 2003, 2004, 2005 and 2005,2006, 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, 20052006 was 14,01119,424 million yen and will be paid through the fiscal year ending March 31, 2006.2007. 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, 2001implement programs to reduce staffingheadcount by streamlining business operations, including closure 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,

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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.sites, 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, generalheadquarters 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.functions.

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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 fiscal 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. There were no restructuring charges incurred for the fiscal year ended March 31, 2006. 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 becominghas become 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 fiscal 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 fiscal 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, 2005.2006.
Fixed Cost Reduction Program -
      During the fiscal 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 fiscal 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 fiscal 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 fiscal 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. AtNo liability existed as of March 31, 2005,2006.
All Other (Music Business)
      Due to the remaining liability balance was 207 million yen, which will be paid or settled overcontinued contraction of the next year.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 business for the future by looking to create a more effective and profitable business model. As a result, the Music business has undergone a worldwide restructuring program since the fiscal year ended March 31, 2001 to reduce staffing and other costs through the consolidation and rationalization of facilities worldwide 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

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the equity method. See Note 5 for more information on this transaction. For the fiscal years ended March 31, 2004, 2005 and 2006, Sony recorded total restructuring charges of 10,691 million yen, 3,025 million yen and 129 million yen, respectively, related to the restructuring of the Music business excluding Japan. Of these restructuring charges, 2,122 million yen for the fiscal year ended March 31, 2004, was recorded in the non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment but reclassified to the Electronics segment. See Note 24 for more information on this reclassification. This worldwide restructuring of the Music business was completed during the fiscal year ended March 31, 2006, and the total cost of the program was 52,702 million yen, which was incurred from the inception of the program through the fiscal year ended March 31, 2006. The restructuring costs within the Music business do not include the restructuring costs of SONY BMG since the establishment of the joint venture. At March 31, 2006, the liability balance was 1,193 million yen which is expected to be settled during the fiscal year ending March 31, 2007.
      In addition to the above, Sony also recorded restructuring charges of 1,291 million yen, 803 million yen and 346 million yen for the fiscal years ended March 31, 2004, 2005 and 2006, respectively, in Japan, which were primarily personnel related costs included in selling, general and administrative expenses in the consolidated statements of income.
      Significant restructuring activities included the following:
      During the fiscal year ended March 31, 2004, Sony broadened the scope of its worldwide restructuring of the Music business, 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 fiscal 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 business. 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.
      During the fiscal year ended March 31, 2006, the worldwide restructuring program was completed and Sony recorded additional restructuring charges totaling 129 million yen, primarily consisting of other associated restructuring costs. Restructuring activities included the further shutdown of certain distribution operations that were no longer required as a result of the recorded music joint venture with Bertelsmann AG. These charges are included in selling, general and administrative expenses in the consolidated statements of income.
All Other (U.S. Entertainment Complex)
      As part of its efforts to restructure and eliminate certain non-core businesses, Sony reached an agreement to sell a U.S. entertainment complex in March 2006. As a result, Sony recorded an impairment charge of

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8,522 million yen. The impairment charge was based on the negotiated sales price of the complex, and is recorded in loss on sale, disposal or impairment of assets, net in the consolidated statements of income.
      The changes in the accrued restructuring charges for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 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   Employee Non-cash    
Non-cash charges  —  (42,240)  —  (42,240)  termination write-downs Other associated  
Cash payments  (38,548)  —  (23,172)  (61,720)  benefits and disposals costs Total
Adjustments  136  (528)  (1,208)  (1,600)         
           (Yen in millions)
Balance at March 31, 2003Balance at March 31, 2003  14,784  —  5,787  20,571 Balance at March 31, 2003  14,784  —  5,787  20,571 
Restructuring costs  133,367  19,170  15,554  168,091 Restructuring costs  133,367  19,170  15,554  168,091 
Non-cash charges  —  (19,170)  —  (19,170)Non-cash charges  —  (19,170)  —  (19,170)
Cash payments  (124,674)  —  (13,686)  (138,360)Cash payments  (124,674)  —  (13,686)  (138,360)
Adjustments  1,173  0  333  1,506 Adjustments  1,173  —  333  1,506 
                   
Balance at March 31, 2004Balance at March 31, 2004  24,650  —  7,988  32,638 Balance at March 31, 2004  24,650  —  7,988  32,638 
Restructuring costs  53,563  25,564  10,836  89,963 Restructuring costs  53,563  25,564  10,836  89,963 
Non-cash charges  —  (25,564)  —  (25,564)Non-cash charges  —  (25,564)  —  (25,564)
Cash payments  (61,523)  —  (10,427)  (71,950)Cash payments  (61,523)  —  (10,427)  (71,950)
Adjustments*  (1,705)  —  (3,096)  (4,801)Adjustments*  (1,705)  —  (3,096)  (4,801)
                   
Balance at March 31, 2005Balance at March 31, 2005  14,985  —  5,301  20,286 Balance at March 31, 2005  14,985  —  5,301  20,286 
         Restructuring costs  48,255  76,999  13,438  138,692 
Non-cash charges  —  (76,999)  —  (76,999)
Cash payments  (42,152)  —  (7,929)  (50,081)
Adjustments  (1,227)  —  3  (1,224)
         
Balance at March 31, 2006Balance at March 31, 2006  19,861  —  10,813  30,674 
         
 * Adjustments primarily consist of the transfer of the accrued restructuring charges to SONY BMG, a joint venture with Bertelsmann AG (Note 5).
18.Research and development costs, advertising costs and shipping and handling costs
     (1)     Research and development costs:
     (1)Research and development costs:
      Research and development costs charged to cost of sales for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were 443,128 million yen, 514,483 million yen, 502,008 million yen and 502,008531,795 million yen, respectively.
     (2)Advertising costs:
      Advertising costs included in selling, general and administrative expenses for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were 442,741 million yen, 421,433 million yen, 359,661 million yen and 359,661419,508 million yen, respectively.
     (3)Shipping and handling costs:
      Shipping and handling costs for finished goods included in selling, general and administrative expenses for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were 98,195 million yen, 106,590 million yen, 107,983 million yen and 107,983114,500 million yen, respectively, which included the internal transportation costs of finished goods.

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

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
100,000 yen 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 fiscal 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 providesprovided on-line security trading services in Japan, and Nikko Beans, Inc. established Monex Beans Holdings, Inc. by way of share transfer of the then 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 2,341,2872,344,687 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,SCN, 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 CorporationSCN 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.shares of So-net M3 Inc. 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 the operation of on-line auction websites in Japan, issued 14,000 shares at 204,600 yen per share with a total value of 2,864 million yen in connection with its initial public offering. In March 2005, Sony Communication Network Corporation,SCN, which had owned a 27.7% interest in DeNA Co., Ltd., sold 2,000 shares of DeNA Co., Ltd. at 204,600 yen per share with a total value of 409 million yen. As a result of these transactions, Sony recorded a 686 million yen gain on issuance of stock by DeNA Co., Ltd. and provided deferred taxes on this gain. In addition, Sony recorded a 76 million yen gain on the sale of its stock.shares of DeNA Co., Ltd.. These transactions reduced Sony’s ownership interest from 27.7% to 24.8%.
      In addition to the above transactions, for the fiscal 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.
      In June 2005, SCN sold 17,935 shares of So-net M3 Inc., at 694,600 yen per share with a total value of 12,458 million yen. As a result of this sale, Sony recorded a 11,979 million yen gain and provided deferred taxes on this gain. This sale reduced Sony’s ownership interest from 74.8% to 60.8%.
      In June 2005, SCN sold 7,000 shares of DeNA Co., Ltd. at 863,040 yen per share with a total value of 6,041 million yen. In March 2006, DeNA Co., Ltd. issued 14,300 shares at 314,138 yen per share with a total value of 4,492 million yen in connection with its private offering. As a result of these transactions, Sony recorded an 821 million yen gain on issuance of stock by DeNA Co., Ltd. and provided deferred taxes on this gain. In addition, Sony recorded a 5,817 million yen gain on the sale of its shares of DeNA Co., Ltd.. These transactions reduced Sony’s ownership interest from 24.8% to 19.1%.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      In September 2005, Sony Corporation sold 230,000 shares of Monex Beans Holdings, Inc. at 119,040 yen per share with a total value of 27,379 million yen. As a result of this sale, Sony recorded a 20,590 million yen gain and provided deferred taxes on this gain. This sale reduced Sony’s ownership interest from 20.1% to 10.3%. See Note 5 for more information on this transaction.
      In December 2005, SCN issued 20,000 shares at 320,960 yen per share with a total value of 6,419 million yen in connection with its initial public offering. Sony Corporation and Sony Finance International Inc., which had owned 82.6% and 17.4% interests in SCN, respectively, sold 66,000 shares and 4,000 shares of SCN, respectively, at 320,960 yen per share with a total value of 22,467 million yen. In January 2006, Sony Corporation sold 12,000 shares of SCN at 320,960 yen per share with a total value of 3,852 million yen. As a result of these transactions, Sony recorded a 4,226 million yen gain on issuance of stock by SCN and provided deferred taxes on this gain. In addition, Sony recorded a 17,321 million yen gain on the sale of its shares of SCN. These transactions reduced Sony’s ownership interest from 100% to 60.1%.
      In addition to the above transactions, for the fiscal year ended March 31, 2006, Sony recognized 80 million yen of other gains on change in interest in subsidiaries and equity investees resulting in total gains of 60,834 million yen.
      These transactions were not part of a broader corporate reorganization and the reacquisition of such shares was not contemplated at the time of issuance.

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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  Fiscal Year Ended March 31
     
 2003 2004 2005  2004 2005 2006
             
 (Yen in millions)  (Yen in millions)
Income (loss) before income taxes:Income (loss) before income taxes:          Income (loss) before income taxes:          
Sony Corporation and subsidiaries in Japan  (7,998)  (84,571)  5,005 Sony Corporation and subsidiaries in Japan  (84,571)  5,005  243,927 
Foreign subsidiaries  255,619  228,638  152,202 Foreign subsidiaries  228,638  152,202  42,402 
               
  247,621  144,067  157,207    144,067  157,207  286,329 
               
Income taxes — Current:Income taxes — Current:          Income taxes — Current:          
Sony Corporation and subsidiaries in Japan  69,311  22,286  23,497 Sony Corporation and subsidiaries in Japan  22,286  23,497  55,154 
Foreign subsidiaries  109,536  64,933  62,013 Foreign subsidiaries  64,933  62,013  41,246 
               
  178,847  87,219  85,510    87,219  85,510  96,400 
               
Income taxes — Deferred:Income taxes — Deferred:          Income taxes — Deferred:          
Sony Corporation and subsidiaries in Japan  (90,016)  (32,845)  4,976 Sony Corporation and subsidiaries in Japan  (32,845)  4,976  105,938 
Foreign subsidiaries  (8,000)  (1,600)  (74,442)Foreign subsidiaries  (1,600)  (74,442)  (25,823)
               
  (98,016)  (34,445)  (69,466)   (34,445)  (69,466)  80,115 
               
      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 fiscal year ended March 31, 2004. Under the Japanese consolidated tax filing system, a 2% surtax was imposed only for the fiscal year ended March 31, 2004. As a result, the statutory tax rate was 43.9% for the fiscal year ended March 31, 2004.
      During the fiscal 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

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the fiscal 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:
             
            Fiscal Year Ended
 Year Ended March 31  March 31
     
 2003 2004 2005  2004 2005 2006
             
Statutory tax rateStatutory tax rate  42.0%  43.9%  41.0%Statutory tax rate  43.9%  41.0%  41.0%
Increase (reduction) in taxes resulting from:Increase (reduction) in taxes resulting from:          Increase (reduction) in taxes resulting from:          
Income tax credits  (1.9)  (2.4)  (0.1)Income tax credits  (2.4)  (0.1)  (1.3)
Change in valuation allowances  5.5  6.5  (22.7)Change in valuation allowances  6.5  (22.7)  21.6 
Decrease in deferred tax liabilities on undistributed earnings of foreign subsidiaries  (14.8)  (9.2)  (4.0)Increase (decrease) in deferred tax liabilities on undistributed earnings of foreign subsidiaries  (9.2)  (4.0)  4.5 
Lower tax rate applied to life and non-life insurance business in Japan  (0.6)  (2.6)  (1.9)Lower tax rate applied to life and non-life insurance business in Japan  (2.6)  (1.9)  (3.2)
Other  2.4  0.4  (2.1)Other  0.4  (2.1)  (1.0)
               
Effective income tax rateEffective income tax rate  32.6%  36.6%  10.2%Effective income tax rate  36.6%  10.2%  61.6%
               

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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  March 31
     
 2004 2005  2005 2006
         
 (Yen in millions)  (Yen in millions)
Deferred tax assets:Deferred tax assets:       Deferred tax assets:       
Operating loss carryforwards for tax purposes  193,212  146,206 
Accrued pension and severance costs  159,610  95,226 
Operating loss carryforwards for tax purposes  196,308  193,212 Film costs  56,746  51,937 
Accrued pension and severance costs  150,073  159,610 Warranty reserve and accrued expenses  56,551  52,008 
Film costs  54,194  56,746 Future insurance policy benefits  36,654  24,785 
Warranty reserve and accrued expenses  45,664  56,551 Accrued bonus  34,536  27,353 
Future insurance policy benefits  35,855  36,654 Inventory — intercompany profits and write-down  30,270  47,578 
Accrued bonus  36,285  34,536 Depreciation  15,320  34,052 
Inventory — intercompany profits and write-down  30,241  30,270 Tax credit carryforwards  8,552  39,443 
Depreciations  14,108  15,320 Reserve for doubtful accounts  6,574  7,479 
Tax credit carryforwards  13,740  8,552 Impairment of investments  52,501  52,658 
Reserve for doubtful accounts  14,005  6,574 Deferred revenue in the Pictures segment  12,947  16,713 
Other  141,731  153,525 Other  88,077  144,337 
           
 Gross deferred tax assets  732,204  751,550  Gross deferred tax assets  751,550  739,775 
 Less: Valuation allowance  (127,577)  (89,110) Less: Valuation allowance  (89,110)  (150,899)
           
 Total deferred tax assets  604,627  662,440  Total deferred tax assets  662,440  588,876 
           
Deferred tax liabilities:Deferred tax liabilities:       Deferred tax liabilities:       
Insurance acquisition costs  (125,768)  (135,083)Insurance acquisition costs  (135,083)  (136,919)
Unbilled accounts receivable in the Pictures business  (71,586)  (57,314)Unbilled accounts receivable in the Pictures segment  (57,314)  (49,953)
Unrealized gains on securities  (45,239)  (41,564)Unrealized gains on securities  (41,564)  (63,739)
Intangible assets acquired through exchange offerings  (36,490)  (35,418)Intangible assets acquired through stock exchange offerings  (35,418)  (34,627)
Undistributed earnings of foreign subsidiaries  (44,778)  (30,865)Undistributed earnings of foreign subsidiaries  (30,865)  (66,719)
Gain on securities contribution to employee retirement benefit trust  (16,899)  (6,184)Gain on securities contribution to employee retirement benefit trust  (6,184)  (3,992)
Other  (39,435)  (58,714)Other  (58,714)  (65,151)
           
 Gross deferred tax liabilities  (380,195)  (365,142) Gross deferred tax liabilities  (365,142)  (421,100)
           
Net deferred tax assetsNet deferred tax assets  224,432  297,298 Net deferred tax assets  297,298  167,776 
           
      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 fiscal year ended March 31, 2004, and a decrease of 38,467 million yen for the fiscal year ended March 31, 2005.2005 and an increase of 61,789 million yen for the fiscal year ended March 31, 2006. The increase during the fiscal year ended March 31,2006 resulted from a provision for additional valuation allowances due to continued losses recorded by Sony Corporation and certain subsidiaries mainly in the electronics business.
      As a result of recording of operating losses in the past, certain consolidated subsidiaries in the U.S. subsidiaries of Sony have had recognized 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 performancebecause 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

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sony’s acquisitionimproved operating results in recent years and a sound outlook for the future operating performance of companies withincertain consolidated subsidiaries in the Electronics, Music and Pictures segments The reversalU.S., Sony reversed 67,892 million yen of the valuation allowance, upon realization of tax benefit from operating loss carryforwards resultedresulting in thea reduction of goodwill.income tax expenses for the fiscal year ended March 31, 2005.
      Tax benefits which have been realized through utilization of operating loss carryforwards for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 were approximately 19,000 million yen, 12,000 million yen, 30,000 million yen and 30,00042,000 million yen, respectively.
      Net deferred tax assets are included in the consolidated balance sheets as follows:
                  
 March 31  March 31
     
 2004 2005  2005 2006
         
 (Yen in millions)  (Yen in millions)
Current assets — Deferred income taxesCurrent assets — Deferred income taxes  125,532  141,154 Current assets — Deferred income taxes  141,154  221,311 
Other assets — Deferred income taxesOther assets — Deferred income taxes  203,203  240,396 Other assets — Deferred income taxes  240,396  178,751 
Current liabilities — OtherCurrent liabilities — Other  (8,110)  (12,025)Current liabilities — Other  (12,025)  (15,789)
Long-term liabilities — Deferred income taxesLong-term liabilities — Deferred income taxes  (96,193)  (72,227)Long-term liabilities — Deferred income taxes  (72,227)  (216,497)
           
Net deferred tax assets  224,432  297,298 Net deferred tax assets  297,298  167,776 
           
      At March 31, 2005,2006, no deferred income taxes have been provided on undistributed earnings of foreign subsidiaries not expected to be remitted in the foreseeable future totaling 988,5151,065,809 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, 20052006 for such temporary differences amounted to 217,792228,546 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, 20052006 amounted to 266,763121,530 million yen and 520,556484,397 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, 20052006 amounted to 139,100173,624 million yen.
      With the exception of 115,714111,265 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, 20052006 amounted to 8,55239,443 million yen. With the exception of 6,9959,116 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 ableof deferred tax assets related to generate sufficient taxable income prior to expiration of the loss carryforwards and tax credit carryforwards.carryforwards is dependent on whether sufficient taxable income will be generated prior to expiration period. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, less valuation allowance, will be realized. 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.

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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 of accounting changes and net income allocated to each class of stock:
              
  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 
          
             
  Fiscal Year Ended March 31,
   
  2004 2005 2006
       
  (Yen in millions)
Income before cumulative effect of an accounting change allocated to common stock  90,756   168,498   122,308 
Income allocated to subsidiary tracking stock  (128)  53   1,308 
          
Income before cumulative effect of an accounting change  90,628   168,551   123,616 
          
Net income allocated to common stock  88,639   163,785   122,308 
Net income allocated to subsidiary tracking stock  (128)  53   1,308 
          
Net income  88,511   163,838   123,616 
          
      As discussed in Note 2, the earnings allocated to the subsidiary tracking stock arewere 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.
      As discussed in Notes 2 and 15, on October 26, 2005, the Board of Directors of Sony Corporation decided to terminate all shares of subsidiary tracking stock and convert such shares to shares of Sony common stock at a conversion rate of 1.114 share of Sony common stock per share of subsidiary tracking stock. All shares of subsidiary tracking stock were converted to shares of Sony common stock on December 1, 2005. As a result of the conversion, the earnings allocated to common stock for the fiscal year ended March 31, 2006 are calculated by subtracting the earnings allocated to the subsidiary tracking stock for the eight months ended November 30, 2005. The accumulated gains of SCN used for computation of earnings per share attributable to subsidiary tracking stock were 8,578 million yen as of November 30, 2005.
          (2)EPS attributable to common stock:
      Reconciliation of the differences between basic and diluted EPS for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 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 
          
              
  Fiscal Year Ended March 31
   
  2004 2005 2006
       
  (Yen in millions)
Income before cumulative effect of an accounting change allocated to common stock  90,756   168,498   122,308 
Effect of dilutive securities:            
 Convertible bonds  2,260   1,209   — 
 Subsidiary tracking stock  —   (0)  (29)
          
Income before cumulative effect of an accounting change allocated to common stock for diluted EPS computation  93,016   169,707   122,279 
          

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
              
  Thousands of shares
   
Weighted-average shares  923,650   931,125   997,781 
Effect of dilutive securities:            
 Warrants and stock acquisition rights  48   61   915 
 Convertible bonds  121,120   112,589   47,468 
          
Weighted-average shares for diluted EPS computation  1,044,818   1,043,775   1,046,164 
          
             
  Yen
   
Basic EPS  98.26   180.96   122.58 
          
Diluted EPS  89.03   162.59   116.88 
          
      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, 7,987 thousand shares and 7,98710,483 thousand shares for the fiscal years ended March 31, 2003, 2004, 2005 and 2005,2006, respectively.
      Warrants and stock acquisition rights of subsidiary tracking stock for the yearsfiscal year 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 fiscal years ended March 31, 2003, 2004, 2005 and 2005,2006, 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 fiscal 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 fiscal years ended March 31, 2003, 2004 and 2005 were 3,072 thousand shares. As discussed in Note 2,At March 31, 2004 and 2005, there were no potentially dilutive securities for EPSnet income per subsidiary tracking stock, as tracking stock shares outstanding were increased upon potential subsidiary tracking stocks’ being exercised, which resulted 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.
      As discussed, all shares of subsidiary tracking stock outstanding atwere converted to shares of Sony common stock on December 1, 2005. As a result of the conversion, earnings per share of the subsidiary tracking stock for the fiscal year ended March 31, 2003, 2004 and 2005.2006 are not presented.

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.employees and the U.S. based music publishing business. 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 27,37429,942 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 27,37429,942 million yen, Sony is obligated to make up the lesser of the shortfall or 22,97325,128 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 43,58447,673 million yen. Of this amount, 1,1811,292 million yen was contributed by the subsidiary, 10,19811,155 million yen was provided by unrelated third party investors and the remaining funding is provided through a 32,20535,226 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 total2006, there were no amounts outstanding under the bank credit facility was 6,441 million yen.facility. Under the agreement, the subsidiary’s 1,1811,292 million yen equity investment is the last equity to be repaid. Additionally, it must pay to the third party investors up to 2,0402,231 million yen of any losses out of a portion of its distribution fees. Any losses incurred by the VIE over and above 3,2213,523 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 optionSAR plan (Note 16) for selected Japanese employees. The VIE has been consolidated by Sony since its establishment. With respect to this entity, there was no impact to Sony’s results of operations and financial position upon the adoption of FIN No. 46. Under the terms of the stock optionSAR plan, upon exercise, Japanese employees receive cash equal to the amount that the market price of Sony Corporation’s common stock exceeds the strike price of the plan. In order to minimize cash flow exposure associated with the plan, Sony holdsheld treasury stock through the VIE. The VIE purchased the common stock with funding provided by the employee’s cash contribution and a bank loan. The SAR plan was terminated during the fiscal year ended March 31, 2006 and there were no amounts outstanding under the bank loan at March 31, 2006.
      Sony’s U.S. based music publishing subsidiary is a joint venture with a third party investor that was determined to be a VIE. The subsidiary owns and acquires rights to musical compositions, exploits and markets these compositions and receives royalties or fees for their use. Under the terms of the joint venture, Sony has the obligation to fund any working capital deficits. In addition, the third party investor receives a guaranteed annual dividend of up to 7 million U.S. dollars and has the option to put its 50% ownership interest to Sony in exchange for a payment of 200 million U.S. dollars. At March 31, 2005,2006, the balancefair value of the bank loan was 3,034third party’s 50% interest exceeded 200 million yen.U.S. dollars.

F-68

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      As of March 31, 2005, there is no VIEVIEs in which Sony holds a significant variable interest that Sonybut is not the primary beneficiary.beneficiary are described as follows:
      As described in Note 5, on April 8, 2005, a consortium led by SCA and its equity partners completed the acquisition of MGM. Sony has reviewed the investment and determined that MGM Holdings is a VIE. However, MGM willHoldings is not be consolidated but accounted for under the equity method as Sony is not the primary beneficiary of this VIE as Sony absorbs less than 50% of expected losses and does not have the right to receive greater than 50% of expected residual returns. MGM continues to operate as a private company and continues to engage in the production and distribution of film content. Through its current ownership of MGM Holdings’ common stock, Sony records 45% of MGM Holdings’ net income (loss) as equity in net income of affiliated companies.
      On December 30, 2005, a subsidiary in the Pictures segment entered into a production/co-financing agreement with a VIE to co-finance 11 films scheduled to be released over the following 15 months. The subsidiary will receive approximately 400 million U.S. dollars over the term of the agreement. The subsidiary is responsible for marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs. As of March 31, 2006, only one co-financed film has been released by the company. The subsidiary did not make any equity investment in the VIE nor issue any guarantees with respect to the VIE. In April 2006, the subsidiary entered into a second production/co-financing agreement with a VIE to co-finance an additional 11 films scheduled to be released over the following 24 months. The subsidiary will receive approximately 330 million U.S. dollars over the term of the agreement. Similar to the first agreement, the subsidiary is responsible for marketing and distribution of the product through its global distribution channels. The VIE shares in the net profits of the films after the subsidiary recoups a distribution fee, its marketing and distribution expenses, and third party participation and residual costs.
23.Commitments and contingent liabilities
          (1)     Commitments:
          (1)Commitments:
A.Purchase Commitments
       Commitments outstanding at March 31, 20052006 amounted to 240,729285,774 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, 2005,2006, such commitments outstanding were 83,68369,286 million yen.

F-66

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
       Certain subsidiaries in the Pictures segment have entered into agreements with creative talent for the development and production of films and television programming as well as agreements with third parties to acquire completed films, or certain rights therein. These agreements cover various periods through March 31, 2008. As of March 31, 2005,2006, these subsidiaries were committed to make payments under such contracts of 51,62543,659 million yen.
 
       A subsidiary in the Pictures 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 3943 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,

F-69

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the subsidiary must fund a portion of the production cost and is responsible for all distribution and marketing expenses. As of March 31, 2005, 292006, 34 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 30,45533,077 million yen.
      In April 2005, Sony Corporation has entered into a partnership program contract with Fédération Internationale de Football Association (“FIFA”). Through this program Sony Corporation will be able to exercise various rights as an official sponsor of FIFA events including the FIFA World Cuptm* from 2007 to 2014. As of March 31, 2006, Sony Corporation was committed to make payments under such contract of 34,639 million yen.
 
       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
    (Yen in
2006  145,111 
Fiscal Year Ending March 31,Fiscal Year Ending March 31, millions)
  
20072007  53,753 2007  139,130 
20082008  16,412 2008  44,538 
20092009  1,632 2009  46,966 
20102010  712 2010  6,003 
20112011  6,553 
ThereafterThereafter  23,109 Thereafter  42,584 
       
Total  240,729 Total  285,774 
       
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, 2005,2006, the total unused portion of the line of credit extended under these contracts was 199,878326,691 million yen.
 
       AtIn August 2004, Sony and Bertelsmann AG (“Bertelsmann”) combined their recorded music businesses in a joint venture. In connection with the establishment of the SONY BMG joint venture, Sony and Bertelsmann AG have entered into a 5 year Revolving Credit Agreement with the joint venture. Under the terms of the Credit Agreement, Sony and Bertelsmann have each agreed to provide one-half of the funding. The Credit Agreement, which matures on August 5, 2009, provides for a base commitment of $300300 million U.S. dollars and additional incremental borrowings of up to $150 million.150 million U.S. dollars.
      As of March 31, 2005,2006, the joint venture had no borrowings outstanding under the Credit Agreement. Accordingly, Sony’s outstanding commitment under the Credit Agreement as of March 31, 20052006 was 24,07526,325 million yen.
 
       The aggregate amounts of future year-by-year payments for these loan commitments cannot be determined.
* FIFA World Cuptm is a registered trademark of FIFA.

F-67F-70

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 26,04921,072 million yen at March 31, 2005.2006. 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 7,6429,325 million yen and was not recorded on the consolidated balance sheet as of March 31, 2005.2006.
      The European Commission (“EC”) has issued the Waste Electrical and Electronic Equipment (“WEEE”) directive in February 2003. The WEEE directive will requiregenerally requires 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. In some member states of the European Union (“EU”) the directive has been transposed into national legislation subject to which Sony recognizes the liability for obligations associated with WEEE. During the fiscal year ended March 31, 2006, the cost that has been accrued in respect to the above mentioned WEEE responsibilities was not material to Sony’s results of operations and financial position. While the cost of this WEEE directive to Sony cannot be determined before the regulation is finally adopted in all individual member states that have to transpose the directive into national legislation, 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, 2005.2006.
      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 fiscal years ended March 31, 20042005 and 20052006 are as follows:
        
         Fiscal Year Ended
 Year Ended March 31, March 31,
    
 2004 2005 2005 2006
        
 (Yen in millions) (Yen in millions)
Balance at beginning of the fiscal year  51,892  50,670   50,670  44,919 
Provision for warranty reserve  51,569  33,493 
Additional liabilities for warranties  33,493  48,471 
Settlements (in cash or in kind)  (46,971)  (40,358)  (40,358)  (45,162)
Changes in estimate for pre-existing warranty reserve  (2,970)  (751)  (751)  70 
Translation adjustment  (2,850)  1,865   1,865  1,172 
          
Balance at end of the fiscal year  50,670  44,919   44,919  49,470 
          

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SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
24.Business segment information
      Effective for the fiscal year ended March 31, 2005,2006, 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. In addition, effective April 1, 2005, a similar change was made with respect to the Japan based disc manufacturing businesses. Results for the fiscal year ended March 31, 20032004 and 20042005 in the Electronics segment have been restated to account for these reclassifications. As a result of these changes in the Music segment, Sony no longer breaks out the Music segment as a reportable segment as it no longer meets the materiality threshold. Effective April 1, 2005, results for the Music segment are included within All Other. Accordingly, results for the fiscal year ended March 31, 2004 and Music segments2005 in the Electronics segment and All Other have been restated to conform to the presentation for the fiscal year ended March 31, 2005.

F-68

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2006.
      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 fiscal year ended March 31, 20032004 and the three months ended June 30, 2004 have not been restated as such comparable figures cannot be practically obtained given that it was not operated as a separate line business within the Game segment. This integration of the semiconductor manufacturing businesses is a part of Sony’s semiconductor strategy of utilizing semiconductor technologies and manufacturing equipment originally developed or designed for the Game segmentbusinesses 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. TheAll 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.Japan, and the Music business which were formerly reported as a reportable segment, described above. 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-69F-72

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Business segments -
Sales and operating revenue:
                            
 Year Ended March 31  Fiscal Year Ended March 31
     
 2003 2004 2005  2004 2005 2006
             
 (Yen in millions)  (Yen in millions)
Sales and operating revenue:Sales and operating revenue:          Sales and operating revenue:          
Electronics —          Electronics —          
 Customers  4,624,181  4,838,268  4,786,236  Customers  4,858,631  4,806,494  4,763,555 
 Intersegment  471,798  204,051  235,411  Intersegment  228,834  260,339  386,922 
               
 Total  5,095,979  5,042,319  5,021,647  Total  5,087,465  5,066,833  5,150,477 
Game —          Game —          
 Customers�� 936,274  753,732  702,524  Customers  753,732  702,524  918,251 
 Intersegment  18,757  26,488  27,230  Intersegment  26,488  27,230  40,368 
               
 Total  955,031  780,220  729,754  Total  780,220  729,754  958,619 
Music —          Pictures —          
 Customers  433,147  409,487  216,779  Customers  756,370  733,677  745,859 
 Intersegment  33,191  30,819  32,326  Intersegment  —  —  — 
               
 Total  466,338  440,306  249,105  Total  756,370  733,677  745,859 
Pictures —          Financial Services —          
 Customers  802,770  756,370  733,677  Customers  565,752  537,715  720,566 
 Intersegment  0  0  0  Intersegment  27,792  22,842  22,649 
               
 Total  802,770  756,370  733,677  Total  593,544  560,557  743,215 
Financial Services —          All Other —          
 Customers  509,398  565,752  537,715  Customers  561,906  379,206  327,205 
 Intersegment  27,878  27,792  22,842  Intersegment  100,903  80,688  81,676 
               
 Total  537,276  593,544  560,557  Total  662,809  459,894  408,881 
Other —          Elimination  (384,017)  (391,099)  (531,615)
 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 totalConsolidated total  7,473,633  7,496,391  7,159,616 Consolidated total  7,496,391  7,159,616  7,475,436 
               
      Electronics intersegment amounts primarily consist of transactions with the Game segment, Pictures segment 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.
All Other. All Other intersegment amounts primarily consist of transactions with the Electronics segment.and Game segments.

F-70F-73

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segment profit or loss:
Segment profit or loss:
                          
 Year Ended March 31  Fiscal Year Ended March 31
     
 2003 2004 2005  2004 2005 2006
             
 (Yen in millions)  (Yen in millions)
Operating income (loss):Operating income (loss):          Operating income (loss):          
Electronics  65,939  (6,824)  (34,305)Electronics  (8,082)  (34,273)  (30,930)
Game  112,653  67,578  43,170 Game  67,578  43,170  8,747 
Music  (28,261)  (5,997)  8,783 Pictures  35,230  63,899  27,436 
Pictures  58,971  35,230  63,899 Financial Services  55,161  55,490  188,323 
Financial Services  22,758  55,161  55,490 All Other  (16,225)  4,188  16,183 
Other  (28,316)  (12,054)  (4,077)        
        Total  133,662  132,474  209,759 
 Total  203,744  133,094  132,960 Elimination  12,658  14,016  13,786 
Elimination  15,065  13,226  13,530 Unallocated amounts:          
Unallocated amounts:           Corporate expenses  (47,418)  (32,571)  (32,290)
 Corporate expenses  (33,369)  (47,418)  (32,571)        
       
Consolidated operating incomeConsolidated operating income  185,440  98,902  113,919 Consolidated operating income  98,902  113,919  191,255 
Other incomeOther income  157,528  122,290  97,623 Other income  122,290  97,623  153,616 
Other expensesOther expenses  (95,347)  (77,125)  (54,335)Other expenses  (77,125)  (54,335)  (58,542)
               
Consolidated income before income taxesConsolidated income before income taxes  247,621  144,067  157,207 Consolidated income before income taxes  144,067  157,207  286,329 
               
      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:
Assets:
                            
 March 31  March 31
     
 2003 2004 2005  2004 2005 2006
             
 (Yen in millions)  (Yen in millions)
Total assets:Total assets:          Total assets:          
Electronics  2,973,972  2,995,306  3,434,138 Electronics  3,036,404  3,476,465  3,548,720 
Game  673,208  684,226  482,037 Game  684,226  482,037  520,394 
Music  500,627  483,990  325,928 Pictures  856,517  863,056  1,029,907 
Pictures  868,395  856,517  863,056 Financial Services  3,475,039  3,885,517  4,565,607 
Financial Services  2,897,119  3,475,039  3,885,517 All Other  763,911  577,733  617,868 
Other  333,485  371,720  347,885         
        Total  8,816,097  9,284,808  10,282,496 
 Total  8,246,806  8,866,798  9,338,561 Elimination  (282,057)  (398,074)  (361,392)
Elimination  (266,167)  (319,204)  (439,489)Corporate assets  556,622  612,366  686,649 
Corporate assets  389,906  543,068  600,028         
       
Consolidated totalConsolidated total  8,370,545  9,090,662  9,499,100 Consolidated total  9,090,662  9,499,100  10,607,753 
               

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.

F-74

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Other significant items:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other significant items:
                         
 Year Ended March 31  Fiscal Year Ended March 31
     
 2003 2004 2005  2004 2005 2006
             
 (Yen in millions)  (Yen in millions)
Depreciation and amortization:Depreciation and amortization:          Depreciation and amortization:          
Electronics  203,433  210,888  275,701 
Game  53,496  57,256  16,504 Electronics  214,400  276,704  304,561 
Music  20,008  16,123  9,451 Game  57,256  16,504  5,087 
Pictures  8,552  7,844  5,598 Pictures  7,844  5,598  7,401 
Financial Services, including deferred insurance acquisition costs  52,041  56,586  52,788 Financial Services, including deferred insurance acquisition costs  56,586  52,788  47,736 
Other  10,157  13,455  8,564 All Other  26,066  17,012  12,755 
               
 Total  347,687  362,152  368,606  Total  362,152  368,606  377,540 
Corporate  4,238  4,117  4,259 Corporate  4,117  4,259  4,303 
               
Consolidated totalConsolidated total  351,925  366,269  372,865 Consolidated total  366,269  372,865  381,843 
               
Capital expenditures for segment assets:Capital expenditures for segment assets:          Capital expenditures for segment assets:          
Electronics  181,316  251,980  311,101 Electronics  253,621  312,216  328,625 
Game  40,986  100,360  18,824 Game  100,360  18,824  8,405 
Music  9,291  3,651  2,894 Pictures  6,013  5,808  10,097 
Pictures  7,138  6,013  5,808 Financial Services  4,618  3,845  4,456 
Financial Services  3,655  4,618  3,845 All Other  12,134  7,928  4,186 
Other  16,993  10,124  6,149         
        Total  376,746  348,621  355,769 
 Total  259,379  376,746  348,621 Corporate  1,518  8,197  28,578 
Corporate  1,862  1,518  8,197         
       
Consolidated totalConsolidated total  261,241  378,264  356,818 Consolidated total  378,264  356,818  384,347 
               
      The capital expenditures in the above table represent the additions to fixed assets of each segment.

F-75

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      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 fiscal year ended March 31, 2005,2006, Sony has partly changed its product category configuration. The main changes arechange is that AIWAthe professional-use projector product group has been moved from “Other”“Televisions” to “Audio” or “Video” or “Televisions”,“Information and the set-top box product group has been moved from “Video” to “Televisions”Communications”. Accordingly,

F-72

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
sales and operating revenue for the fiscal years ended March 31, 20032004 and 20042005 have been restated to conform to the presentation for the fiscal year ended March 31, 2005.2006.
                          
 Year Ended March 31  Fiscal Year Ended March 31
     
 2003 2004 2005  2004 2005 2006
             
 (Yen in millions)  (Yen in millions)
AudioAudio  784,114  675,496  571,864 Audio  675,496  571,864  536,187 
VideoVideo  828,308  949,261  1,034,736 Video  949,320  1,036,328  1,021,325 
TelevisionsTelevisions  981,655  925,501  957,122 Televisions  884,600  921,195  927,769 
Information and CommunicationsInformation and Communications  836,724  834,757  778,374 Information and Communications  878,855  816,150  842,537 
SemiconductorsSemiconductors  204,710  253,237  246,314 Semiconductors  253,237  246,314  240,771 
ComponentsComponents  527,782  623,799  619,477 Components  623,799  619,477  656,768 
OtherOther  460,888  576,217  578,349 Other  593,324  595,166  538,198 
               
Total  4,624,181  4,838,268  4,786,236 Total  4,858,631  4,806,494  4,763,555 
               
Geographic information -
      Sales and operating revenue which are attributed to countries based on location of customers for the fiscal years ended March 31, 2003, 2004, 2005 and 20052006 and long-lived assets as of March 31, 2003, 2004, 2005 and 20052006 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 
          
               
  Fiscal Year Ended March 31
   
  2004 2005 2006
       
  (Yen in millions)
Sales and operating revenue:            
 Japan  2,220,747   2,100,793   2,168,723 
 U.S.A.   2,121,110   1,977,310   1,957,644 
 Europe  1,765,053   1,612,536  ��1,715,704 
 Other  1,389,481   1,468,977   1,633,365 
          
  Total  7,496,391   7,159,616   7,475,436 
          
               
  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 
          
               
  March 31
   
  2004 2005 2006
       
  (Yen in millions)
Long-lived assets:            
 Japan  1,430,443   1,414,632   1,449,997 
 U.S.A.   671,534   662,120   757,055 
 Europe  211,147   183,620   165,352 
 Other  133,640   144,896   159,647 
          
  Total  2,446,764   2,405,268   2,532,051 
          

F-76

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      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 fiscal years ended March 31, 2003, 2004, 2005 and 2005.

F-73

SONY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2006.
      The following information shows sales and operating revenue and operating income by geographic origin for the fiscal years ended March 31, 2003, 2004, 2005 and 2005.2006. 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  Fiscal Year Ended March 31
     
 2003 2004 2005  2004 2005 2006
             
 (Yen in millions)  (Yen in millions)
Sales and operating revenue:Sales and operating revenue:          Sales and operating revenue:          
Japan —          Japan —          
 Customers  2,247,030  2,352,923  2,249,548  Customers  2,352,923  2,249,548  2,253,275 
 Intersegment  2,433,998  2,514,698  2,575,093  Intersegment  2,514,698  2,575,093  3,264,281 
               
 Total  4,681,028  4,867,621  4,824,641  Total  4,867,621  4,824,641  5,517,556 
U.S.A. —          U.S.A. —          
 Customers  2,632,176  2,341,304  2,166,323  Customers  2,341,304  2,166,323  2,197,304 
 Intersegment  189,502  198,450  235,362  Intersegment  198,450  235,362  279,203 
               
 Total  2,821,678  2,539,754  2,401,685  Total  2,539,754  2,401,685  2,476,507 
Europe —          Europe —          
 Customers  1,520,930  1,647,694  1,524,182  Customers  1,647,694  1,524,182  1,575,779 
 Intersegment  121,598  66,950  52,417  Intersegment  66,950  52,417  50,400 
               
 Total  1,642,528  1,714,644  1,576,599  Total  1,714,644  1,576,599  1,626,179 
Other —          Other —          
 Customers  1,073,497  1,154,470  1,219,563  Customers  1,154,470  1,219,563  1,449,078 
 Intersegment  789,444  813,798  804,721  Intersegment  813,798  804,721  1,038,827 
               
 Total  1,862,941  1,968,268  2,024,284  Total  1,968,268  2,024,284  2,487,905 
Elimination  (3,534,542)  (3,593,896)  (3,667,593)Elimination  (3,593,896)  (3,667,593)  (4,632,711)
               
Consolidated totalConsolidated total  7,473,633  7,496,391  7,159,616 Consolidated total  7,496,391  7,159,616  7,475,436 
               
Operating income:Operating income:          Operating income:          
Japan  11,444  (69,875)  (765)Japan  (69,875)  (765)  199,491 
U.S.A.   98,762  85,290  72,414 U.S.A.   85,290  72,414  11,291 
Europe  62,206  78,822  12,186 Europe  78,822  12,186  (25,171)
Other  63,773  70,543  58,554 Other  70,543  58,554  41,953 
Corporate and elimination  (50,745)  (65,878)  (28,470)Corporate and elimination  (65,878)  (28,470)  (36,309)
               
Consolidated totalConsolidated total  185,440  98,902  113,919 Consolidated total  98,902  113,919  191,255 
               

F-74F-77

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 
                
                      
    Additions      
  Balance at charged to     Balance
  Beginning costs and Deductions Other at End
  of Period expenses (Note 1) (Note 2) of Period
           
  (Yen in millions)
Fiscal Year Ended March 31, 2004:                    
 Allowance for doubtful accounts and sales returns  110,494   78,323   (65,281)  (10,862)  112,674 
                
Fiscal Year Ended March 31, 2005:                    
 Allowance for doubtful accounts and sales returns  112,674   56,863   (84,507)  2,679   87,709 
                
Fiscal Year Ended March 31, 2006:                    
 Allowance for doubtful accounts and sales returns  87,709   52,422   (56,772)  6,204   89,563 
                
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 
                
                      
  Balance at       Balance
  Beginning     Other at End
  of Period Additions Deductions (Note 1) of Period
           
Fiscal Year Ended March 31, 2004:                    
 Valuation allowance - Deferred tax assets  116,068   63,936   (39,199)  (13,228)  127,577 
                
Fiscal Year Ended March 31, 2005:                    
 Valuation allowance - Deferred tax assets  127,577   67,889   (104,670)  (1,686)  89,110 
                
Fiscal Year Ended March 31, 2006:                    
 Valuation allowance - Deferred tax assets  89,110   72,340   (11,234)  683   150,899 
                
Note:
1. Decrease resulting from the reversal of valuation allowances (see Note 20 of Notes to Consolidated Financial Statements) or utilization of deferred tax assets.
2. Translation adjustment.

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